Thank you everyone for your input, I really appreciate it.
I'm really sorry but I made an error in my wording re tax brackets, I've amended it now:
Sounds scary, but the portfolio is slightly positive and all properties offset my taxible income (thanks negative gearing!) which bumps me down considerably from one of the highest tax bracket to one of the lowest.
The depreciation on Properties #1 (new build), #2 (new build), #4 (recent renovation) and PPOR (relatively new build, can claim a portion as half rented out) stacks up quite a bit depreciation wise. Also a factor is my salary sacrifice for working in the healthcare sector and regular donations which brings my taxible income from the $80,001 - $180,000 range to the $18,201– $37,000 range. Thank you Marty for picking this up, apologies for the confusion.
Based on your numbers I get an average of $3927 in interest costs per month, not counting your PPOR.
Total rent at current rates for the 5 investment properties is $4,647, total mortgage payments (interest only) are $3774 (not including PPOR where I get $800 per month in rent and pay approximately $1608 in interest (depending on offset amount)).
Do you have land tax problems every year as well? You must have at least $2k per month in Council, Water, R&M or strata, insurance, land tax...
My properties are spread over two states so I haven't had land tax issues as yet, although with my PPOR being in the same state as 3 of my IPs I may be up for a bill (although only half of the property is income producing so I may still scrape by).
Have you worked out what your repayments are going to look like when the interest only terms end? I don't know what the loan terms are, but it looks like you are going to have a bit of a cash crunch coming up in 2018 when they go to P+I?
Doing a back of envelope, you have approx 1.5M in loans that are interest only, including the PPOR. Based on 4% interest rates (record low) that's about $5,000 a month in interest repayments. However, once these revert to P+I, and assuming a remaining 25 year term, this payment is going to go up to approx $8k/month. I'd be a bit concerned about that, particularly if I was planning on heading overseas and giving up my job, as it would be a pretty big cash drain, which would get worse if interest rates rose, or I had some significant vacancies / repairs on the properties.
If it were me, I'd be madly stashing the savings in my PPOR offset while I'm working. Its tax effective and zero risk. I then would have a cash buffer to draw down to service the principal payments.
Thanks BigChris, I'd estimated about $8k per month for P+I as well. I currently have a 55-65% savings rate and am going super mustachian mode to stash as much cash as possible in my PPOR offset account. I really want to make the most of the next 5 years of high wages to set myself up for the future.
What do you think your LVR is? Do you have any prospect of being able to refinance these when the IO loans expire?
The last official LVR is 85% but I haven't revalued many of the IPs for a while, and RPdata suggests that they have risen. I'll be doing light renovations on property #3 and #5 within the next 5 years that will raise the value (and add more depreciation).
I agree with Chris that you will face a cliff when the IO periods expire. With new and ever more restrictive APRA rules coming into play there is little chance of refinancing to IO again, and I believe interest rates will be at least 1% higher by June 2018 so you will need to find another $15k for interest, plus principal repayments.
That's why I was considering knocking out the IP loans, but I guess the offset against PPOR (which will then be a full IP) which using it to servie IPs P+I would really serve the same purpose.
Though hopefully your properties will also be generating more income by then with rising rents.
If the variable interest loans rate goes up I would probably pay that out as its a higher rate.
Assuming that they are all in good areas it would be unlikely that multiple properties would have high vacancy rates.
I'm hoping so too! It would certainly make things a lot easier if they rose in line with each other, but I'm stashing the case to buffer regardless.
Agreed, It is pretty unlikely that they would be vacant at the same time. 3 of the IPs have long term tenants which makes things more stable.
As for Option 4 have you considered diversifying away from Australian real estate?
There are reasonably liquid investments other than offset accounts. I agree build up a cash buffer but leverage is part of the beauty of RE investing imho.
Personally I am still kicking myself for leaving my money in offset while the Aussie went from above parity to the USD down to the seventies....
Thanks Norgirl - I had considered putting some money in Vanguard to diversify. I may make that a smaller portion than I had originally intended to create a bigger buffer in offset for P+I, but that's just more motivation to stash as much as possible over the next 5 years so I have more to play with.
Really the long term goal would be to pay them all off and live off the rent. I'm looking to study music (classical voice) which doesn't have the best track record for stable income (though I would be trying for paid work such as opera choruses), so I'm hoping I can work the IPs in my favour to provide a more stable income.
It's going to be a big 5 years!
