Latest / The Money Puzzle / Investing in your home versus building a share portfolio

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Investing in your home versus building a share portfolio · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard. It's pretty clear now that post-budget
• 0:18
  Speaker 1: that the capital gains tax that you're going to pay
• 0:21
  Speaker 1: just about anything you do investment-wise is probably going to
• 0:25
  Speaker 1: be at least 35% and it used to be about 25%.
• 0:29
  Speaker 1: That's how it's going to work, right? So any exemption
• 0:33
  Speaker 1: from capital gains tax is a pretty powerful asset and
• 0:36
  Speaker 1: that's what's been happening with the family home in relative terms,
• 0:40
  Speaker 1: it's become even more attractive than it had been. Because
• 0:44
  Speaker 1: as you know, the family home, the primary residence, as
• 0:47
  Speaker 1: the tax office wants to call it, is exempt from
• 0:49
  Speaker 1: capital gains tax. So the only challenge it has really
• 0:54
  Speaker 1: is from a tax perspective for the everyday investor is
• 0:58
  Speaker 1: the possibility of owning shares, leveraging into shares, negatively gearing
• 1:06
  Speaker 1: into shares, is it possible that that would be better
• 1:09
  Speaker 1: than putting money into your home? That is the tie now.
• 1:12
  Speaker 1: It's not investment property versus your home. It's the share
• 1:15
  Speaker 1: market versus your home, which has been so good for
• 1:17
  Speaker 1: so long. There are, of course, risks in this scenario,
• 1:21
  Speaker 1: and we're going to have a look at them today,
• 1:23
  Speaker 1: and we're probably going to discover quite some interesting information
• 1:26
  Speaker 1: along the way. My guest is Stuart Weems of the
• 1:28
  Speaker 1: Pro Solution Private Finance Group. How are you, Stuart?
• 1:32
  Speaker 2: I'm really well, James. Very well. Great to be back
• 1:34
  Speaker 2: with you.
• 1:35
  Speaker 1: I mean, question without notice, straight off. I wonder, with
• 1:38
  Speaker 1: someone like you, when you started in property and that
• 1:41
  Speaker 1: was very much your area of expertise, is it the
• 1:44
  Speaker 1: case that you've drifted towards, you mightn't like the phraseology here,
• 1:47
  Speaker 1: but is it the case that you've become more and
• 1:49
  Speaker 1: more interested in shares? It's become more and more part
• 1:51
  Speaker 1: of your daily conversation with clients because you've investment property
• 1:56
  Speaker 1: as we knew it, that is residential investment property of
• 1:59
  Speaker 1: existing properties in Australia is declining as an option. It
• 2:02
  Speaker 1: was declining anyway as an option before the budget and
• 2:04
  Speaker 1: the budget really kicked it in the head with the
• 2:07
  Speaker 1: scrapping of negative gearing for existing properties.
• 2:10
  Speaker 2: I would say no, because I've always been of the
• 2:12
  Speaker 2: view that we, culturally, we love investing in property. We
• 2:16
  Speaker 2: love the Australian dream of owning our own home. And
• 2:20
  Speaker 2: I feel like sometimes investors have the blinkers on. And
• 2:24
  Speaker 2: I much prefer an asset class agnostic approach to say, look,
• 2:28
  Speaker 2: property or shares, either of those two asset classes can
• 2:32
  Speaker 2: work well, probably work best in combination with each other.
• 2:36
  Speaker 2: And so don't take the blinkers off. Don't go all
• 2:39
  Speaker 2: property or all shares. Keep your eyes wide open. And look,
• 2:43
  Speaker 2: a lot of people say, I don't like shares. I
• 2:44
  Speaker 2: don't understand it. It's not a physical asset like property is.
• 2:49
  Speaker 2: I've got to own a home. So I start to
• 2:51
  Speaker 2: really learn how it behaves. And also- as we've all
• 2:55
  Speaker 2: grown up, maybe our parents have owned a home, maybe
• 2:57
  Speaker 2: investment properties too, and we've seen how the fullness of time,
• 3:01
  Speaker 2: multi-decade periods of ownership has worked out for them. So
• 3:05
  Speaker 2: that's our experiences, but our data set is pretty small.
• 3:10
  Speaker 2: And so I think we should always keep our eyes
• 3:13
  Speaker 2: wide open. But certainly I think since the budget, that
• 3:17
  Speaker 2: conversation is much easier today because obviously with the tax changes,
• 3:21
  Speaker 2: the tax setting changes, you know, investing in established property
• 3:25
  Speaker 2: has become far less attractive. And you're right. It really
• 3:28
  Speaker 2: is now the difference between, you know, a home or
• 3:32
  Speaker 2: borrowing to invest in shares.
• 3:35
  Speaker 1: And they are very, very different. As a choice, it's
• 3:38
  Speaker 1: actually a very different choice because you're saying to any listener, OK,
• 3:43
  Speaker 1: here's what you could do. You could gear up and
• 3:44
  Speaker 1: you can invest in your home. Can't go wrong. You
• 3:47
  Speaker 1: live in it. You're going to enjoy that investment once
• 3:49
  Speaker 1: the tradies finally leave and you don't have to look
• 3:52
  Speaker 1: at them again. or talk to them again for a
• 3:53
  Speaker 1: long time. When they're gone, your improved home, you live
• 3:56
  Speaker 1: in it, that's a big win. You have more accommodation,
• 4:00
  Speaker 1: that's a big win. And you have a tax shelter
• 4:03
  Speaker 1: because you would not pay capital gains tax on the
• 4:06
  Speaker 1: sale of that home. That is the plus side. The
• 4:10
  Speaker 1: negative side is you live your life with a gigantic mortgage,
• 4:15
  Speaker 1: which you must pay after tax. No deal on that one.
• 4:18
  Speaker 1: So let's just interrogate the strength first of all, of
• 4:22
  Speaker 1: the improve your home argument in the context of the
• 4:25
  Speaker 1: budget we've just had, and the fact that we're in
• 4:27
  Speaker 1: a falling property market. So really, all the signals suggest
• 4:32
  Speaker 1: it's the best idea you could come upon. And I
• 4:35
  Speaker 1: haven't seen evidence, I haven't seen the data yet on
• 4:38
  Speaker 1: renovation versus new building. But I think anyone who drives
• 4:42
  Speaker 1: around the suburbs will see that there are some streets
• 4:45
  Speaker 1: which seem to be under renovation from one end to
• 4:47
  Speaker 1: the other. So what do you think is going on, Stuart?
• 4:50
  Speaker 2: Just a quick anecdote, because I think it's really relevant
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  Speaker 2: to this conversation, is we have a client that wanted
• 4:56
  Speaker 2: to renovate their home in Adelaide. It's a full renovation,
• 5:01
  Speaker 2: almost a rebuild, if you like. They got a builder's
• 5:04
  Speaker 2: quote for $ 1 million to do that work before COVID.
• 5:07
  Speaker 2: They just refreshed that quote, exactly the same parameters, nothing changed.
• 5:12
  Speaker 2: The cost is now $ 2. 5 million, James. Yes, $ 2. 5 million.
• 5:18
  Speaker 2: I nearly fell off my chair when I heard that.
• 5:20
  Speaker 1: The risk of overcapitalization would seem to be on the
• 5:24
  Speaker 1: table there.
• 5:26
  Speaker 2: Well, you know, the cost increase has been quite significant
• 5:30
  Speaker 2: for basic builds. The cost increase for premium builds is
• 5:34
  Speaker 2: even more stark as we kind of see in that situation.
• 5:37
  Speaker 2: So for the home upgrader and the home upgrading strategy,
• 5:41
  Speaker 2: you know, it used to be, say if we went back, say,
• 5:44
  Speaker 2: a decade ago, it used to be, you know, go
• 5:46
  Speaker 2: and buy yourself a good block of land and a
• 5:49
  Speaker 2: reasonably structurally sound house, and then do the renos, do
• 5:52
  Speaker 2: the improvements after you buy the asset. Don't pay any
• 5:55
  Speaker 2: premium for that. Whereas today, I think given the cost increases,
• 5:59
  Speaker 2: and I've seen some properties resell, and you don't know
• 6:02
  Speaker 2: the numbers, the exact numbers, of course, but you look
• 6:04
  Speaker 2: at it and you go, well, they couldn't have made
• 6:05
  Speaker 2: money out of that renovation project over the last couple
• 6:08
  Speaker 2: of years.
• 6:10
  Speaker 1: Yes, when you know the costs. And you don't have
• 6:12
  Speaker 1: to be, even economics will tell you, if you look
• 6:15
  Speaker 1: at the composition of the CPI, the cost, the portion
• 6:19
  Speaker 1: of the CPI that is experiencing the most severe inflation
• 6:23
  Speaker 1: is building materials. And that's a new thing. That's a
• 6:27
  Speaker 1: second round, it'd be like, of inflation pushing the costs
• 6:30
  Speaker 1: of building improvements higher. Okay. But still, it is very
• 6:33
  Speaker 1: attractive to many people. And we're just putting it forward, folks.
• 6:36
  Speaker 1: We're just basically putting it out there today. Do you
• 6:38
  Speaker 1: improve the home or do you go for shares. In
• 6:43
  Speaker 1: both cases, we assume you gear. You get a mortgage
• 6:45
  Speaker 1: for your home, which is not tax deductible. You get
• 6:47
  Speaker 1: a loan for your shares, which is tax deductible. So
• 6:51
  Speaker 1: we wonder, we're putting it out there, which might be better.
• 6:53
  Speaker 1: Just to look a little bit further at the home
• 6:55
  Speaker 1: and the improvement on the home and the idea of
• 6:58
  Speaker 1: putting all your money into the home, it would seem
• 7:01
  Speaker 1: to me, Stuart, the biggest risk is not that it
• 7:03
  Speaker 1: would fail as a strategy because the chances are over
• 7:06
  Speaker 1: a lifetime or a generation, of course, I think we
• 7:10
  Speaker 1: can be comfortable that it will improve in value. But
• 7:14
  Speaker 1: what if the person emerges 20 years later and they
• 7:17
  Speaker 1: still have a gigantic mortgage and they've been paying that
• 7:21
  Speaker 1: mortgage for years with no tax deductibility? For this to work,
• 7:24
  Speaker 1: they've got to leave that house, don't they? They've got
• 7:27
  Speaker 1: to sell it.
• 7:30
  Speaker 2: Yeah, that's right. And look, I think the general sort
• 7:34
  Speaker 2: of concept has been to look at a home very
• 7:37
  Speaker 2: much like other personal use assets, like buying a car,
• 7:41
  Speaker 2: as in it's a cost that should be minimized, or
• 7:43
  Speaker 2: if you can minimize the cost, you know, financially, that's
• 7:46
  Speaker 2: better off and it leaves you more resources to invest,
• 7:49
  Speaker 2: contribute to super, invest in the share market, whatever you
• 7:52
  Speaker 2: want to do. I think sometimes approaching a home purchase
• 7:57
  Speaker 2: with an investment lens is ideal. And it puts setting
• 8:01
  Speaker 2: the budget in context, in that context. So for example,
• 8:05
  Speaker 2: sometimes I speak to clients and they go, well, we're
• 8:07
  Speaker 2: going to buy a home, we're going to do a
• 8:09
  Speaker 2: home upgrade, our budget's one and a half. But maybe
• 8:12
  Speaker 2: in the location they're looking, if they just spend a
• 8:15
  Speaker 2: little bit more and push their budget to one seven,
• 8:17
  Speaker 2: for example, they might get themselves a much better asset.
• 8:21
  Speaker 2: So sometimes there's a false economy with trying to minimize
• 8:24
  Speaker 2: your budget and Sometimes the best approach is to take
• 8:28
  Speaker 2: an investment lens to this, but I think there's two
• 8:30
  Speaker 2: preconditions that need to work for that live vesting strategy
• 8:34
  Speaker 2: to work, which is, I guess, a play on the
• 8:36
  Speaker 2: word of rent vesting. Yeah.
• 8:38
  Speaker 1: Just to explain to everybody, live vesting being investing in
• 8:40
  Speaker 1: your home.
• 8:42
  Speaker 2: Investing in your home. And of course, then the whole
• 8:45
  Speaker 2: premise then is I'm not going to invest in other assets,
• 8:47
  Speaker 2: or at least I'm going to put more resources towards
• 8:49
  Speaker 2: my home. And there's an opportunity cost there because I'm
• 8:52
  Speaker 2: not investing in other assets. So the first precondition has
• 8:56
  Speaker 2: to be making friends with a downsizer strategy. It's not
• 8:59
  Speaker 2: necessarily committing to a downsizer, but I think you've got
• 9:02
  Speaker 2: to make friends with it because if I'm going to
• 9:04
  Speaker 2: go and put a lot of all my financial resources
• 9:07
  Speaker 2: into one asset, my family home, ultimately I'm doing it to, okay,
• 9:12
  Speaker 2: there's some lifestyle benefits, ultimately doing it because the growth
• 9:16
  Speaker 2: is not taxable and after tax that's going to generate
• 9:19
  Speaker 2: a lot of equity, but I need to use that
• 9:21
  Speaker 2: equity to fund retirement. So I really have to make
• 9:24
  Speaker 2: friends with, you know, the potential outcome of this strategy
• 9:28
  Speaker 2: is that if I need to, I might need to downsize.
• 9:31
  Speaker 2: And that downsize could mean, could necessitate moving out of
• 9:35
  Speaker 2: that location as well. And we need to make friends.
• 9:38
  Speaker 2: I think it's best in Australia to make friends with,
• 9:41
  Speaker 2: you know, almost the realistic worst case scenario. And if
• 9:45
  Speaker 2: it doesn't end up that way, that's great. But at
• 9:47
  Speaker 2: least you've made friends with that. The second precondition, James,
• 9:51
  Speaker 2: it has to be an investment-grade asset. A livevesting strategy,
• 9:56
  Speaker 2: if I live out in the middle of nowhere, probably
• 9:58
  Speaker 2: isn't going to work because I might not get the
• 10:01
  Speaker 2: capital growth that will sort of justify the returns or investment.
• 10:04
  Speaker 2: But if I want to live in a great school zone,
• 10:07
  Speaker 2: for example, close to work, close to a lot of amenities,
• 10:10
  Speaker 2: particularly in that period where I've got younger kids, that
• 10:14
  Speaker 2: can generate, I know from my own experience and from
• 10:17
  Speaker 2: experience of my clients, substantial lifestyle benefits, but also, and
• 10:21
  Speaker 2: particularly relevant today where I don't get negative gearing on
• 10:24
  Speaker 2: established property, that was the big thing that moved the dial,
• 10:27
  Speaker 2: of course, non-deductible debt versus deductible debt. Well, now that's
• 10:32
  Speaker 2: not a factor because the delay in enjoying that carried
• 10:36
  Speaker 2: forward quarantine negative gearing really destroys the actual tax benefits
• 10:41
  Speaker 2: associated with it.
• 10:41
  Speaker 1: Yeah. So do you think we'll have a lot less
• 10:43
  Speaker 1: people out there who have a family home and also
• 10:46
  Speaker 1: have an investment property going at the same time.
• 10:49
  Speaker 2: Oh, that's it. I think, you know, in the past
• 10:51
  Speaker 2: it might've been, look, I'll compromise on the home. I'll
• 10:54
  Speaker 2: spend one and a half, leave myself some capacity, go
• 10:56
  Speaker 2: and buy an investment property. And that strategy had merit
• 11:00
  Speaker 2: because you got some geographical diversification. You got some flexibility
• 11:03
  Speaker 2: to sell the investment property and stay in your home
• 11:06
  Speaker 2: down the track. But I think today that the numbers
• 11:09
  Speaker 2: have changed substantially. And I was having a conversation with
• 11:13
  Speaker 2: Kate Bakos, I know is a friend of the the show.
• 11:17
  Speaker 2: And she was saying 90% of her business at the
• 11:20
  Speaker 2: moment is home buyers. So I think it's already changed
• 11:24
  Speaker 2: in terms of the focus.
• 11:26
  Speaker 1: I see. Yes. Yeah. Okay. So it's what people are
• 11:28
  Speaker 1: reframing their home buying. Okay. So let's hold that folks.
• 11:32
  Speaker 1: And that's the home part of it. What we're going
• 11:34
  Speaker 1: to do is we're going to talk about investing in
• 11:35
  Speaker 1: your home, upgrading your home, seeing your home as the
• 11:38
  Speaker 1: key asset. And we're going to put that against investing
• 11:41
  Speaker 1: in shares. And we're assuming you're going to gear, that is,
• 11:44
  Speaker 1: take a loan against both. And the third part of
• 11:46
  Speaker 1: the show, we'll see how it all turns out. Okay,
• 11:48
  Speaker 1: we'll be back in a moment with a look at shares. Hello,
• 12:06
  Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby
• 12:09
  Speaker 1: here talking to Stuart Weems. W-E-M-Y-S-S. Bet you didn't guess
• 12:15
  Speaker 1: that's how it's spelled. Stuart Weems of the Pro Solution
• 12:17
  Speaker 1: Private Client Group. A regular on the show. Great to
• 12:20
  Speaker 1: have him on the show today. Okay, Stuart. Now, we've
• 12:22
  Speaker 1: talked about the family home. That's an easy one for
• 12:24
  Speaker 1: most people to understand. And it's the comfortable one. Okay,
• 12:27
  Speaker 1: so people say, yeah, you know, I don't care because
• 12:29
  Speaker 1: I can't lose. I'm going to have a nice house.
• 12:32
  Speaker 1: And so what if I'm 50 and I owe $ 700, 000?
• 12:36
  Speaker 1: I've had a nice house and a nice place and
• 12:38
  Speaker 1: there was bedrooms for all the kids and blah, blah, blah, blah. Okay.
• 12:42
  Speaker 1: And we take that as red. Now let's look at
• 12:44
  Speaker 1: shares and it's a different story because obviously it's outside
• 12:51
  Speaker 1: the experience in terms of basically it's something in a drawer.
• 12:55
  Speaker 1: It's something digitized. You don't see them. You don't feel them.
• 12:58
  Speaker 1: You can't go over and visit them. You can't lie
• 13:00
  Speaker 1: in the back garden. With your share portfolio, you were
• 13:03
  Speaker 1: assuming you take a loan. A lot of people don't
• 13:06
  Speaker 1: like that idea. I don't really understand. I've never got
• 13:09
  Speaker 1: a satisfactory answer as to why, when we see share
• 13:14
  Speaker 1: market returns of nine, 10% a year after year and better,
• 13:18
  Speaker 1: much better than that on overseas markets, say 15% a
• 13:21
  Speaker 1: year in the US, why people were afraid to negatively
• 13:26
  Speaker 1: gear shares because they can. And now I think, as
• 13:29
  Speaker 1: you mentioned in the preamble to the show, the issue
• 13:32
  Speaker 1: is your family home. versus a negatively geared share portfolio
• 13:36
  Speaker 1: because negatively geared existing property, which was all property investment
• 13:41
  Speaker 1: for most intents and purposes for most investors, is gone. Okay,
• 13:45
  Speaker 1: so let's just wind back the clock just a little.
• 13:47
  Speaker 1: There was a time, Stuart, where negative gearing of shares
• 13:50
  Speaker 1: was absolutely conventional. It was a mom and dad thing.
• 13:53
  Speaker 1: It was very common. And ironically, in those days, there
• 13:56
  Speaker 1: was no ETFs. You'd have thought it was easier now.
• 13:59
  Speaker 1: What stops people, do you think?
• 14:03
  Speaker 2: Well, everyone that's old enough remembers the GFC and anyone
• 14:08
  Speaker 2: that was a shareholder in 2007, 2008 would certainly, I mean,
• 14:14
  Speaker 2: that's etched into my memory. I'm sure it is to yours.
• 14:18
  Speaker 1: It fell 50% from top to bottom.
• 14:20
  Speaker 2: Yeah, that's right.
• 14:20
  Speaker 1: And it was so slow. It took two years to happen. Yes.
• 14:23
  Speaker 1: But here we are right now. Shares are going up
• 14:25
  Speaker 1: and house prices are falling. And who knows? I mean,
• 14:28
  Speaker 1: it could. It's entirely feasible that it could be worse
• 14:31
  Speaker 1: than the projections of, say, 13%, 15% drop from peak
• 14:35
  Speaker 1: to trough.
• 14:36
  Speaker 2: I think you make a good point in terms of
• 14:38
  Speaker 2: the execution. And that's what I always talk to clients
• 14:41
  Speaker 2: about when they say, look, I don't like shares. I've
• 14:43
  Speaker 2: invested in shares. It hasn't worked out. OK, but let's
• 14:46
  Speaker 2: talk about how did you invest in shares? Were you
• 14:48
  Speaker 2: stock picking? Did you try and time the market? Did
• 14:52
  Speaker 2: you not have the patience? Because the execution could have
• 14:56
  Speaker 2: been the problem, not actually the asset class. So I
• 15:00
  Speaker 2: think you're right in that there's global diversified ETFs. You
• 15:03
  Speaker 2: don't even need to pick a particular market or a
• 15:06
  Speaker 2: particular indexing strategy. All that work is done for you.
• 15:10
  Speaker 2: It's very easy and very cost effective.
• 15:12
  Speaker 1: So if we're talking about investing in shares for the
• 15:15
  Speaker 1: purposes of the listener, measuring it against investing in your home,
• 15:18
  Speaker 1: are we talking about ETF packages, basically, of indices? Yes.
• 15:23
  Speaker 2: I mean, because the biggest thing, if I'm using someone
• 15:25
  Speaker 2: else's money to invest, is I really need to earn
• 15:28
  Speaker 2: a return in excess of the cost of debt. So
• 15:31
  Speaker 2: if I'm paying 6.5% as an interest rate, I really
• 15:36
  Speaker 2: need to earn, obviously, a return in excess of 6.5%
• 15:38
  Speaker 2: net of tax deductions to make it worthwhile. So I
• 15:42
  Speaker 2: think if we're going to gear into any asset selection,
• 15:45
  Speaker 2: asset quality, so buying a quality asset at an attractive
• 15:48
  Speaker 2: price becomes very important. And I think that's a lot
• 15:52
  Speaker 2: easier today than what it was in the GFC. As
• 15:54
  Speaker 2: you said, there might have been only one or two
• 15:57
  Speaker 2: ETFs around at that time.
• 15:59
  Speaker 1: They were just being launched, actually. They were actually all
• 16:02
  Speaker 1: launched in 2008 into the GFC. They all did very
• 16:05
  Speaker 1: badly for a while. So it took them a while
• 16:07
  Speaker 1: to get going. I remember covering it. Okay. So what
• 16:10
  Speaker 1: we're talking about when we talk about shares is negatively
• 16:14
  Speaker 1: gearing shares. And, you know, in case anyone misses this,
• 16:18
  Speaker 1: obviously this is allowing your, your costs and losses relating
• 16:22
  Speaker 1: to your investments to be written off against your actual
• 16:25
  Speaker 1: tax bill. That's what negative gearing is. Now, in the
• 16:27
  Speaker 1: context of the share market, we are talking about ETFs
• 16:30
  Speaker 1: where we buy in and it says, let's make it
• 16:32
  Speaker 1: really simple. We buy, we have a hundred thousand grand,
• 16:35
  Speaker 1: a hundred thousand, and we put 50 in the ASX
• 16:38
  Speaker 1: 250 and the S & P 500, two ETFs. And
• 16:41
  Speaker 1: then we take a loan against them now. Secret sauce. Stuart,
• 16:46
  Speaker 1: perhaps is to not talk about margin calls or whatever.
• 16:50
  Speaker 1: You have something you recommend to people when they go
• 16:53
  Speaker 1: to borrow shares. Explain how they can do it at
• 16:56
  Speaker 1: a good rate.
• 16:58
  Speaker 2: Yeah, well, I mean, you can obviously use equity against
• 17:00
  Speaker 2: your home and it kind of goes hand in hand
• 17:03
  Speaker 2: with the live vesting strategy that we spoke about earlier
• 17:06
  Speaker 2: on in terms of putting most of your resources into
• 17:09
  Speaker 2: the family home. One of the downsides of that strategy
• 17:11
  Speaker 2: is it's single point sensitive in that You have a
• 17:14
  Speaker 2: very large home loan and it sucks out or absorbs
• 17:17
  Speaker 2: most of your cash flow and therefore you don't have
• 17:20
  Speaker 2: the capacity to invest in other assets, make super contributions,
• 17:23
  Speaker 2: these sorts of things. So that's one of the downsides
• 17:25
  Speaker 2: to that strategy. But a lot of people are using
• 17:28
  Speaker 2: what's often referred to as debt recycling, which means that
• 17:32
  Speaker 2: if I repay $ 50, 000 off my home loan, I go
• 17:36
  Speaker 2: to the bank and say, can I have a separate loan?
• 17:38
  Speaker 2: Absolutely has to be a separate loan. Can I have
• 17:41
  Speaker 2: a separate loan for $ 50, 000? Because now I've got some
• 17:44
  Speaker 2: equity in my property because I've already repaid the home loan.
• 17:47
  Speaker 2: And then I will redraw that $ 50, 000 from the investment
• 17:50
  Speaker 2: loan and invest it in a diversified ETF, for example.
• 17:54
  Speaker 1: And the brilliance of this is you're paying a mortgage rate,
• 17:57
  Speaker 1: not a bank's geared share rate.
• 18:01
  Speaker 2: Correct. And so if you're paying 6.5%, you get a
• 18:04
  Speaker 2: tax suction for it. Your after-tax cost of debt might
• 18:07
  Speaker 2: be 3%, 3.5%. It's pretty cost-effective. And I don't have
• 18:11
  Speaker 2: a margin call, so I don't need to worry about volatility.
• 18:13
  Speaker 2: That's always been the concern with gearing into share markets.
• 18:16
  Speaker 2: If there's event and the market falls 50%, I'll have
• 18:21
  Speaker 2: to pay down the debt. I've got to have that
• 18:23
  Speaker 2: ready cash flow. That's always been a risk. With a mortgage,
• 18:26
  Speaker 2: you don't have that risk. It's secured by the property,
• 18:29
  Speaker 2: not the shares. And you can continue that strategy. So
• 18:32
  Speaker 2: each year as you repay your home loan, you increase
• 18:35
  Speaker 2: the investment loan by the same amount. So your total
• 18:38
  Speaker 2: debt isn't changing. It doesn't magically make the debt disappear.
• 18:42
  Speaker 2: But what it does do is it gives you the
• 18:45
  Speaker 2: opportunity to continue to invest in growth assets while you're
• 18:48
  Speaker 2: aggressively repaying down your home. So you're kind of doing
• 18:52
  Speaker 2: two things at once. You're doing the live investing strategy
• 18:55
  Speaker 2: and you're building growth assets outside of super.
• 18:58
  Speaker 1: And you're shifting your debts from dead money, basically, in
• 19:03
  Speaker 1: your home to tax-deductible debts that are actively investments. greater
• 19:08
  Speaker 1: investment debts. It's a terrific concept. What's terrific, folks, you
• 19:13
  Speaker 1: make your own decisions, obviously, but what is terrific is
• 19:15
  Speaker 1: you're paying a mortgage rate, not a city rate that's
• 19:18
  Speaker 1: been invented by some, you know, secondhand dealer in shares,
• 19:24
  Speaker 1: as they used to call them. Okay, we'll take a
• 19:25
  Speaker 1: short break. Stuart has run the numbers on this to
• 19:28
  Speaker 1: see which might be better under some model scenarios. We'll
• 19:32
  Speaker 1: tell you what happened after the break. Hello, welcome back
• 19:54
  Speaker 1: to The Australian's Money Puzzle Podcast. James Kirby with Stuart Weems.
• 19:57
  Speaker 1: You have the floor, Stuart. Did one scenario clearly win
• 20:02
  Speaker 1: over the other scenario?
• 20:04
  Speaker 2: So I consider the situation, James, I'll just give you
• 20:07
  Speaker 2: very high level quick numbers. I consider the situation where
• 20:10
  Speaker 2: I had a home worth $ 1. 5 million and a non-tax
• 20:13
  Speaker 2: deductible home loan of half a million dollars. And I thought, well,
• 20:18
  Speaker 2: if we've got borrowing capacity of a million dollars, I
• 20:20
  Speaker 2: could either upgrade, spend that million dollars and upgrade in
• 20:22
  Speaker 2: the home from one and a half to two and
• 20:24
  Speaker 2: a half, and then have a very large home loan
• 20:28
  Speaker 2: of $ 1. 5 million, or I'll stay in the existing home
• 20:31
  Speaker 2: and borrow a million dollars and go and invest it
• 20:33
  Speaker 2: in the share market in one hit. Of course, I
• 20:36
  Speaker 2: had to make assumptions that if I'm going to put
• 20:38
  Speaker 2: my cash flow towards in the home upgrade assumption, I'm
• 20:42
  Speaker 2: going to put my cash flow towards aggressively repaying debt.
• 20:45
  Speaker 2: I had to use the same assumption on the other side,
• 20:48
  Speaker 2: of course. And the outcome surprised me. It was very lineball.
• 20:52
  Speaker 2: In the shorter term, the gearing into the shares worked.
• 20:56
  Speaker 2: But in the longer term, the home upgrade strategy worked.
• 21:00
  Speaker 2: And the reason for that is because if I'm aggressively
• 21:03
  Speaker 2: repaying debt, I'm losing the negative gearing benefit that shares
• 21:07
  Speaker 2: initially gives you.
• 21:08
  Speaker 1: Of course, because the more you were geared, the more
• 21:10
  Speaker 1: bang you were getting for your buck.
• 21:11
  Speaker 2: Because the loan's coming down. So what it tells me,
• 21:14
  Speaker 2: what that analysis tells me is that the home investing
• 21:17
  Speaker 2: with debt recycling, putting those two strategies together will have
• 21:22
  Speaker 2: a multiplier effect because I'm getting the benefits of the
• 21:26
  Speaker 2: no capital gains tax on my family home, but also
• 21:29
  Speaker 2: then getting the negative gearing and maintaining the negative gearing
• 21:32
  Speaker 2: benefits associated with borrowing to invest in shares. So it
• 21:36
  Speaker 2: really is a great strategy.
• 21:40
  Speaker 1: Are you suggesting basically like a half and half strategy?
• 21:44
  Speaker 2: Pretty much, yeah. And I think it could be a
• 21:47
  Speaker 2: stage strategy. So you might say, look, I'm going to
• 21:49
  Speaker 2: upgrade the home over the next couple of years and
• 21:51
  Speaker 2: And when I'm comfortable in the next five years, I'll
• 21:54
  Speaker 2: start debt recycling and start borrowing to invest in the
• 21:57
  Speaker 2: share market. And at least it gives you the flexibility
• 22:00
  Speaker 2: each year to decide where you want to invest in
• 22:02
  Speaker 2: the share market. So, you know, there might be times
• 22:05
  Speaker 2: where you go, look, I really love the AI story.
• 22:07
  Speaker 2: I'm going to pour my money in that. Maybe next
• 22:09
  Speaker 2: year you might not love the AI story anymore and
• 22:12
  Speaker 2: you might be investing somewhere else. But at least it
• 22:14
  Speaker 2: gives you that flexibility to stage that entry into the
• 22:17
  Speaker 2: share market, build a portfolio over time. which obviously improves
• 22:21
  Speaker 2: the robustness of the strategy too.
• 22:24
  Speaker 1: I really like it. Keep in mind, folks, this is
• 22:25
  Speaker 1: not advice, it's information only. Keep in mind that it's
• 22:28
  Speaker 1: modeling based on averages and markets, you know, might do 9%
• 22:32
  Speaker 1: or 10% a year, but there are years they'll do
• 22:34
  Speaker 1: minus 10. Those years they'll do plus 20. Similarly, housing,
• 22:38
  Speaker 1: you know, averages are even more unreliable than share averages
• 22:42
  Speaker 1: because all property is local. But we are looking at,
• 22:45
  Speaker 1: we're looking at historic modeling and making reasonable assumptions. going forward.
• 22:50
  Speaker 1: But just like share market, the housing market, hey, you know,
• 22:53
  Speaker 1: what will happen? We might look back on 2026 and say, woof,
• 22:56
  Speaker 1: worst year since 1991. Or maybe not. We just don't know.
• 23:01
  Speaker 2: And I'll echo that, James. So it's really easy to
• 23:03
  Speaker 2: fall in love with the idea of investing in shares
• 23:05
  Speaker 2: when we've seen global markets deliver, you know, so strong
• 23:10
  Speaker 2: double digit returns for the last five years. But we
• 23:12
  Speaker 2: can't lure ourselves into thinking that's the normal. So when
• 23:16
  Speaker 2: we go into a strategy like this, we've got to
• 23:18
  Speaker 2: make friends with, look, there's going to be years where
• 23:20
  Speaker 2: the market's going to be down 20% and then the
• 23:23
  Speaker 2: years that it's going to be up 20%. We've got
• 23:25
  Speaker 2: to ride that volatility and understand that volatility is normal
• 23:29
  Speaker 2: as well. So that's the downside is that if you
• 23:32
  Speaker 2: go through a period of time where the property market's
• 23:34
  Speaker 2: underperformed and share markets outperform, which is kind of what
• 23:37
  Speaker 2: we've experienced, not everywhere in Australia, but certainly here in Melbourne,
• 23:41
  Speaker 2: we can't fall into the false sense of security that,
• 23:44
  Speaker 2: you know, shares are always going to be property. It's diversification,
• 23:47
  Speaker 2: I think, is the right approach.
• 23:50
  Speaker 1: And it is a nationwide observation, folks. I mean, obviously,
• 23:52
  Speaker 1: as Stuart says, some markets are worse than others. And
• 23:55
  Speaker 1: I think with any of these sort of strategies, you
• 23:57
  Speaker 1: just have to believe it through thick and thin. And
• 24:00
  Speaker 1: some experience is really useful. You mentioned an anecdote earlier, Stuart,
• 24:05
  Speaker 1: and I was just thinking of one, which I'll never forget.
• 24:09
  Speaker 1: Way back at the absolute depth of despair in the markets,
• 24:14
  Speaker 1: which would be, I would think, early 2009. We had
• 24:17
  Speaker 1: an investment conference in Sydney and Lawrence Friedman was speaking.
• 24:23
  Speaker 1: And he had been one of the great early fund
• 24:26
  Speaker 1: managers in Australia. He basically brought funds management, as we
• 24:30
  Speaker 1: know it, into Australia with his partner. They had done
• 24:34
  Speaker 1: extremely well. And then he owned Channel 10 for a while,
• 24:36
  Speaker 1: et cetera, et cetera, for Mia Friedman, our mama Mia.
• 24:39
  Speaker 1: And he's on stage anyway. And it's like, you know,
• 24:42
  Speaker 1: I look back and you go, how did we even
• 24:43
  Speaker 1: have the wherewithal to manage an investment conference? Because it
• 24:47
  Speaker 1: was so bad. The market was, we didn't know it,
• 24:50
  Speaker 1: but the market was pretty close to the bottom. It
• 24:52
  Speaker 1: was early 2009. And that means that we would have
• 24:55
  Speaker 1: been talking about a market that had fallen more or
• 24:57
  Speaker 1: less 50% over more or less a two-year period from November,
• 25:01
  Speaker 1: late November 2007. And he was on stage and he
• 25:04
  Speaker 1: gave his, what was obviously his always presentation, which he
• 25:06
  Speaker 1: always gave everywhere, which was dollar cost averaging. And he
• 25:11
  Speaker 1: just made the argument for dollar cost averaging. And I
• 25:13
  Speaker 1: remember standing there thinking, oh God, imagine averaging in now.
• 25:18
  Speaker 1: But actually I look back and I go, wow, it's
• 25:21
  Speaker 1: so true. It's so true. You have to have that
• 25:25
  Speaker 1: long-term perspective and you have to stick with it. And
• 25:27
  Speaker 1: there will be times when it's tested. But if you've
• 25:31
  Speaker 1: been through a few cycles and I've been through the
• 25:33
  Speaker 1: share market cycles since 87 and similarly the property ones,
• 25:37
  Speaker 1: it always rebounds. And if you stick with the plan,
• 25:42
  Speaker 1: the worst investor is the one who reacts, who's bullish
• 25:45
  Speaker 1: when you should be bearish, when you should be bullish.
• 25:47
  Speaker 1: They're the ones that get washed out. They're the ones
• 25:49
  Speaker 1: that basically are just cannon fodder, unfortunately, in listed markets
• 25:54
  Speaker 1: or property markets for that matter. Two quick questions, listener questions. Tanya,
• 25:58
  Speaker 1: if I hold money in the bank, in other currencies
• 26:01
  Speaker 1: such as Euro, does that money come onto the government guarantee?
• 26:05
  Speaker 1: Fabulous question, Tanya. Didn't know the answer, but yes. Stuart
• 26:09
  Speaker 1: knows the answer. Yep.
• 26:11
  Speaker 2: AUD only. Financial Claims Scheme is for Aussie dollars only.
• 26:15
  Speaker 2: So if you've got any foreign currency, it's not going
• 26:17
  Speaker 2: to be included there.
• 26:19
  Speaker 1: What's the logic there? What's the explanation?
• 26:22
  Speaker 2: I'm not sure. I guess that the Australian government doesn't
• 26:25
  Speaker 2: want to take foreign currency risk with insuring those deposits,
• 26:28
  Speaker 2: I imagine. But look, I think, I mean, this obviously
• 26:31
  Speaker 2: was introduced just to underpin the banks or leave sentiment
• 26:35
  Speaker 2: within the bank's during the GFC. I think the distinction
• 26:39
  Speaker 2: here is if you're putting money with an ADI, an
• 26:42
  Speaker 2: approved deposit institution, a bank, you should feel pretty confident
• 26:46
  Speaker 2: about the safety of that money. If you're putting it
• 26:49
  Speaker 2: with a non-ADI, and there are a few mortgage managers
• 26:54
  Speaker 2: these days, James.
• 26:56
  Speaker 1: High-profile mortgage managers that don't have it, yeah.
• 26:59
  Speaker 2: That don't have it and that advertise offset accounts or
• 27:03
  Speaker 2: Aussie-style offsets.
• 27:04
  Speaker 1: Look and sound like banks and use similar terminology and
• 27:08
  Speaker 1: run the right side of the law.
• 27:10
  Speaker 2: Yeah, just be careful. Just be careful. But if I've
• 27:12
  Speaker 2: got my money with an ADI, I'm not putting a
• 27:16
  Speaker 2: lot of, or really any material comfort from having that
• 27:20
  Speaker 2: 250 government guarantee.
• 27:23
  Speaker 1: It's not hard, folks. If you're dealing with someone, you're wondering,
• 27:25
  Speaker 1: just put it into AI. Does this book have an
• 27:28
  Speaker 1: approved deposit-taking institution, ADI qualification? in Australia. That's all. Very simple.
• 27:34
  Speaker 1: If it doesn't happen, then your money is at bigger
• 27:38
  Speaker 1: risk than you thought. Okay, final question, which could take,
• 27:40
  Speaker 1: I imagine we could have not just a show, but
• 27:43
  Speaker 1: a series of shows on this ridiculously complicated issue. But
• 27:46
  Speaker 1: I'm going to have a go. It's from Frank. I
• 27:49
  Speaker 1: see some very interesting developments on granny flats, especially new
• 27:52
  Speaker 1: modular buildings that are cheap and very high standard. Can
• 27:55
  Speaker 1: I ask, what is the tax situation with granny flats?
• 27:58
  Speaker 1: How long have you got, Frank? Have a go, Stuart.
• 28:02
  Speaker 2: Well, if it's home, so if I'm putting a granny
• 28:04
  Speaker 2: flat on my home and thinking it's another way to
• 28:07
  Speaker 2: sort of generate an income stream, then I'll have to
• 28:10
  Speaker 2: apportion the main residence exemption. So I'm going to start
• 28:14
  Speaker 2: paying some capital gains tax on my home and I'll
• 28:17
  Speaker 2: need to apportion it by The land area that's taken
• 28:21
  Speaker 2: up with the granny flat and the proportion of time
• 28:24
  Speaker 2: that granny flat has existed relative to.
• 28:27
  Speaker 1: So ideally, the granny flat should be a tower, should it?
• 28:29
  Speaker 1: A granny tower. A really small base. The Spiros jerk is.
• 28:33
  Speaker 2: Yeah, exactly right. That'll optimise it. I'm not sure it
• 28:36
  Speaker 2: optimises your standard of living, but certainly optimises.
• 28:38
  Speaker 1: It's hard to have a lift, actually. You don't have
• 28:40
  Speaker 1: a lift for granny. Yeah.
• 28:43
  Speaker 2: So that's for the home. So it could be, I mean,
• 28:46
  Speaker 2: it could be worthwhile if you've got, you know, a
• 28:48
  Speaker 2: lot of land, unused land value, for example, and you're
• 28:51
  Speaker 2: very keen to generate an income stream. If it's an
• 28:54
  Speaker 2: investment property, it's a little bit cleaner, of course. You
• 28:57
  Speaker 2: It's the same sort of tax rules as when you
• 28:59
  Speaker 2: first purchase the property, gets added to the cost base,
• 29:02
  Speaker 2: you can depreciate the asset.
• 29:03
  Speaker 1: But in all seriousness, if you have an older person,
• 29:06
  Speaker 1: or it doesn't really matter, I imagine it could be
• 29:07
  Speaker 1: a younger person, it doesn't matter. If you rent that
• 29:10
  Speaker 1: piece of land out, you disturb your capital gains exemption
• 29:16
  Speaker 1: on the house that we were talking about earlier in
• 29:17
  Speaker 1: the show. Simple as that.
• 29:19
  Speaker 2: Yeah.
• 29:19
  Speaker 1: Know that, folks. That's the main thing. Correct.
• 29:21
  Speaker 2: Hmm. Yeah, look, you'd have to do the numbers on it,
• 29:25
  Speaker 2: but I wonder if the numbers would really stack up.
• 29:27
  Speaker 2: You might be compromising a future, you know, or creating
• 29:31
  Speaker 2: a future tax liability just for some short-term income, which
• 29:35
  Speaker 2: will be taxable as well. So I think the tax
• 29:37
  Speaker 2: drag on it might be too high.
• 29:39
  Speaker 1: If you don't charge income, if it's just a family member,
• 29:41
  Speaker 1: that's cool, I assume.
• 29:43
  Speaker 2: Yes, that's right. And if you create a life interest,
• 29:46
  Speaker 2: so if you build a granny flat, have your parents
• 29:48
  Speaker 2: live in that granny flat when they're older, for example,
• 29:51
  Speaker 2: but give them a life interest, which is the right
• 29:54
  Speaker 2: to occupy that property for the rest of their life,
• 29:57
  Speaker 2: The ATO said we're not going to treat that as
• 30:00
  Speaker 2: a CGT event. So normally to create a right to
• 30:03
  Speaker 2: live in a property is normally regarded as a CGT asset.
• 30:06
  Speaker 2: So it's very kind of them to, you know, to
• 30:08
  Speaker 2: look the other way on that one.
• 30:09
  Speaker 1: That is the first time that those words were used
• 30:12
  Speaker 1: on this show in combination, the ATO and very kind.
• 30:16
  Speaker 2: I promise not to use them again.
• 30:18
  Speaker 1: You can find them, use them. We did remarkably well
• 30:21
  Speaker 1: to find them in the first instance. Terrific. Hey, thank you,
• 30:23
  Speaker 1: Stuart Williams of Pro Solution Private Client Group. Great to
• 30:26
  Speaker 1: have you on the show as always.
• 30:27
  Speaker 2: My pleasure as always.
• 30:29
  Speaker 1: That was Stuart Williams, folks. Some really interesting points there.
• 30:32
  Speaker 1: I polled, I must say, with the capital gains tax exemption,
• 30:36
  Speaker 1: I thought the home might win. And I'm glad it
• 30:38
  Speaker 1: didn't because it makes us all more adventurous, active investors,
• 30:42
  Speaker 1: which I like. Okay. Talk to you soon. Keep the
• 30:45
  Speaker 1: emails rolling. The Money Puzzle at theaustralian.com.au. Today's show was
• 30:50
  Speaker 1: produced by Tiffany Dimmer.
• 30:58
  Speaker 2: Thank you.