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Buying off the plan property - should you ever? · The Money Puzzle

0:07
Speaker 1: Hello, and welcome to the Australians Money Puzzled podcast. I'm
0:10
Speaker 1: James Kirkby. Welcome aboard everybody. Now, the property market is
0:15
Speaker 1: clearly improving, rebounding, especially in the larger cities, especially at
0:21
Speaker 1: entry level prices. But one of the things we discovered
0:24
Speaker 1: on the show recently was the alarming loss facebine investors
0:28
Speaker 1: in apartment investments all over the country, particularly in the
0:32
Speaker 1: larger cities. When I looked a little closer at this,
0:37
Speaker 1: it became clear that many of these apartments were or
0:40
Speaker 1: had been bought off the plan, something we need to
0:45
Speaker 1: catch up on. Basically on the show, we've never really
0:47
Speaker 1: looked at this properly, and I think I need to
0:49
Speaker 1: speak to an financial advisor who is over property rather
0:53
Speaker 1: than somebody inside property on this and my guest today
0:56
Speaker 1: is ideal for the exercise. It's James Gerard of financial
1:00
Speaker 1: dot com dot U. Hi, James, how are you.
1:02
Speaker 2: I'm doing very well, James, Thank you for having me on.
1:04
Speaker 1: Great to have you on. We have talked a course
1:08
Speaker 1: about just about everything over the years, but we haven't
1:10
Speaker 1: talked on air about buying off the plan. But just
1:14
Speaker 1: to introduce it, it cut my eye, how often they
1:18
Speaker 1: were mentioned in this context, possibly because they are more
1:23
Speaker 1: likely to be newish apartments are newly built in the
1:27
Speaker 1: larger towers and complexes in cosmopolitan cities. But I suppose
1:34
Speaker 1: straight up in terms of buying off the plan, why
1:38
Speaker 1: on earth do people do it? Anyway? I think this
1:40
Speaker 1: is the best way into it. Why would you? What
1:42
Speaker 1: is the value proposal?
1:44
Speaker 3: Yeah, it's interesting, and to put a kV out there,
1:47
Speaker 3: I'm not a big fan of off the plan properties,
1:49
Speaker 3: but there are some reasons, valid reasons why people would
1:52
Speaker 3: pursue this type of purchase. So the first one is
1:55
Speaker 3: that you lock in the price. Now by nature of
1:58
Speaker 3: off the plane, you're buying off the plans. I think
2:00
Speaker 3: that hasn't been built yet. You agree to it. There's
2:03
Speaker 3: a contract that you sign, you leave a deposit, and
2:05
Speaker 3: then the property will be constructed, which could be anywhere
2:08
Speaker 3: from one to three years from the date of when
2:11
Speaker 3: you agree to proceed. So that means that you agree
2:15
Speaker 3: on the price today. But if the property market's moving
2:17
Speaker 3: upwards by the time the place is being completed, you
2:20
Speaker 3: could be sitting on a paper profit. And I've actually
2:22
Speaker 3: seen that a couple of times in Sydney and Melbourne,
2:25
Speaker 3: where people have committed to a property off the plan,
2:28
Speaker 3: it comes two and a half years later and it's
2:31
Speaker 3: ready to complete and they go, well, i'd actually want
2:33
Speaker 3: to buy it. I want to sell it. And then
2:36
Speaker 3: they can just sell it to somebody else and say
2:38
Speaker 3: they paid seven hundred thousand, it might be worth eight
2:40
Speaker 3: hundred thousand dollars. They just bank that profit and all
2:43
Speaker 3: they've tied up is five or ten percent deposit for
2:45
Speaker 3: that period.
2:45
Speaker 1: So what it's best then in a rising market, it
2:50
Speaker 1: has clear advantages that you capture the rise and even
2:55
Speaker 1: in the process of when it's been built, you are
2:58
Speaker 1: actually gaining money. So let's just look at the pros.
3:01
Speaker 1: So that's an obvious pro that you can get in early.
3:06
Speaker 1: There are exemptions and tax breaks and stamp duty attractions.
3:10
Speaker 3: That's right, James, depending on the state that you live
3:13
Speaker 3: in or that you purchase in. More to the point,
3:15
Speaker 3: there are exemptions or concessions on stamp duty when you
3:19
Speaker 3: buy brand new properties. And that's because state governments want
3:22
Speaker 3: to drive the economy. They want the building industry to
3:25
Speaker 3: be employed, so they they'll provide an incentive for people
3:28
Speaker 3: to buy brand new properties. And then when the property
3:30
Speaker 3: is complete and you take ownership of it. If you
3:33
Speaker 3: happen to be an investor, you would engage a quantity
3:36
Speaker 3: surveyor to do a depreciation schedule of which you can
3:40
Speaker 3: depreciate the building itself over a forty year period, and
3:44
Speaker 3: then you can build so depreciate the stuff inside it,
3:47
Speaker 3: so the dishwasher, the blinds, all those type of things
3:49
Speaker 3: over anywhere from a five to fifteen year period.
3:52
Speaker 1: Can you how soon can you start that depreciation schedule?
3:56
Speaker 1: Is it from when the building is officially open?
3:58
Speaker 2: That's right?
3:59
Speaker 3: Yeah, So when buildings complete and you take ownership of it,
4:02
Speaker 3: sometimes the developer will provide you that schedule, but other
4:05
Speaker 3: times you'll need to go engage a quantities of a
4:08
Speaker 3: firm and then they'll provide you with the schedule. You'll
4:10
Speaker 3: get this PDF document or a binded book, and then
4:13
Speaker 3: you give that to your accountant and then they'll just
4:15
Speaker 3: add these tax deductions, which for the average apartment that
4:19
Speaker 3: costs a million dollars, you could be looking at maybe
4:23
Speaker 3: seven to ten thousand for the fixtures and fit ins,
4:26
Speaker 3: and then maybe four or five thousand a year for
4:28
Speaker 3: the building itself, So it can that up to be
4:30
Speaker 3: quite a big tax deduction.
4:31
Speaker 1: Okay, But the specific attractions of buying off the plan
4:35
Speaker 1: then is first of all, in a rising market, if
4:38
Speaker 1: it takes three years to build and you buy your
4:40
Speaker 1: apartment for whatever, five hundred and seven to fifty million,
4:42
Speaker 1: and they go ten percent a year, you're actually capturing that.
4:45
Speaker 1: You're going to capture that increase in value as it's
4:49
Speaker 1: been constructed. That's one. Secondly, there are specific inducements, if
4:53
Speaker 1: you like, sometimes from the developer, sometimes from the government.
4:57
Speaker 1: Sometimes both are in place, or people who want get
5:00
Speaker 1: into the market and mightn't get in easily in any
5:03
Speaker 1: other avenue will come in here. What about these guarantees,
5:08
Speaker 1: which at face value look attractive. So I see an
5:12
Speaker 1: advertisement or I'm invited perhaps to a sales day in
5:17
Speaker 1: a hotel or something, and there's a guarantee, I mean,
5:22
Speaker 1: are they worth it?
5:24
Speaker 3: The guarantee is very interesting, and they signal something to
5:27
Speaker 3: me as a professional investor, Slasher advisor to explain what
5:30
Speaker 3: the guarantee is. It's that you commit to purchase the
5:34
Speaker 3: property for a certain price, and when the property completes,
5:38
Speaker 3: the developer will say, look, if you can't find a tenant,
5:41
Speaker 3: will guarantee to pay you rent for a period of time,
5:45
Speaker 3: and that's usually three to six months at a certain rate.
5:49
Speaker 3: And what that signals to me is that there is
5:52
Speaker 3: potentially uncertainty with regards to the demand for that property
5:56
Speaker 3: when it's completed, to the point whether the developer needs
5:59
Speaker 3: to date all this carrot in front of you and say, look,
6:01
Speaker 3: you don't worry if you don't get a tenant straight away,
6:04
Speaker 3: we'll cover that for a period of time. And that's
6:07
Speaker 3: a really important point to note for investors, particularly where
6:10
Speaker 3: they're buying interstate into high rise apartment complexes. Is that
6:14
Speaker 3: say there's two hundred apartments in a complex or in
6:18
Speaker 3: a little sector of apartments in a particular street, you
6:22
Speaker 3: have to remember that a fair whack of those buyers
6:24
Speaker 3: are going to be investors, and when the property completes,
6:26
Speaker 3: it completes at the same time.
6:28
Speaker 1: Yeah, right, so everybody is advertising in the same place
6:31
Speaker 1: at the same time.
6:32
Speaker 2: Ah Ye, that's right. Yeah, it's just simple supply and demand.
6:37
Speaker 3: Unless it's a really booming area where there's a real
6:39
Speaker 3: big demand for for tenants, you're going to end up
6:42
Speaker 3: with that property that will be vacant. Because your property
6:44
Speaker 3: is identical, like literally identical to dozens of other properties
6:47
Speaker 3: that have completed at the same time.
6:50
Speaker 1: Okay, so that is definitely a negative. What struck me
6:54
Speaker 1: about these guarantees is I presume they're not government guarantees, right,
6:57
Speaker 1: there are guarantees from.
6:59
Speaker 2: The developer, that's correct.
7:01
Speaker 1: So it seemed to me what's really crucial here? Should
7:05
Speaker 1: you go in this direction if you wish to, And
7:07
Speaker 1: I'll ask you when we're finished explaining it basically why
7:09
Speaker 1: you don't like it at all, But it would seem
7:13
Speaker 1: to me that if the guarantee, it's very important for
7:15
Speaker 1: listeners to understand that the guarantees on these off the
7:18
Speaker 1: plan deals are from the developer, not the government or
7:23
Speaker 1: anyone else or the bank or whatever. It's the developer.
7:26
Speaker 1: So how do you know if the developer is good
7:29
Speaker 1: or bad?
7:30
Speaker 3: Track record is a big one, looking at the history
7:33
Speaker 3: of their completions, how long they've been in business as well,
7:37
Speaker 3: So all the things that you would do when you're
7:39
Speaker 3: buying a car or any sort of major purchase, just
7:42
Speaker 3: do your research there on it. Because we're see in
7:45
Speaker 3: the media so much about these foul or troublesome developments
7:49
Speaker 3: and then post completion about clouding issues and structural issues.
7:54
Speaker 3: So that's one of the negatives of buying a brand
7:56
Speaker 3: new property is the uncertainty, and that's start contrast to
8:01
Speaker 3: buy an established property that's been around for say fifteen years.
8:05
Speaker 3: The difference there is that the foundations have settled. Any
8:08
Speaker 3: issues that have come to light would have been done
8:12
Speaker 3: so probably in that ten or field gay period, so
8:14
Speaker 3: you're buying something with more certainty there.
8:16
Speaker 1: So the developer is very important, and the track record
8:20
Speaker 1: of the developer is very important, and the guarantee is
8:22
Speaker 1: only as good as the developer is. So in many
8:25
Speaker 1: ways face value, this all sounds mildly attractive. Tell us
8:29
Speaker 1: what goes wrong with these I'm going to assume a
8:32
Speaker 1: few things right. We're going to assume that developers are
8:34
Speaker 1: selling them right. So there's a certain element of sales
8:36
Speaker 1: pressure on these developments, the sales tactics. To some extent.
8:41
Speaker 1: You are possibly you're part of a larger enterprise that
8:45
Speaker 1: wants to sell the apartments, So we take that on board.
8:48
Speaker 1: What might we not guess?
8:51
Speaker 3: One of the things that I see is an issue
8:54
Speaker 3: is that, and this is maybe not so much about
8:56
Speaker 3: the developers but more about the purchaser, is that some
8:58
Speaker 3: people will take a gamble when they buy brand new properties.
9:02
Speaker 3: They're not in a position to actually settle an investment
9:05
Speaker 3: property for say a million dollars, but they'll commit to
9:08
Speaker 3: and off the plan property for a million dollars on
9:10
Speaker 3: the basis that you don't need to get finance at
9:13
Speaker 3: the time you sign the contract. You need to get
9:14
Speaker 3: finance two months or two years sorry, down the track,
9:18
Speaker 3: when the property completes. And so they're betting on their
9:21
Speaker 3: own ability to be able to get finance, save more cash,
9:24
Speaker 3: get better income over that two year period to then
9:26
Speaker 3: be able to transact on the property. But outside of that,
9:30
Speaker 3: as you said, it's that it's a bit of a
9:32
Speaker 3: murky industry. It's not regulated by ASSEK, and you see
9:36
Speaker 3: a lot of dubious dealings there. So a lot of
9:38
Speaker 3: promotions of off the plan properties, a lot of under
9:40
Speaker 3: the table deals with undisclosed commissions. So you have a
9:44
Speaker 3: lot of property marketers trying to promote this place that
9:48
Speaker 3: they're trying to sell you as the best with regards
9:50
Speaker 3: to growth and livability and all these things.
9:52
Speaker 1: These guys are on commissions.
9:53
Speaker 3: Are there on commissions? Yeah, they're mainly on commission. So
9:57
Speaker 3: the developer has a choice. They either market the properties
10:01
Speaker 3: themselves to try and sell them, or they outsource it
10:03
Speaker 3: and they'll put their hand up and say, hey, anybody
10:06
Speaker 3: who can sell these apartments will pay you x percent.
10:09
Speaker 3: And that x percent depends on where the property is. Interestingly,
10:13
Speaker 3: if it's in Sydney Melbourne, the commissions are lower. They're
10:17
Speaker 3: generally two or three percent. But if it's somewhere regional
10:21
Speaker 3: it could be so like a to Womba property for example,
10:25
Speaker 3: or an Ipswich property, then the commissions can be as
10:27
Speaker 3: high as ten percent.
10:28
Speaker 1: Right, Okay, that's worth knowing. That's worth knowing, all right.
10:33
Speaker 1: So there's a couple of things. I think they were
10:34
Speaker 1: really crucial for listeners who are looking at this area.
10:38
Speaker 1: You know that, first of all, the person they are salespeople,
10:41
Speaker 1: so you're asking salespeople's questions, but their intention is to
10:44
Speaker 1: sell the apartment to you. They're they're not neutral observers.
10:46
Speaker 1: The second thing is that the developer is the developer
10:51
Speaker 1: to some extent, is your risk, right, because it's the
10:53
Speaker 1: developer offers to guarantee not to mention issues around building itself,
10:58
Speaker 1: whether the building is in good chef, et cetera. That's
11:01
Speaker 1: a reputation issue, James. It all comes back to the
11:04
Speaker 1: developer you're buying off the plan from. And how would
11:06
Speaker 1: I know of one? Is is there anything someone was mentioning?
11:09
Speaker 1: How if it developer changes their name every time, a
11:14
Speaker 1: different company for every development, that's a warning signal. While
11:17
Speaker 1: as if you have the same company for ten years
11:19
Speaker 1: doing these but a track record and you can see
11:21
Speaker 1: the ones they did in the past, and they're full
11:23
Speaker 1: and they're buzzing, that's away in Is that a guide?
11:28
Speaker 2: It is a guide to some degree.
11:30
Speaker 3: Developers will trade generally it's the same name across different
11:33
Speaker 3: developments they do. But what they will change is the
11:36
Speaker 3: underlying entity that you're entering the contract with. So they
11:39
Speaker 3: silo every development with a different company, and they do
11:43
Speaker 3: that to limit their liability. So if there's a problem
11:45
Speaker 3: with one, they sometimes the less reputable developers will do
11:50
Speaker 3: some financial magic ry and then things will disappear, namely
11:55
Speaker 3: them will disappear as directors of that company, and then
11:57
Speaker 3: people are left in the lurch with defective building.
12:00
Speaker 1: Okay, so their development could be in trouble, but their
12:03
Speaker 1: developer would not be in trouble.
12:05
Speaker 2: Correct.
12:06
Speaker 3: They have this entity set up solely for the purpose
12:08
Speaker 3: of that development, and all of the developers assets and
12:11
Speaker 3: income is going through other entities or generally held in
12:16
Speaker 3: the name of their spouse. So it's very, very difficult
12:18
Speaker 3: to be able to claw any money back from a
12:21
Speaker 3: developer if something goes wrong without significant legal proceedings, which
12:24
Speaker 3: obviously comes at a large cost.
12:26
Speaker 1: It sounds pretty. It sounds pretty, I will say wild,
12:28
Speaker 1: but it sounds like you're on your own out there.
12:30
Speaker 1: You're very much on your own as an investor in
12:34
Speaker 1: this space. So would you ever recommend someone goes near
12:39
Speaker 1: buying off the plan.
12:41
Speaker 3: I would.
12:42
Speaker 2: It would have to be something quite unique.
12:44
Speaker 3: I'd like to keep it simple when it comes to property,
12:46
Speaker 3: and I look at supply and demand. Now, if this
12:50
Speaker 3: off the plan property is somewhere very unique. So take
12:54
Speaker 3: Barangaroo in Sydney for example, when they built the Crown
12:57
Speaker 3: and they're offering residential apartments there, that's thing which there's
13:01
Speaker 3: limited supply. You have a very unique view of the
13:04
Speaker 3: Sydney Harbor Opera House, Harbor Bridge. So something like that,
13:07
Speaker 3: I can say, Okay, well you're not going to have
13:10
Speaker 3: ten other apartment blocks built around there. That's going to
13:13
Speaker 3: sort of saturate the market. But if it's just another
13:16
Speaker 3: apartment block, if it's just another house and land package
13:19
Speaker 3: in this estate that was farmland a few years ago,
13:22
Speaker 3: I have more hesitations there. And the other thing which
13:24
Speaker 3: I would add is that when you buy a brand
13:26
Speaker 3: new property, you're competing against overseas buyers who can only
13:30
Speaker 3: buy brand new properties. So that plus all of the
13:34
Speaker 3: commissions and charges and profits that are being made, means
13:37
Speaker 3: generally that off the planned properties are much higher and
13:41
Speaker 3: less value compared to an equivalent established property that's even
13:45
Speaker 3: one years old or two years old.
13:47
Speaker 1: So you have an advantage in that you can buy anything,
13:50
Speaker 1: but the overseas buyer can't correct. Interesting, so of course
13:53
Speaker 1: a lot of the marketing is overseas then for these towers,
13:56
Speaker 1: and they're marketing in Singapore and Kyel. I mean I've
13:58
Speaker 1: seen them in hotels in the many, many over many years,
14:02
Speaker 1: and you realize how half the towers in the city centers,
14:06
Speaker 1: especially Sydney and Melbourne, we're financed. How it all worked.
14:10
Speaker 1: Very interesting, Okay, really really interesting subject. I'd love to
14:13
Speaker 1: know what our listeners think of that, whether we were
14:17
Speaker 1: fair on buying off the plant, if it is an
14:19
Speaker 1: area that our listeners think is valid or to be
14:23
Speaker 1: avoided really really interesting. We'll be back in a moment. Hello,
14:35
Speaker 1: Welcome back to The Australian's Money Puzzle podcast. I'm James
14:37
Speaker 1: Kirby with James Gerard Blancial Advisor dot com dot you.
14:41
Speaker 1: Regular contributor of course to the wealth section of the Australian.
14:44
Speaker 1: We both are and these issues are often and regularly
14:48
Speaker 1: covered in the Australian. Speaking of that last weekend, I
14:52
Speaker 1: came across something I thought was just absolutely amazing on
14:56
Speaker 1: self managed super funds. Tim Tooey, who is not a
15:00
Speaker 1: not in the managed super fund space, is not in
15:02
Speaker 1: any way trying to promote him. He's a guy that
15:06
Speaker 1: every now and again beans out these amazing reports. He
15:08
Speaker 1: works with the Yara Capital, used to work with Goldman Sachs.
15:10
Speaker 1: I remember he did a housing report one time which
15:13
Speaker 1: was so spot on, so spot on, many years ago.
15:18
Speaker 1: So he has this ability to cast his eye over
15:20
Speaker 1: an area and he looked at smsfs and he came
15:23
Speaker 1: to the conclusion, James, that they are considerably more successful
15:26
Speaker 1: for investors than industry super funds or other big funds.
15:31
Speaker 1: And he showed and he really laid it out how smsfs,
15:36
Speaker 1: even on a straight asset allocation basis as investors are
15:42
Speaker 1: more successful than big super funds. But when you add
15:45
Speaker 1: in the tax aspect of smsfs, the after tax returns
15:50
Speaker 1: of smsfs compared to big super were they were roughly
15:54
Speaker 1: one third higher over a period of three years and
15:58
Speaker 1: part then he went into why that was, and he
16:02
Speaker 1: mentioned he mentioned the obvious things like that you have
16:05
Speaker 1: this control, you can choose your allocations frank dividends in
16:09
Speaker 1: the local shares, and he did say that the ability
16:13
Speaker 1: to buy property directly was still a powerful issue for
16:16
Speaker 1: smsfs and their out performance. It's really interesting because sms
16:21
Speaker 1: putting property into SMSF gets such a hard time. It's
16:24
Speaker 1: meant so difficult because the big banks withdrew from financing
16:29
Speaker 1: that market, and because there's kind of a cloud over
16:32
Speaker 1: it in that government's blow hot and code on it
16:34
Speaker 1: and they don't really commit to it. There has been
16:37
Speaker 1: threats that it would actually be completely repealed regularly, but
16:40
Speaker 1: they never came to pass. Four people, James, who are
16:45
Speaker 1: thinking about using an SMSF to finance a property investment,
16:52
Speaker 1: do you know what they can do if the banks
16:54
Speaker 1: are out of the business. How do you start the
16:57
Speaker 1: for finance in that area.
16:59
Speaker 3: Yeah, I'm the perfect person to speak about this. I'm
17:01
Speaker 3: actually going through the process in the middle of at
17:03
Speaker 3: the moment.
17:04
Speaker 1: Okay, are you dealing with right? So how did you start, Like,
17:07
Speaker 1: how did you even get a panel together?
17:09
Speaker 2: Yeah?
17:09
Speaker 3: So I went through a mortgage broker and maybe just
17:13
Speaker 3: stepping back a little bit, the major banks pulled out
17:15
Speaker 3: of the self managed super fund lending market, and this
17:18
Speaker 3: is going back almost ten years ago because they saw
17:21
Speaker 3: the risk of these properties. There was a lot of
17:24
Speaker 3: off the plan properties being sold to mum and dad
17:27
Speaker 3: investors who were convinced to set up a self managed
17:32
Speaker 3: super fun and move out of their industry super funds
17:34
Speaker 3: into a self managed buy this off the plan property,
17:37
Speaker 3: and of course commissions paid to the people that were
17:39
Speaker 3: promoting that.
17:40
Speaker 1: So that is not good. It's not good to have
17:43
Speaker 1: to open an SMS just to buy an investment property.
17:46
Speaker 1: That is that is in some expent again, but that's it.
17:48
Speaker 1: That's amst at its worst. That's the worst side of
17:51
Speaker 1: the market. Yeah, okay, that's right.
17:53
Speaker 3: The concentration risk is high where the majority of your
17:56
Speaker 3: super is exposed to one property, and the banks were
17:59
Speaker 3: looking at their loan book where they were self managed
18:01
Speaker 3: super fund loans going geez, these properties are going down
18:03
Speaker 3: in value and if the borrower defaults, we might lose
18:07
Speaker 3: some money here. Because under superannuation law, the banks are
18:10
Speaker 3: limited to what's called limited recourse. The loans are called
18:14
Speaker 3: limited recourse borrowing arrangements or lrbas as an acronym, which
18:18
Speaker 3: means that you can only as the blender, take back
18:21
Speaker 3: that property. And if the property is going down, well,
18:24
Speaker 3: then your loan is becoming risky if there's a default.
18:27
Speaker 3: So the bank said, we don't need this risk. We're
18:29
Speaker 3: getting out of the market. So the major banks all
18:31
Speaker 3: stopped writing self managed super fund loans, which left the
18:34
Speaker 3: second tier lenders as the primary lenders in that market.
18:38
Speaker 3: And interest rates today, I think my rates high sevens,
18:42
Speaker 3: but arranges anywhere from that sort of high sevens through
18:45
Speaker 3: to mid nines as an interest rate, And you contrast
18:49
Speaker 3: that to a normal non super investment loan which would
18:53
Speaker 3: be below six percent. So you do have to pay
18:55
Speaker 3: a premium because of the lack of competition there with
18:58
Speaker 3: the lenders.
19:00
Speaker 1: I used to pay a high rate to borrow for
19:04
Speaker 1: your property inside the super fund. The highest rate in
19:07
Speaker 1: the market because it's higher than commercial. It's it's exclusively
19:10
Speaker 1: high for smsfs, and negative gearing is not as good,
19:14
Speaker 1: right because the tax isn't as high, So the negative
19:16
Speaker 1: gearing is diluted if you like. So why would anyone
19:20
Speaker 1: do it?
19:21
Speaker 3: Well, if I look at an investment property that I
19:23
Speaker 3: buy my personal name, if I want to pay down
19:25
Speaker 3: the principle I every dollar of income that I make,
19:29
Speaker 3: I'm taxed forty seven percent, so I only have fifty
19:31
Speaker 3: three cents in the dollar to then pay down that
19:33
Speaker 3: investment property loan. If I contrast that to Super, depending
19:37
Speaker 3: on my income, if it's above or below two hundred
19:39
Speaker 3: and fifty thousand dollars, I'm taxed either fifteen percent or
19:42
Speaker 3: thirty percent or my SUPER contributions, which means that more
19:45
Speaker 3: of my after tax dollars can go to pay down
19:48
Speaker 3: that same mortgage if it's in SUPER versus outside SUPER.
19:51
Speaker 1: I suppose you have that terrific thing that you can
19:53
Speaker 1: put a deposit out from your super fund, but you
19:57
Speaker 1: you know, which is money you don't have hanging around. Basically,
20:00
Speaker 1: most people don't have the deposit of an investment property
20:02
Speaker 1: hanging around in their every day account.
20:04
Speaker 3: Yeah, and so it helps people that have restrictions or
20:09
Speaker 3: limits around their borrowing capacity personally, maybe they've purchased a
20:13
Speaker 3: home and they've got a home loan and they don't
20:15
Speaker 3: have the ability to purchase another property as an investment.
20:19
Speaker 3: But interestingly, superannuation, when you apply for a loan, it's
20:23
Speaker 3: assessed separately to your personal borrowing capacity, So you may
20:26
Speaker 3: be capped out personally to buy a property, but you're
20:29
Speaker 3: super fund if you were to set one up. How
20:32
Speaker 3: they assess it is that they look at super contributions.
20:34
Speaker 3: They look at is your employer putting in regular contributions
20:38
Speaker 3: into your super account and it doesn't have to be
20:40
Speaker 3: the self managed It could be that the retail or
20:41
Speaker 3: the industry fund, which predates having a self managed super fund.
20:45
Speaker 3: So they're just looking at the contribution history and they
20:48
Speaker 3: use that for what we call serviceability. And then they
20:50
Speaker 3: look at equity, so they look at how much you
20:53
Speaker 3: have in your superannuation account and then based on those
20:56
Speaker 3: two things, they'll make this independent assessment as to how
20:59
Speaker 3: much you borrow inside of super.
21:01
Speaker 2: So that's another benefit of buying property in super.
21:04
Speaker 3: It unlocks in some cases the ability to move down
21:07
Speaker 3: that path of purchasing another property where they couldn't do
21:10
Speaker 3: it outside in their personal name.
21:11
Speaker 1: Yeah, so it's entirely autonomous. Basically, it's it's an issue
21:17
Speaker 1: your super fund has got is separated from you, and
21:20
Speaker 1: they judge it on this fund wants to buy a
21:24
Speaker 1: property and they want to look at the cash flows
21:26
Speaker 1: into this fund, which would be your contributions obviously coming
21:29
Speaker 1: in all the time. And if they're comfortable that there's
21:31
Speaker 1: a that that is that cash flow is there, then
21:33
Speaker 1: the service ability is there, then they can sign it
21:36
Speaker 1: off regardless or autonomous of your personal finance circumstances, what's
21:42
Speaker 1: going on with your your credit card or your mortgage
21:45
Speaker 1: or whatever. That's well worth knowing. That's a very interesting
21:49
Speaker 1: piece of information which I'm sure our listeners will now digest.
21:52
Speaker 1: We will have a short break, we'll be back in
21:54
Speaker 1: a second. Hello, Welcome back to The Australian's Money Puzzle podcast.
22:08
Speaker 1: James Kirby here with James Girard. Well, we've been talking
22:12
Speaker 1: buying off the plan, which I thought was pretty interesting.
22:14
Speaker 1: I must say, ah, yes, I think there's a lot
22:21
Speaker 1: of cons. You listed the pros and cons. I feel
22:24
Speaker 1: there's a lot of cons basically working against buying off
22:28
Speaker 1: the plan James on balance, and I also thought on
22:32
Speaker 1: the smsfs, that's very interesting and it's also very interesting
22:35
Speaker 1: to know, folks that the smsfs, which we talk about
22:38
Speaker 1: all the time, and I know many of you have smsfs,
22:42
Speaker 1: it's nice to know that it wasn't just this year
22:44
Speaker 1: you did better than the big funds. You've done better.
22:47
Speaker 1: It would seem for several years in a row if
22:49
Speaker 1: we judge very deep dive done by Tim Toohey at
22:54
Speaker 1: Yarra Capital, which you can have a look at. It's
22:57
Speaker 1: on the web Arra Capital. Just have a look there
23:00
Speaker 1: all right now, and you'll see he's quite persuasive arguments
23:04
Speaker 1: about the power of SMS investments, which I thought was
23:08
Speaker 1: very important James, that he didn't just say it was
23:10
Speaker 1: tax because someone who would say, oh, yeah, sure, well
23:12
Speaker 1: they get you know, they're playing their Frank dividends and everything.
23:14
Speaker 1: But he actually showed that in terms of asset allocation
23:17
Speaker 1: on that basis alone, the smsfs were more successful than
23:21
Speaker 1: the big funds, which I thought was very very interesting.
23:24
Speaker 1: All right, Corinn, Hello Krinn asks listening to your last
23:29
Speaker 1: episodes in relation to index funds, with one guest liking
23:33
Speaker 1: to follow the Australian top two hundred in index funds.
23:37
Speaker 1: And just when I thought, okay, that's the way I'll
23:39
Speaker 1: go and I'll forget about my SMSF buying property, and
23:44
Speaker 1: another guest points out that the index is heavily weighted
23:47
Speaker 1: towards banks and resources, and then there is this dependence
23:50
Speaker 1: on shares that I come on my bank. Sokriinn puts
23:53
Speaker 1: forward the idea, would she and our answers never advise
23:58
Speaker 1: its information. Only could she construct her own index fund,
24:00
Speaker 1: basically a top fifty Currin's top fifty index fund, and
24:06
Speaker 1: then she would buy proportionately so many stocks. What do
24:11
Speaker 1: I think of the strategy. I think it's very elaborate strategy.
24:14
Speaker 1: It's quite sensible in some fashion. I remember Doug Turek
24:17
Speaker 1: on the show explained that you could build your own
24:19
Speaker 1: index funds. But I think for a word to make sense,
24:21
Speaker 1: with all the fees you'd have and all the trades
24:23
Speaker 1: you'd have to do, I think it would have to
24:25
Speaker 1: be on scale. By that, I mean you'd have to
24:27
Speaker 1: stick with it for a long time I think for
24:29
Speaker 1: it to pay off, and you'd have to track it
24:31
Speaker 1: very carefully and just separately. Kurin. You know, one of
24:36
Speaker 1: the things if you listen to the show again, we
24:39
Speaker 1: talked about most industries are straight market cap indicies, but
24:42
Speaker 1: there are now variations like equal weighted indices, where they
24:46
Speaker 1: try to get away from the from the problems of
24:49
Speaker 1: the same for instance, the banks and minors dominating the
24:52
Speaker 1: top stocks, and they try to get a more equalized,
24:56
Speaker 1: more representative index. So there is there are people almost
25:00
Speaker 1: doing that, are doing versions of that without you having
25:04
Speaker 1: to go and do it by yourself. But in principle
25:07
Speaker 1: it's not crazy. What do you think, James, you're looking
25:10
Speaker 1: Are you looking skeptical there? I'm not sure.
25:13
Speaker 3: No, no, because you don't have to reinvent the wheel.
25:18
Speaker 3: It's been done for you ETFs. So just use one
25:22
Speaker 3: of those. Because if you go buy fifty stocks and
25:24
Speaker 3: you manage your own equal weight portfolio, oh jeez, your accountant,
25:28
Speaker 3: I don't know if they're going to be angry.
25:29
Speaker 1: Your count will cry and you need a software package
25:34
Speaker 1: to follow it all. But also the fees, the fees
25:38
Speaker 1: will be higher than any TF wouldn't they That's right?
25:40
Speaker 3: Yeah, at first, the account is not going to be
25:42
Speaker 3: happy for the transactions, but then they may be rubbing
25:44
Speaker 3: their hands together and all the extra fees are going
25:45
Speaker 3: to be charging you to administer this.
25:48
Speaker 2: Equal weight portfolio that you've constructed for yourself. So I'd
25:50
Speaker 2: say go buy the ETF. There's multiple ETF companies that
25:53
Speaker 2: do equal wait ets.
25:54
Speaker 1: Yes, but look closely at the ETS crew and they
25:56
Speaker 1: are they are now of a variety and they're not
25:59
Speaker 1: all strictly market cap. Some are what we call equal weighted,
26:04
Speaker 1: and have a look at that and how they get
26:06
Speaker 1: around that issue. That was a failing which was highlighted
26:10
Speaker 1: on the show about the index funds. But good on
26:12
Speaker 1: you and very interesting notion. Certainly shows that you understand
26:16
Speaker 1: it very very well. Thank you. Okay, question from Ashley
26:19
Speaker 1: there you want to read that one.
26:20
Speaker 3: So Ashley, he's talking about bitcoin. While bitcoin can be
26:23
Speaker 3: expected to remain volatile in the shortter medium term, it
26:26
Speaker 3: seems that AMP has doubled their investment into it and
26:30
Speaker 3: more companies and people will want to have a greater
26:33
Speaker 3: understanding of why bitcoin was created, how it's used, the
26:36
Speaker 3: implication for current monetary systems.
26:39
Speaker 2: Like every other.
26:40
Speaker 3: Bitcoiner, the AMP journey is on a one way street
26:44
Speaker 3: and growing institutional adoption reflects that process.
26:47
Speaker 1: Yeah, well it's a powerful point actually, which we can't
26:49
Speaker 1: really get around amp representing, if you like, the big
26:54
Speaker 1: end of town establishment Australia, establishment money, a very old
27:00
Speaker 1: Australian virtual providence society as it was. So the definitive
27:04
Speaker 1: establishment incumbent player in our market went and put twenty
27:07
Speaker 1: seven million into bitcoin and they have done very well
27:12
Speaker 1: from that, and we had Shane Oliver on the show
27:16
Speaker 1: explaining why they did it. At a certain point, I
27:20
Speaker 1: felt that the most powerful notion was that they bought
27:23
Speaker 1: it because they thought it was going to go up.
27:24
Speaker 1: Now he rejected that out of hand, but it has
27:27
Speaker 1: gone up, and I think it's still largely the attraction
27:30
Speaker 1: is still largely the concept that it could be an
27:34
Speaker 1: alternative store of value, that it could be something like gold,
27:38
Speaker 1: and clearly mainstream investors are starting to think that way.
27:42
Speaker 1: There's one point six billion in SMSF money in bitcoin
27:46
Speaker 1: and crypto. That's an ATO figure, by the way, so
27:48
Speaker 1: that's not speculation to say to you. So I think
27:51
Speaker 1: it's here to stay. I think it's an ascid class
27:52
Speaker 1: that is on the table. What do you think, James?
27:55
Speaker 3: It was set up well back in two thousand and eight,
27:57
Speaker 3: two thousand and nine in response to feelings around central
28:02
Speaker 3: banks and traditional banking systems post global financial crisis, and
28:05
Speaker 3: there was this desire to have this what they call
28:07
Speaker 3: decentralized digital currency, and up came along Bitcoin as the
28:11
Speaker 3: first one, and there's been thousands that have followed. Now
28:14
Speaker 3: fast forward to twenty twenty five, we've got black Rock, Fidelity, Vanek,
28:19
Speaker 3: we've got big US pension funds that are investing money
28:22
Speaker 3: into it. So it is gaining mainstream adoption. But my
28:25
Speaker 3: personal feeling is that it needs to move to the
28:27
Speaker 3: next stage of actually having some use other than being
28:31
Speaker 3: something that's cool to buy and say that you've got bitcoin.
28:33
Speaker 3: So unless it does become a currency used, I find
28:38
Speaker 3: my feeling is that it may become something like those
28:41
Speaker 3: I forget the names of them, those digital artworks that
28:43
Speaker 3: you could buy linked through crypto and fts. That's all right,
28:48
Speaker 3: I can't remember their name, the Dancing Monkeys, or yet
28:51
Speaker 3: there was this particular epe I think it's called the
28:52
Speaker 3: Board eight Yacht Club, where they were going millions of
28:54
Speaker 3: dollars and now they're selling for hundreds of dollars. I
28:58
Speaker 3: feel that there needs to be stage two bitcoin. It
29:00
Speaker 3: actually needs to be used in practice in economies, otherwise
29:04
Speaker 3: it will decline.
29:05
Speaker 1: You're searching for intrinsic value. But Shane Oliver Chief Economists
29:09
Speaker 1: today and he said he didn't. It didn't require intrinsic
29:12
Speaker 1: value for them to make them move.
29:13
Speaker 2: Yeah, I get that.
29:14
Speaker 1: What do you say to clients who come in now?
29:18
Speaker 1: Has your advice changed to clients on crypto and bitcoin
29:21
Speaker 1: over the last two or three years.
29:23
Speaker 2: It hasn't.
29:24
Speaker 3: It's put money that you're willing to lose to it.
29:28
Speaker 3: And the more that you hear about it in the media,
29:31
Speaker 3: the more that you hear James Kirby talk about bitcoin
29:33
Speaker 3: with guessed like myself, the later it is in the cycle,
29:37
Speaker 3: because when it's out of favor and down and out,
29:39
Speaker 3: that's when people should be buying. But when it's in
29:42
Speaker 3: the newspapers, it's the mums and dads are buying it,
29:46
Speaker 3: and the prices are really elevated and there's not too
29:48
Speaker 3: much more to go. And that's just my opinion based
29:51
Speaker 3: on previous cycles.
29:52
Speaker 1: Oh, it's so true. And it's one hundred and twenty
29:55
Speaker 1: thousand to hit a new record. Why am I paying attention?
29:57
Speaker 1: Because it's one hundred and twenty thousands, it hits a
29:59
Speaker 1: new record. That's unfortunately the nature of the beast. Yeah, okay.
30:03
Speaker 1: One very interesting thing I thought about bitcoin is that
30:07
Speaker 1: the more people buy it, the less volatile it becomes.
30:11
Speaker 1: And as it becomes part of the institutional framework, it's
30:13
Speaker 1: less volatile. But that also means that you won't get
30:17
Speaker 1: those big surges anymore. They didn't want do those amazing
30:20
Speaker 1: run ups. So I think that's part of reality for everybody.
30:25
Speaker 1: Last one from Mark.
30:26
Speaker 3: Yeah, so, Mark says, I'm an avid fan of the
30:28
Speaker 3: podcast and love the variety of topics you cover. Given
30:31
Speaker 3: the tax advantages of salary packaging and electric vehicles, I'm
30:34
Speaker 3: looking into a novaated lisse option and have discovered that
30:37
Speaker 3: there is an option for a self managed novated lease
30:41
Speaker 3: as standard novated liases in bed charges and interest in
30:43
Speaker 3: their fees. As an accountant, I find it hard to
30:46
Speaker 3: determine the effective loan interest rate. Would you be able
30:49
Speaker 3: to cover this topic and explore?
30:51
Speaker 1: All right, Mark's accountant, Remember everybody might be easy to
30:53
Speaker 1: copy him. What exactly is he talking about? James?
30:56
Speaker 2: Sure?
30:56
Speaker 3: So there is this scheme available where you can finance
31:03
Speaker 3: the cost of a vehicle, plus pay the ongoing maintenance
31:07
Speaker 3: and running costs of that vehicle through this arrangement that
31:10
Speaker 3: involves your employer that's called a novated lease. In the past,
31:13
Speaker 3: you would use roughly half of your pre tax income
31:16
Speaker 3: towards this lease and half of your post tax income.
31:19
Speaker 3: But go back a couple of years ago, the federal
31:22
Speaker 3: government said, we want more people driving electric vehicles. So
31:24
Speaker 3: if you buy an electric vehicle less than circle ninety
31:27
Speaker 3: thousand dollars, you can use one hundred percent of your
31:29
Speaker 3: pre tax income to be able to fund the finance
31:32
Speaker 3: plus the operating costs of that electric vehicle.
31:35
Speaker 1: That has been spectacularly successful.
31:38
Speaker 2: Yeah, fantastically.
31:39
Speaker 3: I've got one of my driveway vehicle that's in a
31:42
Speaker 3: novated lease and I was one of the first to
31:44
Speaker 3: do it because it's one of the best tax breaks
31:47
Speaker 3: going around. To facilitate this, if you're an employee, you
31:52
Speaker 3: need to speak to your HR department and they'll either say, look, no,
31:56
Speaker 3: we don't offer that through this employment arrangement, or they
32:00
Speaker 3: may say, yes we do. Go see these people over
32:03
Speaker 3: here at the x y Z leasing company now markets
32:06
Speaker 3: saying rather than go see x y zed people at
32:08
Speaker 3: the leasing company. He wants to pick the provider for
32:11
Speaker 3: the finance, which you can do, but that's again subject
32:14
Speaker 3: to your employer saying, ah, okay, we're going to deal
32:17
Speaker 3: with the extra administration of you picking your own finance
32:20
Speaker 3: company rather than dealing the one dealing with the one
32:22
Speaker 3: that we've signed up a deal with that makes it
32:24
Speaker 3: all streamlined for our payroll purposes.
32:27
Speaker 1: Okay, I see, yes, I know. And most corporations have,
32:31
Speaker 1: like Newsport here, they have a you know, they have
32:33
Speaker 1: the deals, no vated lease, and they haven't arranged with
32:37
Speaker 1: whoever it is. And I would imagine if you rank
32:39
Speaker 1: the pay office and said could I go and do
32:41
Speaker 1: one outside, they really would groan. But Ashley is an accountant,
32:47
Speaker 1: so perhaps he could go fair better than the rest
32:50
Speaker 1: of us non accountants. I would imagine as the majority
32:55
Speaker 1: of listeners. Okay, very good, very good. And how's that
32:58
Speaker 1: novated lease working out? Would you bought an electric car
33:02
Speaker 1: without it?
33:03
Speaker 3: I probably would not have an electric car without the
33:07
Speaker 3: novated lease. Now, the the interest rate wasn't too bad,
33:10
Speaker 3: and that's something that they don't tell you about when
33:12
Speaker 3: you go get yournvated lease. They're just like tax benefits,
33:15
Speaker 3: saving next amount per month, per year, but the interest
33:18
Speaker 3: rate that they hired, and you have to actually work backwards,
33:20
Speaker 3: and in most cases it's not too bad. It's a
33:22
Speaker 3: few percent above what you would expect to pay on
33:24
Speaker 3: your home loan, so at the moment it's probably seven
33:26
Speaker 3: or eight percent interest, so it's not too bad. But
33:29
Speaker 3: what really drew me was that using your pre tax
33:31
Speaker 3: income to to find this vehicle taket me of the
33:34
Speaker 3: line so important.
33:35
Speaker 1: So a few things you as an everyday salary owner,
33:37
Speaker 1: there are so few things that you can do pre tax.
33:40
Speaker 1: You know. Obviously your super contribution maxed out at thirty
33:43
Speaker 1: thousand a year is the big one. And after that,
33:47
Speaker 1: really it's what it's about you doing something like an
33:50
Speaker 1: investment property or whatever. You're looking for your negative gearing,
33:53
Speaker 1: and then there's very little less. And this was the
33:55
Speaker 1: first new thing for many years, wasn't it? That one
33:59
Speaker 1: hundred percent and basically tax concession pre tax if you
34:05
Speaker 1: take an electric car lease as opposed to a petrol
34:09
Speaker 1: car lease, which is roughly fifty percent or there thereabouts. Interesting, Yes,
34:13
Speaker 1: that explains all the byd utes buzzing around my neighborhood. Flashy,
34:19
Speaker 1: brand new zippy they're zippy. I've got to say, the
34:25
Speaker 1: speed these guys moving around on these big, awkward youths,
34:28
Speaker 1: it's alarming, really, and they get away with things because
34:31
Speaker 1: they don't make any noise. That's my personal theory that
34:34
Speaker 1: if it was petrol that makes so much noise, everybody
34:36
Speaker 1: would jump, But it's they've kind of gone past you
34:39
Speaker 1: by the time you realize the outrage that has been
34:41
Speaker 1: committed in front of you, you don't go around to
34:43
Speaker 1: one of those.
34:44
Speaker 2: I died. I've got a little Volvo Electric.
34:46
Speaker 3: But finally, I've been in a few electric vehicles where
34:49
Speaker 3: the speakers for the cast Aeia system make little car noises.
34:53
Speaker 3: So you guys, when you put the accelerator down to
34:56
Speaker 3: limitate as if you were in a petrol vehicle.
34:58
Speaker 1: Yeah, really to tell you what you doing. It is
35:00
Speaker 1: very interesting. Just one last thing, resale value of these
35:04
Speaker 1: electric vehicles is it on tested? Is it is it
35:08
Speaker 1: reliable with any idea?
35:10
Speaker 3: Yeah, So we've had teslas around for ten years now,
35:13
Speaker 3: so that there is market based evidence around the resale values,
35:16
Speaker 3: and they are poorer than the equivalents and internal combustion
35:21
Speaker 3: engine vehicle, so that that's no doubt. People are concerned
35:24
Speaker 3: about technology because technology for evs has moved really fast
35:27
Speaker 3: over the past ten years. The battery technology as well,
35:31
Speaker 3: so the range that you get on the evs, and
35:32
Speaker 3: also people are concerned about the life that they're going
35:35
Speaker 3: to have left on the battery if they're buying one
35:37
Speaker 3: that's seven or eight years old. The manufacturers are saying, well,
35:39
Speaker 3: you know, after ten years, you may need to replace
35:41
Speaker 3: that battery, which could cost ten fifteen thousand dollars.
35:46
Speaker 1: It's an argument to Lisa, isn't it really rather than
35:48
Speaker 1: buy them?
35:49
Speaker 2: Yeah, that's right.
35:49
Speaker 3: At the end of the novated lease, there is still
35:52
Speaker 3: that reckoning event where you need to hand it back
35:55
Speaker 3: and pay this residual or buy it. So you can't
35:59
Speaker 3: get away from the fact that there is that depreciation
36:01
Speaker 3: there on it.
36:02
Speaker 1: Yeah, yeah, I wonder I'd love to see the figures
36:04
Speaker 1: and whether whether there is a propensity if you'd like
36:09
Speaker 1: to lease an ongoing basis electrics. Why wouldn't you if
36:13
Speaker 1: that packete, if you're in the same position, in the
36:15
Speaker 1: same salary sort of frame, the same arrangements, why wouldn't
36:17
Speaker 1: you extend the least rather than buying the car, which
36:19
Speaker 1: you know had to appreciated more than a petrol car.
36:22
Speaker 1: Interesting stuff thoughts for another day. Okay, terrific. Thank you
36:27
Speaker 1: everyone for your questions, keep them rolling the money puzzle
36:29
Speaker 1: at the Australian dot com dot au. And thank you James.
36:32
Speaker 1: We're talking again soon.
36:33
Speaker 2: My pleasure, James.
36:35
Speaker 1: That was the other James, James Gerard of Financial Advisor
36:39
Speaker 1: dot com dot au. Talk to you soon.