Home' Trinidad and Tobago Guardian : June 8th 2017 Contents BG18 | FINANCIAL ROAD MAP
BUSINESS GUARDIAN guardian.co.tt JUNE 8 • 2017
Ishmael has an opportunity to pur-
chase a lot of land from his brother-
in-law Luke (a licensed land surveyor)
who is in the process of developing
a larger two-acre parcel into a gated
community. He recently received
approvals to subdivide from the relevant au-
thorities. The property is located three miles
from a town that presently fetches up to $200
per square foot in the main business area.
Luke is offering $60 per square foot for cash
purchasers so he can bankroll the development
work of roads, drainage and other amenities.
He is confident that within the next five years
Ishmael could sell the land for up to $190 per
square foot based on the steady increase in
commercial property values in the nearby
With ten years from retirement Ishmael is
very interested in bumping up his finances
so he can get rid of a 15-year, 7.0 per cent,
$1,000,000 mortgage for a townhouse cur-
rently rented out at $75,000 per annum and
has a market value of $1,500,000.
Ishmael's investment portfolio includes:
4,762 company shares what has a market value
of $100,000 and has been flat for over three
years but has consistently paid 7.25 per cent
in annual dividends.
His stock-based investments also include a
mutual fund which has not changed value in
several years but has averaged annual distri-
butions of 2.0 per cent.
Finally, he has $130,000 saved at the bank
account, which yields 1.0 per cent per annum.
Ishmael has been battling with the idea of using
some of these savings to clear off a $50,000
credit card debt that is costing him 2.3 per cent
per month in interest.
With the offer from Luke on the table and
having no desire to incur any further debt,
Ishmael wants to know if he should liquidate
his investment portfolio and grab the land deal
along with the 5.0 per cent closing costs; leave
everything as is or focus all of his attention on
eliminating debt before age 60.
Nick's Assessment and
debt & cash flows
It is a good idea for Ishmael to eliminate all
of his debts by the time he retires. However,
based on the numbers provided the mortgage
would still have a balance of $454,000 at age
60. He would have to continue the $8,988
monthly installments until the debt is cleared
five years later.
If the monthly property rental remained the
same at $6,250 ($75,000/12 months) and he
used this to offset the debt payments there
would be a monthly shortfall of $2,738.
This shortfall could be reduced with the cash
flows from the financial assets, as long as the
values and returns remained the same (Bank
Savings Interest: $1,300 + Stock Fund Distri-
butions: $2,300 + Stock Dividends: $7,250 =
$10,850 / 12 = $904 - $2,738 = -$1,834).
Though reduced, a negative cash flow is still
not desirable in retirement, therefore Ishmael
can choose to liquidate his financial assets and
apply their proceeds to the mortgage balance
(Bank: $130,000 + Stock Fund: $115,000 +
Company Shares: $100,000 = $345,000 -
$454,000 = -$109,000).
The residual debt could be cleared in about
twelve (12) months at the monthly installments
of $8,988 or he could request a restructure of
loan payments to stay within the monthly
rental figure (assuming this also remained
If this were done the payoff date would be 18
months later. Ishmael could also not have a loan
balance if he were to set aside all of his annual
investment cash flows ($10,850 x 10 years =
$108,500 - $109,000 = -$500) these could be
paid at the end of the ten-year period or at the
end of each year to reduce interest cost.
Focus on return
Now there is a possibility that Ishmael could
be better off at retirement if he were to take
on Luke's offer. It is noteworthy to state here
that pursuing higher returns does not come
without greater risk. Whilst Luke is confident
that: "within the next five years Ishmael could
sell the land for up to $190 per square foot"
this opinion is purely speculative.
Should his predictions materialise Ishmael
could see his wealth accrue at an annualised
rate of 25% (Applying Time Value of money
calculations: initial investment: 5000 square
feet x $60 = $300,000 + $15,000 legal fees =
$315,000, over five years, future value: 5000
x $190 per square foot = $950,000).
When we look at Ishmael's financial invest-
ment portfolio (excluding real estate) nothing
comes close to 25 per cent per annum. Even if
we included the property investment in our
calculations, the weighted average cash flow
returns is 4.65 per cent per annum.
Compare this to the weighted average cost on
his debts of 7.98 per cent per annum; Ishma-
el is losing wealth by the differential of these
Other conditions remaining the same, by re-
organising his investments with a focus on the
land deal Ishmael could end up with a debt free
income property and significant cash reserves
by the time he retires. If we extrapolate the land
value at 25 per cent per annum to retirement,
Ishmael's $315,000 investment would be worth
$3,740,000; net of the mortgage balance at
that time he would remain with $3,286,000
Of course, the rate of growth is hardly sus-
tainable at these levels but even at a conserva-
tive pace of property development and normal
forces of demand and supply, Ishmael could
probably match and even outperform his cur-
rent investment portfolio returns. To measure
this he can keep an eye on land prices per square
foot at different points in time.
Using the current highest rate of invest-
ment return (stock dividends 7.25 per cent)
as a benchmark Ishmael could achieve the same
result if the future market price per square foot
were: $90 in five years or $130 in 10 years. The
property value would thus be $450,000 and
$650,000 in five and ten years respectively.
& credit card debt
If today Ishmael were to liquidate his fi-
nancial portfolio and purchase the land, he
would be left with $30,000 in hand ($345,000
- $315,000), he could either direct this to the
credit card debt whilst still maintaining ac-
cess to the unused portion of the card limit
in case of emergencies or alternatively hold
on to the cash at bank and approach them to
consolidate the card debt with the mortgage at
a lower interest rate to obtain a lower monthly
Over ten years, a loan of $50,000 at 7 per
cent per annum works out to $581 per month
including principal and interest versus interest
only on card debt: $50,000 x 2.3% = $1,150
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
email@example.com or visit website: www.
Reorganise your investments
to eliminate debt
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