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On the surface, Tom and Sammy were doing well. They were both 35 and already owned 4 properties.

But increasing interest rates had them worried. Very worried.

Here’s their story – how they paid off their mortgage and are on track to have a passive income of $110,000 a year.

Everything in this case study is true to life (goals, salary, property prices, the Opes financial adviser they used). Only the names have been changed to protect their privacy.

Do you have a question or comment about this case study? Feel free to leave your thoughts in the comment section at the end of the page.

Who are the Investors?

Tom and Sammy are both 35 years old and earn $180k between them. They’re busy, working parents, currently raising 2 kids.

At the time, they owned 4 properties –

  • their own home
  • 2 investment properties and
  • another property under construction (due to settle later in 2023)

Together, the three properties already built were worth $1.9m. This would jump to $2.75m once the last property (currently under construction) was completed.

At just 35 years old, this is a great position to be in.

Even still, they decided to meet Dennis Schipper, a financial adviser with Opes Partners.

They were worried about rising interest rates. Their mortgages were about to go from 2.5% to a 6.5% interest rate.

Collectively, their mortgages would cost another $2200 a week. That was split across:

  • $1200 for their investment properties ($66k a year)
  • $1000 extra for their own home

This would hit their bank accounts hard, so what did they do?

What did the investors do?

Here’s what was playing on these investor’s minds:

  • For them, family is their main priority. But less cash meant less money to do things for the kids. They would have to spend more time away from their family at work to make up for the shortfall.
  • Because the banks have tightened their lending criteria, the couple wasn’t sure if they could get the money to pay for their last property once it was built.

Here at Opes Partners our financial advisers, like Dennis, usually focus on helping Kiwis build their wealth.

But before Tom and Sammy could even do this, they had to deal with the higher interest rates.

Step #1 – Find ways to free up cash flow

The first step was to figure out how they could increase their cash flow. This included:

  • Talking to a mortgage broker about extending their loan terms. This would decrease their mortgage repayments, leaving them with more cash
  • Reducing their KiwiSaver contributions, so they had more money coming into the bank
  • Asking for a pay rise from work to increase their incomes.

Tom and Sammy reviewed this list, seeking ways to free up cash. Best of all, they increased their pay by $25k between them.

This meant their household income increased from $180k to $205k.

This would help massively … but they’d still face a financial hit through those higher interest rates.

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Step #2 – Sell an under-performing property

The next step was to look at all 4 properties to see if they were all still fit for purpose.

One of their Auckland investment properties was massively under-performing. The rent wasn’t at market level, and the yield and cash flow were rubbish.

This rental property used to be their family home. They didn’t buy it with the intention of it being a rental property.

Even if they increased the rent to market level, it wouldn’t reach a high enough yield for Tom and Sammy to make the numbers work.

An independent valuer said the property was worth $1.3m, so they decided to sell.

Once they sold the property, they took the money and:

  • Paid off their $680k mortgage on their own home
  • They were then able to get money from the bank to pay for their property that was under construction
  • Buy another investment property with a higher projected return.

Getting rid of their own home mortgage made a massive difference to their bank accounts. They wouldn’t have to pay the bank the extra $1,000 a week. This improved their cash flow.

With their cash-crunch troubles sorted, Tom and Sammy could look to their long-term wealth plan. This has three steps –

Step #1 – How much money do they need to live on?

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 decided they wanted a passive income of $110,000 a year. They also want to retire early. The pair want to stop working by the time they hit 50. That’s just 15 years away from today and 15 years earlier than most.

The next step was to see how far away they were from achieving this goal.

Step #2 – Calculating their Wealth Gap

Now cleared of one property and a personal mortgage, Tom and Sammy needed to calculate how many more assets they needed to create this income.

Remember, they initially aimed for a $110k passive income in retirement. Based on the properties they had left, they were on track to hit a $63k passive income.

This is good, but not the $110k they would need. This means Tom and Sammy have a Wealth Gap of $1,175,000.

That’s the additional wealth they need to create to achieve their goal.

Thanks to some debt reshuffling, their ability to borrow had increased massively. So, Dennis created a new plan.

Step #3 – How many properties did they need to close their Wealth Gap?

To close their Wealth Gap, Tom and Sammy needed more assets. Here’s their plan –

Year #1 (2023) Settle the townhouse already under contract.

Year #2 (2024) Invest in another growth property outside Auckland (a townhouse or a standalone property). This is to diversify their portfolio.

Year #6 (2028) Look at a 4th and final investment property. The type and location will be decided closer to the time.

This 4th and final investment property is projected to take the couple to $110k passive income annually in retirement.

This plan meant Tom and Sammy would be mortgage-free on their own home by 35. They’ll also have 4 investment properties by 41 and will be set to retire at 50.

Next steps

Tom and Sammy’s experience might resonate with many investors in this current market.

Rolling from a super-low interest rate to today’s high (over 6%) can be crippling.

So, if you have a portfolio causing you sleepless nights, it might be worth discussing your options with a financial adviser.

Want the same service as Tom and Sammy?

Your next step is to book a portfolio planning session. This is where you and a financial adviser will create you a financial plan.

Book your free session
Opes Partners
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Laine Moger

Journalist and Property Educator with six years of experience, holds a Bachelor of Communication (Honours) from Massey University.

Laine Moger, a seasoned Journalist and Property Educator with six years of experience, holds a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism. She has been an integral part of the Opes team for two years, crafting content for our website, newsletter, and external columns, as well as contributing to Informed Investor and NZ Property Investor.

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