Hypothetical 5 Million Dollar Question! Assignment/Discussion

Buying a PPOR with case in this case is more effective as the interest on the loan is not deductible and you can still borrow against it to invest - while not negative gearing (assuming this means the situation where the costs are more than the income on any property).

 

But that's my point. The aim of the assignment is not to be negatively geared.

You can still use both the capital in investment properties to borrow against, as well as use their income to fund your PPOR.

 

104K per annum GROSS wont get you a year round traveling lifestyle unless its caravan parks

 

I guess it depends on the definition of 'negative gearing'

 

Negative gearing is a practice whereby an investor borrows money to acquire an income-producing investment property, expecting the gross income generated by the investment, at least in the short-term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan

If we're working from the above definition, you can continue to borrow against your income producing properties bought with cash......and then use a % of equity to purchase other IP as well as then broaden out your investment portfolio into other income producing vehicles like stocks, EFTs, term deposits.

The income generated by your investments could be used to purchase your PPOR ........and still achieve the net goal of NOT being negatively geared.

 

BUt if you use that definition then you could pay cash for a PPOR and borrow against this to invest in investment properties. More tax effective and can be done without negative gearing.

 

If negative gearing from cash flow is a complete no-no in this hypothetical, then I'd gear to @70% LVR on multiple 400K (ish) NRAS properties, where pre tax cash flow is @ neutral or slightly positive.

While I'd technically still be able to generate some negative gearing benefits from depreciation ( as the dwellings would be new) importantly, the pre tax cash flow position would not be generating any losses. This would allow me to forego negative gearing claims on an annual basis if I chose to , and instead carry them forward to offset future capital gains (if I sold) but still enjoy the surplus tax free @ 11K CF+ per property.

With $5million at my disposal, I'd still set aside $2 Million to purchase a PPOR outright. At the end of the day, yes the $2 Million could be invested instead but this is about balance and common sense and capital and lifestyle preservation as well as net profits, so if the world turned upside down, that PPOR being owned outright is still a smart fallback play.

And so assuming a 200K income, and 70% gearing , I'd deploy the remaining $3 Million as follows.

30% deposits + stamp duty equates to @ 140K per 400K purchase. So if my ambition was to use all the money towards property, I guess the $3 Million would theoretically allow for @ 20 purchases, with a 200K "buffer" left over. Of course, this would be subject to borrowing capacity.

Assuming for a moment that the borrowing capacity was OK, using the Firstmac or Adelaide Bank calculators along the way ( as they accept the NRAS credits as income for servicing) I'd end up with

Unencumbered PPOR $2 Million
20 x INV properties with a value of $8 Million, geared to 70% LVR
200K taxable income, likely reduced to $0 taxable by the depreciation across 20 new properties
220K in additional tax free credits , increasing annually indexed to rental CPI ( 5.2% average since 2009)
$5.6 Million debt

End result = 420K tax free income. Unencumbered PPOR. $8 million portfolio with ZERO out of pocket costs. That's pretty good going. ie - 8% fully franked dividend on $5 Million

I would set aside at least 300K per year for the next 10 years, in term deposits or other decent yielding assets, which should easily generate 4 - 4.5 Million within 10 years. The 10 year mark is where the depreciation really starts to fall off a cliff , so at that stage I'd be looking to pay down the $5.6 Million by $4 - 4.5 Million. That, plus the sale of 4 properties properties should clear all of the debt.

I'd also be maximising my Super contributions during this 10 years through salary sacrificing...

In the post NRAS years, rents revert to full market rate and should see me very nicely placed.
Assuming just 3% rental increases compounding , the properties would be generating $550 by Year 11.

16 x $550 = $8800 per week, or @ 457,600 per annum. Allowing for costs of 150K (7.5K per property) I'd be generating a touch over 300K income per annum from the unencumbered portfolio. If I am still earning 200K from salary, that provides me with an income of over 500K per annum, and a completely unencumbered portfolio from which massive expansion would be possible if I wished.

If rents compounded at 4% per annum, that rental figure would be @ $615 per week, or @32K per annum, or @ 512K per annum across 16 properties. After costs, that would result in @ 360K income from rent. With a 200K salary, that is over 560K per annum.

With a portfolio that now enjoys limited depreciation and zero gearing, tax starts becoming a problem at this point obviously... So a complete review of strategy would be required at or around the 10 year mark as the transition from largely untaxed to largely taxed takes effect...

Assuming the portfolio had generated 50% growth in those 10 years, I may choose to sell off the remaining properties, with a value of $9 million, pay about 1.5 Million CGT and simply invest the 7.5 Million balance for a passive income for life using trusts or other tax effective structures for distributing monies here there and everywhere, with no property hassles to concern me.

or I may choose to

Choices choices choices. I suspect the "plan" would be adjusted to changes of market conditions and what not, as you go...

 

Or Asia. I'm somewhat addicted to pho

 

Yes 104K AUD in Indonesia or Thailand would provide for good living

 

Nice strategy.

However, if the world fell apart - like "Walking Dead" fell apart - I wouldn't care which asset was cash flow positive

Under the scenario of maximizing your return whilst being positively geared, the biggest bang for your buck is still in an investment portfolio. If the world falls apart, you still have hard assets - be they investment or your PPOR. So, you would have to consider how to maximise your return.

I understand that buy your PPOR outright with cash is considered a conservative safe bet......it's yours right. You still have a roof over your head. Maybe. Or maybe not.

The game changer in the above scenario is how you legally structure your investments to protect yourself from the potential of the world falling apart.

 

I think a better plan would be swap 2 and 3 around and to take out loans on the properties with offsets and fill your offsets full so you can withdraw the equity whenever you want to.

This way if an even worse property apocalypse happened you would be able to live even longer!

 

One way to help in this regard may be to gift all of the moneybto a new discretionary trust which you control. This trust should do nothing except lend related parties money. You could then go and buy a main residence with a loan from the trust which could take a mortgage over the property. Or you could borrow 80% fr a bank and the rest from the trust. The loan from the trust could be interest free or at interest.

As more properties are purchased separate entities can be set up to own the properties with these entites borrowing drom the trust.

This will give good asset protection on bankruptcy but wont help much if all your assets are property andbthe arse drops out of the market. Actually it could help as you can selectively allow some of the entities go down while keeping some afloat.

But there are other risks involved with this such as death and or losing control ofnthe trust.

 

It's interesting to see most people would still go borrow more money.
Not sure why? I mean how much does one need? What for? Surely $5m in cash is enough for anyone to instantly retire comfortably.
I would probably go buy a place by the water somewhere in QLD for say $1.5m and invest the rest in a mix of asset classes for passive investing. Even if getting only 4% on the $3.5m, that's a cool $140K a year. With no rent or mortgage repayments, that is plenty.

I would take the time to enjoy life without work and without stress, I really would not need more money.

 

Also it's interesting to see quite a few people would stay in Sydney, despite not having to work!

 

Maybe some people aspire to have 10s of millions in net worth with a 7 figure passive income stream. To most its probably ridiculous...but everyone has different goals, motivations and dreams I would assume..

 

The first thing is to look at the small print of the Deposit Guarantee Scheme. This protects up to $250,000 per institution, but I'm not sure if it applies to a group as a whole or is split amongst its subsidiaries.

If you want to play defensively then it's no good being wiped out in a banking apocalypse.

My approach would be:

• Pay off a mortgage if you have one. This is tax efficient.
• I'd keep an eye on the stockmarket. If it feels cheap (and I think it is) then start drip-feeding money in. It'll probably rebound in the next couple of years, and you'd get a good return. I'd either be using index trackers, or approximating the market myself.
• Reinvest dividends.
• I don't know what bonds are like at present, but would probably run a similar strategy to stocks.
• I'd be tempted to hold off on buying property, particularly in Melbourne and Sydney. It looks expensive, and I don't see much value there.

In terms of allocations, I'd probably be looking at:

• $1 million: Repaying the mortgage, and putting money aside for a rainy day. This figure might vary a bit depending on needs.
• $2 million: Stock market. Drip feed it in at around $250K to $500K a month, depending on how it's moving.
• $1 million: Bonds, as above.
• $1 million: Cash, with a view to buying property, shares or other assets if the price is right.

 

If you want to get a bit more radical, follow this advice.



Say a million dollars on a property, be it a modest city dwelling, or something larger in the country, and a couple of million in income generating assets. You'd have $60K to $80K / year coming in, indexed, and a paid off house.

The other two million you can then get a bit more radical with. It'd be a decent stake to start a business with, or pursue some other passion project. The odds of it crashing and burning are high, but a dwelling and income mean you're covered.

 

As I said previously... choice choice choices...

 

Even if u were restricting yourself to property you could retire tomorrow by spending the $5m on an $8m multi tenanted commercial property at 50%LVR. If the yield is 7.5% you'd get 600k in rent abd be paying under 250k in interest repayments. Why work for another 10 years and deal with 25 tenants?

You'd also be cashflow positive by 350k vs negative by a 200k or so, I'd rather the money in my pocket now...

 

At this stage of my life, I would go the "passive and boring " route.

Pay out all debt and invest in Cayman Island managed funds.
Just like Malcolm Turnbull.
Home and Away: Where the Turnbulls invest their millions

It actually surprised me that these funds have a buy in of as little as $1 million. (Not that a million is a small amount, but I always imagined these big games to be for the "super rich" with a much bigger buy in. ). I would be more than happy with a 20% return on $5m. Even allowing for taxes and accountants to run the thing, you would have a very nice income.

I am not sure hubby and I could actually spend that much in a year, we are not buyers of "things" and travel is not that expensive.