On today’s episode,
Bernadette is going to talk about setting goals for 2020, and what we’ve got in store for the new year.
Listen to Episode 54: 2020
Podcast: Download (Duration: 20:04 — 20.21 MB)
- The Game Changer Mastermind event
- Holiday at Black Forest Germany with family
- Her retirement plan project
- Strategies for the retirement plan
- The entity that you purchase the property in
- Using a discretionary trust for asset protection
- The affordable housing path
- New generation boarding house legislation
- The Affordable Housing King
- Risk reduction strategy
- Incorporating low energy into the design and power source
- The building costs of new-gen townhouses
01:02 - The Game Changer Mastermind
03:03 - Part of our retirement plan
05:30 -The strategies
07:40 - Positive cash flow
10:15 - New generation boarding house
12:29 - A risk reduction strategy
14:13 - A caretaker is not required
16:01 - Affordable housing
17:53 - In terms of finance
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"That's the great thing about renovating and property. There is no ageism. You're free to live the life you want and to work as much or as little as you want. And so I guess what I want to say is seize the opportunity"
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I'm recording this episode in our Airbnb in the Black Forest in Germany. So we're currently staying in a medieval castle that sits on top of a hill in the heart of the Black Forest in an area called Baden-Baden. And it's fascinating.
The walls of the building are around a metre thick and we have expansive views for miles so we can see at least 100 miles out from where we are staying. Interestingly, the castle is owned by a chef and he and his son operate a restaurant and they Airbnb one floor of it. So that's where we're staying.
Parts of it are quite very original like very basic but of course where we're staying is quite nicely renovated and we find it quite fascinating.The other interesting thing is that when the chef and his son go home at night, they leave us here. We're the only ones in the whole building and we have the only key. The instructions are to make sure that we're there when they arrive in the morning to open up the restaurant, otherwise, they can't get in which strikes me as being very odd. But anyhow, that's what we're up to.
Today I'm going to talk about what we've got in store for 2020, and I'm going to do this in two sections.
The first section is a project that's part of our retirement plan. And so that's what I will be drilling down into today.
Now, before I get into it on the way over I sat next to a world expert in musculo-skeletal medicine and we were talking about his projects. He's done some property projects, a small development and so on. We were also talking about retirement. He was saying that when he's retired but he didn't retire through choice. I guess the general feeling is in his industry is that once you hit 60 that you need to move aside and retire to let the younger people come through. And he doesn't want to be retired but he's just been forced into that position.
And that's something that we do not have to deal with. That's the great thing about renovating and property. There is no ageism. You're free to live the life you want and to work as much or as little as you want. And so I guess what I want to say is seize the opportunity.
Now, of course, you may have some challenges in terms of getting finance. But then the flip side of that is, generally speaking, you are much more established than younger generations so you have some assets that you can leverage from.
If this is the path that you choose for your retirement years I guess I'm an avid supporter because I just know that it's an awesome way to live your life. It's full of inspiration and creativity and I guess it's no secret I absolutely love it.
But now I want to talk about this project, which is part of our retirement plan. We bought this block in 2015 with the intention of developing in two townhouses. It's 1100 square metres in the west of Sydney. For the last 4 years, it's been on Airbnb and has been covering its costs reasonably well. It currently has a house and a granny flat on the property, which ultimately will be demolished and replaced with townhouses.
First I want to talk about the strategies. A lot of people like when they're investing for retirement get quite hung up on how they're going to pay off the loan. Like how they buy double the amount of properties so you can sell half and pay down the debt.
I actually tend to look at cash flow. And the reason being that I believe that when you retire you should definitely have your family home paid off. You should not have any debt on your principal place of residence. But in terms of your investment properties, I don't think it matters like there's no line in the sand that says that you need to have this all paid off. And I think it's quite I guess not all that smart to be selling property where you will pay a large percentage of the profit to the government in tax. You'll pay agents fees for selling it. So what you end up with in your hand is considerably less than it's worth. Why do that? As long as it's sufficiently cash flow positive that it covers the loan and it also produces cash flow for the purpose that it was intended then I don't see the problem.
And in fact, I learnt this from my mentor, who I'm sure I've mentioned her in previous years. She didn't start investing until she was in her 50's and she died just last year at 93. By which time she had amassed a massive portfolio. But she was still investing and developing and in fact, she had a loan that expired in 2043.
There are definite advantages to remaining active with your investing as you get older. There's no cutoff point where the minute you hit 60 all of a sudden you're not capable of making sound decisions. The one thing you do need to make sure of is that the properties that you invest in have the capacity to produce positive cash flow from day one.
And that's where I think a lot of people come undone. They buy property and that initially is negatively geared and rely on organic growth only. And that's a long, slow burn over which you have very little control. Make sure that it is cash-flow positive from day one.
The other thing about this and the actual debt is over time that debt will pale into insignificance. If you hold it for 10 years the value of the property should be around double what you paid for it. In 20 years, you know, triple or quadruple provided you bought in the right areas. That's my view on it. And that's certainly the view I've taken with this project.
Now the second thing I want to talk about is the entity that you purchase the property in. In this scenario, we've used a discretionary trust and the reason for that is for asset protection but also to be able to have some control over how we distribute the income. So with a discretionary trust you can use discretion in distributing the profit or the income. And so we are able to funnel that to the person with the lowest tax rate.
And the third thing that I want to share about this project is that the plan has evolved. Originally we thought we would do a townhouse development but when we looked at the area, everyone was doing four-bedroom townhouses in that street. The zoning changed around about the time we purchased the property. And so all the common thinking is to get as much building on to the land as possible and that's four-bedroom townhouses.
Now, I don't know that that really works with the way the nuclear family is changing. It just must be the contrarian in me I just didn't want to do what everyone else was doing. And so as time has gone on we've made the decision to go the affordable housing path and build a new-generation boarding house. Now, "boarding house" is a word that generates fear in most people's hearts. And in this scenario we're really just talking about the name of the legislation that we're going to use to get the outcome we want. By using new generation boarding house legislation we're able to build modern-day studios. Brand new studio apartments. They are fully self-contained.
There are some benefits to building using this legislation. The first one is that there is no land tax, which is an incredible bonus. You're also allowed to build 20% more FSR. So that means that you can put 20 percent more building onto your land. You're required to only have one car park per two dwellings and there are also some grants available. However, I wouldn't hang my hat on those because they are subject to availability and that seems to be quite catchy.
Now, technically, the land is big enough to be able to build 20 of these studios on the block. However, we've decided to add a twist to our implementation of the new-gen boarding house strategy and that's to actually subdivide the land into townhouses. And each of the townhouses would be for new-gen boarding house dwellings.
This was a strategy that I learned from Ian Ugarte, "The Affordable Housing King". And it came about when we were looking at doing the numbers on it and there were a few things that just weren't really working in terms of what we wanted as an outcome. Firstly, we didn't want this to be like a boarding house we wanted it to be individual high-quality dwellings. And so doing them in one big block wasn't going to work.
The other thing is it was a risk reduction strategy. So if at some point in time we wanted or needed to sell part of the dwelling off, you can't separate out each of the studios, they're in one lot. So it's a bit like when you put a granny flat onto a house, you can't subdivide off the granny flat. That legislation requires that they stay together and the same with this. So what we thought we would do is if we would subdivide into townhouse lots and put a block of four new-gen boarding houses on each of those lots. Then if we wanted to sell off one or two at some point, then we could and we would have a bigger pool of buyers because the pool of buyers for a lot of 20 is quite small. You're probably limited to self-managed super funds and the like. However, the pool of buyers for a lot of four would be much bigger so a lot less risk
The other reason is because of reduced building costs. If you build a new-gen boarding house that's over 299 square metres you're required to build it to cut class 3 standard. This is a building code requirement and so it's just like building a set of apartment blocks. You have to have all that fire safety measures in place. And so by keeping the square meter each under 299, then we are only required to build to 1b standard which still has fire safety requirements but they are less financially onerous.
And the other advantage of doing them in lots of four is that a caretaker is not required. So you might be wondering who is going to live in these properties. The west of Sydney has experienced huge growth in recent years, so the Badgerys Creek Airport is quite close by to our block. And there's also a massive amount of industry in the area.
It's become an employment hop and many people need to be in the area in order to work, may be leaving homes in another location and have to spend the week in that location and need somewhere to stay. There are also people leaving marriages, young people saving for their own home. So no shortage of tenants.
At the moment, our thinking is that we will build three lots of four dwelling new-gen boarding houses and the other two we will do as traditional townhouses. At least one of them will be four-bedroom. The reason being is that we have run the house and granny flat as an Airbnb for the four years that we've owned the property. And that has been a drawcard because it's able to accommodate 9 people and there are lots of sporting venues and the like in that area that bring teams of people to stay. So I definitely think there's an advantage in keeping an Airbnb in the area. And so I can tell you a new house will be much, much easier to maintain than one that we're about to bulldoze.
Important to note that the blocks that are not going to be used for affordable housing don't get the same benefits as I mentioned in the beginning - no land tax, the increasing deficit and so on. They will have to be built to traditional standards, which is fine. The other thing that we're quite keen about is to make all of the dwellings as low energy as possible because we will be holding on to those, we'll be paying the energy bills. And also just because it's better for the planet then we'll be incorporating low energy into the design and also the power source.
Each of the new-gen townhouses will have one disabled dwelling on the ground floor. That's the planning requirement. So one will be disabled and there will be two car parks, one disabled car park, which is really one and a half and one standard. And then on the top, there will be 3 single dwellings. They'll be just the studio they'll have a kitchenette, they will have a bathroom and also a balcony.
The next step for us is to work with the town planner and architect. The architect will be David (Janson). He has done some new-gen boarding housework, that we're keen for him to develop his expertise in this area. And also we'll need to start working on finance. So finance for any development can be quite challenging. We anticipate it'll probably take us most of the year to get going on this to actually get the plans done, to get council approval, to get it financing and get set to go. I'd like to be turning the first sod by next Christmas.
And in terms of finance, the building costs of this type of development are between $70K and $100K per dwelling. It's slightly higher than traditional dwellings but of course, all those kitchens and bathrooms give you really amazing depreciation value. That's going to be the first thing that we start working on this year.
And so I will give you updates as we go along, as most of that work is going to be planning and preparation for the actual development. There's not going to be a lot to show for it. And of course, I need to have a renovation because that's what I love to do.
In the next episode, I'll share with you the plans for renovating in 2020. So that's it for this episode. If you haven't already done so, please go over to iTunes and leave us a review so that we can share the love because that's how people find out about the podcast. And also we have a free Facebook group called She Renovates and you are welcome to come over and join that, too. And if you do, share what your retirement plans are. Have you got any retirement projects that you're working on? We'd love to hear about them!