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Hello, and some details

Discussion in 'Introductions' started by kemmett, 3rd Jan, 2008.

  1. kemmett

    kemmett Member

    Joined:
    6th Jul, 2007
    Posts:
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    Location:
    Sydney
    Happy New Year everyone,

    I'm Chris. I've been lurking here for a few months (via Somersoft forums) trying to learn what I can - and been prompted whenever I search to introduce myself (that dratted software is the bane of shy people). I've been hoping to peek around the edges and learn enough to begin investing for our future, but it's not working out quickly enough to satisfy me.

    Here's our synopsis:

    I'm 47 and my wife (Tracy) is 46 yrs. Our children are grown and employed (2 still living at home, 2 out).
    Income: 78k and 32k (after salary sacrificing our mortgage)
    PPOR: $485k (bank valuation), 210k mortgage
    We recently set up 2 x LOC's for $178k - these are waiting for our investment action
    About $5k in IAG and NIB shares

    This is the first year we've had two incomes and no dependents. We appear to be able to retain (save?) $12k per year between us, at least that's what we've done this past year - a combination of personal saving and mortgage offset (our finances are separate, each paying into a joint account for household, so this is a guess).

    We have a 20 year horizon (or longer if we keep working), are not currently particularly frugal. I like to think that we learn reasonably quickly, we both learn experientially. I think our combined attitude to investing would be classed as average>conservative.

    We have no experience investing or saving. I realise we need to become educated and take action (simultaneously). I don't have any preference for property, shares, or managed funds, though my wife prefers bricks and mortar because she can see and touch it.

    We have friends who have 2 or 3 IP's each, and in-laws who have multiple IPs. We thought we would try property, went to Brisbane a few weeks ago to see what we could find, but the holding costs appeared too high (4.3% yield, less costs). Our IP friends are wonderfully helpful, but I am concerned at $300+ per week out of pocket as it leaves us with no breathing space.

    I don't have access to anyone who discusses their share or managed fund investments, along with the why's and wherefores.

    My parents are self funded retirees, both from lower income working backgrounds. They use an advisor (fee for service) and their own education (gained approaching retirement) to invest into the share market and this approach is working very well for them. Tracy and I have met with this advisor on several occasions; he has no experience in property, and pushes us to pay off our PPOR before any other action. I hope that this is not as good as it gets for us!

    Goals:
    Looking to change our situation so that we become financially independent (I know that's too broad to be helpful, see below).

    Would like to pay off our PPOR quickly, and simultaneously have other investments growing for us - we are aware of our late start.

    I want to become sufficiently educated to be able to manage our own finances and investments successfully.

    I want to understand the benefits of different classes of investment - managed funds, or property - and how they map to our situation.

    I would like to learn how to enunciate my/our financial goals more easily. I hope this will become easier as I become more experienced.

    Needs:
    Absolutely need help taking the first steps, so that I/we don't analyse ourselves into poverty.

    Would definitely consider assistance from a financial advisor (as opposed to "broker") who is able to consider property and shares. Like others have mentioned in several threads, locating a quality advisor is not so clear cut.

    What alternatives do we have?

    Advice and pointers will be appreciated.
     
  2. The Stig

    The Stig Well-Known Member

    Joined:
    3rd Dec, 2007
    Posts:
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    Central Coast NSW
    Hi Chris and welcome to investing :D

    There are a lot of different ways to start off investing.

    Managed funds, shares, Electronic Traded Funds (ETFs), property domestic and commercial, property trusts, and indexing, just to name a few.

    Rumours are most fund managers can't beat the market after taxes and fees. So indexing into something like Vanguard for property and shares is sort of 101 investing.

    You can buy investment property after investment property. That worked well for me.

    What ever you and your wife do, make sure you understand it 100% and keep doing it.

    Read as many books as you can. My favorite authors are Robert Kyosaki and John Burley.

    I think John Burley's book "Money Secrets of the Rich" is a great beginners book.

    Cheers
    The Stig

    PS, increase your income by charging your kids rent :D
     
  3. Rod_WA

    Rod_WA Well-Known Member

    Joined:
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    Location:
    Inglewood, WA
    Hi Chris (and Tracy),

    Nice work, 2 to go!;)

    It's never too late to start investing. Start now, and don't look back.
    There are a few things you can do immediately:

    Any cash savings you have should be 100% offset against your PPOR; this way, you save interest on the loan and pay no tax on the earnings (the offset account will pay 0% interest and therefore no tax). Any savings accounts, even high interest accounts paying >6%, will require tax to be paid on the interest, so you'll effectively earn about 4% after tax - which is about half what your savings could earn as offset against your PPOR loan.

    You may already be aware of this... Do not let this be used for anything other than income-producing investments... don't be tempted to buy a new car or anything else for personal use from these LOCs. This is very important from a tax point of view.
    Why two LOCs, not one?

    That sounds like a pretty sizeable shortfall. There are other experts around here who can run the figures for you, but I have an IP that leaves me short about $100 a week after tax. But keep in mind that as rents increase, the shortfall decreases, and capital value grows. Short term pain, for long term gain.

    Before you see a financial adviser (and I recommend you find a 100% fee-for-service adviser), you should improve your financial literacy, and this forum is a very good place to start. A few weeks asking questions (no matter how basic you might think they sound! we all start somewhere) will boost your confidence and get a great deal more out of any discussions with a financial adviser.

    Also try your local library, around '332' on the shelf. Don't follow the first 'get rich' book you read, rather read them all! you'll get a titbit here and a little gem there.

    By the way, you've made a good start. You're here.
     
  4. The Stig

    The Stig Well-Known Member

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    Here is a question, is there a link to all the abbreviations people use on this forum?

    Nothing $hit$ me more than not being able to follow a conversation because I can't work out an abbreviation used in a sentence :D

    Cheers
    The Stig
     
  5. kemmett

    kemmett Member

    Joined:
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    Hi Stig,

    Trying to work out which one is right for us at the present time is the killer for me. Maybe the problem is that I'm not clear on the details of what we're trying to achieve?

    Do you have any suggestions on where I might look to understand the differences between, say, Vanguard and the Lincoln Australian Share Fund that has been mentioned recently?

    Tried that: two left home, and the other two refuse to wash up now ;-)

    Cheers,ck
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    We do have a Glossary (which still needs some work!).
     
  7. kemmett

    kemmett Member

    Joined:
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    Sydney
    Hi Rod,

    Tracy and I keep our finances separate (bad experiences with ex-spouses) and don't want to lose that independence so I'm looking at ways to keep track of our individual input. Excel is beckoning...

    A smaller one is to use in improving our PPOR: we figure that there is a bit of headroom in the local market. The larger is for other investment.

    I haven't discounted residential property, I think we simply need to learn more about it to make a good decision - and make sure we have sufficient resources to respond to other opportunities. As you can see though, we don't earn lots.

    Thanks for the advice!

    Cheers, ck
     
  8. samaka

    samaka Well-Known Member

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    LOL - Some of us would beg to differ :D
     
  9. Rod_WA

    Rod_WA Well-Known Member

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    Location:
    Inglewood, WA
    OK, personal reasons are fine, just as long as you understand the consequence.

    OK, just be careful to keep them separate, in particular the investment LOC must be kept purely for investment purposes.
    _______

    Some investment ideas for you:

    We all love bricks and mortar, particularly women! :confused: But finding the right IP, getting a reliable tenant, etc can be daunting.

    But LPTs can offer an immediate alternative to residential property, although they have had their foundations shaken lately via Centro, and it's probably not the right time to be looking at LPTs! So why did I say that? Because there are some LPTs that are not heavily geared and not exposed to the credit crunch. I like Bunnings Warehouse Property Trust (BWP), since I understand what Bunnings do, I can read and understand the PDS, and my wife only needs to touch the wall of our local Bunnings store and she sees the bricks and mortar, and acknowledges that the land is going to grow in value. The rent (and hence dividend) is CPI linked + rent-reviewed, and the tenants (Bunnings) have average 9 years left on their leases. And the price has been pushed down with the sector, to $2.20 (6% dividend yield, about 24% tax deferred). Just one to get you thinking.

    Re an IP, I've read quite widely that Sydney is getting ready to move again. Now might be a good time to be climbing on board, I reckon it's wise to invest locally before you buy elsewhere.

    I (and I stress I)reckon it's a reasonable time to invest in ASX shares, with expected total returns in 2008 at 8-15%, depending on who you follow (I personally anticipate about 14%: 10% share price growth + 4% yield). If you are just learning, then an ETF over the ASX200 eg STW, is a good idea.

    How do you feel about superannuation? Do you follow your balance regularly, and know what your asset allocation is? Have you considered making your super work for you, eg government co-contribution for Tracy? Are you prepared to lock some of your investment earnings within super until your retirement (or at least your 'transition to retirement'?) This can be tax effective, both by reducing your taxable income (salary sacrifice) and since earnings are taxed at only 15% within super.

    You'll need to see a financial adviser to get proper advice in regards to your investments and super. In other words, don't bank on the integrity of the posts on this forum from folk like me!
     
  10. Rod_WA

    Rod_WA Well-Known Member

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    Location:
    Inglewood, WA
    Sim, TopStocks has a mouse flyover for abbreviations; something to consider?
     
  11. kemmett

    kemmett Member

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    Location:
    Sydney
    Sorry Samaka...well said! I regularly forget that I am in a very fortunate position. :eek:

    Rod, thanks very much for these ideas! Your mention of ETFs and LPTs has me scurrying around the net for all I'm worth.

    I'm keeping an eye out. One possibly limiting factor is that we would rather have a freestanding home. Two aspects have me holding back right now:
    1) particularly as we're new to this: I would like to make my/our mistakes on something that is a little more fluid than residential property.
    2) I would like to have some cash in reserve to use in an alternative investment (shares, managed funds, ?)

    However, I just did a scenario based on a place in a suburb neighbouring Parramatta and the holding cost is less than I expected. I do wonder at the potential gain though (where's that crystal ball?).

    My opinions toward super have changed quite a bit in the last two years, I suppose it's my advancing years ;-)

    I have recently rolled a sum over into Australian Super, and am considering switching my employer contributions into the same (does anyone have any better suggestions?). A year and a half ago, I started a savings experiment - $1 a day - to see compound interest at work (I read somewhere how much it can be worth after like 40 years). That's was upped to $5 a day after about 6 months. Last week I figured I may as well salary sacrifice that extra amount into super as well, so that's on the drawing board.

    Last year was the only time we haven't been able to take advantage of the co-contribution, but now we have the salary sacrifice in place for our mortgage, it's something I won't let pass again.

    I'm looking forward to understanding enough to be able to find someone good. I haven't come across any sources for recommendations as yet, but still looking.

    Based on your mention of Bunnings, I looked around and found out what I could about tax-deferral and did a few fictional figures. Would you have a moment to check these out to see if my understanding (and arithmetic) is correct?

    Assumptions:
    9% interest payable each year (I know rates have been lower, but)
    Tax rate 30%
    Purchase in 2003*
    Sell 2007*
    52% gain over the time*
    Investment $300k
    Distribution - 6% (constant)
    Tax deferred - 24% (constant)

    * (figures from http://www1.bunningspropertytrust.com.au/uploads/pdfs/Financial performance - Aug 07 final.pdf)

    Original cost - 300,000
    Interest payable (annual) - 27,000
    Distribution (annual) - 18,000
    Holding costs (annual) - 9,000

    Cost base reduction - 4320

    So at sale time:
    Original cost + holding costs (x 5 years) = 345,000
    Less cost base reduction (4320 x 5 years) = 21,600
    New cost base = 323,400

    Sale (52% gain) = 456,000
    Less cost base = 323,400
    Capital gain = 132,600
    Assessable capital gain (@50%) = 66,300
    Tax payable @ 30% = 19,890

    Net profit = 112,110.

    Is this about right? Also, it's not clear to me what happens with the $9k "loss" (holding cost) per year...does that have an effect on annual income tax?

    Thanks again!!
    ck
     
  12. samaka

    samaka Well-Known Member

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    If the 'holding cost' refers to interest you have to pay on a loan (which is used solely for investment) - then yes it become a tax deduction.
     
  13. kemmett

    kemmett Member

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    No, the cost I mentioned is the difference between the interest payable, and the distribution - perhaps it is the wrong term?
     
  14. samaka

    samaka Well-Known Member

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    Well that is still interest you would have to pay - which is tax deductable.
     
  15. Rod_WA

    Rod_WA Well-Known Member

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    I see you've been in Excel! I can check these figures, but a couple of quick comments...

    The cost base is not reduced by the holding costs - the holding costs are immediately deductible, and the tax deferred distributions reduce the cost base.

    For your spreadsheet, you should do the calculations year-on-year, to account for growth in dividends, variations in interest rates (eg 'what happens if rates go up 2% in 2010?'), etc.

    With no franking credits on the distributions, it's reasonable to take the distribution off the interest costs for a quick'n'easy calculation. But I'd certainly factor franking into any spreadsheet, since FCs can easily turn a good investment into a great one!
    ___________

    The calculations for the last year are compelling:
    Buy $300k at $2.00 on 30 June 2006 (150k shares)
    Distributions 2006-2007 12.98c @ 24% deferred
    equals 6.49% or $19470 ($4599 deferred, $14871 taxable immediately)
    Borrow at 9% or $27k interest payable
    Marginal Tax rate 31.5%
    Tax deduction for interest $8505
    Tax payable on non-deferred distribution $4684

    Outgoings: $27000 + $4684 = $31684
    Incomings: $19470 + $8505 = $27975
    Cash shortfall = $3709

    Capital growth $2.00 to $2.31 over the year
    ie $300k becomes $346500

    Now if you opt to sell after 12 months:

    Reduced cost base = $300k - $4599 + $711 brokerage
    (brokerage @0.11%)

    12 month taxable capital gain is $346500 - $300k + $4599 - $711 = $50388
    Tax on capital gain @ 31.5% and 50% reduction = $7936

    Keep in mind that if you sell the shares in one hit, your capital gain will boost your taxable income significantly, and possibly into a higher tax bracket, so a common strategy is to 'sell down' over 2 or 3 years.

    Nett profit after tax = $34143.

    Please note that I want to run these figures again, I'll do that tonight.
     
  16. Rod_WA

    Rod_WA Well-Known Member

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    Done, see the attached spreadsheet.

    Of course it's great to take capital gain, but the distributions help to hold the shares. Now I would never put $300k into one share, I reckon $30k is more my style (I have about $25k BWP).

    As a guide, at 9% interest rate, it would've cost you $124 per $10k shares bought after tax (MTR 31.5%). Bargain I reckon, will be positively geared after 25% distribution growth (4 years based on past growth).

    For the 2006-2007 year, the required capital growth to break even was 2% (using assumed interest/tax rates in the xls; actual growth has been 10% average 2003-2007).

    Note that the spreadsheet assumes that the shares are bought with all borrowed money, which is practical with an LOC and margin lending. I have assumed 80% LVR in the ML in the model, but this is entirely up to you (better to have lower LVR since LOC rates are usually lower than ML rates).

    Cheers
    - Rod
     

    Attached Files:

  17. Rod_WA

    Rod_WA Well-Known Member

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    I've tidied up the spreadsheet and modified it for CBA, which shows the benefit of fully franked shares.

    CBA has had healthy growth this last 12 months, 19% despite all the sub-prime hassles.

    But gearing CBA shares would have been profitable over the last 12 months even if there was only 1.5% growth (assuming fully borrowed funds at 9%, personal investor, held for >12 months for CGT discount).

    Thank you CBA, for your doozie fully franked yield.

    Chris, bank shares should be the starting point for your portfolio. In fact, you could do very nicely only holding the big four banks plus BHP, and anything in the ASX50 starting with W (WPL, WOW, WES, WDC)

    (Please let me know if you find a bug in the spreadsheet!)
     

    Attached Files:

  18. The Stig

    The Stig Well-Known Member

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    :D I like that :D
     
  19. kemmett

    kemmett Member

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    Hi Rod, thanks for putting in so much work on these examples. I am finding it really helpful to see concrete figures relating to my own scenario.

    I think I've come to the same realisation: I need to learn what it feels like to make, monitor and support investments, and (I'm assuming) the big four banks are performers and a less volatile, so a good starting point.

    Don't worry, I haven't (though I wouldn't be the best person to do that :)

    Two further questions follow from this - please let me know if they should be posted elsewhere:
    1) Given the difference in our taxable incomes, is there any benefit to Tracy and I in setting up another "entity" to make our investments under, or can we get going now and make any changes later if necessary?

    2) Is there any problem using our LOC to purchase, and then organise a ML for a percentage after the event (e.g. 50k CBA, then ML $25k later), or does that create accounting or other problems?

    Thanks again!
     
  20. Rod_WA

    Rod_WA Well-Known Member

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    No worries.

    The general answer is yes, and no. There are tangible tax benefits to setting up a discretionary trust, but I'll leave that to the trust specialists. It will depend on your own circumstances, but you should definitely consider this now. Maybe a post in 'Accounting, Tax and Legal' is the go. But you would need to set this up before you dive in fully, as there will capital gains triggers if you wish to transfer your personal holdings.

    Personally, mine and my wife's investments are directly in our names, rather than a trust. I simply do the calculations at the average tax rate of both of us. Something about keeping it simple that I like.

    No significant problems doing this at all. It's sensible from an interest-saving perspective (LOC is cheaper), and transferring your holdings to a margin lender down the track is very easy.

    As an example, you could say buy $100k in shares through an LOC, and be happy with that. Then in a year or two, you could transfer this into a margin lender, eg Macquarie Prime, and extract 90-95% of the cash back into the LOC, or use the shares as collateral for gearing within the margin loan. Say you felt comfortable with a 50% LVR, you could purchase another $100k within the ML for $200k.

    You might even capitalise the interest in both the LOC and ML, depending on your equity and LOC limit (ideally you can extend this LOC as required, or you could extract cash from the ML - by increasing the LVR - to avoid selling shares and realising gain). If this all sounds too freaky, keep in mind that there are only three things to really consider:

    1. Return.
    If the accumulated sharemarket return (capital growth + dividends) on average exceeds your LOC/ML interest rates, then you are ahead (you can even be ahead if the accumulated return is less than the interest, if the shares are franked!).
    Most reasonable people assume this over the long term.

    2. Cashflow.
    You need to meet interest repayments when they are due. Don't think about paying down any principal on the LOC until you've paid off your PPOR (non-deductible). Dividends will help (ASX200 is around 3.8%, 86% franked as I remember, so that is 5.2% = more than half of your 9% interest demands, and the dividends will grow to make you positvely geared in a few years).
    (If you capitalise interest, then you can use the 'LOC/ML interest repayment money' to pay down the PPOR sooner - say 4 years instead of 15! PLEASE confirm this with your own tax adviser, and/or get an ATO private ruling).

    3. Margin requirements in the ML.
    Keep your LVR conservative (<70%?) to avoid any possible margin calls; If you only use an LOC, this doesn't apply.