the voigtstr's battle plan

Our current battle plan is to pay down our bad debt by the end of this year. For me that is the $8000 owing on my motorbike loan, $2000 owing on a credit card, $2000 owing on an overdraft and approximately $1000 that I owe Cheryl on her credit card. Due to the nature of my work and the availability of overtime I should have these debts paid by Jan/Feb at the latest.

Once my consumer debt is paid my intention is to pay between $1500 to $2700 per month (depends on which shifts were worked) into managed funds. I believe that just on my own income I can save up to almost $30,000 into managed fund by the end of 2009. Cheryl would also be contributing during 2008 as well.

Our intention is to buy a new place of permanent residence towards the end of 2008 for a value of up to $280,000. Our current villa unit would then become a rental.

Our villa unit was bought for $180,000 and is now valued at $200,000. The fixed interest p&i loan on the villa has $167,000 owing on it. We are paying $521 per fortnight on this loan, and believe the villa could be rented for $440 a fortnight, leaving a rental shortfall of $81 a fortnight.

I’ve estimated that having approx $13,200 invested in Navra Australian Retail fund assuming a 4% return per quarter would be enough to fund this rental shortfall.

If we use the $23,000 equity of the villa unit for the purchase costs of a new PPOR then an equity line of credit (assume 7.99%pa) would cost us an additional $71 a fortnight in interest. To meet the costs of the rental shortfall plus the line of credit I’ve estimated that I would need approximately $24650 invested in Navra to fund these costs. Again this is assuming that Navra returns 16% per year (which according to the Navra website looks realistic).

I’m sure the above approach could be fine tuned. Perhaps we should put the money during 2008 into higher returning funds like Platinum Asia or CFS Australian Geared Fund, and then move that money into Navra when its needed towards the end of 2008. I accept that there is more risk in using Platinum Asia or CFS Australian Geared compared to Navra retail because of the gearing nature of the CFS fund magnifies losses as well as gains, and with the Asian fund, China’s market could be volatile, however I’m taking a bullish position with Platinum Asia and believe that China will continue to grow and grow and that its economy will do likewise.

Moving forward from when we have our new ppor, we would like to continue to have a balance of properties, and funds to mitigate the negative gearing costs of those properties, up to a value where I can choose to retire by the time I’m 50 or earlier if the portfolio can keep generating growth without needing my income.

Would you make any changes to the above strategy? I'm still considering using Navra financial services to fine tune the above and assist with getting the balance right between properties and funds. When the market looks a bit more bullish I would consider margin loans on the funds as well.

cheers
the voigtstr

 

Can anyone suggest any improvements to the above plan?

 

Only thing I can think of is you trigger a CGT event if you switch funds.

 

Doh, hadnt considered that. Do you reckon its better to save up the funds required in navra that would cover the expected IP holding cost and LOC interest, and then start investing for growth in other funds (Platinum Asia perhaps to diversify?)

 

I would go income fund first if that is what you need and then look at growth later on.

 

You may want to think about the time frame as well and the risks involved in investing in funds for such a short period of time.

Mark

 

Hi V my thoughts below

V, some tough love there but in my view you're assumption on income return is just unrealistic. Let's say you're right though and NavraInvest over the next decade averages 16%pa - Very respectable. But remember it's an average! That means some years might be -10% and others +25%...and who knows which will come first?

I'd rerun the numbers and figure out if you have sufficient margin of safety in terms of cash flow and savings to be taking on substantial additional debt in the form of a (relative to your other debts) big non-deductible home loan.

Cheers
N

ps. remember the interest and costs associated with the villa will be tax deductible once it's an IP so that may help a bit.

pps. note my comment above about switching the villa debt to I/O once it's an IP.

 

awesome reply Nigel, thanks for that..
Assuming Navra can average 3% (rather than 4% per quarter)
I would need approx 33k in navra to cover rental shortfall and LOC interest.
The intent with this approach is to have the portfolio being cash neutral. (whilst still gaining capitol growth from the IP)

Our cashflow isnt that much of an issue during 2008 (as you can see by the amount that I'll be able to save)

The new ppor is defintely a lifestyle decision, but being in Hobart we'll try and keep the purchase price down to 280k or so.

The next thing to do after that will be to save towards a new IP (I guess by using an offset on the ppor loan (then pay it into the loan, then redraw it to make a percentage of the interest deductable (I'll ask more about that when we get it to))).

I guess the question now then is once 33k is saved in Navra, would I continue adding to it (to mitigate other IP rental shortfalls) or throw all our cash into the offset on the ppor loan...I would like to get a repeatable strategy for milking the equity and buying more ip's and funds. With my Wife contributing as well I should have 40k saved by the end of 2008.

Thanks Nigel for the tip about 16% being too optimistic for Navra. I thought that there would be increasing volatility moving forward that would benefit the Navra contrarian system.

 

That may happen...but don't assume it will and be prepared if it doesn't. That's all I'm saying (fingers crossed for big returns though )
Once you have a ppor debt youll want to repay it asap if that will be the family home for some time. You can then redraw the equity and put it to investment purposes making interest on those loans tax deductible.

Paying down your non-deductible debt is a boring but sensible strategy.

 

So the next step then would be to throw all available cash into the offset, and when there's enough for another IP transfer it into the loan, and then redraw it and use it for the ip. An accountant would be able to look at the percentage of redraws used for ips/managed funds, and make that a tax decuction wouldnt he. I could rinse and repeat until the loan is fully deductable.

To accelerate this process again, I think I'll need to consider a margin loan on the Navra fund.

 

Use a split loan. This way you can pay down the nondeductible portion and let the deductible one run.

 

Here's a spreadsheet I made to work out how much navra retail funds I would need to fund a rental shortfall, plus a LOC used to purchase the ppor, plus margin loan interest.

You might need to turn on cyclical referrences in excel options (I've check the cyclical referrence and its accurate (compared it to hard coded data))

 

What happens if you move out of your new planned house and turn it into a rental and you have paid it down so there is no deductable portion, maybe you should look at the packages like St George/westpac professional where there are the 2 loans in one...

just an idea

 

Is there an issue with using the offset for lifestyle and redraws for investing? An accountant could work out the deductable portion easily enough on the redraws?

If it also became a rental, then I would take the money out of the offset, and I would assume the loan remainder would become deductable?

Simon if I went with the split idea, how would you decide how big to make each split?

 

Trust me, you need to keep deductible and non-deductible interest payments totally and utterly separate.

I know, because I had a MB stuff me up 4 years ago, he mixed IP deposits in with PPOR in a LOC. I have basically had to write off claiming the interest on the IP deposits because it is lost inside the PPOR money. I found out later that I was that MB's second client..........

What is the problem????

Suppose you have $100k PPOR and $50k IP in the same account. If you make a repayment of $150 (not an interest repayment) then ato says that $50 must come off the IP. Then:

1. Deductible interest changes next month
2. You have lost deductible interest (it will mount up...)

If you then spend the $150 dollars, for food say, you have converted $50 into bad debt.....

Solution.....

Use two separate accounts (held against the same PPOR house)!!!!!

A1: $100k with offset
A2: $50k IO

Pay $150 into offset account. All the money works on the bad debt. Spend the $150 on food, you still have $50k of good debt. Interest for the $50k account can be paid out of either of the other accounts. (Side benefit : your deductible interest payments are automatically recorded for you on your statement....)

Keep them separate, from some who learnt the hard way......


Tailcat

 

Thanks Tailcat, with the next property, it's intended to be a ppor to the value of about 280k. How do you determine the percentage of splits to use on the loan of 266000.

 

Voigtstr,

Since this is a clean new purchase, with a 95% lvr, there is nothing you can do initially.

I would set it up as an IO with 100% offset account:

A1: $266000 IO
A2: $0 100% offset

Pour everything into offset account. Pay interest on A1 out of A2. You can buy food out of A2....

Later situation becomes


A1: $266000 IO
A2: $30000 100% offset (remember this is `earning' 7.x% tax free!)

Now we transfer the money into the IO account


A1: $236000 IO means there is now $30000 available equity.
A2: $0 100% offset

Now talk to bank and set up a third account (LOC with cheque book?) and draw down the equity into the new account. Limit on A1 is also reduced by $30000.

A1: $236000 IO means there is now $30000 available equity.
A2: $0 100% offset
A3: $30000 money that is usable for investments

(This assumes that you can/want to maintain the 95% lvr.)

Now use A3 for your investments (and only investments) into anything else. Interest payments for A3 can come out of A2 or A3 (if capitalising and available funds in A3).

Now be careful with any `income' that is generated from your investments, you have two choices:

1) Pay it into A3. It can only be used for investment purposes.
2) Pay it into A2. It can be used for any purpose (including food...). It can also be paid back into A3 at any stage but cannot then be taken back out.

Option 2) is probably the preferred option since the amount in A2 will build up even more rapidly.


Sometime later.........


A1: $236000 IO
A2: $5000 100% offset
A3: $30000 money that has been used for investments

Simply repeat the process of moving money out of A2 into A1. Ask the bank to decrease the value of A1 by $5k and increase the limit on A3 by $5k. Transfer the $5k from A1 to A3. Invest the $5k from A3.

A1: $231000 IO
A2: $0 100% offset
A3: $35000 money that has been used for investments

Repeat until A1 is empty!!!!!!!!!!!

Buy bottle of champagne


Key point: money for investing only comes from A3!!!!!
(as PPOR increases in value the new equity can be used to increase A3.)


NB.

A1 and A3 contain negative amounts of money (debt).
A2 contains actual money (you can spend it).


The usual proviso apply, get competent advice!!!!!!!

The above is designed and simplified to show the flow of money. Many other factors, including tax and LMI implications, will also come into play....

Tailcat

 

awesome, thanks tail cat!

 

That is a fantastic post.

Should be a sticky Sim! Or massaged into a standalone article with a bit of the prelim posts added to the beginning to set the scene.

Cheers,

 

Yep, that was a very thorough post and a good explanation of the debt recycling strategy. Good one tailcat .