Author Topic: Investment advice for young Aussie couple  (Read 1797 times)

Aussie

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Investment advice for young Aussie couple
« on: February 06, 2014, 03:50:49 AM »
My wife and I are contemplating our next financial move and I was looking for some advice.

We are both 28, live in Australia, but might move to the US in the next few years.

Our assets are:
$220,000 investment apartment yielding $1,200/month net rent.  My wife owns this outright in her name.

About $45,000 cash (ubank saver account) in my name to minimize tax.
$20,000 in Super (default industry accounts)

Her income is 90K, mine is around 45K (tax exempt), but mine should go up significantly by the end of the year.

We are just putting our savings into cash right now, but this is obviously not the best long term growth solution. 

We were thinking about buying another investment property, as well as some US and Aussie ETFs.  A lot of people are telling us to buy more Melbourne Property, but the yields seem really low even with a 4.6%. 

I am also interested in REITs and SFIs, but I am afraid about getting ripped off by fees and don't fully understand the tax implications. 

I was wondering if anyone could give me advice on some good resources and how to approach the situation.

Wildflame

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Re: Investment advice for young Aussie couple
« Reply #1 on: February 11, 2014, 12:16:13 PM »
How on earth is your $220k apartment returning $15k net a year? I must assume you mean gross rent, else by the 50% rule you would have to be grossing $600 a week / $30k a year (13.6% yield!) to net $15k after strata fees / council rates / water rates / maintenance etc. More likely you mean $15k gross (6.8% yield, still very good in Aus AFAIK), so $7.5k net. Alternatively, that apartment might be worth a lot more than $220k...

At the very least, consider dumping that cash into something with higher yield (Ubank gives what, 4%?). Say Vanguard's Index Diversified Bond Fund if you are risk-averse (6%), or a share-market ETF otherwise (8-12%). There are both Aus and US options - given you have a source of income in Aus already, you may want to mostly focus on US stock ETFs or mutual funds to act as a hedge against exchange rate changes.

I am unfamiliar with SFIs, but REITs are basically a trust that pools money and uses it to develop property for capital gains, hold property for capital gains, or hold property for rent (sometimes all three). As I understand it, REITs tend to seek capital gains over the long term (more than one year) due to the favourable taxation treatment for capital gains in Australia (50% discount off marginal rate on gains from investments you hold for more than a year). One significant disadvantage of REITs from your position is that it increases your exposure to the property market directly. If it stagnates or falls, you will be out of the money in both your apartment (which may need to cut rent to attract a tenant in such an environment) and the REIT, so investing in an REIT is effectively doubling down on your confidence that the property market in Australia will continue to grow as it has.

Buying an additional property in Melbourne is little different to investing in an REIT, but with the advantage of being able to leverage (and negatively gear) but the disadvantage of less liquidity and higher transaction costs (mmm, stamp duty!).

The taxation treatment of your income in Australia will be relevant when you move to the US. I suggest you invest in meeting with a tax planner who is specialised in dealing with Aus/US clients, or possibly even one based in the US who can advise you on the US perspective. The taxation treatment of various investment options may differ substantially, to the extent it may be the determining factor in your investment choice. That is out of my depth. That said, be sure to investigate what happens to your superannuation when you leave Australia (can you transfer it to an IRA, or a regular account?).

For simplicity's sake I would consider selling the apartment if you decide to live in the US permanently. My brother has had experience managing properties from overseas (first a Melbourne apartment while in the UK, then a London townhouse while in Aus) and it was unpleasant. He had to burn a lot of social capital in order to get friends/relatives to assist with various matters that needed someone to do something in person.

Update: I read up on Westpac's Self-Funding Instalments (SFIs). They are to margin loans what an ETF is to a mutual fund: a pre-packaged margin loan, basically. With fixed leverage (1:1, or 50%) and some interesting taxation implications (capitalisation of interest) which I do not fully understand. Avoid like the plague, unless you really, really know what you are doing no exceptions!

If you must play with fire leverage, redraw against your wife's apartment in order to take advantage of the lower interest rate than you could get through any leverage scheme that is secured against shares. Simpler, cheaper, but still could mean you end up in the dumps if the share market takes a tumble. Don't say I didn't warn you...
« Last Edit: February 11, 2014, 12:19:32 PM by Wildflame »

Aussie

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Re: Investment advice for young Aussie couple
« Reply #2 on: February 12, 2014, 05:59:20 PM »
Thanks a lot for your detailed advice!  It's great to get an unbiased Mustachian view on the subject.

My wife has a large Eastern European family and everyone pretty much just buys and holds residential property.  While I think there are some OK investment spots in Melbourne, I can't see prices doubling again over the next 10 years because interest rates can't go any lower.  Its also so hard to predict a crazy market where most of the activity is coming from Chinese buyers paying cash to let blocks of land sit empty.  Victoria is in a recession and I'm curious as to whether there will start to be some panicky sellers with all the recent mass layoffs, especially in the western suburbs.

Just went back to my tax return:

Gross rent for the apartment was $17,000
- $2,500 strata fees (including insurance, 24 hour security, swimming pool, gardening)
- $1,200 property management
- $600 maintenance
- $600 water
- $400 council rates

So it ended up being around $11,700 net cash flow before tax.  I wrote $15K originally because we get paid $1,200 monthly where only some of the deductions are taken out.  We base the $220,000 price on a sale of an identical apartment for $215K 18 months ago and assume the low interest rates will push the price up at least $5K.  This is still good for a 5.3% yield which is better than maybe 3% for a house in Melbourne.

Its a student apartment near the CBD and these tend to have very high yields... both net and gross, although capital growth has not been so good. We also only average 2 weeks a year of vacancy a year which is very good because no one has ever resigned a lease.  Its mainly first year int'l students living there and they generally move into cheaper share houses after the first year.  Maintenance is also very cheap because there are over 100 apartments in the building and the manager gets volume discounts on maintenance work.

I think US based ETFs are a good deal, especially if the RBA keeps doing everything it can to bring the AUD down.

Good advice about the SFIs.  Buying these sorts of complex financial products are really just gambling at its not really what I am interested in.




Wildflame

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Re: Investment advice for young Aussie couple
« Reply #3 on: February 13, 2014, 10:42:01 AM »
That's an impressive net yield. I normally work off 5% gross and 2.5% net in Australia for my calculations, and tend to find a lot of properties returning as little as 3% gross - which I wouldn't buy into, but I guess if someone bought 5+ years ago, the yield on their initial investment would be decent.

Given you're already paying for property management, I assume you have very little direct involvement, so it would be safer to hold onto it if you move than my previous assumptions suggested. Having family who are also invested in property helps, I know my brother had to rely on some rather undereducated friends and family to act as his agents.

As regards US ETFs, start by looking at Vanguard's offerings and branch out from there if you don't find them satisfactory. I am certain there are plenty to choose from! I am also pretty sure US tax laws double-tax dividends (first at company level then at individual level) so don't expect a dividend income stream, but capital appreciation instead. I assume that the ETF structure means you are only liable for tax in Australia, but am not 100% certain. US laws are weird...

One thing to watch for with US stocks is that they are already highly valued relative to their long-run average Price-Earnings Ratio (much like Australian property). There may be a correction in the offing, so don't invest if you're not willing to take a loss or hold until a recovery after a crash. Then again, there may not be... Poke around this category a bit more to see if anyone is willing to make big predictions. =P

And of course exchange rate changes will influence your returns from the US ETFs as long as you are an Australian resident. A sharp change in the exchange rate may multiply your gains or eliminate them.

Good luck!