borrow funds against your IP to invest in fully franked equities..

In your opinion, if you had equity in your IP and could borrow additional funds to buy domestic shares (fully franked) do you think its a good idea or not? The ATO allows you to claim interest on the loan for this purpose.

The outlook would be long term dividend shares as opposed to buying speculative 'growth' shares.

Whats your opinion on this based on current economic conditions? i.e. low lending interest rates, low savings int rates. My property is positively geared now and thus such a strategy would seem to be tax efficient and hopefully in the long term the shares would outperform the market.

cheers
 
I plan on doing exactly this. Once you have maxed out your borrowing, have surplus equity, BUT it's not enough for another house, this is the best way to fund shares. It's cheaper than a margin loan.
 
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Long term I plan on heading that way, still a number of years away.

Not sure where I would put my dollars if I was in the position to transition today.
 
ANZ $32 pa / Dividends $1.81 pa / Yield 5.65% / 100% franked

Borrow $1,000,000 and purchase 31,250 shares.

Provides and income of $56,562 pa + $24,240 pa Franking Credits
Assume Interest (line of credit, not margin loan) = 4.5% pa, tax rate 34.50%
Assessable income = $80,802 (grossed up dividend)
Taxable income less Interest = $35,802
Tax on income (@34.5%) = -$12,352

Cashflow = $56,562 (dividend) - $45,000 (interest) - $12,352 (tax) + $24,240 (Franking Credit) = $23,450 pa
 
ANZ $32 pa / Dividends $1.81 pa / Yield 5.65% / 100% franked

Borrow $1,000,000 and purchase 31,250 shares.

Provides and income of $56,562 pa + $24,240 pa Franking Credits
Assume Interest (line of credit, not margin loan) = 4.5% pa, tax rate 34.50%
Assessable income = $80,802 (grossed up dividend)
Taxable income less Interest = $35,802
Tax on income (@34.5%) = -$12,352

Cashflow = $56,562 (dividend) - $45,000 (interest) - $12,352 (tax) + $24,240 (Franking Credit) = $23,450 pa

Is it really as simple as this? A genuine question.

Is it reliant on the buy in price - at least not going below purchase price?
 
For people who don't have time to research, is there some sort of fund that targets A) blue chips with low risk and conservative returns, but B) are fully franked?
 
Is it really as simple as this? A genuine question.

Is it reliant on the buy in price - at least not going below purchase price?

Yes.

This way, you avert margin calls.

It's even juicier if you just purchase shares regularly or in the dips like several forum members.

pinkboy
 
For people who don't have time to research, is there some sort of fund that targets A) blue chips with low risk and conservative returns, but B) are fully franked?

A major listed investment company or an ETF that tracks the index would be ideal here.
 
For people who don't have time to research, is there some sort of fund that targets A) blue chips with low risk and conservative returns, but B) are fully franked?

LICs like ARG, AFI, and MLT return around 4% FF. Others I look at are WAM and CDM which return 7% FF (which is effectively a healthy 10% return on your cash outlay).

pinkboy
 
Yes not a bad strategy but for 3% differential, picking the right stock is still very important because the margin is too thin.

Also if you have a lot of houses and debt, questionable to buy a bank stock such as ANZ.
 
Just make sure you don't lose the connection between the Redrawn Funds and the Investment in Shares.

Once you commingle the Redrawn Funds with your other Funds (e.g. transaction account), you could lose that connection and the interest deductibility.

In the Domjan case [2004] AATA 815 the ATO successfully argued that the placing of borrowed money into a savings/cheque account with other personal funds broke the link necessary to prove the funds were borrowed for tax deductible purposes.
 
You'd probably want to dollar cost average in to a LIC or ETF to avoid timing risk, and I wouldn't be focussing on chasing initial yield. So something plain like VAS or AFI would do the job. DYOR and decide what you are most comfortable with. I'd avoid holding individual stocks for most investors. The urge to fiddle and double guess yourself will be too great.

You are looking for a combination of yield to cover holding cost and capital growth, the latter is the key to big yields later on. If you have a long term view - I am talking 10+ years then I think you will do well. Expectation management will be important, and the discipline to stick with it, and keep investing when everyone tells you that you are mad for buying stocks. This is where mindset and education is extremely important, the liquidity of stocks can be a disadvantage for many so conviction in what you are doing is extremely important ;)
 
I do this but via a margin loan. the LOC is my fail safe if I enter a margin call. but I choose to gear thru a ML, such that my home equity is not touched and have money at call to alleviate ML when margin call happens, or deposit for more property...
 
Is it really as simple as this? A genuine question.

Is it reliant on the buy in price - at least not going below purchase price?

not to criticse the plan, the concept is good, but consider that $23k is 2.3% return on investment, you could loose that in a day. If It's that easy we would all do it.

As it happens, i only ever buy shares with redrawn funds, but the source of the funding has no connection to the investment.
 
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In your opinion, if you had equity in your IP and could borrow additional funds to buy domestic shares (fully franked) do you think its a good idea or not? The ATO allows you to claim interest on the loan for this purpose.

The outlook would be long term dividend shares as opposed to buying speculative 'growth' shares.

Whats your opinion on this based on current economic conditions? i.e. low lending interest rates, low savings int rates. My property is positively geared now and thus such a strategy would seem to be tax efficient and hopefully in the long term the shares would outperform the market.

cheers

I hope you know what you are doing? Sometimes people forget that some or more capital can be lost, thus it can wipe out, say 2.5 years of dividends....?
You assume that capital will stay same or higher, but do you have a strategy for when to get out if it falls?

Imagine you bought CBA, say in March15 around $95, would you be out of the market now, or just holding till today?

The author below explains just that:
http://www.brrmedia.com/event/frame/138238
 
ANZ $32 pa / Dividends $1.81 pa / Yield 5.65% / 100% franked

Borrow $1,000,000 and purchase 31,250 shares.

Provides and income of $56,562 pa + $24,240 pa Franking Credits
Assume Interest (line of credit, not margin loan) = 4.5% pa, tax rate 34.50%
Assessable income = $80,802 (grossed up dividend)
Taxable income less Interest = $35,802
Tax on income (@34.5%) = -$12,352

Cashflow = $56,562 (dividend) - $45,000 (interest) - $12,352 (tax) + $24,240 (Franking Credit) = $23,450 pa

A net return of 2.3% does not sound very impressive.

I'd have thought there would have thought getting better net returns than 2.3% would not be too difficult. Could be my ignorance showing :confused:
 
A net return of 2.3% does not sound very impressive.

I'd have thought there would have thought getting better net returns than 2.3% would not be too difficult. Could be my ignorance showing :confused:

Compared to property at apprx 4% yield this is good - no land tax, stamp duty or broken toilets either.

And don't forget the potential capital gains (and losses).
 
Compared to property at apprx 4% yield this is good - no land tax, stamp duty or broken toilets either.

And don't forget the potential capital gains (and losses).

You are probably right but I still don't feel intellectually or emotionally convinced.

Using a basic example of two $500k house/granny flat properties with
-gross yield of 8%
-expenses such as PM fees etc at 15% of rent
-tax rate of 34.5%
Your net cash in hand income would be just under $45k

Broken toilets and the like are not an issue, PM sorts that out and you just sign the check.

For some one who is knowledgeable about investing out side residentlia property (not me), why settle for 2.3% yield?
 
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