Friday 22 September 2023

Rental investment property blues

Apparently the tenants for my rental apartment have not paid the rent since 24 August, so the managing agent issued a termination notice with termination date 22 Sep (today). If the tenants don't pay the rent that is due, or vacate (give possession), then an application will be lodged with the relevant government tribunal (costing $60) and the case will be addressed in a couple of weeks. We'll see what happens. The tenants could catch up on the owed rent, or could move out and hand the keys to the managing agent, or not do anything -- in which case the application will be heard in a few weeks' time. The tribunal might terminate the lease (in which case the tenants should leave -- but sometimes you have to get the local council 'sheriff' to notify them the move out of the premises). Or the tenants might claim difficulty paying the rent and seek some sort of 'arrangement' to slowly catch up on the owed rent -- which can then drag on for a long time (and the tenants eventually move out owing even more in unpaid rent). Or the tenants could pay the owed rent the day of the hearing, in which case the application is dismissed (and often the entire cycle of falling behind in rent repeats).

In my previous experience having a rental property, it is quite common for tenants to move out without notice when they are many weeks behind in the rent, leaving a mess that needs cleaning up, damage to be repaired, and a two week 'bond' that doesn't even cover the cost of repairs and cleaning, let alone the amount of unpaid rent that is owed. The tenants then often move interstate (or in this case possibly overseas) and you can never recover the owed rent. Then you often have the property vacant for another couple of weeks while looking for new tenants (and paying for advertising etc).

One has to take the 'long view' with such things - otherwise you worry about having to make mortgage intereest payments on a $1MM mortgage at 6.29% while not getting any rental income, and also having to pay strata levy, insurance, council rates, utilities etc.

In the 'long run' rental income should cover *most* (or a large part) of the holding costs, the net negative cashflow and depreciation should provide some tax relief, and the eventual capital appreciation (after paying capital gains tax) *should* make the investment profitable in the long run.

ps. My application for income tax variation (based on the expected net loss from the investment property this financial year) was approved in August, but had not been applied by my employer's payroll department as of last week -- so I had to check with the ATO that the variation approval had been sent to my employer (it had) and then try to contact the payroll department (in HR) to find out why my withholding tax had not been varied yet. I still haven't received an update regarding the 'ticket' I had to lodge (other than an automatic response that it had been received), so I have no idea when my take home pay will start to reflect the reduced withholding tax rate of 11% for the remainder of this financial year.

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Thursday 21 September 2023

Simple Financial Lifecycle Illustrator

A Simple Financial Lifecycle Illustrator that you can play around with.

All figures are in current $ terms.

Enter the average after tax (take home) salary, age start and end full time employment, percentage of salary saved. It is assumed that all savings are available for retirement income, and that the amount of take home - savings = budget (both while working and during retirement). Then enter the inflation-adjusted after-tax rate of return (eg. If invested in index stock funds within superannuation, where the tax rate is 15% and the inflation rate was 2%, then an average return of 11% becomes 9% after adjusting for inflation, and 7.65% after tax).

Playing around with it lets you see the impact of changes to savings rate, retirement age, asset allocation (ie expected average return) and so on. It is a very simplistic model, as assumes the entered values are the average for the entire timeframe and doesn't allow for sequencing risk of any variability, periods spent working part-time etc.

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Friday 8 September 2023

Transition to retirement plans

I currently plan on sticking with my current full-time employment (barring any serious health issues or being made redundant) for another 8 years or so -- which would bring me to age 70. When I turn 65 I will be able to transfer my SMSF accumulation account balance into 'pension phase', which will mean (under current tax law) that the earnings and capital gains be taxed within the SMSF at 0% rather than the normal 15% tax rate on earnings (and 10% on capital gains). Based on my current SMSF balance, 10% SGL contributions and roughly 6% real rate of return, I should be close to the TBC (transfer balance cap) of $1.9MM at age 65. I might use $100,000 or so of the TBC at age 65 to purchase a deferred lifetime annuity to commence payments from age 85 -- which should provide an annual inflation-adjusted income of about $21,500 pa from age 85 onwards (which would cover around half of my budgeted living expenses). This should be sufficient to ensure I have sufficient retirement income even if sequencing risks adversely affects my SMSF balance (e.g. if there is a major market crash just after I retire and switch from making contributions to making withdrawals).

The mandatory minimum drawdown rate from an SABP (Simple Account Based Pension) for someone aged 65-74 is 5% pa, so a $1.9MM account balance in pension phase would require $95,000 tax exempt pension payment to initially be made each year. As I plan to be still working FT to age 70, the entire pension income can be used to quickly pay down the balance on my investment apartment loan while I am still working (and working on my PhD).

The investment apartment should become cash flow positive after a few years of paying off the mortgage principle using my SMSF pension income.

Once I retire from FT employment I plan to continue working PT as a financial advisor for up to decade (depending on how I feel at the time). The SMSF pension should be sufficient to cover living expenses and pay off the remaining investment property loan fairly rapidly, so any additional income earned as a financial adviser when 'semi-retired' will be available for investment (probably into my investment bond).

Then when I eventually fully retire, my financial planning business *might* be able to be sold for around 3.5x annual revenue, but I can't really estimate what that might be, Once I completely stop work the SMSF pension should be considerably more than I require, so I will probably invest any surplus income. As the SMSF pension is tax exempt, I will be able to earn up to $45,000 pa from personal investments, rental income etc. and stay within the 19% tax bracket. The net rental income from the investment apartment probably won't be quite this much, so I can probably invest some amount in my own name, then, once the taxable income gets over $45,000, I will direct any surplus income into my Investment Bond account, where it is internally taxed at up to 30% (probably around 20% due to being invested in the tax optimised funds).

The SMSF balance should continue to grow as long as the minimum drawdown rate remains below 8% (the 9% withdrawal rate kicks in at age 85), after which the pension payments will have increased to an extent that it starts to erode my SMSF account balance. The increasing surplus of pension payment compared to my budgeted living expenses (around $40,,000 pa) will be invested in the Investment Bond (and can be withdrawn tax free at any time if I require some additional income during retirement).

I doubt that my SMSF balance will be depleted during my lifetime (longevity risk), but in any case my existing deferred lifetime annuity will commence making pension payments of about $40,000pa (indexed to inflation) from age 99 onwards, so I won't have any financial concerns if I happen to live as long as my great Aunt (who made it to 104).

I did a rough calculation of how my NW has tracked over the past 20 years or so, adjusting the monthly figures to constant 2022 $ terms using the RBAs annual cpi index data, and also adding in the 'deflated' value of the lake house property I was given in 2014 for the prior year figures. I have been savings/investing around $25K pa over this period, and using an average rate of return (after tax) of 6% produces a 'projection' curve that tracks pretty closely to my actual NW. Based on this I should have around $10MM NW by the time I fully retire, and as the required retirement income will be negligible ($40K pa is only 0.4% of $10MM) my NW should continue to grow somewhat in line with this 'projection' even during my retirement. Of course any prediction extrapolating several decades into the future is likely to be nowhere close to reality.

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Friday 1 September 2023

12% solution 'superhero' portfolio and 'moomoo' trading account - end August 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of August was for

60% MDY + 40% JNK

So I will have to update the '12% solution' component of my superhero portfolio by selling the QQQ holding and replacing it with MVV.US (MDY.US is not available in the superhero platform). I have placed a 'market' order to sell QQQ which should get filled tonight, and I will then reinvest the proceeds into MVV (I am not sure if the proceeds from the QQQ sale will be immediately 'cleared' and available to reinvest).

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +21.5%.

My overall 'superhero' trading account was up slightly during August - from $2,149.11 to $2,162.41

My other 'moomoo' trading app account (where I try to read the entrails of technical charts to make profitable 'long' positions on the index trading VAS ETF) was also slightly up during August - from $5,072.30 to $5,179.63. Although a large part of that increase was due to the value of the 'free' shares allocated to the account as a 'new account' bonus. My actual trading result was a 50% win:loss ratio, with two trades losing an average of $73.94 per trade, and two trades gaining an average of $73.25 each. The win:loss ratio was quite good (but with such a small number of trades it is way too early to draw any conclusions), but the realized losses were higher than planned ($50) due to missing one 'stop loss' alert on opening, and closing out the position well below the 'stop loss' target price. I also closed out one positive position too soon, as it was my first trade and I got nervous and wanted to crystalize a 'profit'. At least I improved my trading discipline during the month, with the deviation of trade price from target decreasing from $0.92, to $0.62, then $0.26 and finally $0. The final 'trade' was actually to reset my existing position with new 'stop loss' and 'take gain' alert levels when my profit target was reached. As the chart seemed to show the up trend was being maintained, I decided not to close and reopen a position, but simply do a 'paper trade' and keep the position open but treat it as a new position.

Compared to the 'benchmark' of the S&P500 index my 'trading' seems to have been reasonably successful during August. Even if my account goes down in value, the trading is still a 'success' if it goes down less than the relevant benchmark. I'll see how this looks after a year to two of 'trading'. The dollar amounts involved are relatively trivial, but it gives me something to play around with while my superannuation and real estate investments just sit there and do their thing over several decades.

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Net Worth - AUG 2023

Chart updated to end of August in sidebar.

Stocks/cash increased $4,918 (+2.39%) to $210,527.

Retirement savings (SMSF etc) decreased by -$7,149 (-0.45%) to $1,589,553

Est. of Home valuation (my half) increased by $17,879 (1.74%) to $1,048,105.Conversely,'other real estate' (my 'lake house' and the investment apartment) decreased by -$20,825 (0.54%) to $2,052,532. 1

The outstanding balance of the investment property mortgage is $999.993. The bank credited a small adjustment, so the loan balance decreased to slightly below the $1MM. I have about $136K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $1,077 (2.99%) to $37,067.

Overall, NW decreased by -$4,093 (-0.10%) to $3,945,693 during August. With a dip at the start of the month being recovered by month's end

The tenants of my investment apartment paid 6 weeks rent during August, so have basically caught up with their arrears. So I am glad I told the managing agent to not proceed with a lease termination notification unless they fell more than two week's behind again. The managing agent has a bit of a conflict of interest in this matter, as a change of tenants means I would have to pay one week of rent as a fee for finding a new tenant and additionally pay for some 'advertising' for new tenants (which is basically advertising for the management company paid for by their clients!).

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