If cash was the king where’d you put it?

To answer the question in the title, I would not put any cash into any savings account, unless I had to park it somewhere temporarily until I wanted to use it for another (better) purpose. In this case it would go into an account similar to the ones you mentioned above. But it is strictly temporary and not my favoured choice.

There never is a savings account with an interest rate as high as, or higher than, any loan interest percentage that you have to pay.

With a savings account, you pay tax on the interest you are paid, at your marginal tax rate, and you are charged bank fees in many cases. Your nett return is appalling.
You cannot leverage your return on your money in a savings account.

Any cash I receive will always go towards paying down debt either personal or investment, while there is debt, as debt is more expensive than the savings interest you will accrue. But I will only put the cash into debt reduction of loans only as long as the cash is accessible in the event of an emergency, so the right type of loan is critical.

Once the debt is paid down, and even while some still remains, my cash will always go into income and cap growth producing assets which can be leveraged to do the same again – property, shares, businesses.

Here's a very basic, quick comparison, and there is no re-investing of profits or inflation factored in; $20k invested for 10 years:-

OPTION 1.
$20k in savings account @ 6.8% for 10 years, 30% marginal tax rate (no bank fees factored in).
TOTAL GROSS PROFIT: $13,600
TAX: $4,080.
TOTAL NETT PROFIT: $9,520
CASH ON CASH RETURN: 4.76% per year. OH DEAR!

OPTION 2.
$20k as deposit on $150k property. Rent $170 per week, finance @ 7.5% interest only on $139k (80% of property value plus purchase costs @ 6%). Cap growth rate of 5% per year average. Property is built after 1987, so depreciation claims are high. After tax cashflow is positive $10 per week. House is sold after 10 years. Marginal tax rate of 30%.
TOTAL CAP GROWTH: $75,000
TOTAL AFTER TAX CASHFLOW: $5,200
PROPERTY SOLD FOR: $225,000
CAP GAINS TAX ON 50% OF GAIN, @ 30% MARGINAL TAX RATE, INCLUDING BUYING/SELLING COSTS $15k: $9,000
TOTAL NETT CAP GAIN: $66,000
PLUS TOTAL AFTER TAX CASHFLOW: $5,200
TOTAL NETT PROFIT: $71,200
CASH ON CASH RETURN: 35.6% per year. AHHH!; THAT"S BETTER.

NOTE: holding costs, 1 month vacancy per year, loan interest, "on paper deductions" and other expenses are factored into the after tax cashflow. With careful property selection you can magnify your returns much more than the above model.

I personally perfer channelling my spare cash into diversified funds, particularly those geared towards income producing.  I can leveridge them for extra gain and then use the income to pay off property investments.

There is no 10 year rule with this aspect of your investment.

Houses built after 1987 (I can't remember the exact month and day in 1987 when it kicks in; so just call it "after" 1987) are eligible for a "special building write-off", as well as depreciation on the fixtures and fittings.

Depreciation claims are "on paper" deductions, which cost you NO money from your own pocket, but nevertheless are still claimable on your tax return. It is, in effect, free money. The govt allows you to depreciate the structure on the property.

The depreciation on the building is 2.5% per year for 40 years (100%) from the date of construction, while things like carpet, kitchens etc have different depreciable "lives". Carpet for example is 5 years from memory, so you can depreciate it at 20% per year for 5 years, or even 10% for 10 years I think if the "life" is 10 years.

This aspect of an investment can be very financially rewarding and enormously improve your return on your property cashflow. This is the only type of property I buy.

You engage a Quantity Surveyor to prepare a "Depreciation Schedule" at a cost of around $500 (which is tax deductible). It will pay for itself in the first year.

The Depreciation Schedule is forwarded to your accountant, and he/she applies the list of deductions to your tax return.

The end result is you can turn a neg geared property into a pos cashflow property AFTER TAX, so there is no tax to be paid on the profit.

You can even arrange for your tax return to be forwarded to you in your paypacket, so you don't have to wait until the end of the year for the money (which can be considerable). This can really improve your cashflow on a weekly basis, and if re-invested into your investment loan, or personal debt, will accelerate your wealth building and save you heaps of interest.

You would need to speak to your accountant about this.

You're right dk,

a. you do need to have a taxable income for Margaret's strategy to work, but at the end of the day if your property investing is successful and you end up with a surplus of funds which may be taxed then you have won the game – no work for positive passive income.

Unfortunately, the stats show that most property investors only ever buy one I.P, and then most of them sell it and never buy another. Neg gearing and the financial hardship it produces contributes largely to this.

b. You are incorrect however that the property has to be new or newer. It only has to be built after 1987 -20 years old as of today. You can even use older properties that have been renovated as the renovation costs can sometimes be substantial enough to afford a good on paper deduction. Newer and more expensive properties will produce bigger on paper deductions, but they are not a pre-requisite, and quite often the rent returns are so bad that the great on-paper deductions aren't enough to turn a neg to a pos. I have a property that was built in 1989 and cost me $105k, with a rent return of $220 p/w (it was $180 p/w when I bought it). This is nicely pos cashflowed, and has increased in value by over 50% in 3 years. This, to me, is an easy investment that most people should and could make when they are starting out.

c. Finding a totally positive investment for most average people is extremely difficult. For most average people right now; they are earning a taxable income, and would love to invest and can't find a property investment that doesn't make any loss at all (pos geared) in today's market. Forget Steve's 11 second rule; it is the provider of false hope these days.

Margaret's strategy offers a very workable alternative for the many normal folk who want to kick-start their investing career without the debilitating situation of neg gearing. If the average person can buy a property like the one I described above every 2 years, they will have a lot of satisfying investing experiences.

If they also pay down some debt along the way, rather than park the cash in a pathetic savings deposit account, they will have investments that cost them nothing, and make them rich. Some may even have to pay tax on their investment instead of taking a hit to the hip pocket every week.

Hi S.O.G,

the only problem with the 4% properties between '85-87 is they are only depreciable for 25 years, which runs out in 2012.

I see where you're heading now; I would park the cash in an ING account or something like that for sure, or leave it in the shares, and try to save like mad until I had the deposit required.

The other argument is; can you find a good I.P investment that will carry an almost 100% finance with a pos cashflow after tax? Probably not.

I suppose if you could, then it still may be better to go for the I.P and use the lovely leverage, rather than have to put the cash into a high interest-bearing account until the decent deposit is saved.

Hi S.O.G;

I agree; I am conservative at heart, and like to invest aggressively, but safety is the first concern.

I get nervous when I hear of newbie investors taking the plunge with 100% (and more) finance on property investments. This is too highly exposed in my opinion.

It is not so bad for the more experienced investors who can crunch the numbers and see the dangers to leverage this high, but even then it is not ideal.

I think your strategy is the safest way to go. I'm sorry I can't enlighten you about Bank West.

I just wonder about the catch (if any) if they are offering a higher interest rate than ING, who we have been with for years, and who I'm happy with. I haven't been putting money into the account for a while other than for my son towards his first house (gotta start 'em early). All my funds go into investment loans these days.

I mean; how can they offer the same conditions as ING and pay you a higher interest rate? What is the catch?

If it doesn't cost anything to set up and there are supposedly no fees, why not give it a go and send a few dollars across; say; $10 per week for 3 months and see what happens?

Putting your cash into an 'Offset Account' is the only way to go – assuming you have a loan on your PPR. Doing this will save you about 7.5% on the funds being offset (based on average variable rates at the moment). If you invest your cash into an online saver account paying 6.3% you will end up with about 4.76% in your hand after loosing 30% in tax as it's classed as income earned.

hi  LA Aussie,
to your reply back on april 19 -2007
if you borrow $139k (for a $150k property)  @ 7.5% interest.
how do you get  $10 per week positive cash flow, after tax, with rent at $170 per week.?
considering a building depreciation claim (off set) of $3750.
have you included holding costs and have i understood the depreciation claim right or not?
i have some experience, but very much still learning, just trying to learn more.
thanks
bicky.

Hi,

Does anyone have old DVD's of Henry Kaye, Paul & Danny Hanna, Ed Burton atc. Looking to purchase for research.
Please email me at:   [email protected] 

Thanks