Strategy - Seeking PC help

Hi everyone,

Long time reader of the forum (since SS) and an admirer of many posters here, especially the veterans because I can just feel your investment experience and a genuine positive out look on life.

Finally, I have signed up to seek some guidance and strategic input. (suggestions and feedback will not be taken as financial advice or tax advice ).

I need some help in think about my investment strategy going forward. My situation is that I've being working since high school, got lucky with many breaks. 35 year old male and got married last year. Definitely thinking about the future and family.

Summary:

Income

Me - $130K PAYG pre-tax (whilst this may increase, I'm conservative so not banking on it)
Wife - $50K PAYG pre-tax (we are thinking about starting a family, so she'll be on minimum or no income in a year or 2)

Asset

1) PPOR - Paid off (value $850K)
2) IP1 (value $550K) - Single ownership in my name, mortgage $15K (redraw balance available of $215K, i.e. limit of $230K), net rental income after all expense $20K p.a.
3) IP2 (value $760K) - Joint ownership with wife, mortgage $790K (excluding $50k offset), net rental income after all expense $24K p.a.

Yes, IP2 debt is more than the value because when we bought it. We maximised the debt against it including stamp duty as IP1 was not rented out and was used to help a sick family member to live in.

The conundrum I have is that IP1's income is in my sole name, I'm paying nearly 40% tax on it while my wife will eventually have no income for a few years in the future. I understand if I redraw the $215K plus additional equity and use the combined fund to buy a new IP in my wife's name, the interest on that may not be deductible for me.

What do you all think could be the next effective investment options?

Thanks in advance

TB

 

What do you want to achieve?

Your wife could buy a property and borrow to do so and your can then pile your savings into that, both existing and future savings.

You could borrow against your main residence and onlend to your wife who could invest in something other than property - or even property.

Sell your interest in IP2 to wife?
Sell IP1 to wife

Many variations to the above involving trusts too.

 

Thanks for replying @Terry_w

My goal is to be financially independent in 10 - 15 years with passive income of $100K between me and my wife. From then on, we can be more flexibility in work options, community time and time with family. I like to work on things I enjoy and be part of building something, so not thinking to sit back all year playing golf and cruising.

I looked into discretionary family trust option for the next IP and distribute rent income that way. Though I think I be up for NSW land tax surcharge under the trust, not sure so may need to get formal tax advice.

If the next step is an IP in wife's name, then the timing wouldn't be until late next year or even late 2020 as I agree with most investors on the current post APRA environment. I'm just think through if during this time I'm being efficient in my tax planning.

I'm a fan of the older red brick units in south/southwest Sydney that goes around $550K - $600K ,with minimum strata and some ownership of land (i.e. compared to new high rises). So that will be the next one... or a villa/townhouse if we are not too stretched.

TB

 

If buying in NSW a trust would be too costly until you have both used up your land tax thresholds.

Not sure what you mean about the post apra environment, you could jointly borrow to get a property in her name.

What is your passive income now? Must be around $20k so you are 20% there.
The goal $100k, is that to be from property alone as you probably have super to take into account?

 

Post increase in regulation and ongoing Royal Commission, leading to a tight credit market. Therefore I don't think getting into Sydney Market is good for at least 1 or 2 years.

Passive from IP and shares (I have small parcel of VAS & VAE ETFs), excluding Super.

You are right, net passive now is $20K pre-tax... It just hurts to see 40% of that go to ATO (because its from the low geared IP1 under my name). If work leads to more senior roles, it's almost not worth taking the promotion as the pay doesn't come near the sacrifices.

 

If you think property won't be going up for a few years then perhaps no point in buying just yet.

This is why you need to consider ownership and funding strategies carefully, before purchase, so you can divert income to your spouse.

A spousal transfer might be considered while the markets are down so as to reduce stamp duty and CGT.

 

Probably don't have the stomach when it comes to business risk right now. Hence the corporate job and aim to build a passive income.

I tend to stick to what I know (grow knowledge until I understand the risks then act). With shares, I put aside a 5%-10% of my savings and buy ETFs for the last 3 years. Probably try to keep this going for a long time. Not going to make me great capital return but I'm gambling on my longevity

My strategy since I started working was structured to tick off each basic needs before stepping up on the risk curve:

1) Put roof over head with no mortgage - need for shelter
2) Build passive income stream - basic living needs (current stage)
3) Basic needs met, build broad skill sets and experiences during step 1 & 2 and take more business risk.


Rolf, I enjoy reading your posts by the way.

TB

 

IP 2 appears to be cross colalteralised. Any or all of the other properties are probably being used as additional security for the loan. There's ways to structure more in your favour and still borrow the full purchase price and costs.

If any of the other security properties are part of your strategy moving forward this needs to be fixed as it will create problems sooner or later. It's best to resolve this before things become more complicated.

Beyond that you're in a strong position. There's a lot of ways I could see this going.

 

You are right Peter. IP1 and IP2 are crossed with one financier.

The next IP should be a standalone.

Seems like I may have to just pay a bit of tax for a few years.

 

Do you have a good team @Tofubiscuit ? Tax, legal, finance etc?

 

You've got the cash in redraw of IP 1 to serve as a deposit and costs for the next purchase. Between that redraw and the equity needed to secure IP 2, there probably isn't a lot of equity left in IP 1, but what is the prospect of that changing at some future point?

I doubt it would hurt in any way to restructure the two property to separate them, but it could give you a lot of future benefit. Restructuring may also be very difficult after the next IP if you're approaching a borrowing capacity limit.

 

I've being going it alone for now. Have a broker who haven't help as much as I like on the structuring. Am going to find and start a relationship with an accountant / tax adviser as I start into this income building phase.

 

Don't forget that structuring is largely legal advice, especially ownership structuring.

 

I reckon this might be the missing piece of the puzzle for you.

You're in a great position. Get a team behind you and you'll be laughing.

Investing is a team sport.

 

For IP3 down the track, draw down on IP1's redraw balance plus savings for next year or 2, put it in wife's name. Plan is to purchase an older unit in Sydney (less than 15km from CBD)

Will probably hit borrowing capacity after that for a while. My PAYG income may increase but our tax system doesn't really encourage higher salary earners.

 

Like most things in life.

 

These is an old saying (I heard it from Michael Yardney) which is:

If you are the smartest person your team, your team is in trouble”.
​

I have added to that:

“If you are the only person on your team, you are in deep S_hit”.
​

Warning: posted more than one on PC.

 

Nothing wrong with the "'going it alone"",you just have to find a good Accountant that also is a investor and has a positive outlook and understands why investment tsunami landslides happen .. You seem to have done quite well so far as most place too much emphasis on small amount of recent data..

 

This forum is a great community, yes a team of yourself is deep ****....