SMSF, $150K. No idea where to look

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Adzza, 4th Apr, 2017.

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  1. Adzza

    Adzza New Member

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    Hi All,

    I am completely new to RE Investing, but i've decided to look at buying an IP with my super given I am fairly young and have a generous super balance (Im only 30). Given I have am looking at the long term, I am curious what people think about CG vs CF. I am of the opinion that CF is the most important thing given I am in this for the long haul. With that in mind, it opens opportunities to looking at a range of cheaper suburbs (even looked at beachside stuff in Tasmania that offer a decent cashflow return given their cost (200K yields about $220-$250PW).

    Im posting here as I am actually really unsure what general direction to head. The SMSF is already setup and ready to go. I am aware I have limited buying capacity given the restrictions on SMSF loans, and I know my borrowing capacity is probably going to be around the 350k mark, it narrows the options.

    Any advice welcome to get me started on this exciting journey!

    Cheers
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Would you rather make $50 per week on a $300,000 property with 2% growth or negative $50 pw and have 10% growth?

    I would rather have what makes the most money which would be the high growth property.

    But whether you can find high growth properties now is the question.
     
  3. Foxdan

    Foxdan Well-Known Member

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    The advantage of property within an SMSF is that it is capital gains free once you reach preservation age.
    The property with the most capital growth over the next 35yrs should be your goal.
    You reach 65 (or whatever age it will be in the future), sell the property with no capitals gains and go put that money into a higher yielding / maintenance free options like shares.
    You have 35 years til you can touch it - go for a long term capital growth option with a cash flow you can manage today
     
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  4. Noodlesm

    Noodlesm Active Member

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    Having property only in the SMSF is quite a risky strategy due to its low liquidity. Like Terry said , I would put it in non super environ given your age and negative gearing factor.
     
  5. Adzza

    Adzza New Member

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    What do you mean by non super environment? Cheers all for the advice thus far!
     
  6. euro73

    euro73 Well-Known Member Business Member

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    I would be purchasing a cash cow, with the view to building a residual income at a very low Marginal tax rate, within the fund. Here's a scenario for you at 70% LVR with Offset. Its what I'm doing...

    Dual Occ property 530K, generating 620-650 per week rental income.

    SMSF contributes 30% + Stamp Duty = @ 180K

    SMSF borrows LRBA 70% LVR = @371K

    Assuming member contribution of 30K per annum, and 8-9K CF+ surplus income from the Dual Occ (after the interest and all other holding costs have been paid) , the SMSF would be capable of paying @ 38-39K towards the offset account . Call it 30K to allow for 15% MTR and accounting costs etc. 30K per annum of surplus contributions, would allow the SMSF to build up 371K in the offset account within @ 12.4 years. Allowing for a little rental inflation along the way, it would likely be closer to 10 years, but lets go with 12 years to keep things nice and conservative

    if you have 2 members, its even faster...... 3 members- even faster. 4 members- even faster...

    Fast forward 12 years, and the SMSF has $0 interest being paid on the debt, and assuming a very conservative 40% increase to the rental income over 12 years, the SMSF would then be generating @ 868-910 per week, or $45,136 - 47,320 per annum.

    This income is of course considered "earnings" , not "contributions" .... so you can beat the 750K lifetime limit on non concessional contributions this way as well...

    In 10-12 years. Repeat. Now you have 30K member contribution, 45K rental income from Dual Occ #1, and 8-9K CF+ from Dual Occ #2, to pay down the 2nd loan... which you'll do in 6-8 years.

    End game... 2 x dual income producing properties owned by the SMSF in @ 18- 20 years, with 2 x dual rental incomes ( not contributions) of 90-100K ( conservatively ) ...

    I just dont get why people keep recommending growth only properties, at the exclusion of sensible cash flow management, especially when cash cows can easily get you to a passive income for life within 18-20 years, without having to take any speculative risks, without needing growth, and without needing any luck.

    This fascination with growth is flawed - especially for SMSF strategies using LRBA's, where redraw is not allowed. Its just dumb thinking, to be frank. Here's the reason why - Say you get $1 Million of growth .... What good is $1Million cash from growth these days, anyway? Where can you reinvest it to beat the returns outlined above? Look at the options...you might get 2% in a high interest bank account if you're lucky. Thats 20K per annum. You might get 6-7% in the share market if you're lucky. Thats 60-70K per annum. Compare that to what I just outlined (90-100K per annum) and you'll see that even with the very conservative rental growth I have assumed, and even with the assumption of zero growth - which is very unlikely over a 20 year period of ownership - it still beats those asset classes by a mile... In simple terms, you would need 1.5 Million cash to be returning 6% , just to match the conservative estimate of 90K income that the 2 x dual occs would generate in 20 years time....

    The maths dont lie. :)

    PS - before you go rushing off and doing anything - invest in your personal name first. Do not make the classic rookie mistake of gearing into SMSF and signing a personal guarantee , as an early resi property investment - it will torpedo your personal borrowing capacity, later. ALWAYS leave SMSF resi property purchases until AFTER you have completed your personal accumulation goals. In very simple terms- buy in your pesonal name until you feel you have what you want or need - then address SMSF purchases. Dont do it the other way around.

    Oh... and see a planner ... I might be talking ******** :)
     
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  7. Gockie

    Gockie Life is good ☺️ Premium Member

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    I agree with Terry... long term, capital growth is more important than cashflow, but you need cashflow and income in order to get loans and to be able to hold or else you may get stuck at 1 or 2 IPs.

    Cashflow can be improved by using a high cashflow strategy (e.g. rent by room or short term or executive letting, these are more work and perhaps with higher risk than a usual rental), otherwise as a normal rental you might need something like 3 years or so to go from negative to neutral and even then returns can still be poor and nothing is guaranteed. So keep an eye on it.

    I'll also mention, you don't want to get into financial stress causing you to have to sell before a property has had the chance to perform. So think about your exit strategy.

    When a market busts, it can be very hard and slow to sell something that previously might have sold easily at the first open.
     
  8. Adzza

    Adzza New Member

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    Thanks everyone for the tips. I have a lot to learn ! I need to get professional advice clearly but I've always struggled finding someone who actually does what they advise. I'm after someone who actively invests etc.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Euro - ideal is to get both

    But wouldn't you rather $1mil in capital growth then $500,000 in positive cash flow over the years?

    For starters it is more money - you might have to sell to get it, but no big deal.
    Secondly capital growth is taxed concessionally - outside of super it is taxed half of what income is.

    But higher rental yields may mean you could service more of those properties.
     
  10. Gockie

    Gockie Life is good ☺️ Premium Member

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    Yes... I'd rather the bread and butter Sydney property that went up 50k/year over the past 4 years costing me $5k to hold per year than a stagnant Wagga or Elizabeth property that, on paper had $150 better cashflow per week.

    Must make best use of borrowing ability though, and income plays a huge role. Not everybody can afford to negatively gear.
     
  11. euro73

    euro73 Well-Known Member Business Member

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    Lets say I start with 2 x 371K of debt ( 742K total ) on 2 x 530K cash cows that don't grow very much ( lets say they each grow just 50% in 20 years, to be worth 795K each) , and you start with 2 x 371K of debt on 2 x 530K growth properties which grow to 1.25 Million each during the same time, but I repay my loans and you dont, where does that leave us?

    Strategy 1 - You would have 2.5 Million of assets with 742K of debt. You sell, pay 10% CGT ( SMSF) and that leaves you with @ 1.58 Million cash. You reinvest it into LIC's or ETF's and earn 6% , for $94,932 per annum. Or you sell after pension age and pay no CGT and invest the 1.76 Million @ 6% for $105,480 income.

    Strategy 2 - I would have 1.59 Million of assets, and zero debt. My income would conservatively be 90-95K per annum.... and Ive assumed very modest rental inflation to get there

    An awful lot more has to go right with Strategy 1 than with Strategy 2, for not much better result.

    And I could have repurchased at least 1 or 2 more times along the way, by the way :) Meaning I could have easily improved on this result....

    Here are the other considerations - in my view at least.

    Tax concessions - NG or CGT - may not always be what they are today. I believe the political pressure for change will eventually become impossible to ignore. The billions CGT concessions cost the budget cant be ignored forever. Even the business council - the very definition of liberals - are supportive of changes to CGT now. And the media is now speculating that our beloved "never on my watch" treasurer is pushing for CGT changes as well... one day, one way or another - the tax environment that fostered the capital growth people have become used to, will change.

    Then there is the ever tightening regulatory environment being driven by ASIC and APRA, and more and more by the RBA - consider what has happened to date and consider what is coming under Basel 4.

    And we know for sure that poliies wont leave Super alone... this time they were kneecapped at 750K concessional lifetime limits by the senate... what happens the next time someone can get it throiugh at 500k, and then 400K, and then 300K?

    In the end, when we look at all these factors, I just feel that the best days for growth are now over. The expansionary credit and tax environment that facilitated such spectacular outcomes from what is essentially a speculative, unskilled strategy , is changing . Slowly yes, but surely. And against that, only debt reduction strategies are fool proof. And debt reduction strategies require cash cows.

    Now growth is wonderful, and I enjoy it as much as anyone else- but there are no guarantees that the levels people assume will happen, will actually happen... even less so as the regulatory and political pressures grow... which brings us back to why I'd prefer surplus cash flow /debt reduction as a strategy, rather than hoping there's a big pot of growth at the end of the rainbow...

    I may be wrong...but I cant lose even if I am, because I can still build a 6 figure passive income with zero growth, using a debt reduction strategy facilitated by cash cows. Those chasing grow that the exclusion of cash flow dont have a Plan B. Their entire plan is to get growth to cover their losses.... They cant run 3% - 4% yields against 5%-6% P&I rates ( thats where we are headed) forever....and nor can everyone else- which is where the future growth matching past growth argument starts to fall apart.

    In the end, only one of the two strategies is fool proof, regulator proof, and politican proof.

    #decadetodeleverage #cashcowskilldebt
     
    Last edited: 5th Apr, 2017
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  12. Knights of Ni

    Knights of Ni Well-Known Member

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    Surely strategy 1 costs far less??? In strategy two you outlaid over 1.5M of your own cash, whereas a decent negatively geared property (or 2 as described) with good capital growth as you describe only required an actual cash outlay of lets say $200k over 20 years (excluding deposits).

    Strategy 1 is far far better!!!
     
  13. euro73

    euro73 Well-Known Member Business Member

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    I think you have misread and misunderstood the post.

    The difference between the strategies is not related to money outlaid. It is related to growth v debt reduction.

    In BOTH strategies, the SMSF's have outlaid exactly the same amount of money ie 30% deposits and stamp duty for 2 x 530K dwellings.

    In BOTH strategies, the SMSF have borrowed exactly the same amount of money ie 70% LVR ( 371K ) x 2 properties , for a total debt of 742K

    Now read the following again :)

    Lets say I start with 2 x 371K of debt ( 742K total ) on 2 x 530K cash cows that don't grow very much ( lets say they each grow just 50% in 20 years, to be worth 795K each) , and you start with 2 x 371K of debt on 2 x 530K growth properties which grow to 1.25 Million each during the same time, but I repay my loans and you dont, where does that leave us?

    Strategy 1 - You would have 2.5 Million of assets with 742K of debt. You sell, pay 10% CGT ( SMSF) and that leaves you with @ 1.58 Million cash. You reinvest it into LIC's or ETF's and earn 6% , for $94,932 per annum. Or you sell after pension age and pay no CGT and invest the 1.76 Million @ 6% for $105,480 income.

    Strategy 2 - I would have 1.59 Million of assets, and zero debt. My income would conservatively be 90-95K per annum.... and I've assumed very modest rental inflation to get there

    An awful lot more has to go right with Strategy 1 than with Strategy 2, for not much better result.

    And I could have repurchased at least 1 or 2 more times along the way, by the way :) Meaning I could have easily improved on this result....



    Hopefully this clarifies why Strategy 2 is in fact at least as good as Strategy 1 even with very limited growth, and potentially quite a lot better.
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The costs of operating a SMSF will be largely fixed and need to be considered together with expected net cashflow from the property. You also have to consider IF you can rollover and take contributions to your smsf. Its not always allowed and may need a strategy. Then think about life insurance. Closing the industry fund account to start a smsf needs to consider the low cost life cover you may lose. It is a poor strategy to rely on contributions to fund losses as the fund will just go nowhere.

    $150K wont get a smsf far in property, Lenders expect a cash buffer and more so if its a higher LVR that may burn contributions. 70% LVR with low cash is unlikely. Those are the types of deals they dont like. If you lose rental income then there may be VERY limited options to get cash into a fund. esp if its a sole member fund.

    The benefits of neg gearing arent available in a smsf and tax of tax free and low rates are a long long way off.. Maybe a better option to build property in own name first partly funded by tax concessions. In time super will grow and revisit that later.
     
  15. zlatan9

    zlatan9 Well-Known Member

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    In addition to the risk of retirement age being pushed further and further out, what about the risk of tax changes to CG in SMSF between now and ages into the future? Profit (no matter how small) is profit I guess and there's the advantage of leverage - but could this be an argument for an income play (where you're topping up as you go) vs CG play (where you're waiting for that lump sum payout at the end)?
     
  16. Big Will

    Big Will Well-Known Member

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    Property is not very liquid and if something happens you will have to sell the asset, another thing is you cannot draw the equity out to buy another one which is a huge reason why property becomes such a great asset to invest in but now you cannot get this feature (unless rules change or have changed).

    Further to this you need to keep a minimum amount in cash (what is your SMSF targeting in cash?) and any insurance that is paid will also take away from this pool so you will need to keep replacing it.

    For me personally I use SMSF for Shares and other investments, I would consider buying commercial property in the SMSF if I was thinking of using the premises. Having shares means I can sell in an instant and know what price it is for and also increase my holding. After all you cannot buy another 2,000 bricks for the house but you can with the shares.

    No one knows which asset will perform best over the next 30 years so why not do both?

    In simple terms we do property in our names/trust and shares within SMSF.

    Have a read of Shares, property, bonds or cash? - The Experts | Switzer

    Some interesting info from them.

    [​IMG]

    [​IMG]
     
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  17. euro73

    euro73 Well-Known Member Business Member

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    This is exactly what I tell my clients, and there's also another reason why it makes sense to defer SMSF purchases until you have accumulated a portfolio in your personal name. Personal Guarantees. Disasters for personal borrowing capacity.
     
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  18. Gockie

    Gockie Life is good ☺️ Premium Member

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    And don't be deceived. .. its a log scale graph.
     
  19. Ross Forrester

    Ross Forrester Well-Known Member

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    I would rather cash now than more and uncertain cash later on.

    The benefit of cashflow positive properties is that you can afford to hold an unlimited number of them.

    Yes you want both but I wonder if that is a fantasy. I typically see one or the other. A bit of both gives you 30% of one and 30% of the other

    Happy to be shown the magic properties that give 100% of both
     
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  20. JacM

    JacM VIC Buyer's Agent - Melbourne, Geelong, Ballarat Business Member

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    The banks tend to protect their interests in a SMSF and simultaneously help protect the SMSF. At best a SMSF can get an 80% loan. So there's a decent chunk of skin in the game, which in turn can mean the SMSF doesn't need a super high yielding property to hang on for the ride.