Alex
In your last post - you talk about +ve cash flow properties over a period of time - that is natural - because rent will increase over time... that is all baby stuff... But what i hate is comparing past with future...
This is where the problem is :
I am saying to people
1) Not to buy properties outside of super
any more from now on - I am not saying that
your purchases outside super till today are always bad (for some they are) decisions
2) In the past - all was well and most who purchased pre-boom like Wylie would have done well
3) In the future properties outside of super is NOT a good idea - due to NG / Tax / CGT / Grossed up Loss issues
4) Those who purchase property NG properties outside super -
do not look into structure more closely and ignore costs such as grossed up cost + imputated return on equity + inflation on their equity etc whilst calculating their gains
5) When you purchase IP which are NG -
ATO is your partner as you have to share income from property and growth from property with ATO in the form of CGT whilst with Super - this can be avoided
Any capital growth from now is doubtful - ignore growth altogether - if you get it, you are lucky - concentrate on return - or in other words think of this possibility : Can i property purchase a property for say $200K today - can i find some one today to enter into a contract with me - 12 years from now to purchase that property for $600K - instead of $700K which Wylie has achieved = probably not - because the future is uncertain, capital gain is uncertain - it is possible that there could be a capital loss on property as US has seen on property - we after GFS live in a different world - But the every year loss (grossed up) is certain - which can be avoided in Super - for two reasons
1) we can borrow less in super - which is a good thing
2) all contributions (including salary sacrifice) = reduce income = we pay less tax = can be used to gear and reduce borrowing further - so the return (rental income) is tax free and CGT is tax free
Imagine if Wylie decides to retire with 5 properties similar to those he has - and no loan has been repaid (to continue NG strategy)
Our Data:
Asset base $3.5M ($700K value of each property times 5)
Loan $1M ($200K times 5) - say at 6%
Equity $2.5K
Rental Income Say $500 per week times 5 or $25K each property times 5 or say $125K
I am not counting other costs in my below calculations such as council rates + land tax + agents management commission as i think these costs will be absorbed by any future growth in rental income
Net rental income after interest of $60K = net rental income $65K
Problems which i want to highlight (forget depreciation since they are houses purchased in 1998)
Problem 1) Tax on Income
Net rental income $65K
now we have to pay tax on this income - if on joint name than tax is $8K - net income $57K
= Return on equity 2.3%
Problem 2) Tax on Income if one partner dies
One day one partner will die - the other partner will acquire all the assets and now pay tax on $65K (only one tax free threshold) = tax $18K - net income $47K
= Return on equity 1.9%
Problem 3) Increase in Interest rate to 8%
Rental income $125K
interest costs $80K
Net Rental return after interest $45K
tax on $45K for one person $8K
net return 37K
on Equity rental return is 1.4%
Problem 4) interest rate 8%, one person and One property needs major repairs - say $20K
Rental income $125K
interest costs $80K
Net rental income after interest $45K
major repairs $20K
net cash flow to fund retirement $25K
Return on Equity 1%
I am sure there will be many people who will argue with the above situation - the above is not about if my figures are right or wrong - it is about a fact that when property are sold - you will pay CGT - In super you don't
that everybody will agree - that is the point I am trying to make all along - because like Wylie parents - they can retire on IP's no problem - but on low return on equity and Wylie will tell you the $ figure of CGT if they sell - there is a huge amount of CGT and if the parents won't sell ever - Wylie will, later.
In retirement you can two problems - low disposal income and at the same time be asset rich - that is because you will be holding the wrong asset class - On retirement to change the asset class it will costs heaps to sell and if you remain in this asset class the returns will be low - further, in retirement, you have to control two costs
1) COST ON INCOME - INCOME TAX
2) COST ON SALE - CAPITAL GAIN TAX
This can happen only in Super and not outside and like JIT said - if $50K invested for 30 years gives you $4.5M cumulative - so why bother - you are not going to see the dentist after reading this post - because there is NO NEED - same way if at retirement, If that asset base gives you 10% return TAX FREE - when i retire with $450,000 every year - I would be writing postcards to all those who will be on 1% (taxable) returns.
The only problem remains - can i get my money out of super before my preservation age of 55? For that i have requested all to contact a SMSF specialist advisor on
www.spaa.asn.au = there are situations when that is possible - explore them...
This was my ONLY purpose of starting this thread - to make people aware - not to purchase any NEW properties outside of Super and "think of Super Gearing and Forget Negative Gearing" .
Because super can borrow!
I now know some will "GET IT" and some won't!
And for many many of you, I may still be wrong .... I accept that ... I guess that is why we have these forums, where we compare our experiences and maybe, just maybe, learn some new tricks.... AND If any one, even ONE person, agrees with me - even partially, I guess, this thread will always remain the most read in years to come!