Is neg gearing worth it?

Hi Boothy

What is it you would like to achieve?

Once you can answer that then a course can be set.

Cheers Rob

“Every family is born with a father as the banker.

Hi, I’m putting in some magic number here as I obviously don’t have all the facts. Obviously you would have to work your own real numbers into such a strategy.

Hmm good question. I suspect your net super income is low possibly about $22,000 and thus low tax. I’m a newbie, but I can only think of one strategy at present, all be it risky and not sure if its viable. It would depend
on other cash flow besides super that may exist such as pension or investments etc…

STRATEGY

Basically cash in a chunk of your super say what in total is $400,000 in total ? so cash in $280,000 over 4 years to pay for a $260K property plus $20K for purchasing expenses and Misc expenses.

Buy one new investment property say $260,000 , with a $70K deposit. thus close to cash flow positive after tax. If rented for say $13,000 per year this replaces your super income. Thus you are getting a net income of perhaps $3,000 after tax deductions for annual cash outlays, interest on loan say $12,000 on $200K borrowed, rates, insurance, accounting, property management, body corps etc.. and non cash deductions depreciation etc… being about 1.1% net operating ROI on the asset value.

Now not as bad as it seems as you are only sacrificing $70K of your own money initially in year 1, so really its more like 4.2% net ROI on what you have cashed out in the first year. not much worse than some crappy bank accounts or poor performing super funds.

Now $3000 a year positive cash flow does not sound much, but its only on $70K of your super cashed out or say $90K if tax is paid on transfer. That’s about $57 a week.

Now you may have to pay income tax on the super so there may be a better way to fund the property perhaps in installments of say $70,000 per year instead of a lump sum of $280,000 Effectively baring no other income, this puts you in a position to get the optimum tax benefit for one investment property.

I’m not sure when the super withdrawal tax is applied, so this would effect things a little, such as how much you will need to borrow to pay for the property. But about $70K income seems about optimal for one investment property, from a tax perspective on a property of about $260K in value. Thus you may need to cash out $90K if super tax is paid upon transfer of funds to be left with about $70K

Also consider the tax bracket scenarios with 1 investment property of the mentioned value, in relation to you cashed out deposit value. i.e it may be more tax effective to cash out more super to increase your net income from the investment property for tax purposes. Its hard to say, but you would have to get you IP accountant consultant to model the effects.

But ! Capital Growth ! If we estimate capital growth at a way conservative 5% then you annualized capital income is $12,500 not realized of course, but added value to your property. This could result in better rent in the following rental year, say at least 5% rent income growth.

Basically you are progressively substituting some of your super for property that when considered with good capital growth, can outperform super if chosen wisely. You would need to have the tax side optimized as a whole package in consideration of all income and deductions.

If you get one good idea out of reading all this, even a completely different idea to this, then I am glad. Its just ideas nothing more.

Diversify your investments to manage your risk exposure. I suggest you get expert financial advice. []