$1 Million Dollars – How to spend wisely!?

May I ask your combined household taxable income? Ballpark ?

I ask because if you were to set aside 500K to put towards a principle home, and then 500K towards INV purchases, you could break it up into 5 x 100K “chunks”. Use 5 x 100K deposits to purchase 5 x NRAS properties at @ 350- 400K each. Each 100K deposit would cover 20% deposit (70-80K) + Stamp Duty (12-16K depending on which state you purchase in) + a 10K cash buffer ( to cover the first years pre tax cash flow loss. Typically, that should generate @ 100K in deductions ( based on approx 20K per property, which consists of @8-10K in pre tax cash flow loss and 10-12K in depreciation – per property)

Typically, you’d also generate anywhere between 8-9K CF+ , because you’d receive an ATO refund on your per tax cash loss and depreciation , PLUS the NRAS tax free credit of $10,661.( and it goes up , indexed to rental CPI, annually )

So you’re 500K could buy you @ 1.75-2 million of property, and earn you @ 40-45K tax free after ALL EXPENSES ARE ACCOUNTED FOR.

Looked at another way, thats an 8% Tax Free Return.

If you were to be a little more aggressive and gear to 90% LVR + LMI you could in theory, purchase 8 x NRAS with your 500K ( subject to borrowing capacity of course) Again, using a 350-400K price range for the purpose of this example, 10% deposit = 35-40K S/Duty 12-16K . Cash Buffer 10K . So approx 60-65K invested in each property. You’d generate 160K of deductions ( 8 x 20K) and depending on your assessable income and Marginal Tax Rate, you may also generate as much as 70-80K additional after tax from the NRAS Credit.

So if your combined household income is 200K for example, 8 NRAS properties would typically allow your assessable taxable income to be reduced to @ 40K ( say 20K for you and 20K for your partner) which is effectively putting you both on an almost tax free income, as the tax free threshold is 18,200. You’d also be receiving @ 70-80K in additional refundable tax offsets – ie cash in your hand or bank account, from the NRAS credits.

So in that situation, your 500K invested in 8 x NRAS would be effectively convert 200K of taxable income into 270K tax free income for the next 10 years, and you’d have a property portfolio of 3.5 – 4 Million. Even with conservatiove growth of 3% per annum, your portfolio would appreciate 1.5-2 Million over 10 years.

Or looked at another way, without a dollar of capital growth (which I’m not , for a moment, suggesting will occur) your 500K has been turned into 2.7 Million tax free in 10 years.

With growth of just 3% compounding , your 500K has been turned into 2.7 Million in tax free cash and 1.5-2 million in additional equity

Or looked at another way , 60-65K of your cash invested using a 90% + LMI loan will generate 8-9K Tax Free, which is a 13-15% Tax Free Return.

If you then take that 270K per annum and re-invest in other, non NRAS properties, or maximise your Superannuation contributions, or pay off other non deductible debt, the yield will ultimately be significantly higher than 13-15%, as it’s all about the compounding multiplier effect that all that tax free money can create for you.

• This reply was modified 10 years, 4 months ago by  loan ranger.

bns wrote:

Thanks so much loan ranger & superAndrew for getting back to me!

For your information we are 30 years old, live in QLD and earn a total of 160k pa (80/80) = DINKS. Our (my) year goal is to have a big enough passive income by age 45 to retire or semi-retire atleast. I know it’s ambitious but where there’s a will there’s a way right!?

Ok so i’ll do some more research into family Truts and their yearly fees etc…

Oh BTW we also have just over 1M in shares split 50/50 (yes we consider ourselves very lucky)

A few questions for you loan ranger (very wise ranger). If you don’t mind I’d really appreciative your feedback.

1. Is there anyway we could use property to reduce our CGT once we sell our shares? I suppose the only way to reduce the CGT is to drip feed them out slowly over a few FY’s?

2. So lets assume I pay cash 100% for PPOR of say 1M. I sell half the shares and use that 500k for IP’s and keep the remaining 500k in the market to collect divs etc. Would that be a wise strategy?

3. I had a little read up on NRAS (only 40,000 avail I believe) and TBH they seem like they may be difficult getting our hands on some. Forgetting NRAS – if we were to purchase standard rentals around the 400k mark as you suggest, what sort of figures would that present?

4. With all of the tax deductions, how would this all work out should we be able to retire @ 45 and have no income to offset the tax against?

Once again your calculations have blown my mind – thanks so much for your input.

BNS

What passive income/year do you want from your IPs? A passive income of $150K/year requires $2.5m assets generating 6% yield. This should be achievable in 15 years from a $1m base (you only need to generate an additional capital growth through market forces and manufactured growth).

The only way you can use property to level the growth in the shares is to buy a loss making property – one that you sell for less than you bought it for. CGT is just a cost of investing. As you say, it would be best to drip sell the shares so that you aren’t slugged with huge CGT bills. Talk to your accountant about how to manage the shares and properties going forward. Hopefully you have an accountant knowledgeable in the various investing strategies – if not, put a question in the finance section on the forum and people will suggest accountants they use.

Do you need to buy a PPOR for $1m?? Could you not buy something a little cheaper and have more cash for the investing? If you use more of the $1m for investing, you will probably get further in the long run rather than buying big now to keep chasing going forward.

Read widely on a number of strategies. Do a search through this forum on NRAS and other strategies to research a number of perspectives. There’s more than one way to reach the goal. Also read about a number of different investment strategies – shares, property, cash etc etc. Each have their place in the long term wealth creation path. You have time.

Just food for thought. It’s good to work through all the options before jumping in. If you are looking to use the equity in your PPOR, you might like to think about the CG of the area, so you can keep pulling equity out (I say that, keeping in mind that you don’t want to overcommit the PPOR).

There’s another property investing forum – somersoft.com.au. I think between these 2 forums you should get a number of recommendations of accountants who are savvy in how to deal with investing funds.

$100K income is $1.7m invested at 6% yield – very achievable from a $1m base. If you keep active in learning new techniques and how to manage the IPs, $2+ should be achievable in 15 years. Just keep active on the forums and read lots (Steve’s newest books are a good starting place, but there are a number of books, techniques and authors)!

Great comments by Richard and being a fellow Bisbanite, certainly give him a call for his recommendations (the conversation could drift to good PPoR locations!). Reading other posts by Richard on the forum, I am also aware of the wealth he has generated through various property strategies. He may still have his API article that explained some of the strategies he has used to generate this wealth.

Hi Chris

Yes both my API interview and the joint interview myself and my partner Jacqui (JacM) did are available on our website.

Cheers

Yours in Finance

1. Is there anyway we could use property to reduce our CGT once we sell our shares? I suppose the only way to reduce the CGT is to drip feed them out slowly over a few FY’s?

2. So lets assume I pay cash 100% for PPOR of say 1M. I sell half the shares and use that 500k for IP’s and keep the remaining 500k in the market to collect divs etc. Would that be a wise strategy?

3. I had a little read up on NRAS (only 40,000 avail I believe) and TBH they seem like they may be difficult getting our hands on some. Forgetting NRAS – if we were to purchase standard rentals around the 400k mark as you suggest, what sort of figures would that present?

4. With all of the tax deductions, how would this all work out should we be able to retire @ 45 and have no income to offset the tax against?

1. You should seek an accountants advice on this. I can tell you all the ins and outs of NRAS, but I dont want to advise you on CGT :)

2. No such thing as a right or wrong strategy. There is certainly merit in owning the PPOR outright, then using a Line Of Credit to draw out equity for INV purposes

3. Plenty of good NRAS deals around with no valuation issues and strong yields – you just wont find many using Google. The online marketers flog anything and everything and dont give much thought to valuations. Im not allowed to advertise my services, but……

4. One of the beauties of NRAS is that the tax credit is paid in 2 parts – 75% comes from the Federal Govt via a Refundable Tax offset, and 25% comes from the State via a Non Assessable, Non Exempt cash payment. Neither payment is linked to losses. Theyv are pure tax free refunds. In other words, you receive the money whether you are paying tax or not. “Losses” only affect the negative gearing side of the equation, and if are concerned about losses not being offset against income- bear this in mind. You are 30 now, and looking to retire at 45. That’s 15 years away, so the deductions associated with high levels of gearing will still be of value to you for 15 years. By the time you are 45, the properties wont be running losses anyway, so you need not be concerned about having no taxable income to offset losses against, as there wont be any losses.

Let me give you an example. using a 350K property that currently gets 350 per week rent. The 20% discount under NRAS only stays in place for 10 years. After that, your property returns to normal market rent and you stop receiving the NRAS tax credit. So if the normal market rent for a 350K property is $350 today and increases by a very conservative 3% per annum, compounding… by year 15 ( when you turn 45) your property will be receiving @ 545per week , which is $28,355 , which equates to a yield of 8.1% PRE TAX If the same property achieved 4% compounding rental increases, by the age of 45 you’d be receiving $630 per week, or $32760 per annum, or 9.4% pre tax yield. 5% would yield 10.8% pre tax

Based on your existing combined 160K income, I’d be taking a closer look at something along these lines;

1. 6 NRAS properties. Broadly speaking, each will generate @ 20K of losses ( 1o K Cash loss, 10K depreciation) , and 7-8K CF+ after tax. So 6 of these would reduce your household income from 160K to 40K ( @ 20K each- so pretty close to tax free) And it would add @ 42-48K of additional Tax Free income. End Result… you’d go from 160K taxable household income to a combined tax free ( or very close to tax free) household income of @ 202-208K

2. If you used 90% LVR finance, you’d only have used 6 x 60K to achieve this outcome. 360K of your equity would have been used.

So if you do decide to pay $1Mil cash for a PPOR, you could draw out just 360K to get the 6 properties and effectively set yourself up with a 200K+ tax free income for your household for the next 10 years. that’s $2 Million in Tax free income in the next 10 years- more than enough to quickly pay off the 360K Line Of Credit on your PPOR and return it to debt free within 2 or 3 years. This would also leave you with an enormous amount of equity to invest elsewhere if you wanted diversification.

The secret is to maximise your tax free cash flow so that you can then maximise your $1Mil equity. NRAS is simply the best tool for that job. End of story. It’s not the be all and end all and it’s not the only good investment available, and it’s certainly not where your investing journey needs to end, but it most definitely IS the most potent and powerful place to start, because of all the multiplier effects it creates for you while you are still working and can still avail yourself of the Australian tax system and it’s very investor friendly laws ;)

Consider this; 360K of equity invested in 6 x NRAS properties basically makes you over $2 million tax free cash by the time you are 40 – before $1 of growth is accounted for. You’d have to work for @ 18 years to make $2 million after tax, based on your current taxable household income. And keep in mind, the $2 Million doesn’t account for all the incremental increases built in to NRAS. If I included those, the $2Million would be closer to $2.4 Million. You’d have to work for @21 years to achive that , based on your current taxable household income. However, I cant predict those Rental CPI increases so Ive used an assumption of zero increases to NRAS over the 10 years, to be ultra conservative.

That sort of cash flow ( $200K pr annum tax free) would allow you to pay down the 360K LOC you used to fund the 6 x NRAS deposits, within 3 years easily. So your end result would effectively be – $1 Mil unencumbered PPOR within 3 years + $200K Tax Free income + 6 Investment properties costing you Nil, Nada, Zero, Zilch. Beyond that, with all of that equity and all of that cash flow at your disposal, you can venture off to buy multiple other INV properties (non NRAS , as they aren’t available after June 30,2016) , or commercial properties, shares, magic potions or anything else that tickles your fancy :) The point is, NRAS creates the multipleir effect that you wont get from anything else. It’s the First Stage. The Cash Cow.

And don’t forget – you don’t have to be worried about “losses” holding no value or appeal for you beyond the age of 45, if you are fortunate enough to stop working then – because the 6 NRAS properties will well and truly be past their loss making days by then, as I demonstrated earlier.

NRAS is like an accelerant. It takes equity, and using high LVR lending, low interest rates and the tax system, turns the equity into d supercharged tax free yields, which get reinvested, making everything happen far quicker, creating compounding multiplier effects. You literally get the best of both worlds – great tax losses (negative gearing) AND Tax Free Cash Flow Positive after tax (NRAS Tax Credit) in one asset – at the same time. You get to reduce your assessable income by 20K AND make 7-8K tax free. 60K in. 8K tax free out = 15% tax free. But when reinvested, you get a multiplier on that. There’s nothing like it, and I dont know of any other asset class where you can get a better return on 60K (or 6 x 60K) Where else can you reduce your tax bill to ZERO, increase your after tax income significantly, get a compounding return from reinvesting that yield and get capital growth, in one asset?

Then you can go off an invest in all the other diversified opportunities and retire early on a passive income- whatever that may be . But to get there you have to put that equity to work. Squeeze all the juice out of the lemon while you have the opportunity and the taxable income and the NRAS at your disposal.

• This reply was modified 10 years, 3 months ago by  loan ranger.
• This reply was modified 10 years, 3 months ago by  loan ranger.