Articles by Matthew Gilligan
If you are a DINK household (double income no kids) then the ideas in this article could help you grow your wealth and protect your future.
Mr and Mrs Smith are a professional couple. Mr Smith is a doctor and Mrs Smith a lawyer. The Smiths are your classic DINK pair. Between them they earn circa $250,000 taxable income per annum. They own their home which has a market value of $750,000 in joint names and debt in relation to this is $200,000. The Smiths are now looking at property as a way of investing in their future and growing their current equity. Two issues emerge out of this. First, what sort of property should the Smiths be looking to buy and second how would they structure it.
What Property to Buy?
Based on the Smiths' income earning potential and assuming that they have many years of this income earning potential to come, they could choose to focus on properties that have high capital growth and moderate to high yield. As an example they might find a $500,000 property that rents for $625 per week.
This represents a 6.5% gross yield. A 6.5% gross yield is a moderate yield only, but the property has high capital growth potential. Based on a short-term interest rate of 6%, the gross rent will cover interest but after other expenses are taken into account such as rates, insurance etc the property runs at a $5,000 cash loss.
This means the property costs $100 a week to fund. However, we haven't taken into account depreciation or tax refunds yet. If we work on the basis that there would be depreciation deductions available in respect of this property of circa $9,000 per annum, there would be a total tax loss of $14,000. As the Smiths paid a lot of tax in the 38% tax bracket, they will get 38% of this $14,000 tax loss back leading to a tax refund of $5,300.
What the above has illustrated is that the Smiths have been able to secure a high capital growth potential property at no ongoing cost to them as the cash loss is covered by their tax refunds once depreciation deductions are taken into account.
How to Structure
In terms of the structure, the Smiths would establish an LAQC to own the property. Assuming they earn relatively comparable incomes and expect that situation to continue in the future, they will each own 50% of the shares in the LAQC. In order to enhance their asset protection they would establish a Family Trust and move their home into the Family Trust. To help minimise exposure of their home to bank debt they would seek to utilise two banks when borrowing to buy the property. That is, they would secure $100,000 of new debt against the home, which would then provide a deposit so that a second bank would provide the other $400,000 required secured against the new rental property.
In summary, the Smiths with their high disposable income are able to get ahead by buying a property with good capital growth prospects and enough of a gross yield so that it is cashflow neutral.
In other words, they buy capital gain in the property for free.
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