Author Topic: Case Study: Aussie on the Right Track?  (Read 5044 times)

aussiegal

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Case Study: Aussie on the Right Track?
« on: February 07, 2015, 10:35:14 PM »
Hi,
Long-time lurker etc, and have found myself mesmerised (and frankly a little obsessed) by the whole MMM phenomenon. Looking to check in to make sure that I am on the right track. I woke up a couple of years ago and realised that if I ever wanted to retire I better get on it! I am about to purchase an investment property, and am planning on diverting half of the money now being used in investments to sit in the offset account to build some equity/build a portfolio eventually. To buy where I live is prohibitively expensive, so buying an investment in a cheaper area as a stepping stone.

About Me:
30 Year Old Professional
Living in Sydney (and unfortunately all of the high costs of this)
Partnered but have all separate finances

Income (Based on a fortnight)
Approx 90K (have a salaried position as well as a small income producing business)
$ 2198 Salaried and $600 from business (Note, these are the net amounts!)
Total : $2798 f/n

Current Expenses
Rent: $800
Groceries: $150
Storage: $30
House insurance: $30
Utilities: $43
Netflix: $8
Phone: $16
Health Insurance: $75
Contact Lenses: $25
Pet Care: $46
Additional Health (Dentist etc):$60
Hairdresser: $25
Eating out/Random things: $100
Gift Account: $20
Car Insurance etc: $92 (Have a second hand car that I have had for 10 years, use maybe 1x per week. I walk everywhere)
Total: $1520 f/n

Current Savings
Holiday Account: $200
General Savings: $200
Investment Account: $800
Total: $1200 f/n

Debts:
None. Although in the market for an investment prop with a loan of <200,000 @ 5%.
Use Credit Card for spending and pay off in full.

Assets
$67K Super
$25K Shares (built over the last 2 years)
$40K Savings (the minimum needed will be used from here for deposit/borrowing costs)
Total: $132K

So, from the Moustache perspective am I on the right track? I feel like the property is the next logical step (particularly if I ever want to buy a house to live in). I work in a very niche industry and need to be in the city at least for the next 5 years or so. Cheaper rent would mean increasing transport costs, and for brain space that’s not a feasible option at the moment.
Does anyone have thoughts about splitting the $800 per fortnight between the offset and the investments, or should I just put the investments on hold for now, and smash as much into the offset as possible?
Looking forward to hearing peoples thoughts!

Cheers

« Last Edit: February 12, 2015, 02:13:23 PM by aussiegal »

alsoknownasDean

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Re: Case Study: Aussie on the Right Track?
« Reply #1 on: February 08, 2015, 12:07:49 AM »
Nice stuff firstly :)

I'd say expenses look fine really (how much is the car worth? enough to justify full comp insurance? Or does that include rego?), although it's that fortnightly or monthly? It's a bit confusing :)

As far as offset by investments go, I guess you'd need to look at potential returns and the tax implications. Would an area where the houses go for $200k have many employment opportunities for potential tenants? Would you consider moving there down the track? What about rates?

marty998

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Re: Case Study: Aussie on the Right Track?
« Reply #2 on: February 08, 2015, 02:03:16 AM »
Having trouble understanding where you are going to find an investment property in Sydney for $250k.

Hopefully you are not looking at uni apartments /studios or serviced apartments. The management fees and low growth will not be a pleasant investment experience.

Suggest you consider salary sacrificing your income to super above $80,000. Tax concession is 24% (from a marginal rate of 39c down to 15c in super) for every dollar you put in.

Given you are saving so much already, it is worth considering to start putting away some more tax sheltered money. Better to put away $100 a week now than have to put away $1000 a week in 20 years time, especially if you take time of of the workforce to have kids.

I like the idea of putting money in an offset account. Set up the loan as interest only too and get a good interest rate in the mid 4's. Which bank are you looking to get the loan from?


deborah

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Re: Case Study: Aussie on the Right Track?
« Reply #3 on: February 08, 2015, 02:08:23 AM »
I would like to know about the "storage" item. Does this mean you are paying to store stuff somewhere? It is amazing how much you can declutter when you set your mind to it. Also, if the stuff in storage is not accessed regularly, it may be surplus to requirements.

aussiegal

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Re: Case Study: Aussie on the Right Track?
« Reply #4 on: February 08, 2015, 04:33:48 AM »
Hi,

Thanks for the very prompt feedback!

To clarify, I am buying with another person in a property outside of sydney, good rental return, could potentially live there in the future. Otherwise, will be a vehicle to investing. I will have a 50% stake, and have set up all of the appropriate legals around this! There is no where in Syd for $200k!

Re the car, it costs about $2400 per yr to keep, including comp insurance and rego. I hadn't considered dropping the comprehensive, will look at the viability. Car is probably worth $3k if I were to sell.

Salary packaging to super is also an idea I haven't really considered! Will do! :) The hesitation I would have with this would relate to potential legislative change in the coming years, as I am quite a long way from retirement age (in the traditional sense). Have others reconciled this risk?

The storage is one of the things on the chopping block as we speak!

:)


enpower

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Re: Case Study: Aussie on the Right Track?
« Reply #5 on: February 08, 2015, 04:37:17 PM »
A couple of points:

- Consider reading The Minimalists. I read their books and website and found I needed far less stuff that I thought I needed to be happy. I now have the minimal possessions that I need to live a happy, clutter free and financially stable life. http://www.theminimalists.com/

- I own an investment property with my fianc'e in a 50/50 joint ownership limited company. This has worked well for us. I highly suggest you stick to this plan.

- If you are going to buy the property through a company, I'd put all the excess savings you have directly into the offset/revolving credit mortgage. This is what we have done. Sometimes things just come up with the property and you need a few thousand dollars set aside to fix these things. These being repairs, vacant property for several weeks, etc. You can always withdraw the money from the offset account at a later stage to purchase shares when they are cheap. We are only able to do this if we purchase the shares in the name of the company though. If I bought shares in my own name from withdrawing from the company offset account, we wouldn't be able to offset that loan interest for the purpose of getting investment income (dividends). Talk to your accountant about this as rules in Aussie might be different from NZ where I'm based.

- Health insurance looks expensive. I actually self insure with our health insurance. In NZ we have a thing called ACC which is the government owned health cover. If I was seriously in life danger, treatment would happen or if I had cancer, etc they would treat me. If I broke my leg or needed surgery, I could go on a 3 month waiting list and get it for free. I was paying around $700 for health insurance (I was a healthy 24 year old male) and my excess was $1000. This meant if I made any claims, It would need to be over $1000 for me to even bother. If I needed to speed up my treatments, I could always just pay the $1000 out of my pocket. I had to get an MRI scan which cost $1200 last year so I paid it myself as the wait list was 5 months. I haven't had health insurance and instead put that $60 or so a month into investments. If I ever need something done medically in the private sector I weigh up the urgentness of it and the cost and the waitlist and either decide to wait a few months or pay it myself. I would never get health insurance for me ever again. I may condier it when we have kids for them, but for me, never again. My best friend worked for Sovereign (who are owned by Commonwealth Bank) and their insurance brokers got taken on worldwide trips twice per year if they sold enough insurance. I also went to their head office and the cost of all of this I figured of the $700 I was paying them each year, over enough years for them to be in business I'd never get that $700 back. I cancelled my insurance the day after I met him in their offices. I highly consider you looking into self insurance for health. I still keep car insurance 3rd party (my car is worth $4k or so, not worth full coverage which is an extra $600 per year) and also contents insurance (for legal liability if we burn a house down). We have house insurance for our rental property and thats it. Consider these options.

- Just generally think about anything you are spending. Can you buy cheaper haircuts, cheaper meals out, not buy lunch but make it yourself, etc. I know these are little pesky things and I was hesident to cut out certain things but even saving $2 per week by getting cheaper phone plans all adds up.

- Lastly, you look in a good position, don't forget to have a little fun with your money, it isn't all about skimping and saving money. If you want to go to the movies with your partner, just go, make a night out of it. There is a book a few Canadian PHD students put together about getting the most happiness out of spending your money. I found it really helpful. http://www.amazon.com/Happy-Money-Science-Happier-Spending/dp/1451665075

aussiegal

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Re: Case Study: Aussie on the Right Track?
« Reply #6 on: February 09, 2015, 12:55:42 AM »
Thanks Enpower for such a considered response!

I will look into the mimialists! I havent read before! I generally do quite well with minimal possessions and live pretty simply, but I am sure there are always more ways to save! I would love to be able to cut my own hair, but havent quite got the skillset! :)

I definatley balance the savings with having some fun! I try and travel at least once per year, and dont hesitate to spend time on life enhancing stuff, like the occasional climbing/surfing/biking adventure.

I will also look around for the health insurance options. Part of the reason to have for me is around tax offset, so will chat with the accountant re the cost/benefit of such.

Retired To Win

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Re: Case Study: Aussie on the Right Track?
« Reply #7 on: February 09, 2015, 06:26:19 AM »
I may have missed it, but...

A key question I have is what is your earlier retirement goal age?  What is your target date / age to pull the trigger?  That's a key piece of info to have to be able to analyze whether you are on track.

aussiegal

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Re: Case Study: Aussie on the Right Track?
« Reply #8 on: February 10, 2015, 02:46:31 AM »
Hi,

Mmm, I guess ideally, I would like it to be an option around the age of 50. Earlier of possible!

I can't imagine that I would stop working around that time, but would like to have the option not too!!!

Of course if there are children in the equation, that will look very different!

Astatine

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Re: Case Study: Aussie on the Right Track?
« Reply #9 on: February 10, 2015, 03:02:21 AM »
I've got no idea about the rest of it, but saw someone suggesting you ditch the health insurance. If it's $75/month that's probably in the normal range. If you're 30 you do need to be mindful of paying the loading for each year over the age of 30 that you don't have basic hospital cover (ie the bare minimum to avoid paying the Medicare surcharge).

Health insurance extras is often not worth it, unless you run the numbers on stuff that you know you use and that you'll be likely to break even. If you have extras, it is worthwhile checking that the numbers make sense for you, and ditch it if it costs you far more than you're ever likely to claim.

Hospital cover, however, is a bit different. Yes, the public health system does cover a lot of stuff, but elective surgery waiting lists can be very long in the public health system. And it can be surprising what is elective vs emergency surgery. I have top hospital cover for various reasons, but the main reason I've kept it is so I've got the option of an insulin pump if I want one (otherwise it's $10k out of pocket for me). 3 years ago, I wouldn't have dreamt I would need such a thing (nor that such a thing existed), but health can throw you weird and wonderful curveballs out of the blue. So, IMO it's more of a risk to ditch hospital cover, particularly as you head into your 30s and 40s. But - each to their own and comfort with risk, I guess. 

NICE!

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Re: Case Study: Aussie on the Right Track?
« Reply #10 on: February 10, 2015, 03:09:49 AM »
I think you're doing pretty well. I also think that you should set your FIRE date sooner - you have the good habits & the income to do it much faster. Does that mean you have to stop working at 38 or 40? No, it just means you have the option.

vagon

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Re: Case Study: Aussie on the Right Track?
« Reply #11 on: February 10, 2015, 06:14:38 PM »
Nice work and I think you're definitely on the right track, congrats.

I would however do a few things differently though, so here's my 5c:
I would rethink your IP purchasing decision.
This property allows you access to far higher levels of debt (LVR of 80%) and debt is cheap at the moment, but it may not be the right move.
Excluding super, your asset allocation after this purchase will be 90% property, 10% shares. More over that 90% is in one specific property so you are seriously lacking diversity.
The transaction costs on property are huge, if you and your partner are thinking of purchasing together anytime soon and need to sell this IP, you will be stung with serious costs.
I would allocate the amount you would like to invest into property into low fee REITs, which are diversified and usually across both residential and commercial property types. If you want to leverage you could look into a margin loan, which is more expensive than housing financing but is tax deductible and cheaper than a personal loan.

Kill your storage
Other people have mentioned it and it sounds like you're already focused on this, but to reiterate: kill it now! This is a complete waste of your money. Go sell it on gum tree/ebay. If that fails donate it to friends/charity. Finally if that fails then put it in the next council clean-up.

Don't buy individual shares
You're essentially trying to pick individual winners in the stockmarket, which is effectively white-collar gambling.
Buying individual shares is also non cost efficient for tactics like dollar cost averaging.  Looking at the amount you have invested, I am assuming the brokerage fees would be substantial as a percentage of the sum invested. I would invest the amount you would like into a low fee index fund, this spreads your stock risk across a broad portfolio of companies and allows you to invest small amounts regularly without incurring brokerage. Same story as REITs for leverage.

40K in Savings
This only makes sense if you are imminently looking to purchase a house. Otherwise this money is probably staying flat or even costing you after inflation or tax on the interest. Depending on how much you need for emergencies and whether your credit card limit could cover said emergencies, you would probably be better off putting this into the REITs or index funds mentioned previously. If your still set on getting an IP and know you'll be looking to purchase in a set period of months I'd consider a term deposit for that period over savings.

Cheers and keep up the good work.
« Last Edit: February 10, 2015, 06:38:07 PM by vagon »

JLR

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Re: Case Study: Aussie on the Right Track?
« Reply #12 on: February 10, 2015, 07:47:50 PM »
I look forward to seeing what you end up doing. :)

P.S. Ditch the storage. Add up the value of what you are storing and how long you would need to store it for to reach that cost per week for storing it. It might motivate you.

marty998

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Re: Case Study: Aussie on the Right Track?
« Reply #13 on: February 10, 2015, 11:46:42 PM »
Vagon...what you're essentially suggesting with regards to Property is that no one should buy a rental unless they have $5million of other investments, otherwise they won't be diversified enough.

We all have to start somewhere. 1 property can turn into several quite quickly with enough dedication.

REIT's are not without their risks...when they blow up they blow up spectacularly. See Centro, Rubicon, Investa Office Fund, Macquarie Office Trust, Westpac Office Trust,  GPT etc. ABC Learning Centres was essentially a REIT play in the end too.

NICE!

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Re: Case Study: Aussie on the Right Track?
« Reply #14 on: February 11, 2015, 12:48:43 AM »
Vagon...what you're essentially suggesting with regards to Property is that no one should buy a rental unless they have $5million of other investments, otherwise they won't be diversified enough.

We all have to start somewhere. 1 property can turn into several quite quickly with enough dedication.

REIT's are not without their risks...when they blow up they blow up spectacularly. See Centro, Rubicon, Investa Office Fund, Macquarie Office Trust, Westpac Office Trust,  GPT etc. ABC Learning Centres was essentially a REIT play in the end too.

Which is why you diversify. GM is and AIG was pretty big time, too.

I agree that you have to start somewhere, but I think that people need to go into these things with eyes wide open. One asset that sucks up a huge portion of your portfolio is putting a lot of eggs in one basket. For most Mustachians, it can work out very well if planned properly. For many others, it can "blow up spectacularly," which can cause other problems REITs/Stocks/Bonds typically don't cause. If your whole portfolio blows up, you're back to zero. You can be worse off than that if the housing situation blows up.

vagon

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Re: Case Study: Aussie on the Right Track?
« Reply #15 on: February 11, 2015, 05:42:42 PM »
Vagon...what you're essentially suggesting with regards to Property is that no one should buy a rental unless they have $5million of other investments, otherwise they won't be diversified enough.

Just the opposite, I'm saying that REITs are a more diversified way and therefore less risky play. There's no reason why someone looking to invest essentially $300,000 (regardless of financing) cant spread that out in a suitable asset allocation. Putting 90% of that $300K into a single rental on the outskirts of Sydney during an all time property highs seems risky. Especially given the transaction costs and other potential life factors progressing such as her relationship (e.g. early 30s are a fairly typical time for Sydney-siders to get married and shack up).

We all have to start somewhere. 1 property can turn into several quite quickly with enough dedication.

Leading to more concentration of assets in residential property?
Investing in a diversified portfolio is starting somewhere. More prudently. It might not be a problem if she was aiming to convert the IP into her PPOR at some stage and gain utility, but this is purely an investment and it should be assessed accordingly.

REIT's are not without their risks...when they blow up they blow up spectacularly. See Centro, Rubicon, Investa Office Fund, Macquarie Office Trust, Westpac Office Trust,  GPT etc. ABC Learning Centres was essentially a REIT play in the end too.
Agreed, but its about levels of risk. A single residential property in outer Sydney for $500K would have to put it as one of the riskier purchases in the area, along with the property tax that doesn't exist in other states, etc etc.

aussiegal

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Re: Case Study: Aussie on the Right Track?
« Reply #16 on: February 12, 2015, 02:12:15 PM »
I have been watching this discussion with keen interest!

I have considered the REIT option, and oscillated towards and away over the past couple of years. I agree that the IP option is an expensive one, however, there is a reasonable chance that this property will become a PPOR at some point in the next 10 years. If this becomes the case, then from a FIRE perspective I will be much closer to where I need to be. If not this property, the equity will allow me to buy another PPOR, and this can sit as in investment. I have set a reasonable buffer so that if things were to be more difficult financially for some reason, I would be able to manage for a reasonable period of time without rent from IP etc to keep managing it.

From a share perspective, the options I have taken are LICS mainly, including some Aussie and International based options. However, with falling interest rates there does seem to be a larger than normal discussion in the interweb about the value of the "blue chip" dividend. Essentially for me, I keep a keen eye on what the holdings are doing, but pick things that have long track records that I am able to have little maintainence in. I do some DCA and then have picked up reasonable amounts when there is some SPP for particular holdings. I have looked at the option of a Vanguard index fund however, when I have done the maths it seems that the brokerage for buy and hold is ultimatley less than the ongoing MER of the fund option. That said, there is something to be said about the convienience of it!


vagon

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Re: Case Study: Aussie on the Right Track?
« Reply #17 on: February 12, 2015, 04:16:35 PM »
there is a reasonable chance that this property will become a PPOR at some point in the next 10 years. If this becomes the case, then from a FIRE perspective I will be much closer to where I need to be. If not this property, the equity will allow me to buy another PPOR, and this can sit as in investment.

Ahh right, apologies I didn't realise the intent was to change to PPOR. In that case I dont really see a problem. I would still be mindful about buying a different house and keeping this as an IP, so it might be worth having a chat with both your co-invester about the possibility of a future tenanting arrangement. I would also talk to your current partner to get their view on living there to make sure you dont risk the super high transaction costs.

From a share perspective, the options I have taken are LICS mainly, including some Aussie and International based options. However, with falling interest rates there does seem to be a larger than normal discussion in the interweb about the value of the "blue chip" dividend. Essentially for me, I keep a keen eye on what the holdings are doing, but pick things that have long track records that I am able to have little maintainence in. I do some DCA and then have picked up reasonable amounts when there is some SPP for particular holdings. I have looked at the option of a Vanguard index fund however, when I have done the maths it seems that the brokerage for buy and hold is ultimatley less than the ongoing MER of the fund option. That said, there is something to be said about the convienience of it!

LICs offer good diversity, but being a managed fund they do will incur higher costs than an index fund which only has to match the market. You're also exposed to failures in the picking methodology of the fund managers. At a $25K investment you'd have to be investing less than 8 times a year per LIC (assuming two licks) to make brokerage fees worthwhile and some might argue investing less than 8 times a year isnt really DCA, but really this is all technicalities.
Sounds like you have ll the major pieces of the puzzle in place and you're asking all the right questions. I sure you'll kill it! Best of luck with whichever options you choose.

bigchrisb

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Re: Case Study: Aussie on the Right Track?
« Reply #18 on: February 12, 2015, 06:18:32 PM »
Just to add to the REIT / direct property debate, beyond what's already been said.

REITS provide access to very different asset classes (commercial/retail/industrial/hotel etc) that is generally out of reach of the individual investor.  So its diversification across property types, as well as diversification in locaion / multiple properties.  I see this as a plus.

However, with a REIT, you have limited visibility, and no control over the degree of financial engineering involved.  It was the high leverage and need to refinance loans (liquidity squeeze) that caused many REITS to come un-stuck through the GFC.  The underlying assets of these funds (for example, the shopping centres underlying Centro), were sound assets all the way through.  With direct property investment, you have much more visibility and control over the degree of leverage.  Also, to date, residential loans tend not to have been called when underwater, which allows the breathing space to wait out volatility in prices.  That said, a lot of resi investors seem to put leverage on leverage far beyond the REITS!  But at least its in your control.

As a disclaimer, I've got a fair bit of money in REITS.

Mark31

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Re: Case Study: Aussie on the Right Track?
« Reply #19 on: February 13, 2015, 02:06:27 PM »
Yes you're on the right track!

Your spending is pretty good, you've no debt, and you're thinking about investing! That's an awesome start, housing costs notwithstanding.

If your projected FI date is 45 or later, don't ignore the thought of putting extra into super. The idea being that you can run down your non-super assets, while your super is growing and then access your super. There's been a lot of discussion about legislative risks in other threads, and most people here aren't TOO pessimistic about that. You may be able to search for those threads.

Your posts sound upbeat, but if the trek to FI seems daunting at times, consider my example. At your age I earnt less (in todays dollars) and my partner less again. I now earn not much more than you, and my partner hasn't worked at all for 7 of the last 11 years (three children). Our combined net worth (again, in todays dollars) was a little less than yours. I've always been naturally frugal, but less so than since finding this blog, but I took no interest in optimising tax or investments until two years ago. Our current net worth is $900k, and even if we continue on one income I can retire at 50. (I'm 41 now)

Even with housing cost issues, I'd be surprised if you can't do better than 50, if that's your goal.

aussiegal

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Re: Case Study: Aussie on the Right Track?
« Reply #20 on: February 15, 2015, 11:22:38 PM »
Thanks Handlebar for your kind words of encouragement! Its great to hear that it is possible, and it sounds like you have worked very hard to make it happen!

There is something particularly reassuring about the sense that it is achievable, but I 100% comprehend that there is costs of making it happen! For instance, without my business on the side I know I would have no chance of making it doable, but I would much rather be at home than working 3 nights per week. But, like most things in life it is only temporary!

I will also examine the REIT option again, not a huge percentage, but perhaps worth examining the options for some commercial exposure!