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Getting around the SMSF borrowing ban · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to the Australian's Money Puzzle podcast.
0:13
Speaker 2: I'm James Kirby. Welcome aboard.
0:16
Speaker 1: Okay, so you think reasonably enough as a property investor
0:20
Speaker 1: that the odds are suddenly against you. Rates remain high,
0:25
Speaker 1: the market is wobbling, there is low clearance rates, there
0:28
Speaker 1: is falling prices often by the way the ideal context
0:32
Speaker 1: for an investor. But there are new restrictions now and
0:37
Speaker 1: one of them actually that stands out and maybe captures
0:41
Speaker 1: in some degree the anti property nature of the recent
0:45
Speaker 1: budget is that borrowing by self managed super funds to
0:50
Speaker 1: invest in property will be banned, effectively banned from August ten.
0:54
Speaker 2: Folks.
0:55
Speaker 1: However, as you know, if you're a long time listener
0:57
Speaker 1: to this show, we're not about giving up. We're about
1:01
Speaker 1: becoming an active investor and finding a way to be
1:04
Speaker 1: successful in your area. That might include some workarounds.
1:08
Speaker 2: Sometime.
1:08
Speaker 1: We have some workarounds for you on this ban on
1:13
Speaker 1: self managed super funds, and I think also perhaps a
1:16
Speaker 1: fresh perspective on financing property investment property from now on.
1:21
Speaker 1: Who could I possibly do this show with. It had
1:23
Speaker 1: to be someone who could articulate these changes very clearly.
1:27
Speaker 1: It's Stuart Weams of the pro Solution Group.
1:29
Speaker 3: How are you, Stuart, I'm really well, James, thanks for
1:32
Speaker 3: the introduction. I'm underpression now an.
1:34
Speaker 2: I you are.
1:34
Speaker 1: But Stewart Folks has very usuly even given me some
1:37
Speaker 1: student notes to follow here, which is really good because
1:41
Speaker 1: they're very practical examples of how it over works. But look,
1:45
Speaker 1: let us cut to the chase and go right to
1:47
Speaker 1: the start for listeners, so self managed super funds they
1:51
Speaker 1: could always borrow to my property and as we know,
1:56
Speaker 1: there was something like four times more property out there
2:02
Speaker 1: that was borrowed against by Surfin and super funds and
2:05
Speaker 1: the government basically intimated in the budget. This is also
2:08
Speaker 1: had to come out in recent ds. It's an important part.
2:11
Speaker 1: People won't be able to do it any longer. We
2:14
Speaker 1: found ways to deal with this. But first of all,
2:16
Speaker 1: why why did they balance to it?
2:19
Speaker 3: Well, I mean it was something the Greens wanted in
2:23
Speaker 3: order to vote for the bill, and their thesis behind
2:27
Speaker 3: it was that if we reduce investor competition, if there's
2:30
Speaker 3: fewer investors to compete with, then first home buyers will
2:35
Speaker 3: be better off because there's like competition and hopefully, you know,
2:39
Speaker 3: the property becomes more affordable. I guess mathematically that could
2:43
Speaker 3: be true. The only problem though, is that investors tend
2:47
Speaker 3: to be very rational and financed driven, and its own
2:51
Speaker 3: occupiers that tend to buy with emotion. And actually one
2:55
Speaker 3: of the sort of core tenants in terms of property
2:58
Speaker 3: selection is to buying a location that's predominantly desired by
3:03
Speaker 3: own occupiers as opposed to, you know, buying a location
3:08
Speaker 3: where it's all investors. And the rationale behind that is
3:12
Speaker 3: because own occupiers put more capital into their property to
3:16
Speaker 3: improve it, they look after it, that take care of it.
3:18
Speaker 3: And also what you hope if you're a vendor of
3:22
Speaker 3: a property like that, you're selling to another own occupier
3:24
Speaker 3: that falls in love with your property. Yes, so much
3:27
Speaker 3: so that they're willing to pay you a handsome price
3:30
Speaker 3: for it. So I think technically, yes, if your investors
3:35
Speaker 3: could create less competition for first time buyers, but I
3:39
Speaker 3: would argue the people that are really moving the market
3:41
Speaker 3: from a transactional perspective are the own occupiers.
3:45
Speaker 1: Yeah, right, And we dealt with that in recent shows,
3:48
Speaker 1: folks fascinating you know, keep away from other property investors
3:51
Speaker 1: seems to be actually a useful guide if you're buying
3:55
Speaker 1: because the stats show that the investors among investors, if
3:59
Speaker 1: you know what I mean, in the region, don't do
4:01
Speaker 1: as well as the investors who are in among owner occupiers.
4:04
Speaker 2: Really interesting point.
4:05
Speaker 1: Okay, now there's still lobbying behind the scenes to try
4:08
Speaker 1: and get an exemption on this ban that perhaps they
4:12
Speaker 1: would be allowed self managed super funds would be allowed
4:16
Speaker 1: to invest in new bills in the way that the
4:19
Speaker 1: ban are negative gearing exempted new properties. I know that
4:23
Speaker 1: Peter Burgess and co. At the Self Managed Super Fund
4:26
Speaker 1: Association and property other property industry stakeholders are pushing for that,
4:32
Speaker 1: but I don't know. I think it's probably done to you.
4:34
Speaker 1: It's a legislative it's I think the hardest bolted.
4:38
Speaker 3: There's been a few reviews. Murray Financial System Inquiry in
4:43
Speaker 3: fourteen and the Council Financial Regulators the last couple of
4:47
Speaker 3: years have both so cited that or suggested to the
4:50
Speaker 3: government that it should be banned. Previously, just from a
4:53
Speaker 3: system reperspective that I want too much ball rains going
4:56
Speaker 3: into the super system. I think there's if you're going
4:59
Speaker 3: to un to unwind some of these new rules, I
5:03
Speaker 3: think probably this one's at the bottom of the list, James,
5:06
Speaker 3: I doubt that there's going to be any exemptions there,
5:08
Speaker 3: and I've said previously, you know, on the show that
5:11
Speaker 3: it kind of I'm not unhappy that it was banned
5:15
Speaker 3: because I think property sprewkers would have been very aggressive
5:18
Speaker 3: in this space and that wouldn't have turned out well
5:21
Speaker 3: for investors, or at least to some degree, they're protected
5:25
Speaker 3: from being targeted by property sprewkers.
5:28
Speaker 1: I think, folks, you know, there was two issues with
5:30
Speaker 1: the SERF managed superfunds in property. Kind of you might
5:34
Speaker 1: call it that kind of up market and down market issue.
5:36
Speaker 1: The up market issue was that for investors who knew
5:39
Speaker 1: what they were doing and where it was a perfectly sensible, rational,
5:44
Speaker 1: sophisticated decision, there was a strong argument that it wasn't
5:48
Speaker 1: the best way in anyway for the simple reason that
5:51
Speaker 1: you're super fun has lower tax rates, so that the
5:54
Speaker 1: gearing was never as good, and then you were also
5:58
Speaker 1: paying through the nose actually as an SMSF investor for
6:02
Speaker 1: the right to use your SMSF if you like to
6:05
Speaker 1: buy property or to finance property. That was sort of
6:07
Speaker 1: the argument against it in the rational sense. From the
6:10
Speaker 1: political point of view, I maybe investor protection.
6:13
Speaker 2: Point of view.
6:14
Speaker 1: Unfortunately, the worst low life properties brokers were pushing people
6:19
Speaker 1: into SMSF who had no idea what they were doing.
6:21
Speaker 1: They were pushing them into them in order that they
6:23
Speaker 1: could sell them poor quality properties. That's dreadful part of
6:29
Speaker 1: the market. We are delighted to see the end of that.
6:32
Speaker 1: But I think, as others have said on the show,
6:34
Speaker 1: that's a consumer protection issue, and if there was sufficient
6:39
Speaker 1: consumer protection, then those people need never have been a concern.
6:46
Speaker 2: So that's a yeah.
6:48
Speaker 1: We could to talk about that all day. In any event,
6:50
Speaker 1: those two things put together, it's over. Okay, you can't
6:53
Speaker 1: use your SMSF to leverage or borrow anymore, however, and
6:58
Speaker 1: we're going to deal with this in the show. But
6:59
Speaker 1: first I want to come the broader issue is that
7:02
Speaker 1: there are a lot of ways you can find us
7:04
Speaker 1: investment property, and we will talk about that, but the
7:07
Speaker 1: specific one for the person who thought their SMSF had
7:10
Speaker 1: been met redundant to be like that it was useless
7:13
Speaker 1: now in relation to property investment, that's not the case.
7:17
Speaker 1: I want to explore something and I want to highlight
7:20
Speaker 1: it today because I talked to others stewarts and some
7:23
Speaker 1: pieces I did for The Australian, and they're saying the
7:25
Speaker 1: same thing that I wanted to. You agree with this
7:28
Speaker 1: that people will find there will be work arounds here.
7:30
Speaker 1: Do you think people will find ways to walk around
7:31
Speaker 1: the SMSF man?
7:34
Speaker 3: But yeah, I think so. And I know we're going
7:36
Speaker 3: to talk about ANGI unit trust and sort of co
7:40
Speaker 3: investing with his super in a second. I think so. Look,
7:43
Speaker 3: I think we've got to be careful. I'm having this
7:45
Speaker 3: conversation this morning in our business. We've got to be
7:48
Speaker 3: careful to still remain asset class agnostic in a way
7:52
Speaker 3: that you know, property is not the only game in town.
7:55
Speaker 3: I know this today's episodes about property, so it's a
7:59
Speaker 3: kind of silly thing to say. But look, I think
8:01
Speaker 3: one thing. You know, sometimes you find investors that love
8:04
Speaker 3: property because you know it's a physical asset. They understand it.
8:10
Speaker 3: They live in one these sorts of things and don't
8:12
Speaker 3: have the same sort of level of understanding or comfort
8:15
Speaker 3: with the share market. And I understand that you know
8:19
Speaker 3: that way of thinking, but we've got to understand that
8:21
Speaker 3: it's not the only game in town, and we've got
8:24
Speaker 3: to be careful about because otherwise, if you just focus
8:26
Speaker 3: on one asset class, you end up trying to put
8:28
Speaker 3: a square peg in a round hole, as opposed to
8:31
Speaker 3: if you take an asset class agnostic approach and go,
8:34
Speaker 3: what is the best strategy for me or my self
8:36
Speaker 3: manage super fun that's a better approach.
8:38
Speaker 1: Sure, okay, But just to focus on the investor who
8:41
Speaker 1: has an SMSF or aspire us to have an SMSF
8:45
Speaker 1: and what they can do in property investments that they
8:49
Speaker 1: may not realize. So let me just first of all
8:52
Speaker 1: spell out this this strategy, which is some people call
8:55
Speaker 1: it a partnership strategy. You called it a call investing strategy.
8:59
Speaker 1: And this is how we're I'm going to put it
9:01
Speaker 1: out there and then Stewart can basically explain to you
9:04
Speaker 1: the details pros and cons, but it's fascinating. Basically, how
9:08
Speaker 1: it works is this, you have an SMSF and you
9:10
Speaker 1: wish to get involved in investment property. Your plan had
9:13
Speaker 1: been or maybe you had previously borrowed through your SMSF.
9:19
Speaker 1: That's no longer allowed. However, it is allowed to use
9:23
Speaker 1: the equity in your SMSF as part of putting together
9:28
Speaker 1: a property investment. So in simple terms, what you do
9:31
Speaker 1: is your SMSF puts the equity into the property and
9:37
Speaker 1: you do everything else. You take out a loan, and
9:40
Speaker 1: you do the mortgage, and you do everything else, but
9:43
Speaker 1: the equity part, because it's on geared is all this
9:48
Speaker 1: is allowed under the current arrangements. So but simply, you
9:51
Speaker 1: might have an SMSF, You go and you buy some property.
9:55
Speaker 1: Let's put it, let's call it property. Let's put it
9:57
Speaker 1: eight hundred thousand dollars investment department. You want a deposit
10:03
Speaker 1: of ten percent, looking for eighty thousand. You don't have
10:06
Speaker 1: eighty thousand sitting around. It's in your SMSF. That eighty
10:09
Speaker 1: thousands in your SF. SF is allowed to be ungeared equity.
10:13
Speaker 1: You can put the deposit down from the SMSF and
10:16
Speaker 1: you can do everything else, including paid the mortgage. To
10:20
Speaker 1: the realities of it. The practicalities of it is you
10:23
Speaker 1: have to create a joint venture, and that joint venture
10:26
Speaker 1: can be a unit trust. So the unit trust is
10:28
Speaker 1: split into units. Your super fund owns the units that
10:31
Speaker 1: you use for equity, You yourself own the units for
10:34
Speaker 1: everything else. The two of you own the property. On
10:39
Speaker 1: it goes and the day you want to sell, you
10:41
Speaker 1: split the costs. It's been used, always been used, hasn't
10:45
Speaker 1: it steward by sophisticated investors? But I think it's going
10:48
Speaker 1: to take off now.
10:50
Speaker 3: Yeah, it might do. Look, it's a complex arrangement, so
10:53
Speaker 3: wouldn't describe it as a very simple arrangement, and one
10:56
Speaker 3: that people should get advice on, particularly from you know,
11:00
Speaker 3: they're a self man superfund administrator, which is typically their accountant,
11:04
Speaker 3: because you certainly need to comply with all the restrictions.
11:07
Speaker 3: I mean, the property has to be held in that
11:10
Speaker 3: geared unit trust. As you said that the self manage
11:13
Speaker 3: super fund owns some of the units in that trust
11:15
Speaker 3: and you own the remaining units in the trust. You
11:18
Speaker 3: need to borrow outside of that trust, so you need
11:21
Speaker 3: to have equity and existing property to be able to
11:23
Speaker 3: do that, whether it's your home or an investment property.
11:26
Speaker 3: And you go to the bank and say, Okay, I
11:27
Speaker 3: want to borrow six hundred thousand to buy this eight
11:30
Speaker 3: hundred thousand dollar unit. My super fund's going to put
11:34
Speaker 3: in two hundred thousand, and I'm going to borrow six
11:36
Speaker 3: hundred thousand, and I use those borrowings to buy the unit.
11:40
Speaker 3: So I'm still probably going to be caught by the
11:43
Speaker 3: quarantining of negative gearing on my ownership because the nature
11:48
Speaker 3: of the income that comes out of the unit trust
11:50
Speaker 3: is retained, it's still rental property income, and so I'll
11:54
Speaker 3: have a rental property loss. So it doesn't get around
11:58
Speaker 3: the negative maintaining of negative gearing issue. But what it
12:03
Speaker 3: can potentially do is help and affordability issue. So you know,
12:07
Speaker 3: if my borrowing capacity is six hundred thousand, but are
12:10
Speaker 3: really want to buy or invest in an eight hundred
12:12
Speaker 3: thousand dollars asset, the only the way that I can
12:15
Speaker 3: do that now is use my super to kind of
12:17
Speaker 3: bridge that gap, and so that that's worthwhile.
12:20
Speaker 1: I just thought i'd say two listeners that what this
12:24
Speaker 1: is really good for, if you do the work and
12:26
Speaker 1: keep it clean and do everything by the book, is
12:29
Speaker 1: for the person who wants to have direct property investment
12:34
Speaker 1: and has the capacity to pay loans, pay off loans
12:38
Speaker 1: as they go or interest only loans more typically, but
12:41
Speaker 1: they don't have the deposit. So you have this irony
12:44
Speaker 1: perhaps that you have an SMSF and the deposit potentially
12:47
Speaker 1: sitting inside it and.
12:49
Speaker 2: It can be used.
12:50
Speaker 1: And I think that's the very powerful aspect of this
12:53
Speaker 1: which with the absence of negative gearing, actually makes it
12:56
Speaker 1: even more attractive as a process. So I supposed to
13:01
Speaker 1: just to cut to the chase, smsfs can still be
13:04
Speaker 1: used in property investing. That's the essential point, isn't it.
13:09
Speaker 1: What's banned is smsfs borrowing directly.
13:13
Speaker 3: Absolutely, But one of the things that made properly investing
13:17
Speaker 3: worthwhile from a mathematical perspective is the leverage. And so
13:22
Speaker 3: if you remove the leverage, which obviously have to do
13:24
Speaker 3: with self mariage super fund, that's going to have an
13:26
Speaker 3: impact on returns because obviously leverage magnifies both positive and
13:30
Speaker 3: negative returns. So now so from a pure self mariage
13:36
Speaker 3: superfund perspective, you might arrive at the conclusion, well, that's
13:39
Speaker 3: not ideal and the unleveraged returns from profit property aren't
13:44
Speaker 3: attractive enough. But another way to look at it, James,
13:46
Speaker 3: is you know your overall wealth perspective, so how does
13:51
Speaker 3: that help you also build wealth outside of super and
13:55
Speaker 3: if it allows you to buy a better quality asset,
13:59
Speaker 3: well argument would be that's reducing your risk and also
14:02
Speaker 3: potentially expose you better returns as well as opposed to
14:07
Speaker 3: compromising because of your limited budget outside compromising and buying
14:11
Speaker 3: an inferior asset. So there's a lot to think through here.
14:15
Speaker 3: And as I said, it is a complex arrangement.
14:17
Speaker 2: What don't you like about it?
14:18
Speaker 3: Well, the flip side, as I said, is no gearing
14:20
Speaker 3: inside super. So if I'm strictly advising a self managed
14:24
Speaker 3: super fun and I'm comparing options between investing the share
14:28
Speaker 3: market or invest in a residential property on an ungeared basis,
14:32
Speaker 3: I think I'm going to conclude the investing in a
14:36
Speaker 3: residential property on ungeared bases is probably an inferior option
14:41
Speaker 3: with higher risk. We've got to think about its liquid asset.
14:45
Speaker 3: We've got tendency laws that are changing, all these sorts
14:49
Speaker 3: of things.
14:49
Speaker 1: These are kind of standard arguments. So again, proper invest
14:52
Speaker 1: yes at all, aren't they?
14:54
Speaker 3: Yeah, well they are. But if you have the gearing
14:56
Speaker 3: in there, you've got the magnification of returns, and so
14:59
Speaker 3: then it's start to weigh in the favor of doing
15:02
Speaker 3: something like that. Look, I'm not saying you wouldn't do
15:04
Speaker 3: it or it's no an attractive option. It's certainly an
15:07
Speaker 3: option and one that has merit and should be explored.
15:12
Speaker 3: But I think you want to be well advised. And
15:14
Speaker 3: you also want to just compare what the opportunity costs
15:17
Speaker 3: as well. So yes, you could go into property, what
15:19
Speaker 3: else could you do, and just make sure you weigh
15:21
Speaker 3: it up. I mean, you've comfort level has got to
15:24
Speaker 3: play into it as well, James. There's no point forcing
15:26
Speaker 3: someone to invest in the share market if they are
15:29
Speaker 3: really uncomfortable. As soon as there's volatility, they're going to
15:32
Speaker 3: sell out. That's not going to.
15:33
Speaker 1: Work, That's right, And I'm thinking really of many, many
15:38
Speaker 1: investors though we are diversifying investors, you and I and
15:43
Speaker 1: we are familiar with all parts of the market.
15:46
Speaker 2: You've written books about it and so have I. Not
15:48
Speaker 2: everyone is.
15:49
Speaker 1: We used to keep that in mind, that there are
15:51
Speaker 1: investors and that property are served where they understand it.
15:56
Speaker 1: And you know, golden rule is to buy something you
15:58
Speaker 1: don't understand. So people know I'm talking really to property investors,
16:02
Speaker 1: keen property investors. I'm talking to people who have an
16:04
Speaker 1: SMSF and think, oh g I'm locked out of property
16:07
Speaker 1: now with my SMSF. But you're not really And the
16:10
Speaker 1: other point I want to just develop. In the second
16:11
Speaker 1: segment of the show, we have a break in a
16:13
Speaker 1: moment is this enormous budget, this multi pronged budget which
16:20
Speaker 1: hits property on the tax side, with CGT on the
16:23
Speaker 1: negative gearing side, on the borrowing side, with the smsfs.
16:27
Speaker 1: It's going to change the nature of property financing generally.
16:30
Speaker 1: And you can see from the first segment where we say, okay,
16:33
Speaker 1: well there are ways around it, there are other ways
16:37
Speaker 1: to look at property investment and there are possibilities you
16:40
Speaker 1: may not have known. In the second part of the show,
16:43
Speaker 1: I'm going to talk with Stuart about what now for
16:47
Speaker 1: property investors post the ban and what will work and
16:51
Speaker 1: how you have to reframe how you finance investment property
16:55
Speaker 1: longer term, that's the first thing, and just about the availability,
17:00
Speaker 1: for instance of interest only. We're going to talk about
17:04
Speaker 1: how some lenders are pushing to longer and longer terms,
17:08
Speaker 1: direct repercussion of the budget and some of the new d's.
17:12
Speaker 2: That are out there. Okay, back in a moment.
17:28
Speaker 1: Hello, Welcome back to the Australians Money Puzzle podcast. James
17:32
Speaker 1: Kirby here with Stuart Weens, who was a regular on
17:35
Speaker 1: the show of the pro Solution Group. And I mentioned
17:39
Speaker 1: in the first part that we had both written books,
17:41
Speaker 1: but Stuart has written one much more recently than me. Okay, Stuart,
17:44
Speaker 1: Wealth by Design is your new book? When did it
17:47
Speaker 1: come out?
17:48
Speaker 3: Only a couple of weeks ago? James so very excited,
17:51
Speaker 3: And I built a AI companion tool because you know,
17:56
Speaker 3: I think people have in each of their rate a
17:58
Speaker 3: bookley understand the concept, and then they're always left wondering,
18:02
Speaker 3: how does it apply to my situation? So I thought
18:05
Speaker 3: we'll use AI to try and help bridge that gap.
18:07
Speaker 3: So it's the first time I've done it, so it'll
18:09
Speaker 3: be very interesting to see how I received.
18:12
Speaker 1: Good for you Wealth by Design? Okay, And it's out now.
18:15
Speaker 1: It's out in the shops. So if you wanted to
18:18
Speaker 1: check out Stuart's deeper thoughts, have a look at his
18:22
Speaker 1: new book. I have it on my desk. I halfway
18:23
Speaker 1: through it. It's very good, as you would expect Stewart.
18:26
Speaker 1: In the first segment, we just talked about how the
18:29
Speaker 1: SMSF borrowing band has become a sort of line in
18:32
Speaker 1: the sand with property finance for investors and post budget
18:38
Speaker 1: we have a new Basically, there's a new market out there.
18:42
Speaker 2: Right.
18:42
Speaker 1: You can't borrow anymore, which just super fun. You can't
18:45
Speaker 1: negatively gear into most properties. Okay, they say it's exempt
18:49
Speaker 1: for new properties, but cut to that chase. Most people
18:52
Speaker 1: never went near new properties with negative gearing, and there's
18:55
Speaker 1: a Dannwood reason why in terms of capital appreciation was
18:59
Speaker 1: always better adtionally better proscoam USA in the inner city. Okay,
19:02
Speaker 1: let's take those points on board. So very broadly, have
19:06
Speaker 1: you seen a change in tempo or approach from property
19:10
Speaker 1: finances as in relation to property investors since the budget?
19:16
Speaker 3: Yeah? I mean there was an emerging trend of longer
19:20
Speaker 3: loan terms before the tax changes, but certainly it's more
19:24
Speaker 3: aggressive today. And I guess it's important for listeners to
19:28
Speaker 3: understand how a mortgage is structured. There's always a finite
19:32
Speaker 3: loan term, and then if you had an interest only period,
19:36
Speaker 3: typically at the beginning of that mortgage, it would eat
19:39
Speaker 3: into that finite loan term. So traditionally it was a
19:42
Speaker 3: thirty year loan term, and if you elected to have
19:45
Speaker 3: the first five years as interest only, then your affordability
19:49
Speaker 3: and capacity repay is measured on the remaining loan term
19:53
Speaker 3: because obviously you're not paying or you're not obligated to
19:56
Speaker 3: repay any principle in the first five years, you've only
19:59
Speaker 3: then got the remaining twenty five years to repay that loan. Obviously,
20:02
Speaker 3: that pushed on affordability. So therefore, if the lenders extend
20:07
Speaker 3: the loan term, then obviously that extends boring capacity as well.
20:12
Speaker 3: And a lot of the lenders, all the lenders have
20:15
Speaker 3: now removed the benefit of negative gearing from a cash
20:18
Speaker 3: flow perspective in their calculations of boring capacity, particularly if
20:22
Speaker 3: you're buying established property, So that's compressed boring capacity again
20:26
Speaker 3: as well. And so what we was starting to see
20:28
Speaker 3: is more lenders offer thirty five forty year loan terms,
20:32
Speaker 3: which means that if you have a five year interest
20:35
Speaker 3: only period on a thirty five year loan term, you've
20:37
Speaker 3: got thirty years to prove that you can repay the
20:39
Speaker 3: loan or demonstrate boring capacity. And I think that's going
20:43
Speaker 3: to be a growing trend, James, not only because obviously
20:47
Speaker 3: from an affordability perspective, you know, property is expensive relative
20:51
Speaker 3: to income, so that was a natural progression. The thirty
20:54
Speaker 3: five year loan term has been around for thirty or
20:57
Speaker 3: forty years, so it probably needed a bit of a
21:00
Speaker 3: fresh But I think specifically now given the affordability for
21:04
Speaker 3: those people that still want to borrow to invest in
21:07
Speaker 3: establish property. Extending loan terms is going to help. And
21:11
Speaker 3: there's a big distinction here because we've got banks that
21:14
Speaker 3: are regulated by OPRA, and then we've got non bank
21:17
Speaker 3: lenders that aren't regulated by OPERA and don't have to
21:20
Speaker 3: comply with the prudential rules around the benchmark interest rate
21:24
Speaker 3: and these sorts of things. And I think this is
21:26
Speaker 3: the space they're going to play in, and so a
21:29
Speaker 3: well informed investor needs to understand the distinction between non
21:32
Speaker 3: bank lender and a bank lender and what they can
21:35
Speaker 3: potentially offer investors specifically.
21:37
Speaker 1: Okay, and the banks have been strong in the space
21:39
Speaker 1: already anywhere haven't don property investments, so you're seeing they're
21:42
Speaker 1: starting to offer longer terms. I'm just going to mention
21:45
Speaker 1: one folk. So there's several of them, and just to
21:47
Speaker 1: make the point that we don't want to push anyone
21:49
Speaker 1: in particular, Great Southern Bank, me Money, Liberty, Pepper Money,
21:54
Speaker 1: or SQ Bank, Bluestone and Usitybank already offer forty terms.
21:57
Speaker 1: That list is thanks to Stewart, by the way, that
21:59
Speaker 1: was his homework beforehand. But here's an interesting one. Amp
22:04
Speaker 1: I mentioned them simply because they had surprised the market
22:07
Speaker 1: in releasing an SMSF borrowing specialist loan only a few
22:13
Speaker 1: months ago, and must have been furious when the government,
22:16
Speaker 1: without any consultation banned borrowing in self man super fund.
22:21
Speaker 1: So it is interesting that on the thirtieth of July
22:26
Speaker 1: AMP has come back to the market with a new
22:28
Speaker 1: forty year loan and also has a dimension where it's
22:32
Speaker 1: a ten year interest only. I'm not plugging anything here,
22:36
Speaker 1: but I want to talk to you, Stuart about the trend.
22:38
Speaker 1: It would seem to signal exactly what you were saying,
22:41
Speaker 1: longer terms, so that you can improve your borrowing capacity
22:46
Speaker 1: and the bank can allow you to number one and
22:48
Speaker 1: number two interest only again changing the rules there right,
22:52
Speaker 1: So used to be like five years and a review
22:54
Speaker 1: that was standard in the industry, and they're saying, oh,
22:56
Speaker 1: don't worry about it, ten years.
22:58
Speaker 2: Yeah, how do you read that?
23:00
Speaker 3: Interest only? Certainty around interest only periods is actually very
23:03
Speaker 3: important for investors and something they don't initially think about,
23:07
Speaker 3: not until there's several ways into the kind of the
23:10
Speaker 3: investment journey. But since seventeen, that's when APPRA started to
23:14
Speaker 3: put pressure on the banks in terms of their interest
23:17
Speaker 3: only lending. It's just started to become more difficult. But
23:20
Speaker 3: as you can imagine, James, if you go and buy
23:23
Speaker 3: an investment property, you want certainty over what the cashflows
23:26
Speaker 3: look like, what is your cash flow commitment, And as
23:29
Speaker 3: you approach retirement, you don't necessarily want to be forced
23:33
Speaker 3: into repaying principle from a cash flow perspective. That's a
23:35
Speaker 3: bit of a drain. That might be a discretionary decision,
23:38
Speaker 3: but you don't want to be forced into it. So
23:40
Speaker 3: I think what amp He's done here is read the
23:42
Speaker 3: market to understand that investors want certainty and therefore by
23:46
Speaker 3: having a ten year interest only period, at least they
23:48
Speaker 3: know they've got a full decade where they've got more
23:51
Speaker 3: control over their cash flow and the liabilities around it.
23:55
Speaker 3: And a decade's a nice period too, really, because it
23:58
Speaker 3: should help us go through a full sort of property cycle.
24:01
Speaker 3: So you don't want to be midway in that cycle
24:03
Speaker 3: and then experience cash flow challenges just because your loan
24:07
Speaker 3: is flicked over to principle and interest. So I think
24:09
Speaker 3: there's going to be more in this space, more opportunities
24:12
Speaker 3: and more flexibility offered by lenders.
24:14
Speaker 1: So longer terms, longer periods of interest only yep, unreviewed
24:19
Speaker 1: in simpler terms, and that's welcome, very welcome, Ike would
24:23
Speaker 1: imagine for investors.
24:24
Speaker 2: Just so on the.
24:24
Speaker 1: Broader issues, Steward I would always say, if you could,
24:27
Speaker 1: as an investor, if you can get interest only the
24:31
Speaker 1: whole way and then to the day you sell, why
24:34
Speaker 1: wouldn't you, I mean, is there anything wrong with that proposal?
24:38
Speaker 3: No, not at all. And look, some people are being
24:40
Speaker 3: talking because of their negative gearing quarantining. Well why don't
24:43
Speaker 3: we just only gear it neutrally, you know, until the
24:47
Speaker 3: interest cost offsets the net rental income and so there
24:50
Speaker 3: is no sort of negative or cash flow shortfall. The
24:53
Speaker 3: problem there is that that's certainly duable, of course, and
24:56
Speaker 3: it will certainly helps you navigate the quarantining and negative gearing,
25:00
Speaker 3: but it reduces the leverage. It means you've got to
25:02
Speaker 3: put in more cash, either by repaying the loan more
25:05
Speaker 3: aggressively or putting more cash in the beginning, and that
25:08
Speaker 3: weighs on your internal rate of return because you've got
25:11
Speaker 3: less leverage in that investment. So, as I said previously,
25:14
Speaker 3: the whole one of the main attractions to investing properties, leverage,
25:18
Speaker 3: as well as many other factors, like we've spoken about
25:21
Speaker 3: the physical nature of the asset, the understandability of the asset.
25:24
Speaker 3: So definitely interest only, you know, you want to have
25:28
Speaker 3: that flexibility having interest only, and then if you want
25:30
Speaker 3: to put cash in the offset account to minimize interest
25:33
Speaker 3: or just to park some cash, that's always an option.
25:37
Speaker 3: But at least you can take that cash out again
25:39
Speaker 3: and rege the asset notionally. So absolutely interest only gives
25:44
Speaker 3: you the best of both worlds.
25:45
Speaker 1: It's interesting us behind what you're saying there is the
25:48
Speaker 1: unfortunate dimension that you do need more money basically to
25:54
Speaker 1: be a property investor under the change rules. I mean,
25:57
Speaker 1: that's the simplest that I think, but we would like
25:59
Speaker 1: to think that if, as I say, we'll find ways.
26:01
Speaker 1: And this is what part of the show is about,
26:04
Speaker 1: highlighting to you strategies you hadn't thought of, like the
26:07
Speaker 1: SMSF partnership in the first segment, or highlighting changes in
26:11
Speaker 1: the market that you should know about, like the financiers
26:14
Speaker 1: to property post, the negative gearing band, post, the LRBA band,
26:19
Speaker 1: the SMSF ban are saying, okay, well, we'll offer longer terms,
26:23
Speaker 1: we'll offer for longer terms for interest only, and that
26:26
Speaker 1: actually changes the market.
26:27
Speaker 2: Okay, we will take a short.
26:28
Speaker 1: Break out some great questions from Melanie and Josh and
26:31
Speaker 1: Howard back in a moment. Okay, the first question is
26:49
Speaker 1: from Melanie, and thanks for your compliments. Melanie, I wouldn't
26:52
Speaker 1: read about on air, but they were good, she says,
26:55
Speaker 1: having listened to a previous episode on how the new
26:58
Speaker 1: tax laws are affected property investment, is my understanding correct
27:03
Speaker 1: that if I already own multiple investment properties and they
27:08
Speaker 1: are positively geared, if I was to pursage this an
27:12
Speaker 1: established property, can I negatively gear the new purchase against
27:15
Speaker 1: the positively geared income of my current portfolio. I hope
27:20
Speaker 1: that makes sense. Okay, I think it makes sense. What
27:23
Speaker 1: do you think, Stuart?
27:24
Speaker 3: Yeah, absolutely, it makes sense, James, and you can definitely
27:27
Speaker 3: do that. Obviously, Then if the loss is greater than
27:31
Speaker 3: the rental income from the property that you owned before
27:35
Speaker 3: budget night, then of course that part of that loss
27:38
Speaker 3: is quarantined and carried forward, but you can certainly offset
27:41
Speaker 3: if you've got a lot of negatively geed income. Actually,
27:45
Speaker 3: it brings up something, James, that sort of reinforces the
27:48
Speaker 3: point that we just made about interest only loans. So
27:50
Speaker 3: if you had pre existing property before budget night, with
27:54
Speaker 3: loans against them and money in offset accounts, you'd actually
27:58
Speaker 3: be better off taking that how the offset account and
28:01
Speaker 3: contributing it to your new property purchase. So you've gone
28:05
Speaker 3: by another established property and gear that to a lower
28:08
Speaker 3: level because you're going to get the negative gearing on
28:11
Speaker 3: the pre existing assets, but not the new property that
28:14
Speaker 3: you add to it. So again what that says to
28:17
Speaker 3: or demonstrates interest only loans and using offset accounts give
28:21
Speaker 3: you the maximum flexibility and certainly will give you plenty
28:24
Speaker 3: of flexibility navigate these changes. And it's probably another criticism
28:28
Speaker 3: really because it's giving almost another free kick to property
28:33
Speaker 3: investors that have already probably established or built a lot
28:37
Speaker 3: of wealth in the market.
28:38
Speaker 1: That's right, This inadvertent creation of an lease. Yeah, who
28:42
Speaker 1: are sort of barricaded in and can still negatively gear
28:45
Speaker 1: existing properties, et cetera. I know, Yeah, yet another failing
28:49
Speaker 1: I think of the construction of these taxes. Okay, josh
28:53
Speaker 1: this is more like a comment. It's an interesting one
28:56
Speaker 1: though from josh Ai. Models prioritize productivity and keeping decisions
29:01
Speaker 1: moving forward, What about the quality of those decisions and
29:04
Speaker 1: the quality of productivity. In my case, everything I put
29:09
Speaker 1: into AI flatters me and tells me how great it is.
29:12
Speaker 1: And one or two suggestions I understand, the better the prompts,
29:16
Speaker 1: the better the answer. But to regular Joe blogs who's
29:20
Speaker 1: been asked by their boss to start using AI to
29:23
Speaker 1: increase their output, they probably won't be thinking about the
29:26
Speaker 1: quality of their prompts. Is there a risk then, that
29:29
Speaker 1: widespread AI adoption will end up being productivity for productivity's
29:34
Speaker 1: sake and leave us a little.
29:36
Speaker 2: Better off than we were?
29:37
Speaker 1: Oh boy, Josh, I don't know where to start with that,
29:39
Speaker 1: except to say, as an investor, I think the outstanding
29:43
Speaker 1: question around AI is one how long will it take
29:47
Speaker 1: to transform into a productivity change? But more than that,
29:52
Speaker 1: when it does transfer to productivity improvements, what will be
29:58
Speaker 1: left behind? For instance, could we have a terrific economic
30:03
Speaker 1: and share market and investment acid boom that it goes
30:08
Speaker 1: hand to hand with higher unemployment? For instance? I think
30:11
Speaker 1: that's entirely possible. Where do you come from on this one, Stewart?
30:15
Speaker 3: Well, for property investors, you know, I think Josh is
30:18
Speaker 3: right in terms of a great prompt equals a great outcome,
30:22
Speaker 3: and of course you need to you can't just rely
30:26
Speaker 3: on everything you get out of AI and assume it's
30:29
Speaker 3: one hundred percent correct. But it can certainly help you
30:32
Speaker 3: speed up the due diligence process when looking at property
30:35
Speaker 3: in terms of you know, previously, if you wanted to
30:37
Speaker 3: find out if a property was in a flood zone,
30:40
Speaker 3: what its zoning was, what sort of properties around it
30:43
Speaker 3: that were comparable that had previously sold that that would
30:46
Speaker 3: take quite a bit of time and research going to
30:48
Speaker 3: different places. So we're certainly using it in our business,
30:52
Speaker 3: you know, for our clients that hold direct property, which
30:54
Speaker 3: we have many to do that sort of research, and
30:57
Speaker 3: it's a good starting point. Of course, it doesn't rep
31:00
Speaker 3: I think human thinking. It just helps get gather the
31:04
Speaker 3: information in the one place to help them make that
31:08
Speaker 3: better informed decision. So I think it's great, but of
31:11
Speaker 3: course it could be misused and it could be a
31:13
Speaker 3: race to the bottom too, who knows.
31:15
Speaker 1: Yeah, well, yes, well Josh. And by the way, these
31:18
Speaker 1: are never investment advice. This is information only, but everyone
31:22
Speaker 1: knows that.
31:22
Speaker 2: I'm sure.
31:23
Speaker 1: On the broader issue of productivity, it is the big
31:27
Speaker 1: play in AI. I mean, this is why everyone is
31:30
Speaker 1: bidding it up that it's promise of transforming productivity. We
31:36
Speaker 1: haven't got to the other side yet, so we will
31:38
Speaker 1: see whether it's promise will be delivered. That's I think
31:41
Speaker 1: the big question in the share market and the timing
31:43
Speaker 1: of that promise interesting.
31:45
Speaker 2: It does.
31:46
Speaker 1: It precates through every area of economic activity, financial journalism too.
31:51
Speaker 2: Actually.
31:51
Speaker 1: I mean, I'd love to say that I know all
31:53
Speaker 1: the answers. I don't, and I use AI regularly. But
31:56
Speaker 1: you know what, if it could, if I could trust
31:58
Speaker 1: it to the work I do, would be marvelous. But
32:03
Speaker 1: I can't trust it to check the work I do,
32:05
Speaker 1: so the big productivity lift on my side is yet
32:08
Speaker 1: to come down the line. Okay, Howard asks, I found
32:12
Speaker 1: the podcast with Adrian Raftery Mister Taxman confusing, if not alarming,
32:17
Speaker 1: because my take from it was that the new thirty
32:23
Speaker 1: minimum capital gains tax impost from the budget again is
32:28
Speaker 1: not avoidable. My understanding was that inside Super CGT remains zero.
32:34
Speaker 1: Also avoidable outside Super if in receipt of a Commonwealth pension.
32:39
Speaker 1: Please clarify, Okay, Howard. Mostly Adrian was talking about people
32:44
Speaker 1: who had CGT issues outside of Super in that show.
32:47
Speaker 1: That's what's remembering, But could you clarify for us Stewart.
32:54
Speaker 3: Well, the only way you can avoid the minimum thirty
32:56
Speaker 3: percent tax rate on capital gains tax is if you
33:00
Speaker 3: in receipt of some sort of Social Security, age pension,
33:04
Speaker 3: of study, disability support pension, these sorts of things, or
33:09
Speaker 3: by making donations. But you know they're the only two ways.
33:12
Speaker 3: So Howard's a self funded retiree, so of course he's
33:15
Speaker 3: not going to be in receipt of I imagine an
33:19
Speaker 3: age pension. But if you're able to get a part
33:21
Speaker 3: age pension, and there are strategies around that you can utilize,
33:25
Speaker 3: if you are pretty close to the asset or income test,
33:28
Speaker 3: then that could be a good way to minimize the
33:30
Speaker 3: capital gains tax or the alternate. Really it's not great,
33:34
Speaker 3: but you know you used to sell down shares to
33:37
Speaker 3: minimize capital gains tax, So sell down small parcels of
33:41
Speaker 3: shares each year. If you're going to sell shares now
33:44
Speaker 3: and you do have to pay that minimum thirty percent tax,
33:47
Speaker 3: then of course it's now uneconomical to sell smaller parcels.
33:51
Speaker 3: You just have to small larger parcels and put yourself
33:54
Speaker 3: at least in the forty five thousand dollars tax bracket.
33:57
Speaker 3: Then you're not paying you know, that top up tax.
34:00
Speaker 3: You've already got an average tax rate of thirty percent anyway,
34:03
Speaker 3: But yeah, it's not ideal. There's not a lot of
34:05
Speaker 3: room to move, and arguably you know, but also the
34:10
Speaker 3: minimum rate of tax only is applicable to the post
34:13
Speaker 3: one July twenty seven gain as well. So I wouldn't
34:17
Speaker 3: necessarily just go and sell all your stocks because you
34:20
Speaker 3: want to avoid, you know, the thirty percent tax rate.
34:22
Speaker 3: You've got to understand it's only post that element.
34:26
Speaker 1: Okay, the second half of the question, just to put
34:28
Speaker 1: him at ease and other listeners, he says he's understanding
34:32
Speaker 1: broadly is that inside SUPER capital against tax remains at zero.
34:37
Speaker 2: Can you just clarify what whether that's right or wrong?
34:42
Speaker 3: Well, zero, and if you pension phase up to your
34:45
Speaker 3: transfer balance cap, so every individual can have two point
34:49
Speaker 3: one million dollars in SUPER and not pay any capital
34:51
Speaker 3: gainst tax and then above that amount you're going to
34:54
Speaker 3: pay ten percent up up until three million, and then
34:56
Speaker 3: that's a higher rate thereafter. So you know, SUPER still
35:00
Speaker 3: is the most attractive environment and most likely I think
35:03
Speaker 3: it's a reasonable assumption to assume it will be in
35:06
Speaker 3: the future. And so, as I would say, to most
35:10
Speaker 3: people prior to these rules, holding a little bit of
35:13
Speaker 3: wealth outside of SUPER is not a big deal because
35:16
Speaker 3: you're probably not going to pay too much tax. But
35:18
Speaker 3: now because of these minimum rates of tax, it's really
35:21
Speaker 3: a case of let's try and get as much money
35:23
Speaker 3: into Super as possible. So if you have some direct
35:25
Speaker 3: shares outside of Super, maybe seldom and contribute that money
35:28
Speaker 3: into Super. Could be not advice, of course, but could
35:31
Speaker 3: be something that people want to think about. As I said,
35:34
Speaker 3: there's no immediate urgency around this, because you know it'll
35:38
Speaker 3: only be a growing tax problem after one July twenty seven,
35:41
Speaker 3: so we've still got plenty of time up as sleeve,
35:43
Speaker 3: and who knows what happens over the next few years.
35:47
Speaker 1: Who knows, But very broadly, folks, Super did actually, in
35:50
Speaker 1: relative chimps, come out better than many other areas of
35:53
Speaker 1: investing after the budget, and that holds to from most
35:56
Speaker 1: people most.
35:57
Speaker 2: Of the time, I think, effectively. Very good. Thank you
36:00
Speaker 2: very much, Stuart, great to have you on the show.
36:03
Speaker 3: Thanks James fun as always.
36:05
Speaker 1: Best of luck with the book Wealth by Design.
36:07
Speaker 2: If you're used to hearing Stuart.
36:08
Speaker 1: Maybe you'd like to read him and we would love
36:11
Speaker 1: some more questions. The Money Puzzle at the Australian dot
36:14
Speaker 1: com dot au is the email address. Today's show was
36:17
Speaker 1: produced by Leah Samma Glue. Talk to you soon.