Never use your own money.
You sold a house or got an inheritance or want to use your superannuation to buy an investment property.
If you still have a non- tax deductible housing loan, the first thing to do is to reduce the housing loan and borrow it straight back changing a non-tax deductible housing loan into a tax deductible housing loan.
If you are paying tax, the biggest advantage of investing in property is the tax deductibility of interest on a loan as well as depreciation allowances.
In Session 10 we have seen that investment in property is more profitable the more tax you pay..
This makes investment with borrowed money so powerful.
Also, if you borrow money you are beating inflation.
You are paying back a loan with deflated money.
Only buy investment property with borrowed money.
How do you change cash into borrowed money
A convenient way is to invest the cash in bank shares ( or any other shares paying franked dividends) and then use those shares as a security for a loan.
Ideally you should pick a share with a franked dividend that pays the interest on a loan. An alternative is to use cash to buy a property but borrow 80% back to invest in shares.
Most larger company have a franking credit rate of 30% which means you effectively get a tax rebate at the 30% level. A tax rebate is tax free but your income is taxable. What is the equivalent income for a tax rebate of 30% .
Every 30cts of tax rebate is the equivalent of 42.9cts of income because if you pay tax of 30% on 42.9cts of income you get 30cts
Assume interest rate on a loan is 6% . What is the equivalent franked dividend to pay for this interest. A franked dividend of 4.2 % is the equivalent of 6% of income which will pay the interest on a loan.
Any decrease in interest rate will give a profit.
Any increase in interest rate is not so serious as in the 30% tax rate you are only paying 70% of any increase. If we use the bank shares strategy, dividends will pay the interest on a loan and any capital gain (say 6% on bank shares) is a profit. Also bank shares are liquid and you can cash in part of your shares for emergencies.
Using Superannuation for Investments
There is a large difference between using superannuation money for investments or using your taxable income for investments.
You should have consulted with your investment adviser or googled how to make your super tax free. If you withdraw money from your super it is tax free and we have seen in sessions 10 that tax free money is worth more than income from work or other investments.
If you use money withdrawn from your super to pay interest on a loan you get a direct tax deduction of 30% (or higher).
THERE IS NO OTHER INVESTMENT THAT WIIL GIVE YOU A RETURN OF 30% with 100% SECURITY
If you use superannuation to buy the investment without a loan, the effective return of your cash is the interest you save on a loan.