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Which property plan interests you?

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As property becomes increasingly expensive, younger generations have a feeling that they’ve been left behind with the real estate they want being priced out of their reach. Meanwhile, the houses and units they can afford are generally in remote areas, which brings long commuter challenges and associated higher living costs.

In Sydney, in the most sought after areas near the CBD or close by water amenities, prices have been going – to rely on a corny pun – through the roof.

Talking to Mr Valentine

A couple of years back, in a radio spot on James Valentine’s radio show on 702 ABC, we looked at alternatives to the great Australian dream of a house on a quarter-acre block. While the quarter-acre might be less a priority, and even a unit could have more pull than a house with some busy 30-somethings, the goal to own real estate remains ‘the dream’.

To Valentine’s audience, I argued that given the high prices of properties, perhaps younger people or older Australians not already owning real estate should consider B-plans or even C-plans. While this was a few years back, these back-up plans could still be a relatively good alternative to real estate.

More on B-plan

The B-plan option was to simply become a lifetime or long-term renter and turbo charge your super. My comparisons of shares versus real estate shows you can expect returns around 10-12 per cent on average from both classes of assets and as super is heavily reliant on shares with a preferential tax treatment, non-property owners could build up a big super nest egg for retirement. 

Locked in with super

Of course, the one drawback of super is that you can’t access the money until retirement but it’s a great way to grow your wealth. On the other hand, you could go into a safe managed fund and use the tax credits to reduce the overall tax you pay and pocket pretty good long-term returns. 

Plan with a view

Let me work through a rough example to show the potential pay-off for someone who plays the super game.

Imagine a couple both aged 33, with 32 years of work ahead of them and with $50,000 each in super. Let’s say they’re both teachers in the same industry fund and it returns nine per cent per annum. On this return, it means our couple’s combined money of $100,000 doubles every eight years. Over 32 years, there would be four doublings amounting to $1.6 million but that’s only the growth from the original $100,000!

They’d put money into super for the 32 years as their wages grow, so renting and playing the super game including salary sacrifice and undeducted contributions could create a nest egg worth many millions of dollars. That’s not a bad B-plan and could create plenty of money to buy a nice little retirement home near the water in a coastal town – but you might be a few streets back from the water.

The C-plan

What about the C-plan where you remain a renter but you use the tax system and become a landlord? This is a wonderful play for a young worker who lives at home paying negligible board to parents.

The thinking behind this strategy can be different for different people but the plan is based on someone with good cash flow paying a fair bit of tax. Then by borrowing for a rental property, the losses incurred when the rent does not cover the interest and other costs (this ‘loss’) is used to reduce your taxable income.

That’s why promotional material arm-twists people into buying an investment property using the persuasive line: “And the taxman helps you pay off the property.”

How can I afford this?

One question, which I often hear is: “But how do I find the extra money each week or fortnight to cover the loss?”

The answer is that the tax office allows you to adjust your tax bill by filling out a form you can take to your paymaster, which shows that you are expecting to make a loss that will lower your taxable income.

That means you will receive more money in your pay because your tax will be reduced. Some people who have really good cash flow will take one big tax refund at the end of the year but I’d prefer it to be distributed back throughout the year. 

Summing up the C-plan

This plan means you hold a property, you get tax deductions and you can pocket the capital gain. And one day you could move into it and use it for yourself or use the equity in the property to borrow for another property. Plenty of people have built up a portfolio of properties doing this.

You can also become an expert on positively geared properties where the income from the rent is bigger than the interest rate and other costs. These are harder to find but they’re often pretty cheap to buy, though they tend to have less capital gain.

However, I’ve seen some that have done really well in this area as well.

And finally …

Whatever you choose, make sure you do some planning and it could be wise to talk to an accountant or financial adviser.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, October 14, 2011

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