Author Topic: Case Study - If you were me what would you do?  (Read 2199 times)

Kaminoge

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Case Study - If you were me what would you do?
« on: February 23, 2017, 03:25:58 AM »
I've posted a few times over the years and I always get good advice. This time my question is a bit different. Apologies for the length and the wide range of the questions.

Here's the basics.

1. I'm Australian.
2. I recently married an American.
3. I live internationally and am not a resident of Australia for tax purposes.
4. No long term commitment to any one country, I tend to move every few years. Right now I'm in Bulgaria but will move on in about 18 months.

I own (well the bank and I own) 4 properties (all in Brisbane, Australia). Approx worth around 1.1 million (AUD) with approximately $520,000 owing on them (although I also keep $100,000 in an offset account so I guess really I only owe $420,000).

Currently they are bringing in a yearly income of around $5000 which I'm paying tax on (that's my only income in Australia).

So basically they don't give me much money and they don't cost me much money.

The problem is that's almost all my savings tied up. I've got around $110,000 invested elsewhere but the biggest chunk of money is in the property. My only debts are the mortgages.

My plan was always that I'd probably move back to Australia one day. Honestly I never have had a really solid financial plan, I just spent less than I earned and invested in property because it seemed like a good idea. Who knows if I'll ever go back there. Of course I could sell the property but I'd take a big hit on capital gains because I'm not a resident.

So my basic question is what would you do next if you were me. As I see it the options are

1. Just ignore the property for now. Let it happily tick along as the mortgages slowly decrease (I was paying them off fast but after realising how I was locking all my money up about a year ago I dropped the payments to the minimum and I've started investing in Vanguard with any extra money instead).

2. Try to start selling (honestly the market isn't particularly good right now) them and investing the money elsewhere.

If I do 1. (which is my inclination since it's the least effort) then do I take them into account at all when I'm calculating when I can FIRE? Should I just say that if I need $1 million to retire (random number) then I have to get to that amount without taking into account all the money in the property. Right now I feel like that money's there but there's no real way for me to get at it for living expenses.

Also second part of the story because who knows what good advice people on the internet will have.

As I mentioned above I married an American. He's got no property and has about $250,000 (USD) in a range of investments in the US (some good ones like Vanguard, some slightly questionable ones like ethereum, some in his 401K). He's 10 years younger so not surprisingly has a lot less assets than I do. He has no debt at all. He gets income in the US (from his job) and pays taxes there. I get income in Euros. Currently we both live in Bulgaria.

Any suggestions on what you would do with the money we earn. Right now we keep it completely separate just through sheer laziness of figuring out a different plan. His income stays in the US, mine gets sent to Australia. Living costs we just cover in an adhoc way. There's a few changes we could make.

1. Live more off his money and send more of my money back to Australia.
2. Live more off my money and send more of his money back to the US (invest in Vanguard or similar).
3. Buy property in the US so we have our toe dipped in that pond as well as the Australian property market.

Any thoughts on where it would be advisable to focus our investments or are we best of just keeping everything separate?

Apologies again for the long, rambling post. I'm just throwing it all out there to see if anyone has good advice. Last time I posted I ended up completely changing my investment strategy (that was when I dropped back to the minimum on the mortgage) so I am actually up for making changes based on good advice.

CU Tiger

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Re: Case Study - If you were me what would you do?
« Reply #1 on: March 07, 2017, 07:22:56 PM »
The only thought I have is that I would not want to own property in a country I was not living in. Sounds like a hassle, too many possibilities for things to go wrong.

I would just save, and invest, and have money in the bank. You say your properties bring in about $5000 a year, but one fire, flood, or careless tenant trashing the place, and there goes a lot of cash.
There are two ways to get enough: one is to continue to accumulate more and more. The other is to desire less. - G.K. Chesterton

Laura33

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Re: Case Study - If you were me what would you do?
« Reply #2 on: March 08, 2017, 08:04:30 AM »
I don't follow -- how do you have over $1M in properties that generate only $5K in profit every year?  Is that a typo?  That seems to be a ridiculously low rate of return.  It's not just that you've got all your cash tied up -- it's how much you are losing from not being able to dedicate that cash to other investments that would make you more $.  Your annual income from these investments looks to be less than 1%, which is about what you could get from a bank account.  By comparison, if your @$700K ($600K in equity + $100K in cash) were invested in the stock market, the 4% rule says you could draw $28K from that every year.  I am guessing that you are banking on long-term appreciation and improved cash flow once the mortgages are paid off.  But you are also very concentrated in a single market, which really increases your risk (that's like me putting all my money in GE or Coca-Cola instead of a broad market index fund).   

I am not at all averse to using rental properties as a path to FIRE -- there are a bunch of people here who have done that very, very successfully.  It's one of the few ways individuals can use leverage without putting their entire financial base at risk.  But the people who do this successfully are not simply crossing their fingers and hoping that a particular market appreciates -- they focus on properties that throw off a good income, so they can take that income and either buy more properties (in the early years) or live off of (once the income stream = annual expenses).  They still get the benefit of having the tenant pay the mortgage, with the significant increase in cash flow once those mortgages are paid off -- and if the value goes up over time, that's just a bonus, not something they are relying on to make the investment successful.

Is there a way that you can swap those properties for better income producers without triggering capital gains?  I know in the US you can swap out one rental property for another and defer the capital gains (Starker exchange), but I don't know if you have anything comparable.  If you have $600K in equity + another $100K in cash, that would go a long, long way toward a bunch of other properties that could give you far more income.  In general, I would suggest doing some research into property investing as a business vs. the "seemed like a good idea" approach (not a criticism -- that's where we all start!), so you can learn how to do the financial analysis for what makes a good rental.  Once you have that solid grounding, you can look for better opportunities to put your massive equity into properties that will generate more cash and support you now *and* in the future.
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Patches

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Re: Case Study - If you were me what would you do?
« Reply #3 on: March 08, 2017, 03:23:49 PM »
I don't follow -- how do you have over $1M in properties that generate only $5K in profit every year?  Is that a typo?  That seems to be a ridiculously low rate of return.  It's not just that you've got all your cash tied up -- it's how much you are losing from not being able to dedicate that cash to other investments that would make you more $.  Your annual income from these investments looks to be less than 1%, which is about what you could get from a bank account.  By comparison, if your @$700K ($600K in equity + $100K in cash) were invested in the stock market, the 4% rule says you could draw $28K from that every year.  I am guessing that you are banking on long-term appreciation and improved cash flow once the mortgages are paid off.  But you are also very concentrated in a single market, which really increases your risk (that's like me putting all my money in GE or Coca-Cola instead of a broad market index fund).   

I am not at all averse to using rental properties as a path to FIRE -- there are a bunch of people here who have done that very, very successfully.  It's one of the few ways individuals can use leverage without putting their entire financial base at risk.  But the people who do this successfully are not simply crossing their fingers and hoping that a particular market appreciates -- they focus on properties that throw off a good income, so they can take that income and either buy more properties (in the early years) or live off of (once the income stream = annual expenses).  They still get the benefit of having the tenant pay the mortgage, with the significant increase in cash flow once those mortgages are paid off -- and if the value goes up over time, that's just a bonus, not something they are relying on to make the investment successful.

Is there a way that you can swap those properties for better income producers without triggering capital gains?  I know in the US you can swap out one rental property for another and defer the capital gains (Starker exchange), but I don't know if you have anything comparable.  If you have $600K in equity + another $100K in cash, that would go a long, long way toward a bunch of other properties that could give you far more income.  In general, I would suggest doing some research into property investing as a business vs. the "seemed like a good idea" approach (not a criticism -- that's where we all start!), so you can learn how to do the financial analysis for what makes a good rental.  Once you have that solid grounding, you can look for better opportunities to put your massive equity into properties that will generate more cash and support you now *and* in the future.


I took the $5k to mean net income... after mortgage/expenses were paid by tenant.  Thus making it a nice debt play.

Laura33

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Re: Case Study - If you were me what would you do?
« Reply #4 on: March 08, 2017, 03:40:27 PM »
I don't follow -- how do you have over $1M in properties that generate only $5K in profit every year?  Is that a typo?  That seems to be a ridiculously low rate of return.


I took the $5k to mean net income... after mortgage/expenses were paid by tenant.  Thus making it a nice debt play.

That's also how I interpreted it.  But I thought the rule for a "good" rental was more like 1% profit per month, not per year?  Having $600K in equity on $1.1M in properties that nets only $5K/year seemed very low. 
Laugh while you can, monkey-boy

Patches

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Re: Case Study - If you were me what would you do?
« Reply #5 on: March 08, 2017, 03:44:46 PM »
I don't follow -- how do you have over $1M in properties that generate only $5K in profit every year?  Is that a typo?  That seems to be a ridiculously low rate of return.


I took the $5k to mean net income... after mortgage/expenses were paid by tenant.  Thus making it a nice debt play.

That's also how I interpreted it.  But I thought the rule for a "good" rental was more like 1% profit per month, not per year?  Having $600K in equity on $1.1M in properties that nets only $5K/year seemed very low. 

Hard to say... perhaps there is too much equity there... would be interesting to know how much of that equity was from appreciation or from principal pay-down.  A refi this could potentially capture some of that equity to be reinvested elsewhere while simultaneously lower the monthly payment (extend the remaining debt) and perhaps come closer to your rule of thumb?

waltworks

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Re: Case Study - If you were me what would you do?
« Reply #6 on: March 08, 2017, 08:30:00 PM »
The rentals are absolutely horrible by US standards, there is no question about that. They are appreciation plays only, and as such, are super high risk/reward.

OP should sit down and think hard about risk tolerance and write an investment policy of some kind down. Then implement it.

-W