Am I close to retirement or am I delusional

[orpheus]

Have to say this is the best forum I have come across!!

Never thought that we would actually be as close as we are (or maybe I'm delusional) to retirement. So I am looking to you all for your comments on our situation.

My wife and I are 38 and 36 and we have a 17month old beautiful baby girl and a dog. We live in an expensive part of N.Z.
We own 3 investment properties and are setting up a trust which will essentially let us live in one mortgage free (on paper).
Sorry if this is a bit confusing for all those from the US or Canada.
The investment properties are valued at 1.85 m
Property 1- 800k (450k debt)
Property 2- 660k (470k debt)
Property 3-  385k (250k debt)

So total debt is 1180000 and equity with some retirement savings (50k) is 725k
Once we move into one of the houses (660k one) we will have zero bills except  food and fun. We can walk to town, parks etc, we would need a car but rarely us it.
The other two properties would cover themselves and cost us nothing to own but no debt would be paid off unless we pay it out of our wages (100k combined)

So essentially I just nee to figure out how much longer we need to keep working until we can retire?
Should we pay down debt? (we could be debt free in 12 years) retire at 50 with a passive income from rent of 75k and assets hopefully worth 3.6m
Pay down no debt but put as much as we can into index funds over the next 5 years? And then just let the houses appreciate slowly over time?

Sell one property (385k) and put the difference into an index fund and then continue with #2 above so we are more diversified?

Any comment or help whether we are on our way to retirement or delusional!!

Thank you

Orpheus   

[matchewed]

You should probably give a breakdown of expenses. What would your retirement lifestyle cost per year. Then give a breakdown of cash flow coming in from your properties. If your cash flow covers your expenses congratulations. If not, well you either need to get more cash flow or build up enough savings that it can be drawn down from a calculated SWR %.

[Zamboni]

we will have zero bills except  food and fun.

Won't you still have utilities, taxes, property maintenance, etc?  What about insurance?  Shoes for growing child feet?  Will you have any expenses for education or healthcare?

I'm not in NZ, so those numbers don't really mean anything to me.  Are the properties rented out now?  Is it easy to rent out an $800K property there? (where I am, that's tremendously expensive and you'd never even break even trying to rent a house like that unless it was beachfront, but in some areas it's just an average place.)  It seems like you are a bit cash poor and your cushion isn't going to carry you very far if you have a vacancy or a tenant who decides to stop paying rent right now.  Just my $0.02, but really there's not enough information to say much.

[orpheus]

Break down of costs:

House 1 income 55k
Expenses 53k

House 2 income 22,500
Expenses 24,500

I am maximizing the debt against the above properties so we can live in the other mortgage free (on paper)

Income from basement rent in proposed live in house $18,500 per annum (document storage for a law office) forgot to mention this in my first post.

Monthly bills for household:
Rates $233
Insurance $200
Food $700
Mobiles $100
internet $50
gas $150
fun $500
So total income after expenses $1541 - $1933= a loss of $391 per month.

Income from work $100k combined.
We would want to retire on a combined income of 70k to 80k

When I look at the above it looks like a long way off!!

Thanks

Orpheus

[destron]

My opinion is that you could be somewhat close but aren't there yet for the following reasons:

1.) You only have $50k in cash, which is very, very little. This could disappear very quickly if anything "goes wrong".

2.) Your income will be from two properties. One likely thing that can go wrong is you lose a renter. What if it takes you 2, 3, or 6 months to find another tenant? What if you have to evict someone for non-payment of rent?

3.) What do you do when you have a major property expense such as replacing a roof, foundation problem, etc...?

As Zamboni noted, expensive properties are difficult to really make good money on, at least here in the US. Personally, depending on the numbers, I might sell the most expensive property, invest the money from that, and then save for a few more years. Even if you don't sell it, apparently you are getting a lot of cash from your investment properties (enough to live off of) so you should be able to save at a very high rate, close to 100% of your income. Things might look different in two years.

[Lans Holman]

So house 1 has 350k in equity and earns 2k a year, and house 2 has 190k in equity and loses 2k a year?  And you wouldn't be paying down the debt on them at  all? If that's all we have to go on, those sound like terrible investments.  Could you sell them and invest all that equity into something that's going to give you better returns?  Are you anticipating that they're going to be increasing in value?

[orpheus]

House 1 is valued at 800k but we owe 450k
House2 is valued at 385k but we owe 250k
We are taking all the equity out of these properties and moving it to house 3 so the debt of 470k is reduced to zero.

The houses are all new and very sought after so occupancy is not 100% but I don't anticipate any other them being vacant for more than a month. There is great possibility for capital gains but Im not banking on it. (I would be happy with 5-7% long term)

Hope this makes sense.

Orpheus

[steveo]

I think you need to look at hammering debt down. Personally I couldn't retire unless I had no debt but thats me.

I would sell at least one house and I would consider why you need to spend so much money in retirement - I mean $70k to me is a fortune. I don't think I've ever spend that much in a year in my life and I don't intend too unless when I retire I go on a massive holiday.

[Zamboni]

Actually it sounds like the best income generator you have right now (besides your jobs) is the basement being used for storage.  That seems like a huge amount of money to pay for storage.  What are the odds that the company will decide to start storing their documents somewhere else?

The two rental properties combine for a cash flow of zero right now.  Since prevailing wisdom is that you need to really think about cash flow from a perspective of only 50% of the rent going to cover expenses like mortgage, they are both cash flow negative in the long run because you have nothing going to savings for repairs.

It sound like you are planning to take 2nd mortgages out on those two properties to pay off the property you will live in.  Is that correct?  That would leave you with zero equity in those two, and zero cash flow from them.  Hmmm.  I can't see the wisdom in that unless there's more information missing.  What if the housing market drops even 15-20%?  House values can change fairly rapidly.

[gooki]

Looks like the only way to make money out of your rental investments is through capital gains. Which although tax free in NZ are a big risk.

I'd be selling up now (at least the 800k home), and moving the 350k equity form house sale into index funds.

70k to 80k income is a hell of a lot to retire one when you have no mortgage payments.

One alternative I will propose to you is you could "retire" today by selling up all your homes , and relocating to a lower cost of living area in NZ. You'd have to accept a lower annual budget.

After home purchase ($250,000) you'd be left with $500,000 invested so $20,000 per year with a safe withdraw rate of 4%.

You'll have to be self employed, "working" a total of 30 hours a week between the two of you. I put working in quotes on purpose. If you each earned $5,000 per year, your Working for Families tax rebate would be $8,000. Total income $38,000 per year. So roughly $35,000 after tax. No house payments as you'd own your home in full, no job commitments as you work for yourself.

You can ride this gig until your kids turn 18. If you were smart would have been saving 5-10k a year and now you'll be able to survive entirely of your stash.

[orpheus]

Thanks for all the feed back so far!!

I'll try to address some of the questions.

The basement rent is a 4 year lease with 2 rights to renew at $350 per week. (7 years left to run)
They will not move for a least 3 years and I think they would take up the 2 rights to renew. The basement is 130 square meters of document storage.

Not taking out any second mortgages. I am moving all the lending from three banks to one and they will release the equity to allow me to live mortgage free in our PPOR, Its called an LTC and the accountant sets it all up.

Yes I am speculating on future capital gains but even 5% of the portfolio value is 92k per year and we are not drawing any of it down.
This is over a 10 year average of course.

I think my preferred idea is to pay down none of the debt and let the properties rise slowly with inflation. Over the next 5 years put as much as we can into index funds and then at the end sell the 385k property to pay down some of the debt.
70k may seem like alot but we do have a child and a dog and I would rather have a bit more than a bit less up my sleeve.
Maybe 50k is more realistic? We could make that work

Then retire

Thanks

Aaron

[Zamboni]

Okay, thank you for explaining what you are doing with the banks.

I hope you are correct about the direction of the real estate market in your area.  Pretty much all of your eggs are in that basket right now, and those are not liquid assets.  If that market goes down, you are stuck with almost all of your money tied up somewhat indefinitely.  It happened here, and many people with houses in highly desirable areas saw housing prices cut in half, meaning their equity was completely gone.  Perhaps I am missing something, but I see essentially negative cash flow from the two houses and very little diversification.

Allow me to join the previous advice you've gotten to sell one of the properties and invest that money in another way (at least in properties with much better cash flow if you want to stay almost entirely in real estate as your retirement plan) particularly since you are hoping to retire soon.

[orpheus]

I think the only thing you are missing is that the house are only slightly cash flow negative as all the equity is being taking out to live free from a mortgage on our PPOR.
We don't live in any of the properties at the moment and if we left as is we would be earning 35k after all bills but before tax.
If I sell a property it means I would have debt on our PPOR as I'm using that equity and that is why I would like to hold longer term to realise some further appriciation but the debt stays the same.
If we set it up the way I've explained we live nearly free of rent and most bills and then can either pay down debt or invest in index funds.

I agree we are completely weighted in property and would like to diversify.

Thank you,
Orpheus

[Zamboni]

Quote from an article on real estate investing recently posted by arebelspy:
"You’re not buying a home hoping for appreciation, are you?"

If you have no equity in those rental houses, and they are cash flow negative, then you are basically paying every month for the privilege of hoping that the "looming correction" that happened everywhere else doesn't happen in NZ while you still hold those mortgages.  It looks like NZ had only a small correction in 2008/09 (smaller than in other countries), and that most banking experts are saying that housing there is still quite overvalued.  When housing is overvalued, that's a good time to sell and put the money in a different investment. 

You keep saying you'll be mortgage free.  But, it sounds like you plan to tie all three houses together so you can have two mortgages on property with zero equity, even if your primary residence is theoretically, on paper, mortgage free.  You are only mortgage free on that house you will be living in if they GIVE YOU the title in your name so you can put it in a fireproof safe somewhere.  Maybe that is what they are doing for you; I don't know how this deal you are talking about at the single bank is structured.  Even then I would be wary of losing my shirt with those other two houses.

But, if the market drops and you can't swing payments on these homes for any reason, then I worry that the way you are talking about structuring it the bank can take possession of all three of houses.  People had that happen here.  Smart people who looked great on paper because of theoretical equity in real estate they bought in a rapidly accelerating market and then didn't sell when the market was high.  Read the loan details carefully and think about this.  Get advice from someone local besides the lender. 

[orpheus]

Its not the lender giving me information but my Accountant.
If I do nothing and move into the proposed house I would have a mortgage of 470k of which the interest is not tax deductible as it is a PPOR.
If I structure it the way I suggest than all the debt 1180000 is fully tax deductible.

I agree with everything you say about the possibility of a correction here but I never plan to sell these properties or at least not for 15 years or so. Properties here are no recourse so it doesn't really matter if I have the properties with one bank or 3 as if I get into trouble they can come after all assets. Only real down side is they can choose which house to sell to keep the LVR in check.

So while I am debt free on my PPOR (on paper) I will have the opportunity to have nearly 100% off our wages to either pay down debt or invest in index funds. 

At present we have nearly 40% equity across all three and they (Lender) is giving me a 200k offset account (which I don't pay any interest on unless I use it) This is my emergency fund if there is a vacancy etc.  But I do not think I would ever need it as we have wages coming in.

Thanks

Orpheus

[gooki]

If I structure it the way I suggest than all the debt 1180000 is fully tax deductible.

Minor correction, the interest on the debt is tax deductible :)

And yes if you are dead set on living in one of the houses you own, that is the way to do it.

[gooki]

If I sell a property it means I would have debt on our PPOR as I'm using that equity and that is why I would like to hold longer term to realise some further appriciation but the debt stays the same.

You could still sell one property and still shift the remaining debt around to the one you don't live in.

Sell Property 1 - 350k
Pay off property 2 - 470k
Total debt remaining on property 3 - 370k (would put you in the high LVR range and attract additional fees)

[orpheus]

Thanks gooki,

This makes scents and I great to hear someone familiar with nz tax law.

So I come back to my original question am I close to retirement or am I delusional?

After all the replays I am sure I am not diversified enough even though property is my preferred vehicle to retirement.

So is it better to pay down debt and eventually live off the rents while having three solid properties or not pay debt for 5 years or so and invest in index funds?

Orpheus

[gooki]

I'd say you are about 10 years away from retirement/FI. This is assuming you squirrel away 70k per year into investments/debt repayment.

[orpheus]

If I was to squirrel away 70k per year and focus on debt repayments then the total of 1180000 would be fully paid off and I would have a payed off mortgage free house and two rental properties bringing in nearly 91k.

If property values rise 5% average over 10 years then the portfolio would be worth 3m

Surely I should be able to do it in half the time if I set my sites on a passive income say 50k to 60k?
And still have the investments rising slowly a few % above inflation.

Still all the eggs are in real estate.

If I payed out zero debt then in 10 years I would have nearly 900k in index funds assuming a rate similar to property (5%)
Also the property would or should be close to 3m with debt still of 1180000.
I would then sell a house to drop the debt so a more serviceable level.

Surly I can drop it from 10 to say 5?

Orpheus

[marty998]

http://somersoft.com/forums/

you may find this forum useful. Aus real estate focus, but the concepts discussed regarding "the end game" of how to manage a mature real estate portfolio would still be applicable.

Good luck, you've done really well for yourself.

[orpheus]

Thanks Marty!

Just looking at the site now.

Is the "end game" a thread to follow? Or just look to the site for info on a market closer to home etc?

Cheers

Aaron

[gooki]

If I was to squirrel away 70k per year and focus on debt repayments then the total of 1180000 would be fully paid off and I would have a payed off mortgage free house and two rental properties bringing in nearly 91k.

If property values rise 5% average over 10 years then the portfolio would be worth 3m

Surely I should be able to do it in half the time if I set my sites on a passive income say 50k to 60k?
And still have the investments rising slowly a few % above inflation.

Still all the eggs are in real estate.

If I payed out zero debt then in 10 years I would have nearly 900k in index funds assuming a rate similar to property (5%)
Also the property would or should be close to 3m with debt still of 1180000.
I would then sell a house to drop the debt so a more serviceable level.

Surly I can drop it from 10 to say 5?

Orpheus

I was using your original retirement budget of 70 to 80k per year, and inflation adjusting over 10 years (114 to 130k per year). But yes if you want to retire hit FI much earlier then reduce how much you intend to spend in retirement.