Emma Challands.

Eyes on retirement ... Emma Challands.

Project engineer Emma Challands would like to be in a position to retire before 40. That doesn't necessarily mean she will - she loves her job in building and is studying for a masters in construction management to further her career - but her financial goals are clear.

''In a nutshell, my plan over the next 10 years is to buy basically two properties every year,'' she says.

She already has one investment property and is looking at buying another in the middle of next year. Emma plans to sell half her portfolio of properties as she goes, to pay off debt and use the rent as a passive income stream. You can read about her progress here mypropertyjourney.com/about/.

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Emma has always been interested in building things. As a child she loved Lego and as an older teenager it was Sim City. Having a father in development also helped.

''I think the main reason I got interested in property was my dad does development as a bit of a hobby,'' she says.

Developing might be on the cards but for now Emma wants to know if her income-based strategy will work.

''My main focus is the western suburbs of Melbourne - still in close proximity to the city but obviously a lot lower in price,'' she says.

We asked three financial planners to overhaul Emma's finances and suggest some strategies.

Think about paying HECS

SUZANNE HADDAN
BFG Financial Services

It’s great that Emma does not have high-interest loans outstanding such as a personal loan or big credit card debt. And the interest on the investment loan is tax-deductible, which reduces the annual interest cost from about 6.5 per cent to about 4.45 per cent.

Recommended strategies depend on Emma’s plans. Assuming Emma will at some stage buy a home she should deposit her savings into an offset account against the investment loan. This effectively earns her 4.45 per cent after tax on the funds but keeps them available.

She could get a better return by making voluntary lump sum payments off the HECS debt for a discount of 5 per cent on amounts above $500.  If Emma repaid, say, $2000 her HECS debt would fall $2100. If she pays before June 1 each year she will also avoid indexation of the debt, which could save 2 per cent to 3 per cent more.

The downside is the amount is then not available to meet other goals such as buying a home.

Protecting assets and income is also important. As a minimum this should include income protection in case she could not work; and total and permanent disability, generally combined with death cover, to pay a lump sum should she be disabled and unable to work again.

Borrow wisely to profit

MIKE INGHAM
Obelisk Advisors

Borrowing to invest in residential property has been a very successful strategy for many Australians over the years. However, it is not a sure-fire recipe for success. The tax benefits of gearing are often highlighted but you need growth in the value of your property investments to make the strategy work. So selecting the right property is very important. 

One-bedroom units are often a realistic first step on the property ladder but larger unitsand houses tend to have greater potential for capital gain.

Emma seems to be in a sound cash-flow position withsurplus income of about $10,000 a year. Given her loan of $127,000 represents a relatively high 87.6 percent of the value of the investment property, I would suggest she increases her loan repayments by about $400 per month to build up the equity in the property and reduce the loan-to-value (LVR) ratio below 80 per cent.

She needs to make sure cash savings are held in a loan-offset account that can reduce the interest charged on the loan balance. When the LVR is below 80 per cent, she should progressively build up cash levels in the offset account for her next investment.

Stop for a reality check

PAUL MORAN
Paul Moran Financial Planning

Emma, like many people, dreams of retiring at 40 with a property portfolio. Unfortunately, we often need a bit of a reality check. The investment property dream relies heavily on prices continuing to rise quickly, allowing you to use the equity created as a deposit on the next property.

In this publication and others recently, the talk is of property prices remaining, at best, flat for the time being,  which means Emma will have trouble with her strategy. At the moment, she has usable equity of  about $17,000 in the property — assuming it is valued like others in the area at about $180,000. Usable equity is the amount over the 80 per cent the bank requires you to offer.

If Emma adds her savings she is still a little short of the deposit required to buy another property. This would use all of her savings buffer — never a good idea — and we haven’t included purchasing costs.

Because she lives and works in Melbourne, I would suggest she continues to save and look to make her next purchase somewhere near the city. It could still be an investment property but at some point she will need somewhere to  call home. She should get  tax advice  on how to minimise future capital gains on the new property, perhaps by moving in.

Penny is the deputy editor of www.afrsmartinvestor.com. Follow her on Twitter @Money_PennyP.