Not sure what strategy to go with

Good morning.

We are planing to purchase an investment property but unsure of what is the best way to divide the funds and type of property to purchase.
We have fully paid off our house worth about 2 mil in Sydney many years ago and are happy to stay where we are indefinitely.
We have also managed to save another 2 mil which we would like to invest.
My husband is earning about $250k and I am going to stop working as of next year April/ May 2022 most likely due to personal reasons.
We are not spenders and money we earn is sufficient to cover our family costs.
Therefore we are looking to invest the funds we have.
After speaking to various accountants or financial advisors we were given several options such as:
1. Purchase 1 ppty fully in wife’s name to use all the funds- outright and buy 2 units using a loan from the bank in husband’s name.
2. Purchase several ppty in husbands name using all of the funds as a deposit only 20 percent 80 loan

What option is better? Is there anything we need to consider reg tax?
We are planning to have this as a security for retirement age and maybe to help our kids out one day.
Also, if we buy another house same value, we are thinking each child will inherit 1 house in the future.

Any thoughts on this?
Thank you.

 

What are your ages?

Given your husband’s income and your assets, I would fully leverage your assets.

Only change I would suggest in the above plan is buy one property each in SMSF first.

Second, use the remaining funds to buy a high growth, low yield property (around $2m, using 30% loan, 70% own funds). Even if interest rates go up, this shouldn’t hurt your bottom line as loan would be small.

Finally, buy as many high yielding freestanding houses as possible and fully exhaust your borrowing capacity. You can use 70% equity in your first property as a deposit. I will keep your PPOR out of this just as a peace of mind.

By the time you retire, you should have decent growth in SMSFs and then you can sell the high growth property to reduce the loans on other high yielding properties which can then start generating retirement incomes for you in perpetuity.

 

Has you considered shares as an option OR a combination of property and shares?

What are your Super balances? Have you considered dumping more into Super?

What are your ages?

What are your goals?

…

Lots of missing info

 

I was going to suggest shares but they desperately need to leverage their assets regardless of their age.

My personal view is that shares should only come into picture when banks won’t lend you any further on residential real estate.

 

Hi Kierank.

we are both 45.

No goals, just to live comfortably I guess…

We aren’t considering shares as we don’t take much risk in general, prefer easy and safe option.

My husband’s super is around $400k.

Thank you for reply.

 

neither!

 

Something to bear in mind
- Leverage is risky
- Not diversifying is risky

 

We have been “ waiting” to invest for about 10 years as we simply have no direction or knowledge what to do and this hesitation costs us.
We saw an accountant who told us to use the funds as 20percent deposit for multiple properties and another one who told us to buy 1 in my name outright and second mortgaged in my husband’s because of amount of tax he pays every year( salaried by co)
Terry I see you wrote “ neither” so what would you suggest we do? We don’t want “ to get rich” by investing but we do realise by doing nothing we are loosing $$$. Therefore we need to park our savings into properties in some smart way so once we retire we don’t have to stress.
Thank you.

 

I just want to say I posted on property forum thinking I will receive an advice regarding property investing and not shares and also looking for advice so “ neither” answer may mean something to someone but it doesn’t give me any advice unfortunately.
standtall you are mentioning to first invest in SMSF. May I ask why is that? We have funds sitting in the bank why is this the first option in your opinion?

Can you please let me know specifically in the options we received by our accountant. Why don’t you think it’s good?

I appreciate your replies.

Thank you.





QUOTE="standtall, post: 1087424, member: 3369"]What are your ages?

Given your husband’s income and your assets, I would fully leverage your assets.

Only change I would suggest in the above plan is buy one property each in SMSF first.

Second, use the remaining funds to buy a high growth, low yield property (around $2m, using 30% loan, 70% own funds). Even if interest rates go up, this shouldn’t hurt your bottom line as loan would be small.

Finally, buy as many high yielding freestanding houses as possible and fully exhaust your borrowing capacity. You can use 70% equity in your first property as a deposit. I will keep your PPOR out of this just as a peace of mind.

By the time you retire, you should have decent growth in SMSFs and then you can sell the high growth property to reduce the loans on other high yielding properties which can then start generating retirement incomes for you in perpetuity.[/QUOTE]
Thank you

 

There isn't a 'right' way to do things, but there are a lot of wrong ways. The reason you're not getting really helpful feedback is that the answer it always going to be 'it depends'.

You have $2m in house equity, $2m in cash, and 400k + your Super. You are not spenders and all you want is to 'live comfortably'.

Technically you could invest the $2m on the share market, both of you retire immediately, draw down 4% of that each year for 80k and live comfortably on this forever, knowing you also have super coming in later.

But if you're trying to maximise wealth, leave kids a large inheritance, live life with more luxuries then it's a different story.

Property may work too. Though for what purposes in capital growth, yield, when you'd sell them (if you would vs rental income), and maximising leverage benefits are all part of the considerations. Not to mention commercial property which bought in a trust and distributed to your name would boost your income significantly. And there are risks and benefits associated with all options.

I think you need to think a bit more about what you're trying to achieve, why, and maybe do more of your own reading on investment strategies and principles.

 

With your savings (well done by the way), you can afford to sacrifice some yield to buy a detached house in Sydney with a bias towards growth. For sub $2m, you could consider the St George area in Sydney, or the Seven Hills area with some favourable zoning. Perhaps a house plus a unit in the Bankstown LGA.

You guys are still young enough not to be completely fixated on yield, so the above strategy could be an option for you.

The alternative would be interstate investing in places like Bris-vegas, where you could buy a few properties. Inter state investing is not for everyone, and my personal bias is still that despite the hype, Sydney continues to out perform the averages with the least risk.

 

As the old saying goes:

“If you don't know where you are going, any road will get you there.”
(Alice in Wonderland)​

Wow!!! Over the last 119+ years, the ASX has produced total returns which averaged 13% per annum and you call that risky. Wow!!!

It seems you are already overweight in property and you are contemplating buying more property.

Wow!!! Now that is risky,

IMHO, I would suggest you consider better balance in your asset classes.

 

Hi Kierank,

The reason we haven’t considered shares is that neither of us 2 knows anything about the shares. Buying a property seems easier as I see what I am buying, where, how much…We have worked hard to save the money we have and don’t want to loose any of it. Perhaps it’s something we should consider I guess.
Not sure what you mean by overweight in property? We only own an average house in Sydney…

 

I believe what he means is that if you invested in property with your savings, 100% of your investments are tied up in Australian property. Not only that, but presumably your job/s are Australian based, so all your exposure is Australian.
To diversify your risk, you could look at other asset classes (stocks), you could look offshore (iether property or stocks).

If you are not familiar with stocks I would highly recommend doing some reading on the stocks forum here, look at Peter Thornhill's stuff, it may completely change your attitude towards stocks - well worth the time.
There are plenty of knowledgeable people willing to share, dont be shy to ask.

 

The stock market is way riskier than the "blue chip" Australian property market. Property is tangible, you can touch it, feel it. Buy in the "right" location and it will always be in demand. Land is finite. Mark Twain said "Buy land, they're not building any more of it". Property gives you CGT and negative gearing benefits. And last but not least, property gives way better return on investment. I put another 10k into an investment property, I can increase my passive income by 2,3, 4k per year by bumping up rent. I put another 10k into shares, I can increase my passive income by $500-1k per year. Who the hell knows what a stock is anyway?? A tiny little shard of a company?? Past returns are no indication of future returns so this 13% annual average is a bogus figure........ and people lose their shirts on the stock market every day......Diversification is great yeah but I would not be parking that kind of dosh in stocks unless I was prepared to lose it all in a crash.

 

I say neither of these sounds too good to me because

1
a) property is not a good investment if unleveraged
b) and you could borrow 100% to buy in the wife's name and fully offset the loan for the same effect but much more flexibility down the track
Good to get legal advice on the estate planning aspects and land tax too

2.
Buying units may not be a good investment. It sounds like htey are suggesting a negative gearing strategy, if so why would you not borrow 105% instead of 80%. but any negative gearing would be a short term thing and then the tax on the income when it goes positive could be 47%.

Some of the other strategies might be worth considering but these ones don't sound too good.

 

@Henrietta, I wrote the following for a nephew of mine as he didn’t know where to start with his investment journey.

BTW, I am a big fan of property and a big fan of shares, (both in balance) plus one must have cash-on-hand as a risk management tool.

I trust you find the following helpful:

There is only three investment types (I listed four below because there are some differences between property bought as a home vs property bought as an investment):

1. Cash

· Don’t need much cash to open an account, say $1

· Easy to find out the exact amount of one’s cash balance

· Quick and easy to withdraw funds for spending (instantaneous)

· Can withdraw part of one’s investment (no need to withdraw the lot)

· Nil costs to deposit and withdraw funds

· Safe investment, value is only eroded by inflation

· Absolutely passive investment, nothing to do

· Need a reserve to cater for the unknown/unexpected, typically 1 to 3 months of living expenses

· Easy and low risk to use cash as security for a loan (as long as one meets income criteria) but most people would not want to lock up their cash as security for a loan

· Absolutely zero capital growth

· Income return is poor (currently, lucky to 0.1% pa)

· Income is taxable

· Net total return (growth + income - tax) is very poor

2. Shares

· Don’t need much cash to start buying shares, say $100 (prefer a minimum of $1,000)

· Easy to find out the exact value of one’s investment (share price is live)

· Easy and relatively quick to sell shares/withdraw funds for spending (say a day)

· Can sell part of one’s shares holding (no need to sell the lot)

· Low cost to buy and sell shares

· Fairly passive investment, especially ETFs, not much to do (mainly respond to correspondence)

· Good capital growth, average of 8% to 9% pa over last 119 years on ASX

· Good income, average dividends of 4% to 5% pa over last 119 years on ASX

· Income is taxable but has tax benefits called dividend imputation (can yield a tax refund)

· Net total return (growth + income - tax) is great, typically 13%+ per year

· Can re-invest dividends which means value will double in 5½ years whereas it will take 9 years if one doesn’t (the Rule of 72)

· Volatile investment, value can drop 20% to 40% in a short time (eg COVID crash in 2020)

· Risky to use share portfolio as security for a loan (Margin Call)

· Must pay Capital Gains Tax (CGT) when one sells


3. Property - Home

· Relatively easy to find out the approximate value of one’s investment

· Fairly stable investment price-wise but values can go up and down over time, could be 10% to 20% in year

· Reasonably good capital growth, typical long-term of 2% to 7% pa, depending on location (best to go for higher growth areas such as Sydney, Melbourne, Brisbane)

· Net total return (growth only) is good, typical long-term of up to 7% pa, in high growth location

· Easy and low risk to use property as security for a loan (as long as one meets income criteria)

· One should obtain a loan (prefer Interest Only due to less impact on one’s cashflow) linked to an Offset account. This Offset account should hold ALL of one’s cash (including the cash reserve above) plus ALL income should be deposited into this account. This cash amount is offset against the loan principal, resulting in less interest being charged for that period.

· One of the biggest advantages is leverage. Say, one buys a $500,000 property with a $100,000 deposit. If the property value increases 5% in the first year, this is a $25,000 increase in one’s equity. More importantly, it is a 25% return (tax-free until one sells) on one’s deposit.

· No Capital Gains Tax (CGT) when one sells

· One can buy a home, move in, later move out, rent for up to 6 years, then move back in and the property is still CGT free when sold (the 6 Year Rule)

· Need a significant amount of cash to buy a property, typically 20% deposit. That is, $100,000 on a $500,000 purchase

· Not quick nor easy to sell property/withdraw funds for spending (takes weeks/months)

· Must sell the whole property (can’t sell off one bedroom)

· High costs to buy and sell property (allow 6% of purchase price to buy and 6% of sale price to sell). Hence, a long-term investment, typically 7+ years

· Fairly active investment:- must deal with rates, insurance, maintenance issues, etc

· Zero income

· Fairly costly investment to hold:- must pay interest, rates, insurance, maintenance issues, etc

· The building ages and depreciates; requires renovations to maintain value

· Ownership costs, depreciation and renovations are NOT tax deductible

4. Property - Investment

· Relatively easy to find out the approximate value of one’s investment

· Fairly stable investment price-wise but values can go up and down over time, could be 10% to 20% in year

· Reasonably good capital growth, typical long-term of 2% to 7% pa, depending on location (best to go for higher growth areas such as Sydney, Melbourne, Brisbane)

· Reasonably good income, average gross rental return of 2% to 7% pa, depending on location

· Income is taxable but has tax benefits with ownership costs, depreciation and renovations BEING tax deductible (can yield a tax refund if costs exceed rental income)

· Net total return (growth + income - tax) is great, typical long-term of up to 7%+ pa, in high growth location

· Easy and low risk to use property as security for a loan (as long as one meets income criteria)

· One should obtain a loan (prefer Interest Only due to less impact on one’s cashflow) linked to an Offset account. This Offset account should hold ALL of one’s cash (including the cash reserve above) plus ALL income should be deposited into this account. This cash amount is offset against the loan principal, resulting in less interest being charged for that period.

· One of the biggest advantages is leverage. Say, one buys a $500,000 property with a $100,000 deposit. If the property value increases 5% in the first year, this is a $25,000 in one’s equity. More importantly, it is a 25% return (tax-free until one sells) on one’s deposit.

· Ownership costs, depreciation and renovations ARE tax deductible

· Need a significant amount of cash to buy a property, typically 20% deposit. That is, $100,000 on a $500,000 buy

· Not quick nor easy to sell property/withdraw funds for spending (takes weeks)

· Must sell the whole property (can’t sell off one bedroom)

· High costs to buy and sell property (allow 6% of purchase price to buy and 6% of sale price to sell)

· Hence, a long-term investment, typically 7+ years

· Fairly active investment, even with a property manager (must deal with tenants, lease renewals, rates, insurance, maintenance issues, etc)

· Must pay Capital Gains Tax (CGT) when one sells (so don’t sell)

· Fairly costly investment to hold:- must pay interest, rates, insurance, maintenance issues, etc

· The building ages and depreciates; requires renovations to maintain value and rental income

· Ownership costs can consume 30%+ of one’s rental income. With depreciation and interest payments, costs can exceed rental income (negatively geared)


You will note that Super is NOT an investment class, a lot of people think it is. Super is an investment vehicle (it holds investments) and can invest in any one or all of the above investment classes. The main benefits of Super is that it is very secure (eg very difficult/impossible for creditors to attack it) and the tax benefits (Super has lower tax rates which means more of your returns go into compounding growth). The main drawback of Super is that one’s money is tied up until one retires (one can get access due to financial hardship but it isn’t easy).

 

Nice summation @kierank

PPOR worth $2mil plus $2mil savings (wow)

The way I look at this is to not worry about what each child will inherit. You could buy something they don't want. Buy what works for you, and when the time comes for inheritance, the kids can buy what they want with the funds at the time.

 

Very nice summary above.
I have attached 2 docs to start your journey into shares
1 - Beginners guide to Long Term Investing - put together I believe by Nodrog on the forum
2 - A summary I did of an old LIC thread pulling out all the main points - it was a very long thread.

These should get you off to a flying start.

I am also a believer in property and own some, but prefer shares - a lot of it comes down to personality type, there are advantages and disadvantages to both.

 

Thank you very much, this is an excellent summary and very detailed.