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Using managed funds to cover regular expenses

Discussion in 'Managed Funds & Index Funds' started by voigtstr, 18th Aug, 2007.

  1. voigtstr

    voigtstr Well-Known Member

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    I was considering using the Navra retail fund quarterly distributions to cover rental shortfall, LOC interest and margin loan interest. A 6 month buffer initally would be used to ensure cash flow. It has been discussed elsewhere that Navra isnt as efficient because the regular income is taxed and there is little in the way of franking credits.

    How would regularly drawing money out of CFS452 Australian Geared fund compare. Instead of regular income tax on the drawings wouldnt I have to account for capitol gains tax instead? Isnt the captiol gains tax higher (some cash would be in for over a year, but I would be contributing monthly to the fund as well). One benefit of CFS I see is that there is no minimum amount to redraw, so I could withdraw exactly what is needed each month or fortnight to meet interest costs and rental shortfall.

    Whether I use I Navra or CFS I would be topping up them up each month anyway.

    Are there any pros or cons to using on fund over the other for the stated purpose? With CFS I can see that I would be eating into the number of units held and then paying back between 2 and 4 times what I took out each month. With Navra I would also be contributing between 2 and 4 times what my costs are but using distributions to keep topping up the buffer (and using salary when the distribution wasnt enough)

    Over time I want to acculate more units in what ever fund so that I could purchase other properties as well (hopefully using LOC's for the purchase price and the fund to meet the interest costs and rent shortfalls)

    Which fund is the better fit?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay - if you have cashflow negative properties, then the income you receive from Navra will be used to offset that shortfall - you won't pay tax on that portion of it ... this is particularly useful in a trust which doesn't get negative gearing benefits.

    Capital gains are cheaper if units are held for more than 12 months since you get a 50% discount. However, if you are holding assets in a trust with cashflow negative property, you don't get to offset the capital gains with those losses - capital gains must be distributed separately, so you end up with the worst of both worlds, quarantined losses and tax to pay on the capital gains. This is not really such a problem for assets held only in your own name.

    As to which fund is better - they are quite different funds ... perhaps you go a split between the two ? :D

    That way you can let the undistributed growth accumulate tax-free in the geared fund, and use the income from Navra to help with holding costs, only selling units in the geared fund when you need to top up the returns from Navra ??

    You are allowed to invest in more than one fund you know :D :D :D
     
  3. voigtstr

    voigtstr Well-Known Member

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    Thanks Sim. Strangely enough, using both fund was my original plan... Navra to fund the shortfall (and cover margin loan, and cover LOC interest) and throw any left over cash from my monthly pay into CFS for growth.

    I guess to save tax on navra funds, intended to cover margin loan interest, I could capitalise the margin interest, and not pay for it out of distributed income?
     
  4. tailcat

    tailcat Well-Known Member

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    Voigtstr,

    Am I right in thinking that you do not have a servicability problem in this scenario?

    If so, why are you pumping all of your money into MFs only to draw some back (by selling units) to service your -ve gearing?

    Surely you are better off, keeping some of your money back to service your debts directly.

    By all means pump the rest into MFs, but now you know that these purchases are going to be there for a reasonable length of time and you can take advantage of the known `time in the market'.

    Tailcat
     
  5. voigtstr

    voigtstr Well-Known Member

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    The way I see it by using navra, I can continue building up units in that and use the income to service property..
    I want to build a system thats repeatable and sustainable, and doesnt negatively effect my monthly cashflow.

    Rather than just saving a deposit, I'd prefer the accelerated approach of saving into navra, gearing it (once I reach 20k) and then using a loc to fund the next ppor, whilst still increasing the unit account in navra every month, and using the income from navra to pay the rental shortfall, loc interest and margin interest (although might capitalise that).

    The intent is that I keep contributing 1200 to 2400 a month (depends on what shifts I worked the previous month) into Navra, and withdraw equity as it becomes available to use for investment property deposits. (wife will also be contributing about 500 a fortnight)

    By paying money into navra first and using the income to pay for investments I think I'm building up the unit count quicker than paying costs fortnight to fortnight (or month to month) and then depositing into navra.

    I dont have a servicability issue but I do want to maximise the amount of cash going into funds.

    If the distributions are higher than is needed for the six month buffer then those extra funds will go into the LOC (which initially will be bad debt for buying the next ppor) once the LOC is payed off it could possibly be used for the next ip (cross that bridge when we come to it). If the distributions are less that what is required to meet costs then yes that buffer will be topped up from my salary.

    The intent is to control as much investments as possible at safe LVR's (50-60 for navra)(80-95 for property) whilst maintaining flexibility of cashflow (ie contribute to funds for next year of so, but be able to pay childcare when needed for when we have our first child)

    I wont be selling units if I use Navra for income. I guess its a better vehicle for what I want to do than CFS for this purpose. I cant see my unit count in navra going backwards ever. With CFS we might occaisonaly take profits and try to buy back in during dips
     
  6. bundy1964

    bundy1964 Well-Known Member

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    *waits for the thunderbolt from heaven to strike Sim*

    You could use Navra for income and under a margin loan a growth fund to capitalise interest and still pocket the income from the growth fund, best of both worlds I think.
     
  7. voigtstr

    voigtstr Well-Known Member

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    Once I'd acculumated 20k in navra funds, to get them into a margin loan, do I have to withdraw them all and then have the margin lender buy them on my behalf? Or can I use existing funds as the asset for further funds?

    I like your idea though Bundy, the growth from CFS if it behaves itself would cover the margin loan capitalisation.
     
  8. bundy1964

    bundy1964 Well-Known Member

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    You can do a transfer form to get you started, just takes them a while with managed funds before it shows in your account.