Managed Funds savings gearing plan

Not sure when your planning to buy the ppor but lets say November 2008.

You are saving 2k per month. Over 12 months you could say 24k and use this (plus 6k from ur loc) as a deposit for the ppor. In theory you would of invested 24k in the market via the loc and thus that money is now deductible.

So tax position at Dec 08 would be
PPOR 24k cash deposit 6k from loc remainder from a new loan
Funds: 24k invested - deductible as money from LOC
Current PPOR (New invest property) I think you have said worth 210, debt about 161k so this would all be deductible as its now a rental (subject to you not mixing the loans up which i dont think you have)

Deductible debt 185k Non Deductible debt 6k+New loan (lets say 250k) So it becomes a 41%:59%

Rather than 161k deductible and 280k non deductible or 36:64 spilt

Hope i havent confused you (i think ive confused myself though)

 

Thanks DaveA, I see the plan now. The only issue is that the loc now has a percentage going to a deductable cause being the funds, but then 6k going to the ppor which wouldnt be deductable.

Also when you talk of drip feeding into the funds (which I do want to do to average out the drops in the market) from the LOC , can the margin provider actually direct debit from a LOC account (rather than my normal bank account which is what I was planning to do)?

 

I agree, mixed loan isnt great but it is better than it all being non deductible, a way to avoid this could be, when your ready sell the 4k you have in shares now (which is non deductible), hope for a large distribution on the money you have invested, hope for a big tax return, get a low interest credit card and take a cash withdrawal from that for 6k and pay it down as quick as possible, or wait one or two months later to buy the ppor.(or a combination of either)

cant see why not, just change the direct debit form to show ur loc details...

Also i know my sugestions are flawed, you currently cant save 2000pm so your saved 24k wont be there in 12 months time. My recommendations are from 12 months when you can save this. However if your time frame is to buy in 12 months, the 24k will be reduced by 2k each month you cant save it.

 

Assuming the my wife and I earn approx 50K each a year, and that the investments and debts are held in both names 50/50, how much tax return do we get back if we have 185 deductable as opposed to 161?

 

Tax per person (assuming 8% interest rate)

Currently Tax $9600
Tax with 161 debt $7668
Tax with 185 debt $7380

So its a saving of $576

At 8.5% its $612, 9% its $648

This would change though as the funds would make money for you each year, as well as ur IP would be negative geared, so if its negative geared more than $11,600 this year (or 7,600 next year) (net of earnings from ur funds) then the advantage decreases

 

thanks Dave

I think I will use a LOC on this current house to drip feed the funds over next year. The return from funds should help with the holding costs of the ip. If the funds underperform I can still easily cover interest payments (loc and margin loan) from wages.


And I think ING direct would be the best way to save up the purchase costs of the new ppor. Because my pay fluctuates a bit I worked out I could probably save 16k by next Christmas, if the wife can save approx 14 then I'll be happy.

 

Yes make sure u use an ING, and not your current home loan as you dont want to mix the borrowings on that.... Once your fixed rate is up then refinance it onto a IO.

Seems like youve got it all covered.

I think its fairly ok to say your IP wont run a tax loss of 15k (net of fund earnings) as its not brand new and its 200k so i think the above would be fairly accurate

 

Another thought I just had is that it might be a better idea to use the loc at a later stage to fund another IP purchase.

Navra says you count on the returns from the fund being about 10%.

if I have a 30k loc at 8% interest, thats $2400 a year interest
if that 30K is put into funds and I use a margin loan to 50%
then thats another 30k on loan at perhaps 9% so theres another $2700 a year interest.

At 10% return on the 60k invested thats $6000 in distributions (we hope).
So that 30k loc invested in funds with a margin loan returns (6000-2700-2400) $900. Thats not a very good return on investment is it? Also that $900 isnt going to go far covering monthly or fortnightly holding costs of the IP.

Obviously if the returns are 12 or 16 or 18 percent from the funds it looks more worthwhile, but what if the funds return less than 10%

Should we simply take a longer term view and say that the funds over time will have returns perhaps around a long time average of 16%?

(working on the 10% return again) I know that the loc interest and margin interest are deductable so theres perhaps another $1530 or so year as a tax return (cash flow wise I guess we would get a pay as you go variation done).

Overall it looks like investing the loc money would only put about 200 ((1530+900)/12) a month into our pockets to help pay IP holding costs.

 

Yes i agree, @10% i dont really understand the whole invest in funds to pay your costs.

It works well if you use cash but not borrowed money.... however exposure to funds gives you to access to the diversification rule (if thats your thing)

 

Now if everyone could polish their crystal balls and then tell me that navra will return much better than 10% then investing money from a loc looks like a much better proposition.

 

Hi, in regards to expected returns from Navra, it really amazes me how many people use the ultra conservative 10% minimum given by Navra. Why do you ignore the fact they have averaged over 15% since inception, except for the initial start up phase. If you are trying to assess the value of investing with fund use the actual historical return as a basis for your estimate. Then gather any other information relevant to assist with a future expectation of returns.

Yes I know past performance is no guarantee of future performance, but it is extremely helpful when combined with other market data, and there is really no other guidance for such a trading fund; ie; actual trading details are not published information for analysis.

So with Navra you could assume 15% returns less approximately 9% interest costs on 100% borrowing. Other assumptions for the above, approximately one third of loan LOC at 8% interest rate, two thirds margin loan at 9% interest rates and a 70% gearing level with margin lender.

Thus on your tax return 15% income less 9% interest costs gives a 6% taxable return on your investment. Subtract about one third tax and your looking at an after tax profit of 4%.

 

I certainly dont want to ignore the possibility. Even at 10% its a small gain on the money put in (the point being its still a gain). Since we are expecting volatility, I might still go with the savings plan idea, buying more units when the price happens to be down and less units if the payment date happens to be when the market is up.

To test the water I could set up a gearings plan with the small amout of cash I was drip feeding into cfs monthly. In the new year (and when our debts are clear... roughly march/april) we could get the loc on this house and increase the gearing plan to 2000 of our dollars a month. After 15 months (when the loc is used up) we could reduce the gearing plan back to a trickle feed smaller amount. The distributions before we have bought the next house could be used to start building up a cash buffer incase of margin calls or other emergency money situations. Once the buffer is where we want it to be, the distributions could pay down the LOC to reduce the interest bill a bit.

At some stage I could imagine large distributions being used to debt recycle the ppor mortgage.

 

Hi Sim, yes I understand that risk, and warning investors of that possibility.

(edit)However I do not think a 10% return in the current environment is appropriate in evaluating expected Navra funds returns. That the fund may move to 10% needs to taken into account as a risk factor.

By first comparing current performance of securities (moderated by analyst forecasts), allows shortlisting contenders and focusing on securities most likely to be suitable.

Risk analysis is then applied to the most
likely investments.

 

Tasmo, do you think Navra's returns from the last few years will continue or do you think that the market will decline over the next year or so bringing navra's returns closer to or lower than the 10% mark?

 

Last time I heard people guaranteeing returns above cash they were investigated by ASIC.

Only from risk do you get return.

I suggest that Navra should not be quoting a 10% minimum return... did they? If so, I'll invest a trillion dollars.

 

My point exactly, Sim.

If 10% is their goal of minimum performance, then I would never be assuming more than a 10% return in any scenario.

 

From: Kylie Sharpe [mailto:***************]
Sent: Wednesday, 5 December 2007 11:58 AM
To: ****************
Subject: FW: questions re wealthbuilder

Hi Simon,

Unfortunately, we do not lend on NAV0001AU, as have reached our prudential limit.

Regards,
Kylie Sharpe