OWN TWO HOUSES INSTEAD OF ONE AT RETIREMENT – HERE’S HOW

Nathan Coad of NMC Finance tells us what we need to know to retire comfortably, as long as we start now.

You know that guy. He earns the same as you, but he has two houses and you only have one. What’s his secret? GOOD FINANCIAL ADVICE. He has people working for him who know how to get the best from the existing system. And you can too. You just need to know how to make the system work for you.

I need to stress to the Over 50s that it is just so important to have a clear strategy for retirement. I work with a lot of clients in this space. The way you approach your planning at this stage of life can make all the difference to how you live in your later years. And it’s easy, legal, and very, very smart. Everybody needs to know this.

For those of you with an outstanding home loan debt on your home, there is good news. You are generally sitting on a lot of equity from the uplift in property values. It may seem to be just an imaginary amount of money or simply theoretical, but it is actually an important tool that you can use to free yourself from money worries in your later years.

You probably currently have no passive income sources and are going to be reliant in retirement on your superannuation generating a small amount, and then likely the Age Pension. But you could change that, depending on how you are currently set up financially.

You need to use the equity in your home to increase your wealth. We meet with people to understand the structure of their home lending, and work out how much equity they have. And then we can work out how they can put that equity to work, rather than having it sitting there doing nothing.

The good news is that anyone with equity building up, can use that equity to buy a second property. The second properties our business associates suggest you buy, they suggest for a reason.

• The second property can help you reduce your existing tax base. Our associated registered accountants provide the advice here.
• The second property is expected to increase in value over time, providing capital growth and make life easier at retirement. Again I will refer you to our partnered advisors who will guide you through that.
• Clients will only have to contribute $20 to $50 a week themselves to actually secure the property in the current environment.
• You will pay down your mortgage five to 10 years faster.
• You’ll have an extra asset at retirement. With this, you can sell it, take the capital growth or keep collecting the rent.

The second properties our business associates suggest are all across Australia. They identify suitable properties in specific areas of Victoria, New South Wales and Queensland. These properties have been selected according to population trends, infrastructure, investment, and what is going on from various levels of government.

RISKS

There are the usual risks. There’s always the potential of interest rates increasing. If the rents don’t increase as well, you’ll have to pay the difference. Our associates take some of that risk away from the actual rent side of things. Properties that carry a five-year rental guarantee provide support. Our associates work with property managers so that if the tenant doesn’t pay the rent, or if there’s a delay in being able to find a tenant, the property manager will actually cover the rent for five years at an agreed rate.

The other key risk is that there cannot ever be a guarantee that property prices are going to rise. But, if looking at historical data in Australia, property generally has only really done one thing over the long-term. Gone up over time. Over the decades, as population growth occurs, urbanisation happens and infrastructure goes in. Areas that weren’t once ideal to live in then become very sought-after areas. Inner city areas in Melbourne like Carlton, Richmond, Collingwood are examples. In Sydney, you have Surry Hills and Redfern. At some point in time they were very undesirable places to live. Redfern only 10  years ago was still undesirable, but thanks to urbanisation and population growth, those areas have become sought after because of their close proximity to the city.

This gentrification and subsequent increase in property values is expected to happen all through Brisbane and through to the Gold Coast. It’s these areas of stable increases in capital growth that we our associates focus on.

The Covid crisis has ultimately started to change our culture. Regional areas propertywise have experienced such a boost because of people realising that they’re never going to have to go back to the office five days a week in the city. Personally, I don’t believe it’ll ever go back to what it was with large corporations in Australia reducing commercial leasing capacity and assisting employees with flexible working arrangements.

A CASE STUDY

Alison (48) and Paul (53) have a combined income of $200k. They are both self-employed and have a house which they live in. The house they bought last year for $655k has just been valued at $850k now. They paid $300k as a deposit. What should they do before they retire?

Advice: Firstly, I would work out what the borrowing capacity is and I’d suggest property-wise, Alison and Paul can probably secure a second property around about $470k over a 30 year term. A second property is a saleable asset, if you need to sell it, you are not going to be without anywhere to live.

Alison and Paul also need to have an exit strategy at retirement.

On the other side of this process, Alison and Paul would build ownership in the property that has a renter in it and the rent is paying it off. They are only approximately paying $20 to $50 per week to get into this situation. The lending is structured so that direct mortgage exposure against the primary home is limited.

THE SECOND PROPERTY

No emotion should be attached to an investment property. Think of it like purchasing a share in a  company. What you’re looking for is an asset that’s going to be generating demand.

OTHER OPTIONS

There are other ways to increase your retirement pot. An example is salary sacrificing a part of your salary, into superannuation and at the same time access a part-pension from your superannuation. That round-robin transaction results in you firstly ending up with the same net salary each pay period that you would have otherwise, but you end vvsuperannuation’s a lower tax environment than your personal status, in your marginal tax rate.

Any superannuation strategy will be guided by our associated financial planners who are engaged to advise on the suitability of acquiring property in the fund.

So why isn’t everyone doing this? Mostly they don’t know they can. This is why financial advisors are so valuable. They understand areas in which you can quite lawfully utilise the tax laws to your advantage.

People who build up large property portfolios – all they’re doing is utilising knowledge and applying it. It’s sitting within the parameters of the tax law. Knowledge is power, and then applying it, that’s when it becomes apparent.

Property is just one asset class, and there’s many asset classes you can access. But property is one which you can utilise with the tax system to help you pay down that asset faster.

SUPERANNUATION

Superannuation is the other key area we can assist with. If people have built up a good base of superannuation over their careers, we can help clients navigate purchasing property through their superannuation.

EXPERT ADVICE

How do I know how all this works? Because I’ve been a career banker. I started in 2005 and spent most of that time in the lending environment.

Up until 2018 I worked in two of the major banks, before I started NMC Finance. I started my own brokerage because I saw a gap in the bank offering. One of the reasons why I really enjoyed being a  commercial banker was being able to go out and build relationships with clients and provide that personalised experience. So setting up my own firm really allows me to do that.

I’m not limited to one set of credit policies with one bank, one set of products that probably doesn’t fit all clients. I’ve got about 38 lenders in my panel, and I’ve also got the ability to go offpanel where there’s an alternative scenario that’s suitable for a client. And so when you’ve got the power of that behind you, you can build strong relationships with clients that you can keep for life. I really enjoy working in this space and it’s thrived through the pandemic.

THE TIME TO ACT IS NOW

It’s been a really great time for clients to be able to secure extraordinary discounts on their finance which are in place for the whole of the 30-year terms. It’s also the perfect time to be refinancing, securing very cheap money. It is the lowest environment, interest-rate-wise, in the history of Australia. This is your window, jump through it.

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