What is your debt recycling strategy ?

Discussion in 'Investment Strategy' started by aussieB, 19th Jul, 2017.

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  1. Wiz of Aus

    Wiz of Aus Active Member

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    Did the NRAS thing once. CF reasonable but not wonderful and tax benefits died as depreciation was less a factor. CG sucked badly, sold after 12 years with pathetic gain that got eaten up by costs. Rental assistance scheme housing has it's issues and over all conclusion is maybe it works for some but I would never buy a direct property that way again.

    Agree with @Alex Straker comment that most Aussies are overexposed to property and balancing out overall assets with high quality shares is the smart approach to the next phase of accumulation for many reasons.
     
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  2. LibGS

    LibGS Well-Known Member

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    Er.... NRAS hasn't been around that long. Are you sure you are talking about the National Rental Affordability Scheme?

    The legislation for NRAS was passed in 2008, and you only get a government incentive for 10 years.

    National Rental Affordability Scheme Act 2008
     
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  3. euro73

    euro73 Well-Known Member Business Member

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    Yes... Like @LibGS I'm trying to figure out how a property could have been entered into NRAS 12 years ago when the legislation was only passed in 2008 , the first call for applications was done in late 2008 and the first incentives werent activated until after that.... So its a little difficult to believe you had an NRAS property entered into the scheme since 2005.

    Just so you know...

    By May 2009 - 455 dwellings had actually commenced in the NRAS.
    By May 2010 - 1930 dwellings
    By May 2011 - 5555 dwellings
    By May 2012 - 17,989 dwellings
    And so on.....

    You can confirm those figures here - https://www.dss.gov.au/sites/default/files/documents/07_2014/nras-performance-report-june2011.pdf
     
  4. Invest_noob

    Invest_noob Well-Known Member

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    @mcarthur thank you for posting this spreadsheet. I've been playing around with it, trying to see if it is worth the effort. Does this look right? If I extract 30k equity and invest it in shares, plus put in additional 5k every year, the total benefit that I get at the end of 10 years is only $33,346? This is assuming I get a total return of 10% pa every year and the interest rates stay at 5%. If this is the case, it is not really the magic bullet I expected it to be. Am I missing something? Screen Shot 2017-10-18 at 5.31.46 PM.png
     

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  5. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    PPOR near 100% deductible debt with 70k non deductible (mostly fully offset or close to) as the slush fund/living expenses etc.

    Various loan splits for shares, SMSF and IP deposits plus costs.
     
  6. JK200SX

    JK200SX Well-Known Member

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    After your PPOR is paid off (ie no non deductible debt), what type of debt recycling strategies can be used?
     
  7. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Do a cash out loan to 80% LVR with a bank that has the ability to easily create extra loan splits post settlement, that is you can do it over the phone.
     
  8. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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  9. albanga

    albanga Well-Known Member

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    Very interesting thread!
    @euro73 I was of the understanding that NRAS is now finished? If that is the case then apart from dual income properties for cashflow what do you recommend?

    I am looking to start a debt recycling strategy and have to say I'm more leaning towarards the share route purely for the simplicity.
    My concern with the dual income properties is all the hassles that come with owning property! I'm also not convinced on the demand for dual income properties and the ease in how easily it would be too lease them.

    What does your experience show on those fronts?
     
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  10. euro73

    euro73 Well-Known Member Business Member

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    No new NRAS credits being issued, but there are still some NRAS properties available. You wont get the full 10 years though.

    The dual occ's I am selling have been renting quite easily. Everyone said there would be no demand for granny flats. As usual.... wrong :)

    In the meantime, I'm still waiting for this guy to explain how he had an NRAS property since 2005, when the legislation didn't exist before 2008...

     
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  11. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Is that via existing NRASers exiting the scheme by selling up?
     
  12. euro73

    euro73 Well-Known Member Business Member

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    Several ways to get NRAS still

    1. There are projects that have NRAS approvals which are not yet finished. A good example is townhouses I sold at Goulburn, NSW. I have several of those I didnt sell as the pre sales werent needed beyond a certain point. There are a small number of other examples around the country.

    2. There are resales.

    3. And there are substitutions available. lets say you owned an NRAS property, then got divorced. You were forced to sell because of the divorce, and the people who buy it from you decide to use it as a PPOR. The NRAS incentive , which has already been activated and used up X amount of its 10 year eligibility, is now an orphan. It doesnt have a home. The NRAS approved participant/consortium ( Questus/AAHSL, Ethan, AMC, Aspire, NAHC etc) can make a submission to the Govt to transfer the incentive to an alternative dwelling in the same state. The proposed dwelling must be new, have an OC and never been lived in or tenanted previously

    What is NOT available is the ability to transfer NRAS incentives from property A to property B that havent yet been activated. This would be considered a change of property, not a substitution of property. Change requests were closed down on Dec 23,2014. Substitutions remain available . This is because the funding has already been triggered when the incentive went "live" . Incentives that havent gone "live" havent triggered any funding yet.

    What is also NOT available is any new NRAS incentives. The last batch (Round 4) were approved in 2012 and Round 5 was cancelled by the Libs when they got in. Unless there was another call for Round 5 applications, it would appear there will be no further NRAS issued.

    July 1,2016 was the latest possible countdown start date for NRAS. All NRAS funding ends on or before June 30,2026. Plenty of NRAS properties started before JUly 1, 2016 of course and will therefore use their 10 years max eligibility before June 30,2026 .... but those are the maximum dates funding is available from and to under the legislation.

    So if you built an INV property today, got an OC and contacted me to get you an NRAS credit via a substitution, it would have a maximum eligibility of today until June 30,2026. ie @ 8 years and 7 months
     
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  13. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Nice, will be in touch around April 2018 :)
     
  14. albanga

    albanga Well-Known Member

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    Thanks @euro73
    And what are you finding to be the common equation? Is it usually a family with say a granny or an older child that prefers to live independently in the second property?

    Or are you also finding mixed tenants who do not know one another?

    Just curious on the dynamics.

    Also being the NRAS master is their talks of anything coming that will supersede it now it's finished? And apart from the financial benefit to a lot of your clients do you think the actually purpose was a success?
     
  15. euro73

    euro73 Well-Known Member Business Member

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    Typically two unrelated parties. We do the granny flats beside, rather than behind - The properties are fully fenced off. For all intents and purposes the living arrangements are no different to two houses next to each other. No issues whatsoever.

    There is no NRAS 2.0 on the horizon. Look, the Libs loved it initially - really loved it - you'll understand why in a moment. They were actually looking at it seriously in the Howard era but didnt get it launched before he was punted - Then the politics changed. Rudd launched it, and for the Libs it became one of many policies they decided to be obstructive about , simply because it wasnt their idea and it gave them something to create a point of difference with. Here's why Howard and the Libs were all for it initially. The idea was stolen/copied from a Ronald Regan initiative called the Low Income Housing Tax Credit , which makes it a pure capitalist /republican/ liberal type of policy.... and which has proven massively successful in the US and still exists today, some 20+ years and 2.4 Million dwellings later. If Labor gets back in...maybe. Otherwise...nothing on the horizon. So dual occ is the next best thing in resi property for producing strong surplus cash flows.

    Whether people like NRAS or dual occ or CF+ in general because of a bias ( and in incorrect one at that) towards growth, based on a belief that strong cash flow cant also give strong growth , they have to start getting their heads recalibrated to accept that without some cash cows working debt down, borrowing capacity rule changes are going to see them snookered very early in the game from now on. If you run your property portfolio like you would run a business, you wouldnt think twice about increasing the income streams within your business and using them to reduce non income producing, non deductible debt.

    Debt recycling /debt reduction/ debt repayment is literally the single most important ingredient required in the post APRA era, for anyone wanting to build a resi portfolio and who isnt on huge money.

    However someone chooses to do that is their business, but a cash cow is a very simple way to achieve it, without the volatility of the share market.
     
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  16. John Ferguson

    John Ferguson Well-Known Member

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    Scenario question

    If one had a home with no mortgage valued at $600k and a LOC of $500k, would you:

    1. Invest the entire LOC into shares (LIC’s)

    2. DCA the LOC into shares over a 5 year period ($100k p.a)

    3. Hold the LOC and wait for bargain buying opportunities in the event there was a market crash/correction.

    Disclaimer: With no mortgage there is $40-$50k of surplus employment income currently being used to buy shares (LIC’s). And then leaving LOC available into perpetuity. I have no qualms with good debt

    Interested to hear people opinions and rrasoning etc.
     
  17. ShireBoy

    ShireBoy Well-Known Member

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    Can't comment on the other points, but have a read through this
    https://personal.vanguard.com/pdf/s315.pdf
    Think about the potential performance of:
    Having $500k invested for 5 full years, versus
    Having $100k invested for 1 year, then $200k for another year, etc etc.

    TL;DR version: time in the market is more important than timing the market, especially if you have a lump sum ready to go.
    This is dependent on your risk appetite, of course, and managing the loan repayments between dividend repayments.
     
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  18. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    I won't answer the financial advise questions, but just say that once you have used the money, make sure you convert your LOC into an IO or PI loan. Get a lower rate and less risk of it being called in.