Getting The Portfolio Back On Track
Rolling up from super low interest rates can be crippling, but a portfolio review can fix all that, writes Laine Moger.
28 February 2023
On the surface it looked as if 35-year-old investing couple Tom and Sammy were doing really well, but increasing interest rates had them beat.
A rolling interest rate from 2.5 per cent to 6.5 per cent meant an extra $1,200 a week in property top-up contributions – a significant blow to their cash flow and time spent with their young children.
Here’s how they sold one property, to get them back on track.
Tom and Sammy had a combined salary of $180,000 and were busy, working parents raising two kids. Their portfolio of four houses included their own home, two investment properties, and they had another property under construction (due to settle later this year). Currently, the portfolio was worth $1.9 million, which would jump to $2.75 million once the last property settled. At just 35 this is a great position to be in.
But a 4 per cent rise in mortgage interest rates greatly impacted their personal cash flow. The main concern for Tom and Sammy was the effects on their family. After all, less cash flow meant less money to do things for the kids.
To make up for the shortfall they would have to spend more time at work, away from the kids. On top of that, given their debt to income, the couple weren’t sure they were going to settle their property under contract, which meant possibly losing their deposit and threatened their overall retirement goal of a $100,000 a year in
HOW MUCH MONEY?
To create a property investment plan you need to figure out what you’re investing for (your goals). Once you have your goals figured out, you can decide how ambitious your plan needs to be.
Tom and Sammy did have a number in mind: $100,000 (and an early retirement). But here’s the thing, right now they were stuck. The market has changed. In dollar terms, they were looking at an extra $2,200 a week.
- $1,200 in investment property top-up a week ($66,000 a year).
- $1,000 top-up on the P+I loan on their owner-occupier.
‘To create a property investment plan you need to figure out what you’re investing for’
Because of Tom and Sammy’s unique situation, they had to do a total review of their property portfolio.
And as it turned out, there was one Auckland property that was massively under-performing and, even with a rental refresh, it was never going to reach the level they needed it to be. This property was the former family home, and therefore never intended to be a rental property.
An independent valuer said the property was worth $1.3 million, and they were clear of the bright-line test. The next step was selling it.
With the proceeds the couple could not only clear the outstanding $680,000 left on their owner-occupier mortgage and settle the property they have under contract, they could also look to buy an additional (more suitable) investment property.
WHEN AND WHERE
Now mortgage free, and one property down, Tom and Sammy sat down again to do a wealth plan.
The new plan was to look at another two more growth-based properties outside Auckland (a townhouse or a standalone property). The first would be purchased in 2024, the next in 2028.
This sixth and final property took the couple to $110,000 passive income per year in retirement, with a retirement age of 50 – just 15 years away from now, and
15 years earlier than most.
Tom and Sammy’s experience might resonate with a lot of investors in this current market. Rolling from a super low interest rate to today’s high (over 6 per cent) can be crippling. So, if you have a portfolio that’s causing you sleepless nights, it might be worth discussing your options with a financial adviser.