Lazy $$$$$ Ppor

I have received many questions about the term "LAZY $$$$$$$".

Here is an example of the use of LAZY $$$$$ (Unemployed equity) in a PPOR over a 5 year period.

The crux of the matter is:

A $500,000 home will increase in value over.......5 years at 5% by $138,141
A $500,000 home will increase in value over.....10 years at 5% by $414,447

By utilising the Lazy $$$$'s the gain could be......5 years at 5% by $355,442
By utilising the Lazy $$$$'s the gain could be....10 years at 5% by $884,332

See the attachment for spreadsheet details.

Regards,

Steve

Excellent explanation and example Steve - as always

Steve Navra said:

I have received many questions about the term "LAZY $$$$$$$".

Here is an example of the use of LAZY $$$$$ (Unemployed equity) in a PPOR over a 5 year period.

The crux of the matter is:

A $500,000 home will increase in value over.......5 years at 5% by $138,141
A $500,000 home will increase in value over.....10 years at 5% by $414,447

By utilising the Lazy $$$$'s the gain could be......5 years at 5% by $355,442
By utilising the Lazy $$$$'s the gain could be....10 years at 5% by $884,332

See the attachment for spreadsheet details.

Regards,

Steve

Click to expand...

The lazy equity need not be just in the home. There are lots of investors who are too conservatively geared...

Steve , nice clear cut post to illustrate an important point .

NigelW said:

The lazy equity need not be just in the home. There are lots of investors who are too conservatively geared...

Click to expand...

If they're conservatively geared and achieving what they want , with very low risk level , why is that Lazy?

See Change

Hi Steve

Like the concept, just need some clarification please.

Under Home - what are net costs $16K?

Gain of $884,442 - what happened to the loan of $400K?

GarryK

Would it be fair to include the unrealized capital gains tax liablity into the calculations?

see_change said:

Steve , nice clear cut post to illustrate an important point .



If they're conservatively geared and achieving what they want , with very low risk level , why is that Lazy?

See Change

Click to expand...

I'm being deliberately provocative SC. just wait till I start cancan dancing

I just hate to see people failing to achieve their full potential...whether it be wealth creation or any other endeavour...

This is an excellent example which is very easy to understand. Well done! I do have one concern however.

My understanding is that the example given will cost up to $30k pa to service (before tax benifits). I don't question that you'll be $814k ahead after 10 years, but it's still a lot of money to have to come up with on a day to day basis. Capitalising the interest would probably cut into the end profit significantly. What could be done to offset this liability?

I agree that plenty of people out there have equity which is not working for them. I'm currently geared as far as I'm confortable going, but I feel that it's also useful to have a 'buffer zone' in case the plan isn't executed as predicted.

Hi GarryK; AL & PT Bear,

GarryK said:

Like the concept, just need some clarification please.

Under Home - what are net costs $16K?

Gain of $884,442 - what happened to the loan of $400K?

Click to expand...

Under Home:

Interest cost of borrowing $400,000 @ 7% = $28,000
Less $12,000 tax saving. ($28,000 at 42% tax rate) = $16,000

Gain of $884,442:
Nothing happened to the $400,000 . . . you still have a deductible loan against the home!

However, this $400,000 loan is offset by the equity you placed into the 2 IP’s and your Shares . . . which equity is still there; and the growth achieved is over and above of that.

AL said:

Would it be fair to include the unrealized capital gains tax liablity into the calculations?

Click to expand...

Very UNFAIR! Capital gains will ony be realized on selling the assets. Why ever sell??

PT Bear said:

This is an excellent example which is very easy to understand. Well done! I do have one concern however.

My understanding is that the example given will cost up to $30k pa to service (before tax benifits). I don't question that you'll be $814k ahead after 10 years, but it's still a lot of money to have to come up with on a day to day basis. Capitalising the interest would probably cut into the end profit significantly. What could be done to offset this liability? ?

Click to expand...

Even without the tax benefit, then:
$30k p.a. X 5 years = $150,000 (Cost)
Growth over 5 years = $814,000 (Gain)

Net Gain = $664,000

Cashflow solution: Capital draw-down per year to fund the cashflow cost. (Cashbond / LOC) . . . easy!

Regards,

Steve

Steve

Any chance of posting the year-to-year spreadsheet for a new chum? I am stumped as to how some of these numbers are derived.

Theo

Hi all,

Steve, You might like to readjust those numbers in your last post.

bye

G'day Steve

Fantastic thread. Some of these questions may make me sound a bit ignorant, which I probably am, but I'm sure you can point me in the right direction.

Steve Navra said:

Cashflow solution: Capital draw-down per year to fund the cashflow cost. (Cashbond / LOC) . . . easy!

Click to expand...

As per your example, if I had a fully paid off PPOR worth $500K & borrowed 400K (80%), then how could I take out a LOC when my LVR is already 80% ie if I were to take out a LOC to help pay the $30K p.a. needed to service this strategy, wouldn't that add to the amount needed to be paid back ie the LOC (at the very least, the interest)? & all this prior to any tax saving. Could you expand on how this would be serviced for me please.
Would I need to draw down more from the LOC every year & if so would I need to be getting evaluations done every year? & how would that affect the bottom line in your scenario?

I have also noted in some posts from this forum that usually an IP will, as far as Capital Growth(CG) is concerned, stagnate for a number of years before having a rapid spurt in CG and then stagnate again for a few years before again having a rapid spurt in CG (cycle, boom etc). How would that affect your Scenario 2 or would it make no difference as long as the gain over say the 10 year period was equal to the 5% compounding gain annually?
So, if an evaluation was needed each year to allow a draw down on capital to service the loan, how would that be affected by the above, ie stagnate growth?

Steve Navra said:

Gain of $884,442:
Nothing happened to the $400,000 . . . you still have a deductible loan against the home!
However, this $400,000 loan is offset by the equity you placed into the 2 IP’s and your Shares . . . which equity is still there; and the growth achieved is over and above of that.

Click to expand...

Just to clarify, wouldn't that equity be $360k as 40k was used for costs in purchasing the two IP's?
Also if a LOC was taken out to service the loan, shouldn't it be included here?

Thanks

Hi Bill.L and Gad,

Yes I agree my figures are badly presented . . . I will have to post the spreadsheet as an attachment so that you can see the full basis of all the calculations.

Early April!! (I am about to hop on a 'plane to Fair Adelaide . . . then back for the Sydney Course next week, so after that.

Regards,

Steve

A Great course too, Steve!

I attended Adelaide, and learnt a lot!

Thanks for taking the time to come down to SA.

Regards,

Martin

G'day

Steve Navra said:

Hi GarryK; AL & PT Bear,
Even without the tax benefit, then:
$30k p.a. X 5 years = $150,000 (Cost)
Growth over 5 years = $814,000 (Gain)

Net Gain = $664,000

Cashflow solution: Capital draw-down per year to fund the cashflow cost. (Cashbond / LOC) . . . easy!

Regards,

Steve

Click to expand...

I think the 814k (Gain) refered to is actually the gain over 10 years, not five.

Also, in Steve's UseOfLazy$$$.doc, Scenario 2 the "Less net costs" under the 10 year example are the same as under the 5 year example. Those figures under the 10 yr ex. need to be doubled.

Looking forward to viewing Steve's detailed spreadsheet.

Does any one know why you can't attatch an .xls spreadsheet. It does not include it as an acceptable attachment, so I didn't try.

Thanks

Spreadsheet

Attached corrected SS.

Comments and feedback appreciated.

Thanks Bill.L for noticing the errors . . . please check this one too

Regards,

Steve

PS: Please ZOOM in if the document is too small!!

Thanks that is clearer. I am interested in this.

I still can't see how the 'Tax savings (est)' of $5529 for the IP is calculated, nor the 'Less net costs' of -$871.

Can you or anybody explain (with numbers)?

Theo

Theo said:

Thanks that is clearer. I am interested in this.

I still can't see how the 'Tax savings (est)' of $5529 for the IP is calculated, nor the 'Less net costs' of -$871.

Can you or anybody explain (with numbers)?

Theo

Click to expand...

G'day Theo

As Steve says in the notes at the bottom, "It has been assumed that the client purchased new or near new & therefore he could take advantage of the full depreciation allowances (app. $5000 p.a. for each property)."
You are also paying interest on the loans & that interest, as well as the "other costs" are tax deductable.

"Less net costs" is arrived at by:
Income: Tax savings, rent = 25,529
less
Costs: Interest + Other costs = 26,400
=
-871

Hope that helps.

Thanks gad you nailed the -871. But what about the 5529 ?

No matter how I play, I cannot get to 5529.

Can you put me straight?

Theo

Hi Theo,


Hmmmmm, the purpose of this thread was not meant to be a tax explanation on how gearing and deductions work!!

However . . . for purposes of good practice and accuracy I will attach the example 'neg gear' spreadsheet to show the calculations. (Ahem, next week after the Sydney course.)

Regards,

Steve