Why buy Negatively Geared Properties? I think the calculations are wrong

[alexlee]

There is no situation when buying outside of super will give you a better result.

Then we disagree.

I have noticed that some want to retire at the age of 40 with $100K coming from passive income / rental income – quite frankly to collect $4M of equity by that age is quite tough – I have not seen many with about 22 years of exposure – I have seen a few – where the 5 acre property was rezoned – but nothing run of the mill investing can produce that result…

Just because you think it's tough doesn't mean it can't be done. Plenty on this forum, in fact.

To those newer investors who are reading this thread, ask yourself. Does the strategy meet your goals? My plan is to live off income well before I'm 55. 40 is a distinct possibility. The strategy outlined by manoj doesn't allow for this because he doesn't think it's viable to achieve 100k income by 40.

The logical question would be, of course, if manoj hasn't seen 40 yo financially free investors and he puts everyone and everything into super funds, could it be something about super that prevents it? Lack of gearing, perhaps? If I couldnt gear to the extent I did in the past, I would be much poorer.

On the other hand, a number of experienced, successful investors have raised questions based on their experiences (and financial achievements). Personally, I think you'd want to at least consider what successful investors who have achieved what manoj says is unlikely have to say and not just blindly trust an 'expert'.

I'm reminded of when 'expert' management consultants with a lot of nice charts talk to a successful businessperson and tell them this is now you should run your business and what you've been doing so far is crap.

Make your own decisions.
Alex

 

[Rolf Latham]

There is no need to read books –

There is no situation when buying outside of super will give you a better result.

This could be taken as a bit blind sided dont you think ?


While such strong commitment is to be commended, taking a step back and looking at other people's perception and experience might provide some valuable insight.

ta
rolf

 

[wobbycarly]

Primarily you should be using your own Super balance and then borrow the remainder for 25 years from a bank and let the income pay off the interest and collect more contributions and do it all over again – if you maximise contributions and if husband and wife work – every three years you should be able to purchase property in your SMSF with $150K of contributions = say a property worth $450K – if you start now –say if you are 30 – by 45 you should have 5 properties – then you keep contributing maximum and then instead of buying more – simply get rid of the loans with contributions and rental income – my figures say that by age 55 these properties will be all paid up

So my wife doesn't work - by choice. And there's now way I could put $50k pa into super. BUT, for the last 5 years, every 18-24 months, I've been able to buy a property outside of super. These have all grown, and while the grossed up costs would result in a loss at sale for the most recent purchase, the path I'm on is growing wealth at a greater rate than I could save! Would manoj suggest that instead of investing in NG properties, I should be squirrelling away cash into a super fund and possibly buying a property in super only every 5 years or so?

Still comes back to point that many others have made - not everyone's circumstances will suit buying property in super, neither will NG properties suit all.

 

[joanmc]

My benefits are preserved until 60 because I was born in 68 Hubby was born in 63 so his are untouchable until 58.

I cannot access my super until then because I am NOT on Newstart or in financial hardship.

I am LOE which by it's very nature means that I am asset rich.

So I think Manoj isn't looking at all the different pictures. I still can't see how his strategy would have gotten me to where I am now.

 

[wylie]

That is not exactly what I said – after selling the first 5 – there was no problem with the debt and interest was under control due to high income – but after selling a few – I realised the Profit & loss from each of them – mind you I sold them in 2002 – 2004 – the best time to sell – and some of them will sell even lower if sold today – so had I not sold them back then …. I would have got less today –

Why would they be worth less today than in 2002 and 2004?

further I would have to pay 6 years of loss each year!

What do you mean by this?

I actually feel sorry for those who purchased them for NG purposes – I came out in front in each deal – but not after taking in to consideration of all costs such as Stamp duty on purchase / holding costs (grossed up) / agents commission / imputation income for my equity / CGT to ATO believe me all deals were at a loss which led me to believe that the structure which I was using of 50% is wrong – the ATO is hanging this carrot – but the profits just not add up ….

For those who can prove to me that they have made a profit – after considering all costs – they do have to sell the property – assume it is sold at market price – and if they can prove that they have beaten inflation – I am happy to pay for their dinner for two for $100!

House we paid $156K for in 1998 (rented immediately $190 per week), spent $30K over twelve years adding deck, kitchen, re-roofing, air-con etc. Value now probably $700K renting for $495 per week. Where have we lost money on this house? I don't understand?


If I was wrong – why in your “Mecca of NG” – not even one taker has come to claim the price

So all those of you, thinking of retiring with NG’ed properties – please wake up now - as that retirement is an illusion and will NEVER happen.

My parents retired on NG properties, quite wealthy, it CAN happen and plenty here on SS can say the same.

I don't know how we would have fared had we gone down a different path and invested within super. I don't think it was available to us when we started down the IP path anyway.

I do know that investing OUTSIDE super has proven to be a great strategy for us. I don't think you should make blanket statements for either strategy. Perhaps they can BOTH work.

 

[neK]

Alex,

Another way to effectively access super before 55 is called spousal transfer of super contributions.

Eg. A wife can transfer 85% of their annual super contributions to her husband (or vice versa). This is 100% of their contributions - 15% contributions tax.

If the wife is 50 and the husband turns 55, the younger partner can in effect access super by virtue of her older partner reaching the preservation age first!

If there's a bigger age difference it works even better for the younger partner!

This does not work if the spouse has met a condition of release.

eg if Wife is working and is 45, husband is 55 and retired (hence meeting a condition of release), wife cannot transfer to husband. If husband was 55 and still working then this would be fine.

 

[neK]

This strategy works only when you have enough equity in your own home – if not then you will have get your own home revalue every – 5 years or so – since I am living this strategy – I suggest you do your sums to your personal situation and see it works for you…

The idea is not paying the home loan – but pumping your super with salary sacrifice and they Super Gearing (SG)

The issue im referring to has nothing to do with equity. Imagine for a moment you had HEAPS of equity (like $10 million for example), have you looked at the effects of capitalising the interest?

My point is that the capitalised interest will eventually catch up and get to a point where the tax saved is less than the interest payments (and worse of all, the interest payments are not tax deductible).

My question was whether or not you had actually modelled this to see the effects of capitalising interest for this long and what the break even point would be.

 

[battler]

What happens with this strategy in the event of a marriage breakdown?

 

[BV]

I don't think you should make blanket statements for either strategy. Perhaps they can BOTH work.

Wylie
IMO both strategies can work.

I agree with Alex that while people are in accumulation phase and have high wages they can gear better outside super so they can build up their portfolio quicker.
Once they have a sizeable portfolio ticking away, they could change strategy and look at super gearing.

And as you know 1 strategy does not fit everyone.

There will also be those who only want to have 1 PPOR and nothing else
or those who only want to buy 1 or 2 IP's and for those people investing through super could be the way to go.

cheers

 

[alexlee]

I agree with Alex that while people are in accumulation phase and have high wages they can gear better outside super so they can build up their portfolio quicker.
Once they have a sizeable portfolio ticking away, they could change strategy and look at super gearing.

The change in strategy to super may make sense as you get closer to 55. If you're still relatively young, you can always just shift assets into a family trust instead if you want flexibility.

There will also be those who only want to have 1 PPOR and nothing else
or those who only want to buy 1 or 2 IP's and for those people investing through super could be the way to go.

The problem is that your strategy changes. As we've seen with with some forum members, they start off thinking buying 1 or 2 is 'enough'. But then they see the results, and suddenly they realise they can afford to / want to buy more.

If a young person says 'I don't want to learn how to invest, I just want the PPOR and nothing else' I probably would suggest maxing out super.
Alex

 

[JIT]

There is no situation when buying outside of super will give you a better result.

How can you say this?

You could have positively geared or ungeared investments generating income in a family trust with a number of beneficiaries including companies and some deductible super contributions, and you could potentially be paying an effective tax rate even less than the 15% tax rate you would pay in a super fund (and with greater access not being limited by preservation ages)... couldn't you??

Further, after reading this post, you are not to see your dentist – the reason is simple – there is no NEED – the same way – there is no need to collect $4M outside of super till the age of 55 – if we can collect only $1M in super and get a 10% return – that will give us the same result – that is $100K after tax ….

Fair point, if you are happy to wait till 55 y/o of course.

I have many people who at the age of 30 and 40 claim that $100K is not enough – to those I just have only one thing to say – when you get to the age of 50+ the need for money reduces – need for money is higher when we are younger – at age 30 – 50 and do not ruin it by NG – I have seen many couples where the wife is delaying childbirth due to the fear of taking time off – which cannot be afforded to pre-set NG plans. Today is to be lived first – worrying too much about a better tomorrow can get you in all sought of problems… like divorce, stress, etc

Good points.

At best after paying CGT today – you will be left with about $400K – which is your capital + the loss which you have paid each year + the imputated income on your equity – no more…

Cool, 400k sounds good.

If I invested that money in super (un-geared) at say 8% pa compounded over 25 years, with no further super contributions, it would roughly give me at the typical retirement ages you mention...

$3.5M!!!

I think you've just proved my point.

So I think I win your dinner prize... agree?

The power of compound interest!

Cheers.

FWIW, in my current situation at 30 y/o I feel that I have ''enough'' residential IP outside super, apart from the PPOR I plan to purchase in the next 12 months or so.

So I don't mind putting some relatively small deductible contributions into super, and using the bulk of my spare equity to leverage via a DT into positively geared investments such as commercial property.

And btw I would plan to debt recycle outside super to convert future non-deductible PPOR debt into deductible debt... I think this is far more prudent at a younger age than Manoj's PPOR strategy that I think is more suited to the 45+ age group.

Anyway, this thread has been good for me as it has spurred me on to starting my own SMSF!

 

[alexlee]

FWIW, in my current situation at 30 y/o I feel that I have ''enough'' residential IP outside super, apart from the PPOR I plan to purchase in the next 12 months or so.

So I don't mind putting some relatively small deductible contributions into super, and using the bulk of my spare equity to leverage via a DT into positively geared investments such as commercial property.

And btw I would plan to debt recycle outside super to convert future non-deductible PPOR debt into deductible debt... I think this is far more prudent at a younger age than Manoj's PPOR strategy that I think is more suited to the 45+ age group.

And for me, at a similar age as JIT, I plan on buying more resi IPs. I might buy commercial in the future. I see no point in contributing small deductible contributions into super: 25k a year isn't much especially if it has to be locked away until I'm 55. Instead I'll move spare equity into a family trust if I want some asset protection for later on, with much more flexibility to access the assets.

Loan recycling by capitalising interest on the IPs will decrease the non-deductible debt. My investment portfolio is negatively geared but +ve cashflow. I have never experienced stress from negative gearing, and mine is a single income household. That is not to say some people won't be stressed from negative cashflow property. But negative gearing doesn't mean financial stress. It can even be +ve cashflow, which ADDS to your after tax income.

In the future, say around age 40, I'll have transitioned to more high yield investments. I might combine that with some LOE, or a business. This flexibility would not be available in super at that age.

Two very different strategies, using different vehicles. There is no right or wrong. Different objectives, different circumstances, different plans, different strategies.

Anytime someone says 'this will work for anyone, under any circumstances', I would be very, very wary. It's like someone selling you a car and saying 'this is the best car ever' without ever asking you what you're going to be using the car for. Or selling you clothes without asking on what occasion you're going to be wearing it. Or, for that matter, selling you a house without asking where you want to live and how big a house you want / need.

I would also be wary of a tax advisor that says 'well, I think it's unlikely you'll be able to retire early anyway, so this plan doesn't really allow for it' when that's your objective. People HAVE done it, and people are doing. Not everyone can, not everyone will. But to discard the possibility, well........

Clearly, my plan is tailored to my own circumstances and views. You might not want it, you might not be able to, you might want / be able to do something else. But the vehicle you use (trust, personal name, super, company, whatever) should match your strategy and objectives. not the other way around.
Alex

 

[JIT]

In Manoj's favour, if you had say 35k in super at 30 y/o, and invested 25k pa deductible contributions annually ($21250 after contributions tax) for the next 30 years at say a compound growth rate of 10% pa, you would have at 60 y/o...

$4.5M!

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Have fun.

 

[manoj]

Thanks all

I have been delibarately agressive in some (many of) my statements to get as many people to comment ....some have very intelligently and i thank them for contributing to this thread, some have commented emotionally... I mean why their way is being challenged .......specially since it is working ....

I have a learnt a lot, specially that "one medicine will not cure everyone" and have been made aware that there are other medicines also available to cure the same ailment.

At the end of the day, I guess, most have learnt that although, SMSF borrowing has been available since Sept '07 - today, it is a topic of much discussion and consideration by property investors. Those who are interested to know - One of the 4 major banks write about (in Sydney) 10% of their loans to SMSF rest mostly to PPOR.

There is still resistance to this type of borrowing - perhaps due to many legislative restrictions placed on super by various Govt's.

In any case, most of the discussion was in good spirit and will give future readers / members some food for thought.

I thinkthere is nothing more to add - those who are thinking to roll over their super - please read below

In relation to new procedures within the Australian Taxation Office (ATO) when establishing a Self Managed Superannuation Fund (SMSF). The additional measures were a response to the number of illegal early release schemes utilising SMSFs to access superannuation monies. The ATO stated that:

"From January 2010, improvements will be made to the SMSF registration process to identify and prevent sham SMSFs from operating and being displayed on Super Fund Lookup (SFLU). The new registration process means that it will take approximately seven days before an SMSF is shown on SFLU.”

The Australian Prudential Regulation Authority (APRA) has now written to all funds that they regulate, that is, non SMSFs, to provide guidance on additional processes that trustees (of non SMSFs) should consider implementing to assist in verifying the validity of transfer or rollovers requests to SMSFs.

These additional processes include:

Obtaining proof of identity of fund member requesting rollover;
Reviewing identity document provided for characteristics of forgery;
Confirming that SMSF is included on the SFLU;
Where the SMSF status is “Registered – status not determined” (usually for new SMSFs) perform additional checks to ensure SMSF is valid.
The rollover fund may request copies of the SMSF’s trust deeds, investment strategies, bank account establishment documentation, ATO notifications, etc. Make sure you have these on hand in order to quickly satisfy their queries and expedite the rollover process.

For a copy of the letter sent by APRA please click below.

http://www.apra.gov.au/Superannuation/upload/IER-FINAL-LETTERTO-TRUSTEES-5-Feb-2010.pdf

Again, it is important that sufficient time is allowed when rolling over superannuation monies from an APRA Regulated Fund to a SMSF, particularly where the SMSF is settling on a contract to acquire an asset.

Manoj Abichandani

 

[Piston Broke]

I don't think what manoj is saying is complicated, it's just that I don't think he's not presenting it clearly.
It's all basic maths not fluid mechanics.

Though I don't agree that an SMSF may be the best way to go for every one.
For those on wages paying 40% tax, it does currently make sense and may be useful.
But how many times have the super laws changed? And how much more will they change?

And since we're borrowed 180Bil to splurge on the economy, what better target than those millionaire super holders in 20 years time* to slug for the bill.
Heck they got the benefit of the stimuli, now they can pay their dues.

For those biz owners whose taxable income is way low without the SMSFs, then it's not all that relevant anyway.
Though it may be beneficial for a high $$ asset owner to have some of the wealth diversified in a super fund.

*edit

 

[BV]

I don't think what manoj is saying is complicated, it's just that I don't think he's not presenting it clearly.

piston get off the scotch mate

 

[Rolf Latham]

Thanks all
SMSF borrowing has been available since Sept '07 - today, it is a topic of much discussion and consideration by property investors.

With appropriate structuring SMSF benefit lending has been available since the early 90s............its only since 2007 that its become available to "mainstream" advisers and SMSF holders.


ta
rolf

 

[Piston Broke]

piston get off the scotch mate

Sorry m8 it makes me reasonable

 

[wylie]

I asked manoj some questions, but they seem to have been ignored......

 

[s050399b]

One question:
its so strongly harped that if you buy negative gearing properties outside super, and it will still be negative gear after 10 years?

Why? Rent would increase while loan will be same or lesser?