4% Rule - what is it.....and how does it work...

Discussion in 'Investment Strategy' started by sash, 21st Jul, 2015.

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  1. KDP

    KDP Well-Known Member

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    The interest can be deductible if structured the right way. I think @Rixter is just living off the gross rent and using the equity to capitalise interest and pay for the IPs expenses.
     
  2. sash

    sash Well-Known Member

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    Yeah..I hear..but the different ideas....under the so called responsible lending rules (they can liable) they have to ensure that you can meet serviceability....income requirements. They are playing with this and each bank has their policies around this. The majors are a no go at the moment.

    This is what I am grappling with..I can quit today and have a great life but it will close the investment game due to the DSR requirements in place. Once you don't have a regular job the game changes...though you can get back in after 2 yrs of tax returns...but even then they will not lend as much. Old ways of thinking still in place and has not caught up to the modern job environment.

     
  3. sash

    sash Well-Known Member

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    Only if the money was via savings or excess rents put into a offset.

    If it is a LOE off a IP reval...the ATO will have issues. I am not an accountant will leave the accountants to answer this.

     
  4. MTR

    MTR Well-Known Member

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    You can reduce debt by selling down. Still an issue with banks because they don't like you to do rent reliant? The thing is do you want to retire and then continue investing or just become a bum...that's a joke? I have not read all the posts sorry?

    MTR:)
     
  5. KDP

    KDP Well-Known Member

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    It's really no difference from what Keith was doing in his initial retirement. Living off the dividend and then capitalising the interest of the margin loan (deductible as for investment purpose).

    In this case, instead of using rent to service the debt and then living off the drawn down equity you would use the drawn down equity to service debt and pay for IP costs (deductible as for investment purpose). You will then have the whole gross rent to live on.
     
  6. sash

    sash Well-Known Member

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    Yep...and more changes on rent reliance policies targeted to investors on the way. Having said that...I think there is also a way to get funding via being classified as a "Professional Investor"..don't have all the ins and outs of this.

    I am hobo anyway....so no offence taken....so being a bum comes naturally to me.;)

    No Louis Vuittons ...Lear Jets or Louboutins (maybe I can pull off a Chris Jenner)..for me. :p

     
  7. MTR

    MTR Well-Known Member

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    and you are compounding debt? sorry, just that little chestnut, don't mean to be cynical but if I recall Keith had to take on contract work, nothing wrong with this, but just another layer of risk.
     
  8. KDP

    KDP Well-Known Member

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    We may have to look at other income stream like dividends as well.
     
  9. MTR

    MTR Well-Known Member

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  10. KDP

    KDP Well-Known Member

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    No doubt that's the risk. I'm not a proponent of 100% relying on LOE either. My only point was that you should be able to structure it so the LOE draw down is deductible.
     
  11. sash

    sash Well-Known Member

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    Yep....rebalancing to some element of shares also de-risks income continuity...

     
  12. sash

    sash Well-Known Member

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    Again not an accountant...but if it is off IP income no...but can be used for dividend income creation from shares from where you can use the income of this to live.

    Only issue is asset values of shares if they tank....you then have lost capital...a catch 22...

     
  13. MTR

    MTR Well-Known Member

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    Yes, you are right, I am doing this now, using 2 lo doc lenders, and my accountant signs off on business income, as I have projects on the go and some sold that fall in the following tax year my accountant is happy to sign off as he can see the income no rubber numbers, but I am sure many do use rubber numbers its pretty common.

    You also need to have established a business 2 years. Now 2 years tax returns for my business so this should be OK moving forward.
     
  14. MTR

    MTR Well-Known Member

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    got it:)
     
  15. sash

    sash Well-Known Member

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    So you got classed a "Profession Investor" as well?

     
  16. MTR

    MTR Well-Known Member

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    Any asset can fall, but you are only interested in dividends right? you are not selling, I am no expert with shares
     
  17. KDP

    KDP Well-Known Member

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    Look at rent and dividend as the the same thing, both income.

    The issue is as you've identified, the lost capital if the underlying asset value falls (whether it's shares or property).
     
  18. MTR

    MTR Well-Known Member

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    I am considered a developer, I pay GST as well a CGT, because I am running it as a business, I never pay more than 30% tax on my money because we buy land in our Trust and we have another business which is project management and we use this to reduce tax. I am no expert but my accountant is also a developer so I believe he is giving me good advice. I posted some of my tax strategies and seems the tax gurus here(SS) did not pick it to death and look like they agreed with how he has structured this.
     
    Last edited: 22nd Jul, 2015
  19. Fargo

    Fargo Well-Known Member

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    No the converse is true, that's what the smart investors do is buy high growth shares and sell a portion while maintaining or increasing portfolio value , average growth of over 15-20%, Can be much more lucrative than getting a piddling 4% dividend.
     
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  20. sash

    sash Well-Known Member

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    Depends which stock....but I would take more of Warren Buffett approach buy only in companies you know what they do. I prefer Australian oligopolies or monopolies.- i.e. Telstra, ANZ, CBA, Westpac, NAB, Woolworths, Westfamers, etc. They cannot fail as if hey did there would be serious consequences. Remember also that 5% yield is achievable and then you also get franking credits which should further reduce tax.