My investment plan, incl MF and IPs. Comments pls!

I am 33 and am looking into our future financial position. Might have to… but I really don’t want to work until I’m 65, only to have a meagre existence after retirement. Currently I earn 82,000 (gross) and my wife is on about 50,000 (gross), I have a young daughter (16 months) and my wife will be stopping work soon (if all goes to plan I guess in about 2 years) to have a 2nd child. I’ve been reading online investment forums and books/magazines for a few months now, I think I’ve come up with a plan to supplement my wife’s income when she stops work while (hopefully) not having to trim down on the lifestyle we’re used to. I’m going to lay it all out here, please advise/comment/remark on my plan. It definitely needs refining and I’m hoping to get help refining it.

Our home loan (HL) = 305,000
Offset account has 70,000
Shares/savings account = 35,000

I am thinking of using half of the offset funds to buy into a managed fund (MF) and use margin lending (ML) to increase my exposure.

Current Home loan rate: 7.47%
ML rate: 9.15%

If I use 35,000 from my offset account I will be paying 7.47% on it… right? This is because it is no longer in the offset acct to reduce the total HL amount.

The HL interest rate together with the ML interest repayments means the managed fund that I buy into will have to perform better then 16.62% (7.47% + 9.15%) to make it worth while… right? Anyone know of an online calculator to work out the amounts? Or if you’re good with excel and can create a spreadsheet… hint hint!!

EG: If a bank is willing to lend 75% for a particular MF. Is this correct:
35,000 plus 75% = 61,250 total MF
35,000 x 7.47% = 2,614.50 p.a. (interest repayment)
26,250 x 9.15% = 2,401.88 p.a. (interest repayment)
Total repayment = 5,016.38 p.a.
For the total of 61,250, it has to return above 5,016.38 p.a. to make it worthwhile… right?

The MF has to produce an income because it’s main (only) reason/use is to help service IPs (none acquired yet, planning stage).

Once that is setup, I will look into buying the first IP shortly after and continue to buy IPs when equity builds up enough. Serviceability. This is the greatest concern, we could probably afford to service a couple of IPs but it would mean not being able to provide a decent life/school for the kids and a huge change to the current lifestyle. Yep, I want my cake and eat it too . How can I afford to service more IPs? Ideas please?!

That’s it. That’s a plan to work on. Rough isn’t it?! Hopefully with the ideas/comments from here I’ll be able to get a firmer understanding and refine it.

Seems about right to me, a LOC may be better option.

You have doubled up on costs there but you would like at least 10% return to make it pay.

By my maths at 75% thats 140,000.00 total.

Anything above that is profit and remember profit can include capital gains as well as income.

Untill you do buy IP's on your income tax will eat into profits. Not that there is anything wrong with making a profit with an income fund especialy if your going to offset that income later.

Most common negative gearing fixer is by using an income fund. There is also capitalising interest and LOE that can be used as well.

I included paying 7.47% for the 35,000 removed from the offset, that will becomes a cost.


Showing my newnest to this. It obviously isn't worked out like this: 35,000 + 26,250 (35,000x75%)... well that was embarrassing!

'Income Fund' as in income producing managed funds?

140K asumes you reinvest in 75% lvr investments. Sim would say go no more than 70K to start with, I am more aggressive than he is though.

Navra, AMP and Vangaurd all have income funds as would some other managers, those three I am more familiar with though.

Don't use the offset - the opportunity cost you mentioned is not deductible.

Borrow 100% of your investment funds until you have no personal debt left.

Will save a lot in the long run.

Cheers,

Best to try to pay down non-deductable debt as much as you can, then draw down the equity. Then this non-deductable debt becomes tax dedectable! I think they call it debt recycling.

Once you draw this down, invest it into quality managed funds. I recommend choosing growth funds, as you don't pay tax on them until you sell. Income funds you pay tax on the income each year which reduces your investment amount.

Then gear at 50%, not 75% as if your geared to the hill, the market drops like it did recently, then you will be margin called, meaning you either cough up cash, or they sell down your funds - at the worst time!.

Keep putting your wage into your home loan, and redrawing the equity and investing into new funds.. As your house increases in value, get your loan redone to access these new funds, which you dump into managed funds again.. this will grow and grow until you can retire! The bigger commitment you put into it, the quicker you will reach your retirement goal!

You should expect this plan to take 10 years to achieve.

When choosing your funds, choose say 5-6 funds in different asset classes to spread your risk.. Although Sim will say to pick the current winners, I personally think no-one has a crystal ball and can't say what will happen tomorrow.. so best to be safe, spread your risk, and view it as a long term plan, so don't worry about the roller coaster ride along the way!

... actually I don't say that - my fund selection strategy is a bit more complex - I strongly suggest you do NOT select a fund just because it has performed well recently. However, just because is HAS performed well recently is NOT (in my opinion) a reason to dismiss it as some other people might suggest !!

fair enough, I personally think you should be in a basket of quality asset classes.. and over the long term, they will all complement each other.

I was on the assumption you look at investments which are "performing today"..

Yes, that's a better description, and quite a bit different to "current winners", which implies they have to be the best.

I actually prefer consistency - performance with less volatility, rather than looking for just the highest performance.

However, I'm quite prepared to move out of an asset class completely if it shows signs of a change in sentiment (eg listed property at the moment), rather than holding long term regardless of what the market does. I'm not saying there's anything wrong with holding long term - I'm just explaining my personal strategy. It's about ensuring my money is working for me and not just sitting idly waiting for a market to recover.

You mention LPT's.. so did you manage to get out of them when they were booming and there was great sentiment? or did you get out in the last few days once the big falls had taken place?