Client Case Study

Purpose

Our clients really wanted Suzanne to continue to work part-time. Suzanne was adamant she wasn’t going back to full-time work due to family commitments with their three school aged children. They wanted to find a better way to get ahead financially that gave them the work-life flexibility that they so desperately desired.

Situation

Our Discovery Session revealed that John and Suzanne had purchased a negatively geared apartment that had average performance over the last 8 years. They purchased the apartment for $450,000 and it was now worth $650,000. The rental income was originally $390 p/w and grew to $520 p/w. They had made some capital growth, but the rental income turned out to be lower than expected and not strong enough to support their need to keep Suzanne’s flexible working hours. They realised that body corporate fees and outgoings really impacted their net return and didn’t provide enough cashflow to supplement an income. They were also worried about the usual things like maintaining mortgage payments, paying too much tax and not having enough assets to support them in retirement. They had plenty of equity in their home, but their main issue was that they couldn’t move forwards with buying another investment property because they did not have additional borrowing capacity.

Strategy

As part of our investment process, we sat down with our clients in a Strategy Session and showed them how it is possible to purchase two positive cash-flow properties and still get great tax benefits. This is made possible by the way banks calculate different sources of income. Banks only include 40% of every dollar earned from employment income in borrowing capacity calculations; whereas they use up to 80% of every dollar earned from rental income. We ran the numbers on the scenario where they sold their underperforming apartment (and paid the capital gains tax) allowing them to pay down their home mortgage. This strategy would reduce their personal expenditure and increase their borrowing capacity.

Solution

We presented two Co-Living Property Solutions one for $750,000 and the other for $812,000 in two different strategic locations to mitigate vacancy risk. They were able to borrow 80% on each new property and used their offset account of $500,000 to fund the deposits, closing costs and furniture packages. We suggested that they use different banks for reduce lending risk from cross-collateralisation. All interest payments were tax deductible.

Outcome

Our clients couldn’t believe that they could increase their property portfolio so quickly after so long with lacklustre performance. They love that the Co-Living properties are fully managed and that they are true passive investments that put money in their pocket each week. They decided to be disciplined and pay the surplus cash-flow into their offset account each week, with a view to acquire another Co-Living property in three years’ time once their eldest is no longer considered a dependant and they have additional borrowing capacity. They love the idea knowing that they are on track to have three positive cashflow investment properties knowing that they will be able to leave a legacy to their three kids.