A STEP-BY-STEP PLAN TO Build a $66,000 p.a Positive Cashflow Portfolio WHILST PAYING PRACTICALLY ZERO IN TAX

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1 A STEP-BY-STEP PLAN TO Build a $66,000 p.a Positive Cashflow Portfolio WHILST PAYING PRACTICALLY ZERO IN TAX

2 Ever thought: I want to be a millionaire? Millionaire status is the milestone that every wealth creator wants to reach. Currently in Australia, there are only 192,000 millionaires. This is only 0.8% of the population. We want you to join the millionaire ranks! This is a step-by-step guide to how to construct and build a $1m property portfolio, debt-free, using real numbers, real market conditions and real strategies. Various team members were employed to ensure the accuracy of all figures in this article, including mortgage brokers, accountants, and acquisitions team members. This example will follow a current client situation as a starting point to illustrate these steps. There are some key philosophies that must apply in almost all portfolio construction strategies, which are important to understand before we move forward: 1. Property investing is a business and needs to be treated that way. This means that it needs to be separate from your personal life and should not absorb all your cash flow. Your portfolio is supposed to enhance your life, not take away from it. 5. Buy every property and make every finance decision with the next three moves in mind. Always ask the question: How is this property going to get me closer towards my million-dollar portfolio? To show you how this can be done in real life, let s take a look at our investing pair, Peter and Mandy. 2. Get caught up in the outcome, not in the property itself. Focus on the fundamentals of the deal itself and make strategic investment decisions based on facts, not on personal emotional decisions. 3. There are stages in your portfolio to focus on. When investing, the three main stages are: Acquisition: The main priority is creating leverage in the market and expanding your portfolio. Consolidation: This is when you begin consolidating your portfolio and your debt. Lifestyle: This is when you create strategic results in your portfolio based on your outcomes. It is important to focus on just one stage at a time. 4. It is not about the number of properties you have. Don t get caught up in the number of properties you own; instead focus on how they are helping you achieve results. 2 Positive Real Estate

3 Serviceability: This has been calculated after each year to ensure the banks will still continue to lend the pair money for the next deals. Using current servicing calculators all of the following purchases work. Savings: As net income goes up, savings will also increase. However, only 50% of the wage increase will go into savings; the rest will go into improving Peter and Mandy s lifestyle. PUTTING THEORY INTO ACTION: How to build a million-dollar portfolio debt-free as fast as you can ASSUMPTIONS A few assumptions must be made when mapping out a 10-year portfolio plan. These are: Wages: Wages increase at 3% per annum. Rent: Rental income increases at 3% per annum. Capital growth rates: The average capital growth rate used is only 5.9% per annum across the portfolio. However some growth rates have been adjusted depending on the deal itself. Interest rates: We start at 2013 interest rates and increase to 7% over time, which is in line with many economists projections of the interest rate environment. There are a few things we need to consider about Peter and Mandy s situation: The interest rate on their owner-occupier loan is high compared to the current market, at 5.45%, and can be reduced to the current market rate. Their buying power and serviceability is a relatively balanced figure, meaning they can move forward with a balanced strategy in regard to equity and cash flow. Both individuals have minimal tax deductions as PAYG employees, and are presently paying the full marginal tax rate. The current debt level is relatively low, with only a car loan. Their credit card is paid in full each month, and they have a regular savings plan. This suggests Peter and Mandy can manage their money well. How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 3

4 Year 1 FINANCE PROPERTY SELECTION Peter and Mandy will start with two purchases within the first six months, which can be achieved comfortably with serviceability of $1.1m and a buying power of $960,000. PROPERTY 1 Property type: New one-bedroom unit in a bluechip area Location: Newstead, QLD Purchase Price: $400,000 Refinance their home mortgage to reduce the interest rate to 4.84% and fix 70% of the loan for three years to lock in the low rate and secure against any upward swing in rates. Leave 30% as a variable loan to keep in an offset account to offset the personal mortgage on Peter and Mandy s home with their savings, buffer and ongoing income. All of their personal income will be directed into the offset account and they will live off a credit card for most of their personal expenses, which will be paid off each month. This will maintain the maximum balance in their offset account, and compound to reduce overall interest paid. Rent: $430 per week, giving a 5.6% gross rental yield Ownership: 90% ownership will be in Peter s name, as he is paying the most tax and this property will reduce tax owed for the next financial year Finance: 90% LVR with a separate bank to that used for the principal place of residence (PPOR) to avoid cross-collateralisation ensuring a strong foundation for the portfolio Switch the loan to interest only and use the offset account to reduce the interest payable. A focus on debt reduction will come later in the portfolio. TAX Peter and Mandy have minimal deductions to legally reduce their tax, but with more investment properties they will have more deductions. Tax refunds will be filtered back into the portfolio for further deposits and buffers. DEBT MANAGEMENT At this stage of the portfolio, they should not focus on debt reduction as the primary outcome. This will happen organically through the use of the offset account. PROPERTY 2 Property type: Four-bedroom house and land construction 4 Positive Real Estate

5 Location: Newcastle, NSW Purchase price: $450,000 Rent: $480 per week, giving a 5.5% gross rental yield Ownership: 90% ownership in Peter s name Finance: 90% LVR with a separate bank to the PPOR and the Brisbane blue-chip deal, to avoid crosscollateralisation Year 2 With their PPOR in Western Sydney, their purchase in Brisbane and with construction started in Newcastle, there will be some solid growth in both Newcastle and Western Sydney and very moderate growth in Brisbane. Additional equity can be released from their home and a small amount from Brisbane after a 12-month period, in addition to some savings and a tax refund, ready for another property purchase in the first half of the year. A second purchase will be made in the second half when more savings are accumulated, once Newcastle is completed to release equity, and once another tax refund is received. Servicing is decent, with $620,000 still remaining for the next deal. This is a point at which a lot of people get stuck on chasing equity deals only and hit a serviceability wall, which needs to be avoided through strategy. This is also time to consider setting up a PAYG tax variation. Receiving tax back on a monthly basis and applying it to the offset account will further increase the debt reduction strategy on the personal mortgage of the PPOR. PROPERTY 3 Property type: Dual-income strategy. House and flat to generate two incomes on a single title. Location: Peregian, Sunshine Coast, Queensland Purchase price: $430,000 Rent: $600 per week, for a 7.2% gross rental yield How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 5

6 Ownership: 90% ownership in Peter s name Finance: 90% LVR and with a separate bank to all other properties Total new cash/equity = $70,600 This gives a new buying power of $470,666 at 90% LVR. PROPERTY 4 Property type: Existing Location: Liverpool, NSW Purchase price: $390,000 Rent: $430 per week, for a 5.7% gross rental yield Ownership: Peter s tax has been reduced after our first three deals, so we now flip the ownership to a 50/50 arrangement Financial situation by the second half of year 2: Finance: 90% LVR, with a separate bank to those used for all other properties Peter and Mandy have $30,700 left over. They can save another $7,500 They can do a loan increase on the Newcastle house and land once construction is completed. The market has grown by a solid 8%, creating an additional $32,400 to be released. Year 3 The focus in the foundation years of this portfolio is to ensure servicing stays solid to continue building equity in the portfolio. The portfolio is diverse in four different states and these properties can be retained for future barter potential. Due to the high rental yield of the dual-income strategy on the Sunshine Coast and income increases as per the assumptions, serviceability stands at $550,000. There is still buying power of up to $585,000 without releasing any equity from Liverpool, which can be done mid-year if required. Future purchases at this stage will be done at 80% LVR to ensure that servicing stays strong in the future and to begin to deleverage Peter and Mandy, which 6 Positive Real Estate

7 suits their personal life outcomes. This is also a strategic lending decision based on the intention for the next deal. PROPERTY 5 Property type and strategy: Duplex build strategy Location: Toowoomba Purchase price: $545,000 Rent: $660 per week, for a 6.1% gross rental yield Ownership: 50/50 arrangement Finance: As mentioned, this deal is going to be done at 80% LVR Year 4 The portfolio has hit a borrowing serviceability wall and future deals are focused on 80% lends. This is a common hurdle that most investors come up against in their journey. It has good and bad points; good, in that they are deleveraging their debt position and beginning to shift the portfolio to a more positive nature. The downside is that much larger deposits are needed in order to continue investing. What we can see from the above summary is $129,000 in capital for deposits and costs, creating a buying power of $516,000 at 80% LVR. Servicing is still at $600,000, maintained due to growing yields and income, as well as by lowering the debt level compared to value. How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 7

8 PROPERTY 6 Ownership: 50/50 arrangement Finance: 80% LVR. Property type: Off-the-plan blue-chip townhouse. Location: Melbourne Purchase price: $580,000 Rent: $660 per week, for a 6.1% gross rental yield Year 5 At some point in every investment journey, it s time to sit and wait for the market. There is potential to bring a property up to 90% LVR to move forward again in the following year. However, Peter and Mandy are on track for results within the desired timeframe. The focus in the next 12 months is to settle the Melbourne property and allow the other properties to grow. DEBT ON PPOR Through the effective use of an offset account, Peter and Mandy have been able to pay off their original personal mortgage of $395,000 on their own home completely, simply by getting their money working harder for them. TAX Personal tax has been reduced by over $20,000 and is now received fortnightly through a PAYG tax variation. This is the halfway point in the 10-year strategy. By now, Peter and Mandy s overall wealth creation plan has achieved the following: CASH FLOW The overall portfolio is cash flow positive by $292 per week. 8 Positive Real Estate

9 Year 6 Peter and Mandy s portfolio has reached a critical mass and the equity is starting to take on a life of its own. There are seven properties in the portfolio, all below 80% LVR and cash flow positive after tax. The new value of the investment properties has reached $4.47m, with a debt level of only $3.35m. GOAL ACHIEVED: $1.11m in net investment assets Buying power sits at $890,000, while servicing has become a limiting factor, still sitting at $500,000. To consolidate and sell down now would result in selling costs and capital gains, so a bit more time is required before moving into the consolidation phase within the next 12 months. Time for another property. PROPERTY 7 Property type: Duplex build strategy. Location: Adelaide Purchase price: $720,000 Rent: $720 per week, for a 5.5% gross rental yield Ownership: 50/50 arrangement Finance: 80% LVR How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 9

10 Year 7 It is time to move into the consolidation stage of the portfolio. The equity position is strong but servicing is limited at $450,000, due to the increase in the portfolio and servicing figures now being calculated at an interest rate of 6.5%. Properties need to be sold to move forward; the duplexes in Toowoomba and Peregian have served their purpose of equity creation and rental yield. The other trading properties Liverpool, Newcastle and Adelaide are still to be held at this point. TOOWOOMBA Sold = $730,000. Capital gains tax = $38,076 Selling costs = $18,250 Legal costs = $2,000 Net profit = $94,674 PEREGIAN Sold = $523,000. Capital gains tax = $14, 918 Selling costs = $13,077 Legal costs = $2,000 Net profit = $88,569 This gives a total of $183,243 in cash and frees up $900,000 of serviceability. This cash goes towards the deposit for the next deal. The deal needs to create cash to eliminate the debt of the core portfolio in the future. We will only be required to pull out approximately $112,000 of equity, which we will take from the more recent duplex deal in Adelaide. This will give us a total equity/cash position of around the $350,000 mark for the next deal. At this point, we will stop accessing equity from our core properties, including Brisbane, Melbourne and Newcastle. 10 Positive Real Estate

11 PROPERTY 8 Ownership: Family trust structure Finance: 70% LVR Property type: Block of four units. Location: Outskirts of Melbourne Purchase price: $1m Rent: $1,200 per week, for a 6.2% gross rental yield Year 8 While completing the build of the units in Melbourne, the Newcastle property will be sold. Although it is in a strong area and could represent a solid long-term investment, for the greater good of the portfolio it will be liquidated to free up further cash and servicing. Being in the consolidation phase, the focus is on creating equity to eliminate debt, but are still open to having more buy-and-hold properties if they serve a purpose. Property type: Subdivision. Location: Perth Purchase price: $980,000 Rent: $950 per week, for a 5% gross rental yield Ownership: Family trust structure Finance: 70% LVR PROPERTY 9 Year 9 For these final years of the portfolio, it s time to let the properties sit. There is nothing more to do except consolidate completely during the final quarter of year 10. How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 11

12 Year 10 It s time to see the results that the last 10 years have created as Peter and Mandy consolidate debt in the portfolio. They can do one of the following: Keep all of the properties they are all cash flow positive after tax at this point and they can simply hold the portfolio. If Peter and Mandy want to continue working full-time, this would be a solid option. Sell down some of the properties and again release servicing and cash to continue building the portfolio. Sell down and consolidate two to four properties, preferably owned outright or at a very low LVR. As the original outcome was always to eliminate the debt on a few core assets, this third option is the best choice for Peter and Mandy. On the chopping block are the Melbourne, Adelaide and Perth properties; their sale prices are shown in the table below: The result is $1,039, in cash to use for debt reduction on the properties they intend to keep, including Newstead in Brisbane, the Melbourne townhouse, Liverpool, and half of the splitter block in Perth four properties in four states. The cash to eliminate the debt on Newstead and Liverpool completely. With the remaining $287,000, pay down the debt on the Melbourne property to only $287,000 which is a 31% LVR. The property in Perth is left at a 59% LVR. If they wanted to reduce the Melbourne property debt further, the property in Perth could be sold to clear another $180,000, but it is not necessary. 12 Positive Real Estate

13 A lot has been accomplished during this 10-year period: The PPOR is down to $184,000, and we have $200,000 in cash, which could be used to pay this debt off completely. Peter and Mandy have two properties owned outright and another two at relatively low LVRs. The portfolio is cash flow positive by $66,000 per annum, which is more than the average income in Australia of $57,980 (ABS). Peter and Mandy have reduced their tax to practically zero. The strategy focused on creating equity when going into deals, shifting around the country to take advantage of various growth cycles, as well as taking equity out and trading properties to keep the portfolio moving forward. This balanced strategy and conservative but active approach has set up a quality portfolio that will continue to grow into the future. Ultimately Peter and Mandy have been provided with more opportunities to live out the life they truly want, unlimited by income. And of course, they are now the proud holders of a million dollar property portfolio. Mandy now has the option to quit her job if she wants to and Peter can reduce his hours, while they maintain the same standard of living they are used to. Want to know more? Get in touch with one of our coaches after this exciting event and discover how to get started in a 45 minute FREE Discovery Session. Our expert team can help you put together a tailor-made strategy for your unique situation and help identify the RIGHT properties that can build HUGE wealth whilst SLASHING YOUR TAX. Disclaimer: The information provided is of a general nature only and should be considered as general education only. Readers should not act on the information above without obtaining advice from a qualified professional person. How to Build a $1 Million Property Portfolio Debt-Free in 10 Years 13