Lets face it, although it’s a bit morbid to contemplate, other than leaving it to the kids, there’s not much you can do with property once you pass away. While some people’s children may be a little unhappy about their parents spending their inheritance, you could have a whole lot more fun if you did spend at least some of it!
Over the last three months, we examined how a couple who were earning $120,000 combined (increasing at five percent per annum) built a property portfolio worth around $13 million (with $3 million debt left) in 30 years. They achieved this by buying their home worth $600,000 with a $570,000 loan and then buying a $500,000 investment property every four years with their equity growth based on an average growth rate of seven per cent per annum compounding. After 20 years they had purchased five investment properties. As they wanted to retire in a further 10 years time, they stopped buying property.
After tax benefits, this investment property portfolio cost a maximum of $215 per week at five year fixed rates of 7.3 per cent (or $275 per week at a 15 year fixed rate of 7.8 per cent), while rents were increasing on average by seven per cent per annum. The portfolio took around 14 years before it was positively geared.
The couple also started with $15,000 savings in their offset account, used interest only loans for all the properties including their loan but made additional payments of at least $100 per week into the offset account to build a buffer of spare cash to help manage risk. This buffer grew to more than $170,000 in 30 years.
After 30 years, their home is worth close to $4.5 million and the investment properties are worth close to $8 million but there is about $3 million of debt left, so the couple have to decide whether to:
- A. Sell enough property to pay off all the debt so they can just live off the rent, then not sell any more property until they pass away, leaving the children with far too much inheritance; or
- B. Same as above, but plan to sell most of their property by the time they pass away, leaving the children with far less inheritance, or
- C.Sell less property initially, but keep some debt and more property, just until they need to sell another property for additional funds to live off – again planning to sell most of it by the time they pass away, leaving little inheritance for the kids.
But which strategy will give them more funds to live off?
Well, provided we get a little capital growth but assuming our average growth rate of seven per cent again, the answer by quite a significant margin, is option C. This is simply due to the fact that option C sells less property initially and keeps a bigger property portfolio for longer, which therefore achieves more long term growth. Look out for next month’s article for more on this.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 425 595.