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Here's a great example of why....

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Mark Laszczuk, 24th Oct, 2007.

  1. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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  2. Dr Lobster

    Dr Lobster Well-Known Member

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    I agree that extra super contributions may not be the best strategy for active investors. For people that take no interest or action in investing I think it can be beneficial.

    I remember when compulsory super was introduced, I was resentful of the fact that I had to forgoe some income. I wasn't investing at the time, I just wanted the $$$s to spend.

    After a while I forgot about it and my mind adjusted to the fact that it was just another expense like tax.

    Then in recent years I became resentful again as I became more aware of investing and that I was not able to control where it went. Then that improved when our company super got moved to AMP and we could mix the allocation.

    Then outright choice came about and now I've almost finished setting up my smsf. I received my first cheque from rolling over my main super acct and its for $100k. I've never had a chq before anything like $100k. And at that point it became very real money.

    I'm now really stoked with super. My smsf will open with $160k, my wife's super will go into it as well. Its built up over a number of years and had I not been forced to contribute I wouldn't have this opportunity now.

    Its 25 yrs before I get to it, I'll position it towards growth and it should be worth heaps in the end. Sure I can't tap into it to gear into more property. I don't see that as a bummer, it means I focus on an additional asset class.

    I can't wait to see what I can turn it into.
     
  3. Rob G.

    Rob G. Well-Known Member

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    As long as you have a large stable salary that you can sacrifice, then negative gearing is a powerful strategy not available to super funds.

    Negative gearing only works in a rising market, so risk is added for the reward. In flat and falling markets this strategy hurts more.

    At some point in life, you will need your investments to be positively geared to finance your lifestyle and withdrawal from the workforce.

    Part of the loss of gearing in a smsf can be offset by low fees and tax concessions.

    In fact, a properly structured protfolio should compound tax-free in the accumulation phase due to franking credits.

    Yet I know some 'active investors' (and Accountants) who pay somebody to MANAGE their smsf !!!!!!!!!

    Cheers,

    Rob
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi Mark,

    I'm more keen to find out what the full numbers were, I prefer to find out percentage return rather than dollar returns. $160k on $1m is normal at the moment (say Perpetual Industrial has had similar returns %) but say $160k return on $100k is impressive.

    My 2c.

    Cheers,

    Dan
     
  5. Billv

    Billv Getting there

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    Asxbroker
    It's called leveraging, in property it can be very powerful :)
    Cheers
    Bill
     
  6. AsxBroker

    AsxBroker Well-Known Member

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    Hi BV,

    We already had this discussion in another thread you can leverage in managed funds and property to at least 100%.

    I'm still after a percentage return...

    Cheers,

    Dan
     
  7. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Dan,

    Please don't turn this into a property vs. shares debate. It's been done a bajillion times and I'm not interested. The topic of the thread is:

    Here's a great example of why....it's NOT better for active investors to put extra money into super.

    That means investments other than super. I was just using that particular post as an example. The fact that it's about property is irrelevant.

    Mark
     
  8. Rob G.

    Rob G. Well-Known Member

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    Yeah, but Dan is saying that leveraging does not make a bad investment into a better one.

    You still need to be careful with your choice, this being based on percentage returns, risk, diversification etc...


    Cheers,

    Rob
     
  9. crc_error

    crc_error The Rule of 72

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    You can also Leverage in your super fund.. you can do it via geared managed funds, warrents, CFD's.. so gearing isn't unique to residential property.

    As interest rates rise, the benefits of leverage becomes more limited.. secondly leverage on IP's is limited to the persons income.. before which you need to lower leverage so as the new investment becomes self funding.
     
  10. crc_error

    crc_error The Rule of 72

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    Mark, its got nothing to do with shares vs property. Its got to do with Leverage, which the person your quoting achieved outside super. We are simply highlighting that leverage is also available within super, and thats regardless if you invest in commercial property - listed or unlisted, Australian shares, global property or global shares.

    doing so within super has its benefits, ie lower tax rates..

    I do however agree that devoting large sums of extra money into super probably isn't the best idea for active investors.. it might be good for those close to retirement though..

    plus within super, you can get the dividends tax free.. you can't do this outside super via IP's.
     
  11. DaveA

    DaveA Well-Known Member

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    has anyone considered the lazy equity they must of had lying around to finance this.... 4 propertys would require atleast $100K

    now not to get into the property v shares debate - they have made 160k on 4 properties, so 40k per property, so they have made back thier 20k they paid in stamp duty, and they have probably paid 50pw on each property as a short fall, so theres another 5k over too years. So really they have made 15k each property...

    It must of been large super contributions to be replaced by 4 negative geared properties....

    I agree %s are needed
     
  12. crc_error

    crc_error The Rule of 72

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    then which really the results aren't that good.

    People quickly forget all the additional costs swallowed up when purchasing and holding property.. All they see is 'I made $160k in equity' when out of this there are lots of costs which need to be taken out to get the real return.

    If its gearing your after within super.. there are cheaper ways to achieve it..
     
  13. AsxBroker

    AsxBroker Well-Known Member

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    DaveA understands me.
    $$$ returns are nothing without knowing the original capital.

    % please...

    Thank you,

    Dan
     
  14. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Dave,

    What he is saying is that the money they were using to make extra super contributions was then used to cover the negative gearing costs of holding the properties, not that the contributions covered the costs of purchasing the properties themselves.

    Mark
     
  15. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Alright, let's address this percentages thing, making it relative to the topic. Let's say they bought 4 houses for a total of one million bucks. It's a nice easy round number. Using equity from their existing properties for deposit and costs, they have put none of their own money into the deal. Percentage return - infinity. Yes... you can borrow money in your own name to invest into super, but guess what - that money is NOT tax deductible. Also, who here thinks the bank is going to lend you one million dollars to invest in super?

    But let's say they used a 10% cash deposit for the properties. Let's ignore costs for ease of the example. So that's $100,000 cash into the deal. Percentage return (on money invested) - 160%. Note that this percentage return is based on the cash that they put into the deal themselves, it does not take into account borrowings.

    So if they had put the money into super instead, they would have either had to have had one million dollars to put into super (and who has a cool mill in cash to put into super?) or they would have had to get a 160% return from the fund in order to equal what they got from the properties.

    Can anyone show me a fund that has returned 160% in the last 18 months? Cause I'd like to invest some money in it if it exists.

    Personally I don't see what % has to do with anything at all in this example? The point of the thing is that leverage allows for much better returns than simply adding money to super. Did some of y'all miss the point that using leverage has allowed this couple, using the additional contributions they were formerly putting into super to hold an additional 4 investment properties that has given them another $160,000 to put into more investments of their choosing in the last 18 months?

    This money can be used to purchase an income stream, should they wish to do that - an income stream that may allow them to work less hours or to go on holidays or buy a new car or do whatever they want with that cash. If they had put it into super, they would not under any circumstances be able to do that. So you can focus on percentages all you want, I'd rather focus on the freedom that channeling my funds into investments other than super will give me long before I turn 55 (assuming they haven't raised the age limit before then, which they almost certainly will).

    So you pay more tax on investments outside super, big deal. I refer to this extra tax as 'the cost of purchasing freedom' and I don't know about you guys, but I think it's worth it. There are plenty of ways to legally reduce tax anyway.

    Mark

    Note: keep in mind that the $160,000 rise in value came from a bank valuer. Bank valuers are notorious for being extremely conservative with valuations to cover their own bums. So who knows what the actual value based on recent comparable sales in their area actually was. I wouldn't be surprised if it was at least another 20%.
     
    Last edited by a moderator: 27th Oct, 2007
  16. crc_error

    crc_error The Rule of 72

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    Mark, Yes I agree, I would prefer to invest outside super as tieing up money till your 60 is not much fun for me..

    Negative gearing is great providing you have the income to support it, however as the new tax packages come out, negative gearing will be come less and less attractive.

    On the positive note.. with these new tax cuts I would say this should help property keep on raising in value.
     
  17. Allison

    Allison Member

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    I don't mean to be rude, but you sound like a financial planner Mark. Planners have an uncanny ability to show any investment as returning 100+%. While financially literate people can dismiss such talk as twaddle, I feel for the retirees and other people who fall for this trite.

    The investment did not make 160%, the investor with the use of gearing made 160% - allegedly (once you read stuff like his, you really have to question all of the other facts too). There are plenty of funds that offer 100% gearing, which would also lead to 100+% geared returns. There are futures, CFDs, options, etc that also allow high gearing and hence the possibility of 100+% geared returns - this is nothing special.

    You can have all the gearing you want, but long-term 12% returns on residential property are only going to get you so far. Sorry, but seeing so much of this divisive talk in the industry really makes my blood boil. Please no one listen to this garbage.
     
  18. Glebe

    Glebe Well-Known Member

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    Interesting first post Allison, don't hold back now :eek:
     
  19. Rob G.

    Rob G. Well-Known Member

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    With a complete absence of financials, here's my guess:

    Equity $100k
    Borrow $900k

    Then a $160k unrealised CG in 18 months sounds like a 11% pa gain.

    This will be altered by any net rentals.

    If the properties have a shortfall of $50 pw each then an annual loss of $10k reduces the return by 1%.

    i.e. Return on assets 10% pa

    This ignores initial costs (stamp duty etc).

    Return on equity about 100% purely due to gearing, but gearing is not unique to property.

    Cheers,

    Rob
     
  20. crc_error

    crc_error The Rule of 72

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    This figure is completely a waste of time. You would be paying another $60k in stamp duty to purchase 1 mil of property.. so you would never buy 1 mil of property with 100k. secondly you would be paying lots of mortguage insurance, and thats IF the bank would loan you 1 mil @ 90%.

    and you would not be $50 a week short on such loans....