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If cash was the king where'd you put it?SoundOfGold [59 Posts]  This post seems to be dead for while but I thought its the most relevant I found so here I go: Recently I sold some property and put par to the money into some shares and still have some cash in my hands. Since I am not yet in the position to buy a new IP I was lookin around to see who is offering the best rates on those online savings accounts. I found that BankWest is paying 6.8% first year than reducing to 6.25%, and than HSBC offering around 6.4%. Anyone has any experiences with any of those? For example what does prevent me from leaving BankWest once the "honeymoon" rate is about to expire? Anyway I have the list of top 20 on my web if anyone wants to know too http://www.soundofgold.com/2007/04/17/top-20-australian-high-yielding-cash-accounts/ Cheers
SoundOfGold - Intelligent investing not only in Australia
SoundOfGold - Intelligent investing not only in Australia L.A Aussie [1470 Posts]  To answer the question in the title, I would not put any cash into any savings account, unless I had to park it somewhere temporarily until I wanted to use it for another (better) purpose. In this case it would go into an account similar to the ones you mentioned above. But it is strictly temporary and not my favoured choice. There never is a savings account with an interest rate as high as, or higher than, any loan interest percentage that you have to pay. With a savings account, you pay tax on the interest you are paid, at your marginal tax rate, and you are charged bank fees in many cases. Your nett return is appalling. Any cash I receive will always go towards paying down debt either personal or investment, while there is debt, as debt is more expensive than the savings interest you will accrue. But I will only put the cash into debt reduction of loans only as long as the cash is accessible in the event of an emergency, so the right type of loan is critical. Once the debt is paid down, and even while some still remains, my cash will always go into income and cap growth producing assets which can be leveraged to do the same again - property, shares, businesses. Here's a very basic, quick comparison, and there is no re-investing of profits or inflation factored in; $20k invested for 10 years:- OPTION 1. OPTION 2. NOTE: holding costs, 1 month vacancy per year, loan interest, "on paper deductions" and other expenses are factored into the after tax cashflow. With careful property selection you can magnify your returns much more than the above model. Cheers, "we get sent lemons; it's up to us to make lemonade"   taplin [23 Posts]  If you have enough money hanging around why not put some of it into gold? It is just not everyone's cup of tea as it doesn't pay dividends or interest but even though it is quite high now my husband assures me it is going to go up even further. Otherwise, if that is a little too foreign for you ING has a great savings account on-line with no banking fees. Fred and Debbie Taplin islandgirl [44 Posts] I personally perfer channelling my spare cash into diversified funds, particularly those geared towards income producing. I can leveridge them for extra gain and then use the income to pay off property investments. tgavin71 [36 Posts]  Sorry to take over your post but I just wanted to ask about the 1987 part of Marc's answer. Why is it best to buy a house built after 1987? Is a ten year issue? So if I bought a property in 2009 I would be best of buying one that was built after 1999? Thanks Only stupid people don't ask questions L.A Aussie [1470 Posts] There is no 10 year rule with this aspect of your investment. Houses built after 1987 (I can't remember the exact month and day in 1987 when it kicks in; so just call it "after" 1987) are eligible for a "special building write-off", as well as depreciation on the fixtures and fittings. Depreciation claims are "on paper" deductions, which cost you NO money from your own pocket, but nevertheless are still claimable on your tax return. It is, in effect, free money. The govt allows you to depreciate the structure on the property. The depreciation on the building is 2.5% per year for 40 years (100%) from the date of construction, while things like carpet, kitchens etc have different depreciable "lives". Carpet for example is 5 years from memory, so you can depreciate it at 20% per year for 5 years, or even 10% for 10 years I think if the "life" is 10 years. This aspect of an investment can be very financially rewarding and enormously improve your return on your property cashflow. This is the only type of property I buy. You engage a Quantity Surveyor to prepare a "Depreciation Schedule" at a cost of around $500 (which is tax deductible). It will pay for itself in the first year. The Depreciation Schedule is forwarded to your accountant, and he/she applies the list of deductions to your tax return. The end result is you can turn a neg geared property into a pos cashflow property AFTER TAX, so there is no tax to be paid on the profit. You can even arrange for your tax return to be forwarded to you in your paypacket, so you don't have to wait until the end of the year for the money (which can be considerable). This can really improve your cashflow on a weekly basis, and if re-invested into your investment loan, or personal debt, will accelerate your wealth building and save you heaps of interest. You would need to speak to your accountant about this. Cheers, "we get sent lemons; it's up to us to make lemonade" SoundOfGold [59 Posts] Marc: And I also tend to agree with you as to paying the debts (assuming they have higher interest rate than your potential return on another investment) before anything else. Looking at your analysis closely reminds me the technique by Margaret Lomas called "positive cashflow" if I remember correctly :) I think this is a very valid technique however there are some points I think one needs to keep in my mind. a) you need to have other income for the life you hold this type of IP otherwise there is no paid tax against which you can offset your on paper loss from IP Um I have more but I think this will perhaps keep you going for a while now :) Take it easy dk SoundOfGold - Intelligent investing not only in Australia L.A Aussie [1470 Posts] You're right dk, a. you do need to have a taxable income for Margaret's strategy to work, but at the end of the day if your property investing is successful and you end up with a surplus of funds which may be taxed then you have won the game - no work for positive passive income. Unfortunately, the stats show that most property investors only ever buy one I.P, and then most of them sell it and never buy another. Neg gearing and the financial hardship it produces contributes largely to this. b. You are incorrect however that the property has to be new or newer. It only has to be built after 1987 -20 years old as of today. You can even use older properties that have been renovated as the renovation costs can sometimes be substantial enough to afford a good on paper deduction. Newer and more expensive properties will produce bigger on paper deductions, but they are not a pre-requisite, and quite often the rent returns are so bad that the great on-paper deductions aren't enough to turn a neg to a pos. I have a property that was built in 1989 and cost me $105k, with a rent return of $220 p/w (it was $180 p/w when I bought it). This is nicely pos cashflowed, and has increased in value by over 50% in 3 years. This, to me, is an easy investment that most people should and could make when they are starting out. c. Finding a totally positive investment for most average people is extremely difficult. For most average people right now; they are earning a taxable income, and would love to invest and can't find a property investment that doesn't make any loss at all (pos geared) in today's market. Forget Steve's 11 second rule; it is the provider of false hope these days. Margaret's strategy offers a very workable alternative for the many normal folk who want to kick-start their investing career without the debilitating situation of neg gearing. If the average person can buy a property like the one I described above every 2 years, they will have a lot of satisfying investing experiences. If they also pay down some debt along the way, rather than park the cash in a pathetic savings deposit account, they will have investments that cost them nothing, and make them rich. Some may even have to pay tax on their investment instead of taking a hit to the hip pocket every week. Cheers, "we get sent lemons; it's up to us to make lemonade" SoundOfGold [59 Posts] L.A. Aussie, Even though quite a bit OT, I think we are pretty much on the same page here. to But your argument about older renos is a valid one indeed. As a suggestion what if one was to focus only at properties in 1985 -1987 range which I think is the 4% building depro time range? c) Oh no no no I was not advocating or trying to suggest somebody should use 11 secs rule for today's market not at all. IMHO a real positively geared properties do not exist here these. In "as is" state that is. I dont realy count a complete rebuild/subdivision/other magic performed on neg geared house to make it positive for a positively geared property from the outlay. I am a big fan but no sorry Steve :) But back to my original question - if I direct you this way - say you dont have any debt to speak of and the cash on your hands does not really make a decent 20-30% house deposit (because errrr you put the majority of house sale proceedings into sharemarket :) ) and you want to park it somewhere for the period shorter than 1 year (I know I did not probably make myslef this clear initialy). Would you still be suggesting me to invest in a positively geared IP? Good to talk to ya, got me thinking again which is always a good sign. SoundOfGold - Intelligent investing not only in Australia L.A Aussie [1470 Posts] Hi S.O.G, the only problem with the 4% properties between '85-87 is they are only depreciable for 25 years, which runs out in 2012. I see where you're heading now; I would park the cash in an ING account or something like that for sure, or leave it in the shares, and try to save like mad until I had the deposit required. The other argument is; can you find a good I.P investment that will carry an almost 100% finance with a pos cashflow after tax? Probably not. I suppose if you could, then it still may be better to go for the I.P and use the lovely leverage, rather than have to put the cash into a high interest-bearing account until the decent deposit is saved. Cheers, "we get sent lemons; it's up to us to make lemonade" SoundOfGold [59 Posts] Hi Marc, true the 4% time range is soon running out. Personally I am not a big fan of 100% leverage at the best of times and so even less in current interest rates environment. I will therefore leave my money in ING, but I was hoping that somebody would also add his / her experiences with BankWest accounts as an alternative. SoundOfGold - Intelligent investing not only in Australia L.A Aussie [1470 Posts] Hi S.O.G; I agree; I am conservative at heart, and like to invest aggressively, but safety is the first concern. I get nervous when I hear of newbie investors taking the plunge with 100% (and more) finance on property investments. This is too highly exposed in my opinion. It is not so bad for the more experienced investors who can crunch the numbers and see the dangers to leverage this high, but even then it is not ideal. I think your strategy is the safest way to go. I'm sorry I can't enlighten you about Bank West. I just wonder about the catch (if any) if they are offering a higher interest rate than ING, who we have been with for years, and who I'm happy with. I haven't been putting money into the account for a while other than for my son towards his first house (gotta start 'em early). All my funds go into investment loans these days. I mean; how can they offer the same conditions as ING and pay you a higher interest rate? What is the catch? Cheers, "we get sent lemons; it's up to us to make lemonade" SoundOfGold [59 Posts] Hi L.A. Aussie, Yup newcomers get often alured by some unscupulous finance institutions offering 100-110% finance. To BankWest account - the only catch I see with them is that the 6.8% is only introductory rate reverting to about 6.25% after 12 months (still more than 6% fm ING). But since I cant get any existing customer's experience I am going to stick to what I know and stay with ING. After all I reckon that risk of losing substantial portion or all of my cash is not worth the 0.8% reward. SoundOfGold - Intelligent investing not only in Australia L.A Aussie [1470 Posts] If it doesn't cost anything to set up and there are supposedly no fees, why not give it a go and send a few dollars across; say; $10 per week for 3 months and see what happens? Cheers, "we get sent lemons; it's up to us to make lemonade" daniellee [61 Posts]  Hi, LA Aussie and S.O.G The two of you have pretty much dominated the conversation so far. You two can keep going at it, but let me chip in my 2 pennies worth. If you are renting and am saving up to buy a PPOR, put your money into high-interest internet accounts. Have to pay tax on the interest earned though. My partner and I are doing that. We just leave our money in ING. Who really would want to go through the trouble of jumping from one online account to the next every year just to earn the highest interest rate? If you already have your own PPOR or IP, put everything into a offset account or make extra payments (Depending on what you like, but a 100% offset account is like a high-interest tax free savings account). Like mentioned earlier, the interest from the internet accounts will not be high enough to make a standard home loan rate. Makes a lot of sense to put your spare cash into your loan(s). That is what we will do when we do buy late next year. That pretty much sums it all up. Regards PRODEV [12 Posts]  Putting your cash into an 'Offset Account' is the only way to go - assuming you have a loan on your PPR. Doing this will save you about 7.5% on the funds being offset (based on average variable rates at the moment). If you invest your cash into an online saver account paying 6.3% you will end up with about 4.76% in your hand after loosing 30% in tax as it's classed as income earned. Brad Samers ormeau [71 Posts] You will find gold, and the mining of will continue in an upward trend aligned with crude. In the early 80's gold hit $850 an ounce, imagin what it can do today considering we are at peak oil production???? bicky [12 Posts] hi LA Aussie, L.A Aussie [1470 Posts] bicky wrote:
hi LA Aussie, Hi Bicky, In the model I posted, I was actually being a bit general and used a bit of quick mental arithmetic for some of it. There was no figure for depreciation, and I can't remember what figure I used (probably guessed), and it's difficult to work out exactly as the fixtures and fittings have different depreciation "lives" than the building anyway, so let's use this; the building, fixtures and fittings cost $100k in total, so the first year is 2.5% of this @ 30% tax margin gives approx $14 p/week approx. Keep in mind that this is simplistic. In reality, the income (rent) is added to personal income to create a new taxable income, then the expenses and depreciation are applied to that figure to give a new taxable income and the difference in the original taxable income's and the new taxable income's tax amounts is the tax return. So, the numbers would be; interest = $200 p/w I always allow for 20% of the rent to be used for holding costs such as insurance, maintenance, management, rates, and even 4 weeks vacancy. This has never actually occured for me, but you never know. The figure is probably closer to 15%, or even less with some properties. So, nett rent is $136 p/week. Interest = $200 Now, add back the depreciation, the holding cost and interest deductions. cashflow = -$64 p/w Allowing for a few variations in how the taxable incomes are worked out by the accountant, I would guess that the property was pos cashflowed by the above amount, but let's say $10. I always like to under-estimate income and over-estimate expenses. There may be an accountant on the forum who can correct this if it is drastically wrong, but I think it is close enough. But for me; if the cashflow is somewhere between -$10 p/w and +$10 p/w I don't care. It's good enough and I would buy the property if the cap growth prospects looked good for the area. It's one shout at the bar (not even; with my drunken mates). Cheers, "we get sent lemons; it's up to us to make lemonade" pgf2 [3 Posts] Hi, Does anyone have old DVD's of Henry Kaye, Paul & Danny Hanna, Ed Burton atc. Looking to purchase for research. Thanks :D bicky [12 Posts] hi marc, lets base this senario on a wage of, lets say $60,000 with a flat tax rate of 30%. [ even though it is not right because of the sliding tax scale, but just to simplify it a bit ]. tax to be paid would be $18,000. $170 p/w rent =$8,840 to come off this amount would be your deductions [ costs,depreciations,etc ]. $68,840-$14,668=$54,172 $18,000-$16,251=$1,749. tax return = $1,749. now, next step, property income = $8,840. sub total, out of pocket expense for property = $3,328. now ,total out of pocket expense for property , after tax is $1,579 = $30 p/w. i would now think this property is neg-cash flowed by about $30 per week. i would like to know if these calculations are wrong in any way. please reply marc ,or anybody else who may be able to comment. |
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