Operation 2016

Hi everyone,

I recently sat down and though long and hard about a retirement plan for my Wife & I. I was initially thinking of a 10-year timeline, until we decided to (almost) halve that figure.

I will be updating this thread as time goes on and it's all open for discussion and as a motivator. Mainly for ourselves, but also for others who may be in a similar boat.

I started investing (really) in 2004-5 when saving for a deposit. I wasn't real sure what to do with this money, but I knew it was a good idea at least.
3 years later in 2007 I bought my first property. A little unit in a complex that always quite appealed to me. Not sure why this was but it did. 2 years later in 2009 in bought another one in there. Then that same year a house that would later become our PPOR. And then 1 more house in that same year I believe. I'd met my now wife after the first two purchases and we never thought we'd end up living in that (then) crappy house. We married in 2010 and have since sold one of those units to fund the deposit for our dream home in a 'fancy' rural area. which took us to the top of our budget. We both work full time and earn a low/middle income.

Operation 2016

We still have a large loan for our newly aquired PPOR, and if we never paid any more principal, the equasion would look like this in 2022: $2M net equity, around $4M portfolio value. Including the home loan of $500k, or 850p/w in repayments. That would eat alot of money each year.. $45,000 just in repayments. Sure, we could sell it, but thats no life.. Thats still a povvo retirement.

If we sold something, we would have $1.7M equity and a portfolio value of $2.75M in 10 years time, but my charts tell me we'd be back up to $2M equity and LVR of 32% within 2 years of the sale date so not too bad.. That means we have no mortgage, a positive cashflow (probably not much though but it will pay for rates, water and power) and we can fund a little bit of spending money from equity or heaven forbid the sale of another property in 2022. Bad thing is the property we would sell used to be our PPOR and if it's sold in 10 years time we will incur substantial CGT.

Another option would be to sell something in 6 years from now (beat the 6-year CGT rule and pay no GCT) and the figures would look similar to this once we sell 1 property to pay off the mortgage: portfolio val $2M, $1M equity 50% LVR. And in 10 years from now (2022) the numbers look similar to this: Portfolio val $2.75M, $1.75M equity 36% LVR.. I'd rather the earlier exit That would make us 38 years young and I guess while some are still just deciding to place a deposit on a house (or even renting with only Superannuation as a retirement fund which might equal $400-500k at age 67), or, the same as a hard working couple who have managed to pay off their mortgage over 30 years and have $500k super so around $1M in equities at 67),

We have the ability to 'retire' or at least feel financially free enough to stop working for a while, or whatever. So it seems like a fairly reasonable nest egg to sit back on. One problem with this is: We may still have a small mortgage of $200k or so.. We would also 'save' around $100,000 in interest and principal payments over the 4 year period if we execute plan 2016 (as I'm calling it) Geeez thasts alot of money.

So by executing this 4 years prior (6 years time instead of 10) we gain the CGT exempt and $100k Not a bad incentive.

We might also purchase more property over the 6 year perod also. That will change the outcome.

At lease you have the option of retiring early.
Many people set themselves up, so they never have that option.
Good luck..and it will be interesting to watch as time progresses.

What are your assumptions of growth? It may not be realistic to use the same growth rates for the next decade, that we experienced in the last.

Also whats the, "beat the 6-year CGT rule and pay no GCT", rule? I'm happy to be educated, but I'm pretty sure that you still pay CGT after 6 years.

You may be thinking of the ability to move out of your PPOR for up to 6 years and still claim the CGT PPOR exemption, but this is very different to what you've described. I'd be delighted if you're right though. It would increase my personal wealth by up to 22.5%.

Hi PT. I'm under the assumption that as long as the property is sold within 6 years of us moving out, we are exempt from CGT. I may also be incorrect but this is what my account has told us? Please see here: http://www.ato.gov.au/corporate/content.aspx?doc=/content/86191.htm Although we initially bought it with a DHA lease and moved in within 11 months to receive the FHOG and stamp duty concessions that go along with that. We may be taxed on that 11 months but we also had a Real Estate Agent write a letterhead note to say what the value was when we moved in and it was like.. $5000 more than the purchase price so a possible tax on $5000 is my understanding.

In regard to growth rates for the next 10 years I've assumed 7%, although Darwin is set to boom with the LNG Inpex plant that will be in operation for 40 years here so I am thinking this should be about right, but wouldn't be suprised if it turned out to be more actually, although I won't bank on it.

I am a little concerned with the total portfolio val of $2M, so we'll be strongly considering another property investment within the coming years. I'd like to see us pay cash for the deposit. Then again, it doesn't bother me too much because I'd probably be happy to go back to work after having a little time off, save the deposit(s) and keep the value up that way. I can't imagine myself retiring and never doing any kind of income producing work again. It's more about having the freedom to us. I doubt my Wife could sit still for too long either but she'd like the ability to take a part time job.

That's my understanding as well. You can claim the Capital Gains Tax exemption for your PPOR, even if you have moved out of that PPOR, if sold within 6 years of moving out. Bare in mind however you are then up for any CGT on the house you are/have been in at that point.

In my goal (I found yours thanks to your input over there - http://www.somersoft.com/forums/showthread.php?p=871302 ), I had my PPOR, made it an investment and moved into another PPOR. It has been 2 years now, and in another 4 years I'll need to make a decision on if I sell that PPOR or lock down the capital gains in that period, or stick with the PPOR I am in now. I had an evaluation completed and have a copy of that evaluation from when we moved out. Highly reccomended as in 6 years time it will be a battle no doubt to prove values at time of move!

investor2009 said:

In regard to growth rates for the next 10 years I've assumed 7%, although Darwin is set to boom with the LNG Inpex plant that will be in operation for 40 years here so I am thinking this should be about right, but wouldn't be suprised if it turned out to be more actually, although I won't bank on it.

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This is a more general question, but why do people only ever run projections using a single growth rate?

Computers are good at performing calculations quickly, so it would be possible to run a series. For example, if capital values and rents could independently grow at 0%, 3.5% or 7% per annum, then there are nine combinations.

If you want to add more complexity then add a couple of different interest rates to the above. But three interest rate levels would mean twenty seven combinations. That's the combinatorial explosion for you.

The chances are that none of the projected scenarios will happen, but it would give you some numbers to start making plans and contingencies from.

Yes the 6yr rule is only on your PPOR so you can't sell ANY property. If you move out and sell within the 6yrs or move back in then out again and the 6yrs starts again. You cannot have another PzpOR though in order to claim it. You can only claim one PPOR at a time.

Hi Investor2009. You seem to be a pretty switched on guy with this investment thing, and are passionate about excelling in this part of your life. I have no doubt you will do very well, whether or not you reach your pre determined retirement plans.

I used to spend a lot of time like yourself planning for retirement at 35, 40, 47 etc...developing scenarios and creating all types of models. I reflected on all these strategies and wondered if i wouldn't be better off to actually start investing even more in my job and work and at least make this part of my life as pleasurable and rewarding as possible. As I took on more and more development opportunities, (some paid and some not), I found I concentrated less on "retiring", and more on enjoying my work, and continuing passive investments. My mindset has now completely changed. I'm basically planning to keep going until someone tells me to stop.

I'm 46. I have a multi million property and share portfolio (net), 1/2 a mill sitting in the bank, and a job that keeps on giving. I could stop working for years but I rarely think of retiring any more.

not to hijack your thread but I found focusing less on immediate retirement and more on my immediate life helped a lot emotionally and financially.

good luck!

Thanks for the replaies and opinions.

Graemsy, Yea, I do play around with all the parameters on my software, although the only thing that really changes for me is the time it would take to reach the set goal(s) is all so I'm not too worried about that. But good to play around with and I like how I can change it if need be.

Oscar, thanks for your wisdom. I've always concentrated on being financially indipendant so we do not have to work if we do not wish, which we think would be a fantastic feeling! (and such a great goal to achieve) and I've always just thought that after we reach this goal we get the time time to really think and go out on a limb we otherwise would not be able to whilst working toward our indipendance goal because for now, we require wage certainty.

People do mention to me that maybe I should be more job/career orientated, but the people that have mentioned that to me when I tell them of our plans are the ones who do not own any kind of investmnents so I just take it that our 'reality' is not even in their vocabulary so they have no knowledge or option of doing what we are and I just brush them off because in my heart, I really don't want to have to show up to work everyday. Trust me, I know. I've been doing it 5-6 days a week for a good 10 years now.

I'd love to be doing something of my own when it suits like yourself, and I like your financial position! But we require the capital to do this also.. Which we WILL have once we reach our main goal for now. Who knows, I might decide I want to go to Uni and become a Doctor.. Stranger things have happened. But at least if I do, I'm already financially free because we did things the opposite way they teach us at School. Usually it's get a degree on a low wage for many years, then buy houses. We work hard for okay money, become financially free and then figure out what it is we'd like to do while our investments are continuing to grow. I think we're doing alright and I really think this makes more sense.

UPDATE** I sent the plan through to our mortgage broker over the weekend to see what he thinks and if he can see any flaws in it. If I trust anyone to give it the tick it's Steveo' because he is also an investor and a good mortgage broker who knows well the rules of LOE lending so it's great.

He wants to see us late this week to discuss because he can see what he thinks are flaws. I will be interested to see what he classes as 'flaws'. I would think that cash-flow would be his main concern, but we already know that cash-flow is probably not going to be rich at that particular stage. And also the size of our assett base, but we're still young so that doesn't concern me too much.

Part of our plan is to have a good buildup of cash prior to this date and it will become much easier to save this cash when the debts erode and rents rise accordingly.

I will keep you posted on his concerns after our meeting Friday. In the mean-time, please feel free to chime in if you yourselves spot anything you don't quite see working.

investor2009 just don't get caught up too much in your excel spreadsheet...the only thing you'll know with certainty is that it'll be wrong.

investor2009 said:

I'm under the assumption that as long as the property is sold within 6 years of us moving out, we are exempt from CGT. I may also be incorrect but this is what my account has told us? Please see here: http://www.ato.gov.au/corporate/content.aspx?doc=/content/86191.htm Although we initially bought it with a DHA lease and moved in within 11 months to receive the FHOG and stamp duty concessions that go along with that. We may be taxed on that 11 months but...

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Someone correct me if I'm wrong...

But I thought that if you rented out the property 1st, then moved in to make it your PPOR, CGT is calculated on the percentage of time it was rented out.

eg. rented 11 mths, lived in 4 years, rented 5 years and 1 mth. Total time = 10 years. Total rented time = 6 years. CGT calculated on 60% of the gain.

Whereas if you moved into it first as your PPOR, then you can sell within 6 yrs of moving out and be exempt from CGT.

Ski-bum said:

Someone correct me if I'm wrong...

But I thought that if you rented out the property 1st, then moved in to make it your PPOR, CGT is calculated on the percentage of time it was rented out.

eg. rented 11 mths, lived in 4 years, rented 5 years and 1 mth. Total time = 10 years. Total rented time = 6 years. CGT calculated on 60% of the gain.

Whereas if you moved into it first as your PPOR, then you can sell within 6 yrs of moving out and be exempt from CGT.

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In the example you gave, you would pay CGT on the 11 months rented, claim 4 years PPOR then you are eligible for the 6 year exemption so the next 5 years 1 month would be CGT free.

But the first 11 months will always be subject to CGT as you can't claim the 6 year exemption until you have actually made the property your PPOR.

Of course, this excludes you from claiming another PPOR in the 6 year exemption period.
Marg

Ski-bum said:

Someone correct me if I'm wrong...

But I thought that if you rented out the property 1st, then moved in to make it your PPOR, CGT is calculated on the percentage of time it was rented out.

eg. rented 11 mths, lived in 4 years, rented 5 years and 1 mth. Total time = 10 years. Total rented time = 6 years. CGT calculated on 60% of the gain.

Whereas if you moved into it first as your PPOR, then you can sell within 6 yrs of moving out and be exempt from CGT.

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Hi Ski-bum

I would agree with yourself.

If the property is first a rental, then the CGT is pro-rata, If a PPOR first
then the 6 year exemption is available when other conditions are met.

Cheers

Pete

UPDATE** I've just had lunch with our Broker Steveo' and we had an excellent chat. Mainly about rural living, mowers and snakes but the other stuff was cool too His concern is 'your income will go up over the next 5-years'. And the only other thing was that it may take more, or less than 5 years to hit those figures, but it will happen 'around' there, somewhere.

He also told me a little about his own retirement plan and how he uses Shares and Property as the vehicle. He has $150,000PA at the moment but wants to work the next 2-3 years to hit $300,000p/a which sounds good.

He says the best thing is that he could just up and leave work tomorrow and not think much of it, whearas most others do not have anywhere near that luxury.

He has filed my original email and will take a look at it in 5 years time. He agreed strongly that our 6-year PPOR sale was a great idea.

I have a query regarding the 6 year rule. If investor2009 does not sell the PPOR within 6 years, and instead sells it after 10 years, does he pay CGT on 10 years worth of gain, or only the final 4 years?

In other words, is the first 6 years still CGT exempt if he did not move back in during that time or not?

You do not get the 6 year CGT PPOR exemption where the property has been rented first and not used straight away as your PPOR. The capital gain will be on a pro rata basis based on the number of days the property was available for rent compared to the number of days the property was your PPOR. I suggest you go back and get your accountant to clarify the situation.

Oscar said:

Hi Investor2009. You seem to be a pretty switched on guy with this investment thing, and are passionate about excelling in this part of your life. I have no doubt you will do very well, whether or not you reach your pre determined retirement plans.

I used to spend a lot of time like yourself planning for retirement at 35, 40, 47 etc...developing scenarios and creating all types of models. I reflected on all these strategies and wondered if i wouldn't be better off to actually start investing even more in my job and work and at least make this part of my life as pleasurable and rewarding as possible. As I took on more and more development opportunities, (some paid and some not), I found I concentrated less on "retiring", and more on enjoying my work, and continuing passive investments. My mindset has now completely changed. I'm basically planning to keep going until someone tells me to stop.

I'm 46. I have a multi million property and share portfolio (net), 1/2 a mill sitting in the bank, and a job that keeps on giving. I could stop working for years but I rarely think of retiring any more.

not to hijack your thread but I found focusing less on immediate retirement and more on my immediate life helped a lot emotionally and financially.

good luck!

Click to expand...

Hi,

Agree with Oscar here. The wife and I moved into a rental, sold our PPOR recently, and bought our 2nd IP. having satisfied ourselves with a 'property sugar hit', we just focus on other things like work, etc. I do enjoy my work as it is in the field that I enjoy (as much as one could enjoy a JOB).

With that said, we do not have an official plan for 'financial freedom'. As we intend to keep working, we have a rough idea that we would use our age as a gauge on how aggressive we should invest.

So while we are young and can serve longer-term loans, we will go at it aggressive, buying when we can. As we go into our 40s, we will slow down and then the 50s will be spend paying down the loans.

Since we intend to keep working into our late 60s or even early 70s, we find that focusing on a satisfying career helps take the focus off 'retirement / financial freedom' as a goal and more on the journey of living and raising a family.

With that said, we only started property investing back in 2009, so have many years to go.

Regards,

Daniel Lee

INXS said:

You do not get the 6 year CGT PPOR exemption where the property has been rented first and not used straight away as your PPOR. The capital gain will be on a pro rata basis based on the number of days the property was available for rent compared to the number of days the property was your PPOR. I suggest you go back and get your accountant to clarify the situation.

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What about if he did live in it first, then moved out.
For example I lived in my place first, and now I rent it out. (while I rent)
If I sell after 10 years (without moving back in) what period will I pay CGT on? (is it just the last 4 years)

Hi everyone

We purchased the home with the FHOG & FHOB. Rented it for 11 months, and then moved in where a local REA friend of mine wrote up an appraisal. The market had moved approximately $5000 so I believe we are taxed on $5000 if we beat the 6-year rule which began ticking the day we moved out in-to our new PPOR.

The house was leased to the DHA and we could not move in-to it. It was physically impossible. Rules are rules.

See below copy and paste direct from the ATO' website, this should clear things up a little for you.

The property must have been your main residence

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.

The property was our main residence from the day we aquired it. We had to rent until such time the DHA lease expired. This is quite common among buyers and many properties have existing leases that cannot be broken.

Worst case: We can move back in after 5 years and create a new 6 year when we move out. Whatever suits at the time.

Moving out of your home more than once

Your circumstances may change so, if you move back into your home after it has been rented out and subsequently move out again, a new six-year period commences from the time you last moved out. There is no limit to the number of times you can do this provided you do not nominate another home to be CGT exempt and each absence is less than six years.

It doesn't matter how many properties you control, although if you've been living in one of the others, that home will then be subject to CGT. Could be a good, or bad thing depending on your personal circumstance. In our view it works out well.