What would you do now scenario?

Hi all,
I am a new member and am looking for some advice, basically a "What would you do now?" scenario. I have a basic understanding of finance principles but do not have enough nous or confidence to follow my gut instinct.

I bought my home approximately 2 years ago for approx. $450k. Borrowed $344k. I have split the loan into P&I and IO, 50%-50% fixed-variable. To date, myself and my partner have paid approx. $80k. This $80k is in effectively an offset account.

I own approx. $30k in shares and have approx. $5-10k in the bank. We own our car. I have an approved margin loan account available of $50k with my shares as collateral. To date, this account has not been used.

My partner's salary services the loan with approx. $1k to spare. She earns approx. $65k before tax. I earn approx. $80k before tax (in my own small pty. Ltd. company. The company earns more than this, around $15k, but i only pay myself this figure to stay within the 30% tax bracket).

Possibly looking to start a family within 2-3 years (we will then be on my wage only for around 6 months before my partner goes back to work p/t) and purchase a car later this year for approx. $50k (in the company name (or do i lease?)). When we do start a family, i will also pay my partner a wage to do the books etc. from home therefore lowering my taxable income by as much as possible.

I would like to purchase an IP later this year, if not earlier, yet don't really know if this is the right action? I would then like to get a 3rd then 4th IP as soon as practical in the future. Would using my margin loan be a better response? Should i debt recycle-how though?

What i really like to know is "what would you do if you were in my shoes"? Potentially i will receive different responses from this thread, and i know there are different ways to skin a cat so to speak, however, i will be looking for a common thread in responses where possible.

My investment timeframe would be 5-10+ years and consider myself to be not scared of risk but obviously not a risk cowboy. I understand that risk and return are generally inclusive of eachother.

By accountant is not much help unfortunately and my financial advisor has gone AWOL.

Any sound assistance / advice would be greatly appreciated. I understand it is only advice that will be provided, but i am sure that your advice will be from past experience which can only assist me.

Thanks again in advance.

 

You are definitely right that there are different opinions on what is the way forward from the current economic climate.

However my opinion is, pay down as much debt as possible! It's awesome that you have 50% fixed. I think that is the best play at the moment, and it's exactly what I have recommended to my own mother (which she acted on).

My gut instinct tells me interest rates will probably be going quite high (above 10%) in the next couple of years if central banks around the decide quantitative easing is required to jump start the world economy. Alternatively if they let deflation set in then having as much debt paid off as possible is critical. So any way you look at it paying down debt right now is a smart move IMHO.

Other than that I am personally holding some physical gold and silver, old school insurance policy for system collapse. Also generally a good preservation of wealth in times of high risk.



And I'll also be looking at moving more funds into Asia ETFs and managed funds over the coming months and years, I think despite the downturn, with a 5 - 10 year timeframe I personally think this will be the best returns will be. I will also probably look into South America assuming that Argentina and Venezuela don't implode.

I personally don't like Australian property, I think it has a lot more downside potential than upside at this stage. Though that said there aren't a lot of things I that see having huge upside potential at this stage, but I definitely wouldn't be borrowing heavily if you were going to put more money into the Australian property market.

That's my two cents on some options you could think about.

My only other advice would be read these forums! Just flick through all the threads and read as many of them as possible.

 

You say

This $80k is in effectively an offset account.

Which is it am offset account or is it really a LOC? You are aware that there is a big difference between the two as far as future tax consequences?

Cheers

 

Everyone so far, thanks for the reply. Please keep them coming!

It is an offset account handyandy. We can draw on that money as required.

 

Finance strategy

My view is that wealth creation is a finance strategy. I like property because you can leverage far higher than shares and has far less volatility (read margin calls) but you need to set your loan structures up correctly.

I would look at getting your home revalued than refinanced if appropriate and setting up an additional LOC to be used for investing purposes. You then look at purchasing an IP using a different lender and funding this with a portion of your LOC. The type of property depends on your own interests and time but most favour a buy and hold strategy so rental yields are equally important with capital growth in today's climate.

A median priced property in a good location should be close to after tax cash flow neutral, so your holding costs are minimal.

You direct rent into your offset to further reduce the interest cost paid. You build your equity in (now) 2 properties and do it again. In practice you could build a solid base of 5 IP's in a 10 year timeframe.

In terms of buying a car - get a good second hand and in the company name and most likely lease it. The car is a reducing asset purchase, losing value over time, so spend as little as possible on these type of purchases in your early years of building wealth. The rewards come later.

 

Great response Greg. Sounds logical. Can you (or anyone) provide some more info. on rental yields and the assoociated reasoning behind the same?

Also, if you are tax cash flow neutral, where does the rent come into it? I mean, aren't i breaking even (neutral) so there is little, if any, extra cash available to reduce interest costs. Apologies if i missed your point and it is a dumb question.

Do you, or does anyone, have a spread sheet or calculation or link to the same which provides a breakdown of all the costs associated with an IP purchase and assesses cash flow etc? This would be very handy to explain the whole process!


With regards to the car, i was considering taking up the gov. business tax break which allows a 50% tax deduction. Your thoughts?

Thanks again to all.

 

Cashflow Investor Model

ynot2009,
There are a number of organisations that provide data on rent yields. Certainly magazines like Your Mortgage or Property Investor often have that type of information. Organisations like Residex or RPO Data also and Terry Ryder hot spotting is a well known resource.

With current interest rates, if you have a rent yield approaching 5.6% and depending on associated holding costs, body corp, land tax etc, and depreciation/building allowance and capitalised LMI (if applicable) you will be close to after tax, cash flow neutral for that property depending on your marginal tax rate. I do have a spreadsheet calculator that I can send to you if you are interested. It is designed for the Victorian market and is an estimate rather than a definitive answer due to the many variables involved.

There is nothing in the tax act that says your rental income or your reduced personal income tax benefit (presuming you submit an annual income tax variation) has to go against or to service your investment loan. It doesn't. It is this additional income that goes into your offset to reduce the interest of non tax deductible debt. Obviously you need to service your investment loan but you do this by a LOC already set up. The exact methodology needs to be worked out for your circumstances and how much you do of this. In a sense it is a debt recycling but using property as the vehicle

I agree, take advantage of the additional tax depreciation on a vehicle if you are in a position to do so. A chattel mortgage should suit and a CHP should also achieve this but check with a good tax accountant.

I hope this helps clarify my earlier response.

 

Hi Greg,

If you are willing to share your spreadsheet with me i would be more than pleased to review it. I am sure it can only assist in my learning.

Many thanks.

 

I would get a good lawyer, accountant, and financial planner to help me get the right structures in place for the wealth I am about to build.

I would get a new home loan. I'd get the cheapest variable home loan on the market with a redraw facility and 55 days interest free credit card. I would put every dollar into the loan and use the 55 day interest free credit card to live off. Repay the credit card before the 55 days are up.

I would put the maximum amount into super and buy shares in my super if I wanted to be financially free at 55. If I wanted to be financially free before 55, I would put the minimum in super and invest outside of super.

I would cut my expenses to the bone. I would earn as much as I can and work all the extra hours I could.

I wouldn't buy a 50k car. I'd buy something much cheaper. I'd pay cash from the home loan or get a lease if it was for business. I'd be directd by my accountant. He/she should know what is best.

I would get a stockbroker. He/she would want to be good enough that they could find great companies at great prices. I would use "Buffett" criteria for picking the companies to invest in. I would use options and warrants as well as shares to build my wealth. I wouldn't use a margin facility unless it was absolutely necessary.

I'd take money out of my home loan when necessary to buy these investments.

I would get good wealth protection (insurance) incase something goes wrong.

I retired financially free at 35. I made a lot of mistakes. If I was doing it again, the plan above is what I would use. Good luck

 

Awesome post thanks.

I havnt had a credit card for ten years (since I maxed out the last one) and I thought that was good but reading your post it seems the best way to pay off my ip

I am intriged that you don't go for margin loans. Why is that?
Most of the posters here are saying if no margin loan don't bother turning up


th

 

Interest rates can be cheaper with warrants. Check out RBS Self Funding Warrants. I know they are cheaper than Leveraged Equity at 8.25%.

If you had warrants over ABC Learning or Babcock & Brown, then the warrant issuer can't sell any of your other investment to make up any loss they might suffer. If those shares are in a margin lending account, the margin lender can sell other investments that you lodge as security.

I do recommend Margin Lending to clients, but I encourage them to pay off the debt as fast as they can. If the LVR gets up to 50% I get uncomfortable. I have been using them a for Share Purchase Plans if the client has no funds left.

Hey, if you suck with Credit Cards, don't go back to using them. That plan is for people with discipline. Perhaps a debit card might suit better. Make sure you get proper financial advice if you are going down this path.

General Advice Warning.