July 15, 2025 • 36 mins
If buying off the plan property is so long associated with later problems, why do investors ever do it?
Today we take a look at the value proposal offered by off the plan property with its discounts, tax breaks and guarantees...
In today's show, we cover...
- The best and worst of off the plan investments
- Who is offering the guarantee?
- Buying through Self-Managed Super funds
- A listener wants to construct their own index fund.
James Gerrard of www.financialadviser.com.au joins Associate Editor - Wealth, James Kirby in this episode
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:07):
Hello, and welcome to the Australians Money Puzzled podcast. I'm
James Kirkby. Welcome aboard everybody. Now, the property market is
clearly improving, rebounding, especially in the larger cities, especially at
entry level prices. But one of the things we discovered
on the show recently was the alarming loss facebine investors
(00:28):
in apartment investments all over the country, particularly in the
larger cities. When I looked a little closer at this,
it became clear that many of these apartments were or
had been bought off the plan, something we need to
catch up on. Basically on the show, we've never really
looked at this properly, and I think I need to
(00:49):
speak to an financial advisor who is over property rather
than somebody inside property on this and my guest today
is ideal for the exercise. It's James Gerard of financial
dot com dot U. Hi, James, how are you.
Speaker 2 (01:02):
I'm doing very well, James, Thank you for having me on.
Speaker 1 (01:04):
Great to have you on. We have talked a course
about just about everything over the years, but we haven't
talked on air about buying off the plan. But just
to introduce it, it cut my eye, how often they
were mentioned in this context, possibly because they are more
likely to be newish apartments are newly built in the
(01:27):
larger towers and complexes in cosmopolitan cities. But I suppose
straight up in terms of buying off the plan, why
on earth do people do it? Anyway? I think this
is the best way into it. Why would you? What
is the value proposal?
Speaker 3 (01:44):
Yeah, it's interesting, and to put a kV out there,
I'm not a big fan of off the plan properties,
but there are some reasons, valid reasons why people would
pursue this type of purchase. So the first one is
that you lock in the price. Now by nature of
off the plane, you're buying off the plans. I think
that hasn't been built yet. You agree to it. There's
a contract that you sign, you leave a deposit, and
(02:05):
then the property will be constructed, which could be anywhere
from one to three years from the date of when
you agree to proceed. So that means that you agree
on the price today. But if the property market's moving
upwards by the time the place is being completed, you
could be sitting on a paper profit. And I've actually
seen that a couple of times in Sydney and Melbourne,
where people have committed to a property off the plan,
(02:28):
it comes two and a half years later and it's
ready to complete and they go, well, i'd actually want
to buy it. I want to sell it. And then
they can just sell it to somebody else and say
they paid seven hundred thousand, it might be worth eight
hundred thousand dollars. They just bank that profit and all
they've tied up is five or ten percent deposit for
that period.
Speaker 1 (02:45):
So what it's best then in a rising market, it
has clear advantages that you capture the rise and even
in the process of when it's been built, you are
actually gaining money. So let's just look at the pros.
So that's an obvious pro that you can get in early.
(03:06):
There are exemptions and tax breaks and stamp duty attractions.
Speaker 3 (03:10):
That's right, James, depending on the state that you live
in or that you purchase in. More to the point,
there are exemptions or concessions on stamp duty when you
buy brand new properties. And that's because state governments want
to drive the economy. They want the building industry to
be employed, so they they'll provide an incentive for people
to buy brand new properties. And then when the property
(03:30):
is complete and you take ownership of it. If you
happen to be an investor, you would engage a quantity
surveyor to do a depreciation schedule of which you can
depreciate the building itself over a forty year period, and
then you can build so depreciate the stuff inside it,
so the dishwasher, the blinds, all those type of things
over anywhere from a five to fifteen year period.
Speaker 1 (03:52):
Can you how soon can you start that depreciation schedule?
Is it from when the building is officially open?
Speaker 2 (03:58):
That's right?
Speaker 3 (03:59):
Yeah, So when buildings complete and you take ownership of it,
sometimes the developer will provide you that schedule, but other
times you'll need to go engage a quantities of a
firm and then they'll provide you with the schedule. You'll
get this PDF document or a binded book, and then
you give that to your accountant and then they'll just
add these tax deductions, which for the average apartment that
costs a million dollars, you could be looking at maybe
(04:23):
seven to ten thousand for the fixtures and fit ins,
and then maybe four or five thousand a year for
the building itself, So it can that up to be
quite a big tax deduction.
Speaker 1 (04:31):
Okay, But the specific attractions of buying off the plan
then is first of all, in a rising market, if
it takes three years to build and you buy your
apartment for whatever, five hundred and seven to fifty million,
and they go ten percent a year, you're actually capturing that.
You're going to capture that increase in value as it's
been constructed. That's one. Secondly, there are specific inducements, if
(04:53):
you like, sometimes from the developer, sometimes from the government.
Sometimes both are in place, or people who want get
into the market and mightn't get in easily in any
other avenue will come in here. What about these guarantees,
which at face value look attractive. So I see an
advertisement or I'm invited perhaps to a sales day in
(05:17):
a hotel or something, and there's a guarantee, I mean,
are they worth it?
Speaker 3 (05:24):
The guarantee is very interesting, and they signal something to
me as a professional investor, Slasher advisor to explain what
the guarantee is. It's that you commit to purchase the
property for a certain price, and when the property completes,
the developer will say, look, if you can't find a tenant,
will guarantee to pay you rent for a period of time,
(05:45):
and that's usually three to six months at a certain rate.
And what that signals to me is that there is
potentially uncertainty with regards to the demand for that property
when it's completed, to the point whether the developer needs
to date all this carrot in front of you and say, look,
you don't worry if you don't get a tenant straight away,
we'll cover that for a period of time. And that's
(06:07):
a really important point to note for investors, particularly where
they're buying interstate into high rise apartment complexes. Is that
say there's two hundred apartments in a complex or in
a little sector of apartments in a particular street, you
have to remember that a fair whack of those buyers
are going to be investors, and when the property completes,
it completes at the same time.
Speaker 1 (06:28):
Yeah, right, so everybody is advertising in the same place
at the same time.
Speaker 2 (06:32):
Ah Ye, that's right. Yeah, it's just simple supply and demand.
Speaker 3 (06:37):
Unless it's a really booming area where there's a real
big demand for for tenants, you're going to end up
with that property that will be vacant. Because your property
is identical, like literally identical to dozens of other properties
that have completed at the same time.
Speaker 1 (06:50):
Okay, so that is definitely a negative. What struck me
about these guarantees is I presume they're not government guarantees, right,
there are guarantees from.
Speaker 2 (06:59):
The developer, that's correct.
Speaker 1 (07:01):
So it seemed to me what's really crucial here? Should
you go in this direction if you wish to, And
I'll ask you when we're finished explaining it basically why
you don't like it at all, But it would seem
to me that if the guarantee, it's very important for
listeners to understand that the guarantees on these off the
plan deals are from the developer, not the government or
(07:23):
anyone else or the bank or whatever. It's the developer.
So how do you know if the developer is good
or bad?
Speaker 3 (07:30):
Track record is a big one, looking at the history
of their completions, how long they've been in business as well,
So all the things that you would do when you're
buying a car or any sort of major purchase, just
do your research there on it. Because we're see in
the media so much about these foul or troublesome developments
and then post completion about clouding issues and structural issues.
(07:54):
So that's one of the negatives of buying a brand
new property is the uncertainty, and that's start contrast to
buy an established property that's been around for say fifteen years.
The difference there is that the foundations have settled. Any
issues that have come to light would have been done
so probably in that ten or field gay period, so
(08:14):
you're buying something with more certainty there.
Speaker 1 (08:16):
So the developer is very important, and the track record
of the developer is very important, and the guarantee is
only as good as the developer is. So in many
ways face value, this all sounds mildly attractive. Tell us
what goes wrong with these I'm going to assume a
few things right. We're going to assume that developers are
selling them right. So there's a certain element of sales
(08:36):
pressure on these developments, the sales tactics. To some extent.
You are possibly you're part of a larger enterprise that
wants to sell the apartments, So we take that on board.
What might we not guess?
Speaker 3 (08:51):
One of the things that I see is an issue
is that, and this is maybe not so much about
the developers but more about the purchaser, is that some
people will take a gamble when they buy brand new properties.
They're not in a position to actually settle an investment
property for say a million dollars, but they'll commit to
and off the plan property for a million dollars on
the basis that you don't need to get finance at
(09:13):
the time you sign the contract. You need to get
finance two months or two years sorry, down the track,
when the property completes. And so they're betting on their
own ability to be able to get finance, save more cash,
get better income over that two year period to then
be able to transact on the property. But outside of that,
as you said, it's that it's a bit of a
murky industry. It's not regulated by ASSEK, and you see
(09:36):
a lot of dubious dealings there. So a lot of
promotions of off the plan properties, a lot of under
the table deals with undisclosed commissions. So you have a
lot of property marketers trying to promote this place that
they're trying to sell you as the best with regards
to growth and livability and all these things.
Speaker 1 (09:52):
These guys are on commissions.
Speaker 3 (09:53):
Are there on commissions? Yeah, they're mainly on commission. So
the developer has a choice. They either market the properties
themselves to try and sell them, or they outsource it
and they'll put their hand up and say, hey, anybody
who can sell these apartments will pay you x percent.
And that x percent depends on where the property is. Interestingly,
if it's in Sydney Melbourne, the commissions are lower. They're
(10:17):
generally two or three percent. But if it's somewhere regional
it could be so like a to Womba property for example,
or an Ipswich property, then the commissions can be as
high as ten percent.
Speaker 1 (10:28):
Right, Okay, that's worth knowing. That's worth knowing, all right.
So there's a couple of things. I think they were
really crucial for listeners who are looking at this area.
You know that, first of all, the person they are salespeople,
so you're asking salespeople's questions, but their intention is to
sell the apartment to you. They're they're not neutral observers.
The second thing is that the developer is the developer
(10:51):
to some extent, is your risk, right, because it's the
developer offers to guarantee not to mention issues around building itself,
whether the building is in good chef, et cetera. That's
a reputation issue, James. It all comes back to the
developer you're buying off the plan from. And how would
I know of one? Is is there anything someone was mentioning?
How if it developer changes their name every time, a
(11:14):
different company for every development, that's a warning signal. While
as if you have the same company for ten years
doing these but a track record and you can see
the ones they did in the past, and they're full
and they're buzzing, that's away in Is that a guide?
Speaker 2 (11:28):
It is a guide to some degree.
Speaker 3 (11:30):
Developers will trade generally it's the same name across different
developments they do. But what they will change is the
underlying entity that you're entering the contract with. So they
silo every development with a different company, and they do
that to limit their liability. So if there's a problem
with one, they sometimes the less reputable developers will do
(11:50):
some financial magic ry and then things will disappear, namely
them will disappear as directors of that company, and then
people are left in the lurch with defective building.
Speaker 1 (12:00):
Okay, so their development could be in trouble, but their
developer would not be in trouble.
Speaker 2 (12:05):
Correct.
Speaker 3 (12:06):
They have this entity set up solely for the purpose
of that development, and all of the developers assets and
income is going through other entities or generally held in
the name of their spouse. So it's very, very difficult
to be able to claw any money back from a
developer if something goes wrong without significant legal proceedings, which
obviously comes at a large cost.
Speaker 1 (12:26):
It sounds pretty. It sounds pretty, I will say wild,
but it sounds like you're on your own out there.
You're very much on your own as an investor in
this space. So would you ever recommend someone goes near
buying off the plan.
Speaker 3 (12:41):
I would.
Speaker 2 (12:42):
It would have to be something quite unique.
Speaker 3 (12:44):
I'd like to keep it simple when it comes to property,
and I look at supply and demand. Now, if this
off the plan property is somewhere very unique. So take
Barangaroo in Sydney for example, when they built the Crown
and they're offering residential apartments there, that's thing which there's
limited supply. You have a very unique view of the
(13:04):
Sydney Harbor Opera House, Harbor Bridge. So something like that,
I can say, Okay, well you're not going to have
ten other apartment blocks built around there. That's going to
sort of saturate the market. But if it's just another
apartment block, if it's just another house and land package
in this estate that was farmland a few years ago,
I have more hesitations there. And the other thing which
I would add is that when you buy a brand
(13:26):
new property, you're competing against overseas buyers who can only
buy brand new properties. So that plus all of the
commissions and charges and profits that are being made, means
generally that off the planned properties are much higher and
less value compared to an equivalent established property that's even
one years old or two years old.
Speaker 1 (13:47):
So you have an advantage in that you can buy anything,
but the overseas buyer can't correct. Interesting, so of course
a lot of the marketing is overseas then for these towers,
and they're marketing in Singapore and Kyel. I mean I've
seen them in hotels in the many, many over many years,
and you realize how half the towers in the city centers,
especially Sydney and Melbourne, we're financed. How it all worked.
(14:10):
Very interesting, Okay, really really interesting subject. I'd love to
know what our listeners think of that, whether we were
fair on buying off the plant, if it is an
area that our listeners think is valid or to be
avoided really really interesting. We'll be back in a moment. Hello,
(14:35):
Welcome back to The Australian's Money Puzzle podcast. I'm James
Kirby with James Gerard Blancial Advisor dot com dot you.
Regular contributor of course to the wealth section of the Australian.
We both are and these issues are often and regularly
covered in the Australian. Speaking of that last weekend, I
came across something I thought was just absolutely amazing on
(14:56):
self managed super funds. Tim Tooey, who is not a
not in the managed super fund space, is not in
any way trying to promote him. He's a guy that
every now and again beans out these amazing reports. He
works with the Yara Capital, used to work with Goldman Sachs.
I remember he did a housing report one time which
was so spot on, so spot on, many years ago.
(15:18):
So he has this ability to cast his eye over
an area and he looked at smsfs and he came
to the conclusion, James, that they are considerably more successful
for investors than industry super funds or other big funds.
And he showed and he really laid it out how smsfs,
even on a straight asset allocation basis as investors are
(15:42):
more successful than big super funds. But when you add
in the tax aspect of smsfs, the after tax returns
of smsfs compared to big super were they were roughly
one third higher over a period of three years and
part then he went into why that was, and he
mentioned he mentioned the obvious things like that you have
(16:05):
this control, you can choose your allocations frank dividends in
the local shares, and he did say that the ability
to buy property directly was still a powerful issue for
smsfs and their out performance. It's really interesting because sms
putting property into SMSF gets such a hard time. It's
meant so difficult because the big banks withdrew from financing
(16:29):
that market, and because there's kind of a cloud over
it in that government's blow hot and code on it
and they don't really commit to it. There has been
threats that it would actually be completely repealed regularly, but
they never came to pass. Four people, James, who are
thinking about using an SMSF to finance a property investment,
(16:52):
do you know what they can do if the banks
are out of the business. How do you start the
for finance in that area.
Speaker 3 (16:59):
Yeah, I'm the perfect person to speak about this. I'm
actually going through the process in the middle of at
the moment.
Speaker 1 (17:04):
Okay, are you dealing with right? So how did you start, Like,
how did you even get a panel together?
Speaker 2 (17:09):
Yeah?
Speaker 3 (17:09):
So I went through a mortgage broker and maybe just
stepping back a little bit, the major banks pulled out
of the self managed super fund lending market, and this
is going back almost ten years ago because they saw
the risk of these properties. There was a lot of
off the plan properties being sold to mum and dad
investors who were convinced to set up a self managed
(17:32):
super fun and move out of their industry super funds
into a self managed buy this off the plan property,
and of course commissions paid to the people that were
promoting that.
Speaker 1 (17:40):
So that is not good. It's not good to have
to open an SMS just to buy an investment property.
That is that is in some expent again, but that's it.
That's amst at its worst. That's the worst side of
the market. Yeah, okay, that's right.
Speaker 3 (17:53):
The concentration risk is high where the majority of your
super is exposed to one property, and the banks were
looking at their loan book where they were self managed
super fund loans going geez, these properties are going down
in value and if the borrower defaults, we might lose
some money here. Because under superannuation law, the banks are
limited to what's called limited recourse. The loans are called
(18:14):
limited recourse borrowing arrangements or lrbas as an acronym, which
means that you can only as the blender, take back
that property. And if the property is going down, well,
then your loan is becoming risky if there's a default.
So the bank said, we don't need this risk. We're
getting out of the market. So the major banks all
stopped writing self managed super fund loans, which left the
(18:34):
second tier lenders as the primary lenders in that market.
And interest rates today, I think my rates high sevens,
but arranges anywhere from that sort of high sevens through
to mid nines as an interest rate, And you contrast
that to a normal non super investment loan which would
be below six percent. So you do have to pay
(18:55):
a premium because of the lack of competition there with
the lenders.
Speaker 1 (19:00):
I used to pay a high rate to borrow for
your property inside the super fund. The highest rate in
the market because it's higher than commercial. It's it's exclusively
high for smsfs, and negative gearing is not as good,
right because the tax isn't as high, So the negative
gearing is diluted if you like. So why would anyone
(19:20):
do it?
Speaker 3 (19:21):
Well, if I look at an investment property that I
buy my personal name, if I want to pay down
the principle I every dollar of income that I make,
I'm taxed forty seven percent, so I only have fifty
three cents in the dollar to then pay down that
investment property loan. If I contrast that to Super, depending
on my income, if it's above or below two hundred
and fifty thousand dollars, I'm taxed either fifteen percent or
(19:42):
thirty percent or my SUPER contributions, which means that more
of my after tax dollars can go to pay down
that same mortgage if it's in SUPER versus outside SUPER.
Speaker 1 (19:51):
I suppose you have that terrific thing that you can
put a deposit out from your super fund, but you
you know, which is money you don't have hanging around. Basically,
most people don't have the deposit of an investment property
hanging around in their every day account.
Speaker 3 (20:04):
Yeah, and so it helps people that have restrictions or
limits around their borrowing capacity personally, maybe they've purchased a
home and they've got a home loan and they don't
have the ability to purchase another property as an investment.
But interestingly, superannuation, when you apply for a loan, it's
assessed separately to your personal borrowing capacity, So you may
(20:26):
be capped out personally to buy a property, but you're
super fund if you were to set one up. How
they assess it is that they look at super contributions.
They look at is your employer putting in regular contributions
into your super account and it doesn't have to be
the self managed It could be that the retail or
the industry fund, which predates having a self managed super fund.
So they're just looking at the contribution history and they
(20:48):
use that for what we call serviceability. And then they
look at equity, so they look at how much you
have in your superannuation account and then based on those
two things, they'll make this independent assessment as to how
much you borrow inside of super.
Speaker 2 (21:01):
So that's another benefit of buying property in super.
Speaker 3 (21:04):
It unlocks in some cases the ability to move down
that path of purchasing another property where they couldn't do
it outside in their personal name.
Speaker 1 (21:11):
Yeah, so it's entirely autonomous. Basically, it's it's an issue
your super fund has got is separated from you, and
they judge it on this fund wants to buy a
property and they want to look at the cash flows
into this fund, which would be your contributions obviously coming
in all the time. And if they're comfortable that there's
a that that is that cash flow is there, then
(21:33):
the service ability is there, then they can sign it
off regardless or autonomous of your personal finance circumstances, what's
going on with your your credit card or your mortgage
or whatever. That's well worth knowing. That's a very interesting
piece of information which I'm sure our listeners will now digest.
We will have a short break, we'll be back in
(21:54):
a second. Hello, Welcome back to The Australian's Money Puzzle podcast.
James Kirby here with James Girard. Well, we've been talking
buying off the plan, which I thought was pretty interesting.
I must say, ah, yes, I think there's a lot
(22:21):
of cons. You listed the pros and cons. I feel
there's a lot of cons basically working against buying off
the plan James on balance, and I also thought on
the smsfs, that's very interesting and it's also very interesting
to know, folks that the smsfs, which we talk about
all the time, and I know many of you have smsfs,
(22:42):
it's nice to know that it wasn't just this year
you did better than the big funds. You've done better.
It would seem for several years in a row if
we judge very deep dive done by Tim Toohey at
Yarra Capital, which you can have a look at. It's
on the web Arra Capital. Just have a look there
all right now, and you'll see he's quite persuasive arguments
(23:04):
about the power of SMS investments, which I thought was
very important James, that he didn't just say it was
tax because someone who would say, oh, yeah, sure, well
they get you know, they're playing their Frank dividends and everything.
But he actually showed that in terms of asset allocation
on that basis alone, the smsfs were more successful than
the big funds, which I thought was very very interesting.
All right, Corinn, Hello Krinn asks listening to your last
(23:29):
episodes in relation to index funds, with one guest liking
to follow the Australian top two hundred in index funds.
And just when I thought, okay, that's the way I'll
go and I'll forget about my SMSF buying property, and
another guest points out that the index is heavily weighted
towards banks and resources, and then there is this dependence
(23:50):
on shares that I come on my bank. Sokriinn puts
forward the idea, would she and our answers never advise
its information. Only could she construct her own index fund,
basically a top fifty Currin's top fifty index fund, and
then she would buy proportionately so many stocks. What do
(24:11):
I think of the strategy. I think it's very elaborate strategy.
It's quite sensible in some fashion. I remember Doug Turek
on the show explained that you could build your own
index funds. But I think for a word to make sense,
with all the fees you'd have and all the trades
you'd have to do, I think it would have to
be on scale. By that, I mean you'd have to
stick with it for a long time I think for
it to pay off, and you'd have to track it
(24:31):
very carefully and just separately. Kurin. You know, one of
the things if you listen to the show again, we
talked about most industries are straight market cap indicies, but
there are now variations like equal weighted indices, where they
try to get away from the from the problems of
the same for instance, the banks and minors dominating the
(24:52):
top stocks, and they try to get a more equalized,
more representative index. So there is there are people almost
doing that, are doing versions of that without you having
to go and do it by yourself. But in principle
it's not crazy. What do you think, James, you're looking
Are you looking skeptical there? I'm not sure.
Speaker 3 (25:13):
No, no, because you don't have to reinvent the wheel.
It's been done for you ETFs. So just use one
of those. Because if you go buy fifty stocks and
you manage your own equal weight portfolio, oh jeez, your accountant,
I don't know if they're going to be angry.
Speaker 1 (25:29):
Your count will cry and you need a software package
to follow it all. But also the fees, the fees
will be higher than any TF wouldn't they That's right?
Speaker 3 (25:40):
Yeah, at first, the account is not going to be
happy for the transactions, but then they may be rubbing
their hands together and all the extra fees are going
to be charging you to administer this.
Speaker 2 (25:48):
Equal weight portfolio that you've constructed for yourself. So I'd
say go buy the ETF. There's multiple ETF companies that
do equal wait ets.
Speaker 1 (25:54):
Yes, but look closely at the ETS crew and they
are they are now of a variety and they're not
all strictly market cap. Some are what we call equal weighted,
and have a look at that and how they get
around that issue. That was a failing which was highlighted
on the show about the index funds. But good on
you and very interesting notion. Certainly shows that you understand
(26:16):
it very very well. Thank you. Okay, question from Ashley
there you want to read that one.
Speaker 3 (26:20):
So Ashley, he's talking about bitcoin. While bitcoin can be
expected to remain volatile in the shortter medium term, it
seems that AMP has doubled their investment into it and
more companies and people will want to have a greater
understanding of why bitcoin was created, how it's used, the
implication for current monetary systems.
Speaker 2 (26:39):
Like every other.
Speaker 3 (26:40):
Bitcoiner, the AMP journey is on a one way street
and growing institutional adoption reflects that process.
Speaker 1 (26:47):
Yeah, well it's a powerful point actually, which we can't
really get around amp representing, if you like, the big
end of town establishment Australia, establishment money, a very old
Australian virtual providence society as it was. So the definitive
establishment incumbent player in our market went and put twenty
(27:07):
seven million into bitcoin and they have done very well
from that, and we had Shane Oliver on the show
explaining why they did it. At a certain point, I
felt that the most powerful notion was that they bought
it because they thought it was going to go up.
Now he rejected that out of hand, but it has
gone up, and I think it's still largely the attraction
(27:30):
is still largely the concept that it could be an
alternative store of value, that it could be something like gold,
and clearly mainstream investors are starting to think that way.
There's one point six billion in SMSF money in bitcoin
and crypto. That's an ATO figure, by the way, so
that's not speculation to say to you. So I think
(27:51):
it's here to stay. I think it's an ascid class
that is on the table. What do you think, James?
Speaker 3 (27:55):
It was set up well back in two thousand and eight,
two thousand and nine in response to feelings around central
banks and traditional banking systems post global financial crisis, and
there was this desire to have this what they call
decentralized digital currency, and up came along Bitcoin as the
first one, and there's been thousands that have followed. Now
fast forward to twenty twenty five, we've got black Rock, Fidelity, Vanek,
(28:19):
we've got big US pension funds that are investing money
into it. So it is gaining mainstream adoption. But my
personal feeling is that it needs to move to the
next stage of actually having some use other than being
something that's cool to buy and say that you've got bitcoin.
So unless it does become a currency used, I find
my feeling is that it may become something like those
(28:41):
I forget the names of them, those digital artworks that
you could buy linked through crypto and fts. That's all right,
I can't remember their name, the Dancing Monkeys, or yet
there was this particular epe I think it's called the
Board eight Yacht Club, where they were going millions of
dollars and now they're selling for hundreds of dollars. I
feel that there needs to be stage two bitcoin. It
actually needs to be used in practice in economies, otherwise
(29:04):
it will decline.
Speaker 1 (29:05):
You're searching for intrinsic value. But Shane Oliver Chief Economists
today and he said he didn't. It didn't require intrinsic
value for them to make them move.
Speaker 2 (29:13):
Yeah, I get that.
Speaker 1 (29:14):
What do you say to clients who come in now?
Has your advice changed to clients on crypto and bitcoin
over the last two or three years.
Speaker 2 (29:23):
It hasn't.
Speaker 3 (29:24):
It's put money that you're willing to lose to it.
And the more that you hear about it in the media,
the more that you hear James Kirby talk about bitcoin
with guessed like myself, the later it is in the cycle,
because when it's out of favor and down and out,
that's when people should be buying. But when it's in
the newspapers, it's the mums and dads are buying it,
(29:46):
and the prices are really elevated and there's not too
much more to go. And that's just my opinion based
on previous cycles.
Speaker 1 (29:52):
Oh, it's so true. And it's one hundred and twenty
thousand to hit a new record. Why am I paying attention?
Because it's one hundred and twenty thousands, it hits a
new record. That's unfortunately the nature of the beast. Yeah, okay.
One very interesting thing I thought about bitcoin is that
the more people buy it, the less volatile it becomes.
And as it becomes part of the institutional framework, it's
(30:13):
less volatile. But that also means that you won't get
those big surges anymore. They didn't want do those amazing
run ups. So I think that's part of reality for everybody.
Last one from Mark.
Speaker 3 (30:26):
Yeah, so, Mark says, I'm an avid fan of the
podcast and love the variety of topics you cover. Given
the tax advantages of salary packaging and electric vehicles, I'm
looking into a novaated lisse option and have discovered that
there is an option for a self managed novated lease
as standard novated liases in bed charges and interest in
their fees. As an accountant, I find it hard to
(30:46):
determine the effective loan interest rate. Would you be able
to cover this topic and explore?
Speaker 1 (30:51):
All right, Mark's accountant, Remember everybody might be easy to
copy him. What exactly is he talking about? James?
Speaker 2 (30:56):
Sure?
Speaker 3 (30:56):
So there is this scheme available where you can finance
the cost of a vehicle, plus pay the ongoing maintenance
and running costs of that vehicle through this arrangement that
involves your employer that's called a novated lease. In the past,
you would use roughly half of your pre tax income
towards this lease and half of your post tax income.
(31:19):
But go back a couple of years ago, the federal
government said, we want more people driving electric vehicles. So
if you buy an electric vehicle less than circle ninety
thousand dollars, you can use one hundred percent of your
pre tax income to be able to fund the finance
plus the operating costs of that electric vehicle.
Speaker 1 (31:35):
That has been spectacularly successful.
Speaker 2 (31:38):
Yeah, fantastically.
Speaker 3 (31:39):
I've got one of my driveway vehicle that's in a
novated lease and I was one of the first to
do it because it's one of the best tax breaks
going around. To facilitate this, if you're an employee, you
need to speak to your HR department and they'll either say, look, no,
we don't offer that through this employment arrangement, or they
(32:00):
may say, yes we do. Go see these people over
here at the x y Z leasing company now markets
saying rather than go see x y zed people at
the leasing company. He wants to pick the provider for
the finance, which you can do, but that's again subject
to your employer saying, ah, okay, we're going to deal
with the extra administration of you picking your own finance
company rather than dealing the one dealing with the one
(32:22):
that we've signed up a deal with that makes it
all streamlined for our payroll purposes.
Speaker 1 (32:27):
Okay, I see, yes, I know. And most corporations have,
like Newsport here, they have a you know, they have
the deals, no vated lease, and they haven't arranged with
whoever it is. And I would imagine if you rank
the pay office and said could I go and do
one outside, they really would groan. But Ashley is an accountant,
(32:47):
so perhaps he could go fair better than the rest
of us non accountants. I would imagine as the majority
of listeners. Okay, very good, very good. And how's that
novated lease working out? Would you bought an electric car
without it?
Speaker 3 (33:03):
I probably would not have an electric car without the
novated lease. Now, the the interest rate wasn't too bad,
and that's something that they don't tell you about when
you go get yournvated lease. They're just like tax benefits,
saving next amount per month, per year, but the interest
rate that they hired, and you have to actually work backwards,
and in most cases it's not too bad. It's a
few percent above what you would expect to pay on
(33:24):
your home loan, so at the moment it's probably seven
or eight percent interest, so it's not too bad. But
what really drew me was that using your pre tax
income to to find this vehicle taket me of the
line so important.
Speaker 1 (33:35):
So a few things you as an everyday salary owner,
there are so few things that you can do pre tax.
You know. Obviously your super contribution maxed out at thirty
thousand a year is the big one. And after that,
really it's what it's about you doing something like an
investment property or whatever. You're looking for your negative gearing,
and then there's very little less. And this was the
(33:55):
first new thing for many years, wasn't it? That one
hundred percent and basically tax concession pre tax if you
take an electric car lease as opposed to a petrol
car lease, which is roughly fifty percent or there thereabouts. Interesting, Yes,
that explains all the byd utes buzzing around my neighborhood. Flashy,
(34:19):
brand new zippy they're zippy. I've got to say, the
speed these guys moving around on these big, awkward youths,
it's alarming, really, and they get away with things because
they don't make any noise. That's my personal theory that
if it was petrol that makes so much noise, everybody
would jump, But it's they've kind of gone past you
by the time you realize the outrage that has been
(34:41):
committed in front of you, you don't go around to
one of those.
Speaker 2 (34:44):
I died. I've got a little Volvo Electric.
Speaker 3 (34:46):
But finally, I've been in a few electric vehicles where
the speakers for the cast Aeia system make little car noises.
So you guys, when you put the accelerator down to
limitate as if you were in a petrol vehicle.
Speaker 1 (34:58):
Yeah, really to tell you what you doing. It is
very interesting. Just one last thing, resale value of these
electric vehicles is it on tested? Is it is it
reliable with any idea?
Speaker 3 (35:10):
Yeah, So we've had teslas around for ten years now,
so that there is market based evidence around the resale values,
and they are poorer than the equivalents and internal combustion
engine vehicle, so that that's no doubt. People are concerned
about technology because technology for evs has moved really fast
over the past ten years. The battery technology as well,
(35:31):
so the range that you get on the evs, and
also people are concerned about the life that they're going
to have left on the battery if they're buying one
that's seven or eight years old. The manufacturers are saying, well,
you know, after ten years, you may need to replace
that battery, which could cost ten fifteen thousand dollars.
Speaker 1 (35:46):
It's an argument to Lisa, isn't it really rather than
buy them?
Speaker 2 (35:49):
Yeah, that's right.
Speaker 3 (35:49):
At the end of the novated lease, there is still
that reckoning event where you need to hand it back
and pay this residual or buy it. So you can't
get away from the fact that there is that depreciation
there on it.
Speaker 1 (36:02):
Yeah, yeah, I wonder I'd love to see the figures
and whether whether there is a propensity if you'd like
to lease an ongoing basis electrics. Why wouldn't you if
that packete, if you're in the same position, in the
same salary sort of frame, the same arrangements, why wouldn't
you extend the least rather than buying the car, which
you know had to appreciated more than a petrol car.
(36:22):
Interesting stuff thoughts for another day. Okay, terrific. Thank you
everyone for your questions, keep them rolling the money puzzle
at the Australian dot com dot au. And thank you James.
We're talking again soon.
Speaker 2 (36:33):
My pleasure, James.
Speaker 1 (36:35):
That was the other James, James Gerard of Financial Advisor
dot com dot au. Talk to you soon.
Hello, and welcome to the Australians Money Puzzled podcast. I'm
James Kirkby. Welcome aboard everybody. Now, the property market is
clearly improving, rebounding, especially in the larger cities, especially at
entry level prices. But one of the things we discovered
on the show recently was the alarming loss facebine investors
(00:28):
in apartment investments all over the country, particularly in the
larger cities. When I looked a little closer at this,
it became clear that many of these apartments were or
had been bought off the plan, something we need to
catch up on. Basically on the show, we've never really
looked at this properly, and I think I need to
(00:49):
speak to an financial advisor who is over property rather
than somebody inside property on this and my guest today
is ideal for the exercise. It's James Gerard of financial
dot com dot U. Hi, James, how are you.
Speaker 2 (01:02):
I'm doing very well, James, Thank you for having me on.
Speaker 1 (01:04):
Great to have you on. We have talked a course
about just about everything over the years, but we haven't
talked on air about buying off the plan. But just
to introduce it, it cut my eye, how often they
were mentioned in this context, possibly because they are more
likely to be newish apartments are newly built in the
(01:27):
larger towers and complexes in cosmopolitan cities. But I suppose
straight up in terms of buying off the plan, why
on earth do people do it? Anyway? I think this
is the best way into it. Why would you? What
is the value proposal?
Speaker 3 (01:44):
Yeah, it's interesting, and to put a kV out there,
I'm not a big fan of off the plan properties,
but there are some reasons, valid reasons why people would
pursue this type of purchase. So the first one is
that you lock in the price. Now by nature of
off the plane, you're buying off the plans. I think
that hasn't been built yet. You agree to it. There's
a contract that you sign, you leave a deposit, and
(02:05):
then the property will be constructed, which could be anywhere
from one to three years from the date of when
you agree to proceed. So that means that you agree
on the price today. But if the property market's moving
upwards by the time the place is being completed, you
could be sitting on a paper profit. And I've actually
seen that a couple of times in Sydney and Melbourne,
where people have committed to a property off the plan,
(02:28):
it comes two and a half years later and it's
ready to complete and they go, well, i'd actually want
to buy it. I want to sell it. And then
they can just sell it to somebody else and say
they paid seven hundred thousand, it might be worth eight
hundred thousand dollars. They just bank that profit and all
they've tied up is five or ten percent deposit for
that period.
Speaker 1 (02:45):
So what it's best then in a rising market, it
has clear advantages that you capture the rise and even
in the process of when it's been built, you are
actually gaining money. So let's just look at the pros.
So that's an obvious pro that you can get in early.
(03:06):
There are exemptions and tax breaks and stamp duty attractions.
Speaker 3 (03:10):
That's right, James, depending on the state that you live
in or that you purchase in. More to the point,
there are exemptions or concessions on stamp duty when you
buy brand new properties. And that's because state governments want
to drive the economy. They want the building industry to
be employed, so they they'll provide an incentive for people
to buy brand new properties. And then when the property
(03:30):
is complete and you take ownership of it. If you
happen to be an investor, you would engage a quantity
surveyor to do a depreciation schedule of which you can
depreciate the building itself over a forty year period, and
then you can build so depreciate the stuff inside it,
so the dishwasher, the blinds, all those type of things
over anywhere from a five to fifteen year period.
Speaker 1 (03:52):
Can you how soon can you start that depreciation schedule?
Is it from when the building is officially open?
Speaker 2 (03:58):
That's right?
Speaker 3 (03:59):
Yeah, So when buildings complete and you take ownership of it,
sometimes the developer will provide you that schedule, but other
times you'll need to go engage a quantities of a
firm and then they'll provide you with the schedule. You'll
get this PDF document or a binded book, and then
you give that to your accountant and then they'll just
add these tax deductions, which for the average apartment that
costs a million dollars, you could be looking at maybe
(04:23):
seven to ten thousand for the fixtures and fit ins,
and then maybe four or five thousand a year for
the building itself, So it can that up to be
quite a big tax deduction.
Speaker 1 (04:31):
Okay, But the specific attractions of buying off the plan
then is first of all, in a rising market, if
it takes three years to build and you buy your
apartment for whatever, five hundred and seven to fifty million,
and they go ten percent a year, you're actually capturing that.
You're going to capture that increase in value as it's
been constructed. That's one. Secondly, there are specific inducements, if
(04:53):
you like, sometimes from the developer, sometimes from the government.
Sometimes both are in place, or people who want get
into the market and mightn't get in easily in any
other avenue will come in here. What about these guarantees,
which at face value look attractive. So I see an
advertisement or I'm invited perhaps to a sales day in
(05:17):
a hotel or something, and there's a guarantee, I mean,
are they worth it?
Speaker 3 (05:24):
The guarantee is very interesting, and they signal something to
me as a professional investor, Slasher advisor to explain what
the guarantee is. It's that you commit to purchase the
property for a certain price, and when the property completes,
the developer will say, look, if you can't find a tenant,
will guarantee to pay you rent for a period of time,
(05:45):
and that's usually three to six months at a certain rate.
And what that signals to me is that there is
potentially uncertainty with regards to the demand for that property
when it's completed, to the point whether the developer needs
to date all this carrot in front of you and say, look,
you don't worry if you don't get a tenant straight away,
we'll cover that for a period of time. And that's
(06:07):
a really important point to note for investors, particularly where
they're buying interstate into high rise apartment complexes. Is that
say there's two hundred apartments in a complex or in
a little sector of apartments in a particular street, you
have to remember that a fair whack of those buyers
are going to be investors, and when the property completes,
it completes at the same time.
Speaker 1 (06:28):
Yeah, right, so everybody is advertising in the same place
at the same time.
Speaker 2 (06:32):
Ah Ye, that's right. Yeah, it's just simple supply and demand.
Speaker 3 (06:37):
Unless it's a really booming area where there's a real
big demand for for tenants, you're going to end up
with that property that will be vacant. Because your property
is identical, like literally identical to dozens of other properties
that have completed at the same time.
Speaker 1 (06:50):
Okay, so that is definitely a negative. What struck me
about these guarantees is I presume they're not government guarantees, right,
there are guarantees from.
Speaker 2 (06:59):
The developer, that's correct.
Speaker 1 (07:01):
So it seemed to me what's really crucial here? Should
you go in this direction if you wish to, And
I'll ask you when we're finished explaining it basically why
you don't like it at all, But it would seem
to me that if the guarantee, it's very important for
listeners to understand that the guarantees on these off the
plan deals are from the developer, not the government or
(07:23):
anyone else or the bank or whatever. It's the developer.
So how do you know if the developer is good
or bad?
Speaker 3 (07:30):
Track record is a big one, looking at the history
of their completions, how long they've been in business as well,
So all the things that you would do when you're
buying a car or any sort of major purchase, just
do your research there on it. Because we're see in
the media so much about these foul or troublesome developments
and then post completion about clouding issues and structural issues.
(07:54):
So that's one of the negatives of buying a brand
new property is the uncertainty, and that's start contrast to
buy an established property that's been around for say fifteen years.
The difference there is that the foundations have settled. Any
issues that have come to light would have been done
so probably in that ten or field gay period, so
(08:14):
you're buying something with more certainty there.
Speaker 1 (08:16):
So the developer is very important, and the track record
of the developer is very important, and the guarantee is
only as good as the developer is. So in many
ways face value, this all sounds mildly attractive. Tell us
what goes wrong with these I'm going to assume a
few things right. We're going to assume that developers are
selling them right. So there's a certain element of sales
(08:36):
pressure on these developments, the sales tactics. To some extent.
You are possibly you're part of a larger enterprise that
wants to sell the apartments, So we take that on board.
What might we not guess?
Speaker 3 (08:51):
One of the things that I see is an issue
is that, and this is maybe not so much about
the developers but more about the purchaser, is that some
people will take a gamble when they buy brand new properties.
They're not in a position to actually settle an investment
property for say a million dollars, but they'll commit to
and off the plan property for a million dollars on
the basis that you don't need to get finance at
(09:13):
the time you sign the contract. You need to get
finance two months or two years sorry, down the track,
when the property completes. And so they're betting on their
own ability to be able to get finance, save more cash,
get better income over that two year period to then
be able to transact on the property. But outside of that,
as you said, it's that it's a bit of a
murky industry. It's not regulated by ASSEK, and you see
(09:36):
a lot of dubious dealings there. So a lot of
promotions of off the plan properties, a lot of under
the table deals with undisclosed commissions. So you have a
lot of property marketers trying to promote this place that
they're trying to sell you as the best with regards
to growth and livability and all these things.
Speaker 1 (09:52):
These guys are on commissions.
Speaker 3 (09:53):
Are there on commissions? Yeah, they're mainly on commission. So
the developer has a choice. They either market the properties
themselves to try and sell them, or they outsource it
and they'll put their hand up and say, hey, anybody
who can sell these apartments will pay you x percent.
And that x percent depends on where the property is. Interestingly,
if it's in Sydney Melbourne, the commissions are lower. They're
(10:17):
generally two or three percent. But if it's somewhere regional
it could be so like a to Womba property for example,
or an Ipswich property, then the commissions can be as
high as ten percent.
Speaker 1 (10:28):
Right, Okay, that's worth knowing. That's worth knowing, all right.
So there's a couple of things. I think they were
really crucial for listeners who are looking at this area.
You know that, first of all, the person they are salespeople,
so you're asking salespeople's questions, but their intention is to
sell the apartment to you. They're they're not neutral observers.
The second thing is that the developer is the developer
(10:51):
to some extent, is your risk, right, because it's the
developer offers to guarantee not to mention issues around building itself,
whether the building is in good chef, et cetera. That's
a reputation issue, James. It all comes back to the
developer you're buying off the plan from. And how would
I know of one? Is is there anything someone was mentioning?
How if it developer changes their name every time, a
(11:14):
different company for every development, that's a warning signal. While
as if you have the same company for ten years
doing these but a track record and you can see
the ones they did in the past, and they're full
and they're buzzing, that's away in Is that a guide?
Speaker 2 (11:28):
It is a guide to some degree.
Speaker 3 (11:30):
Developers will trade generally it's the same name across different
developments they do. But what they will change is the
underlying entity that you're entering the contract with. So they
silo every development with a different company, and they do
that to limit their liability. So if there's a problem
with one, they sometimes the less reputable developers will do
(11:50):
some financial magic ry and then things will disappear, namely
them will disappear as directors of that company, and then
people are left in the lurch with defective building.
Speaker 1 (12:00):
Okay, so their development could be in trouble, but their
developer would not be in trouble.
Speaker 2 (12:05):
Correct.
Speaker 3 (12:06):
They have this entity set up solely for the purpose
of that development, and all of the developers assets and
income is going through other entities or generally held in
the name of their spouse. So it's very, very difficult
to be able to claw any money back from a
developer if something goes wrong without significant legal proceedings, which
obviously comes at a large cost.
Speaker 1 (12:26):
It sounds pretty. It sounds pretty, I will say wild,
but it sounds like you're on your own out there.
You're very much on your own as an investor in
this space. So would you ever recommend someone goes near
buying off the plan.
Speaker 3 (12:41):
I would.
Speaker 2 (12:42):
It would have to be something quite unique.
Speaker 3 (12:44):
I'd like to keep it simple when it comes to property,
and I look at supply and demand. Now, if this
off the plan property is somewhere very unique. So take
Barangaroo in Sydney for example, when they built the Crown
and they're offering residential apartments there, that's thing which there's
limited supply. You have a very unique view of the
(13:04):
Sydney Harbor Opera House, Harbor Bridge. So something like that,
I can say, Okay, well you're not going to have
ten other apartment blocks built around there. That's going to
sort of saturate the market. But if it's just another
apartment block, if it's just another house and land package
in this estate that was farmland a few years ago,
I have more hesitations there. And the other thing which
I would add is that when you buy a brand
(13:26):
new property, you're competing against overseas buyers who can only
buy brand new properties. So that plus all of the
commissions and charges and profits that are being made, means
generally that off the planned properties are much higher and
less value compared to an equivalent established property that's even
one years old or two years old.
Speaker 1 (13:47):
So you have an advantage in that you can buy anything,
but the overseas buyer can't correct. Interesting, so of course
a lot of the marketing is overseas then for these towers,
and they're marketing in Singapore and Kyel. I mean I've
seen them in hotels in the many, many over many years,
and you realize how half the towers in the city centers,
especially Sydney and Melbourne, we're financed. How it all worked.
(14:10):
Very interesting, Okay, really really interesting subject. I'd love to
know what our listeners think of that, whether we were
fair on buying off the plant, if it is an
area that our listeners think is valid or to be
avoided really really interesting. We'll be back in a moment. Hello,
(14:35):
Welcome back to The Australian's Money Puzzle podcast. I'm James
Kirby with James Gerard Blancial Advisor dot com dot you.
Regular contributor of course to the wealth section of the Australian.
We both are and these issues are often and regularly
covered in the Australian. Speaking of that last weekend, I
came across something I thought was just absolutely amazing on
(14:56):
self managed super funds. Tim Tooey, who is not a
not in the managed super fund space, is not in
any way trying to promote him. He's a guy that
every now and again beans out these amazing reports. He
works with the Yara Capital, used to work with Goldman Sachs.
I remember he did a housing report one time which
was so spot on, so spot on, many years ago.
(15:18):
So he has this ability to cast his eye over
an area and he looked at smsfs and he came
to the conclusion, James, that they are considerably more successful
for investors than industry super funds or other big funds.
And he showed and he really laid it out how smsfs,
even on a straight asset allocation basis as investors are
(15:42):
more successful than big super funds. But when you add
in the tax aspect of smsfs, the after tax returns
of smsfs compared to big super were they were roughly
one third higher over a period of three years and
part then he went into why that was, and he
mentioned he mentioned the obvious things like that you have
(16:05):
this control, you can choose your allocations frank dividends in
the local shares, and he did say that the ability
to buy property directly was still a powerful issue for
smsfs and their out performance. It's really interesting because sms
putting property into SMSF gets such a hard time. It's
meant so difficult because the big banks withdrew from financing
(16:29):
that market, and because there's kind of a cloud over
it in that government's blow hot and code on it
and they don't really commit to it. There has been
threats that it would actually be completely repealed regularly, but
they never came to pass. Four people, James, who are
thinking about using an SMSF to finance a property investment,
(16:52):
do you know what they can do if the banks
are out of the business. How do you start the
for finance in that area.
Speaker 3 (16:59):
Yeah, I'm the perfect person to speak about this. I'm
actually going through the process in the middle of at
the moment.
Speaker 1 (17:04):
Okay, are you dealing with right? So how did you start, Like,
how did you even get a panel together?
Speaker 2 (17:09):
Yeah?
Speaker 3 (17:09):
So I went through a mortgage broker and maybe just
stepping back a little bit, the major banks pulled out
of the self managed super fund lending market, and this
is going back almost ten years ago because they saw
the risk of these properties. There was a lot of
off the plan properties being sold to mum and dad
investors who were convinced to set up a self managed
(17:32):
super fun and move out of their industry super funds
into a self managed buy this off the plan property,
and of course commissions paid to the people that were
promoting that.
Speaker 1 (17:40):
So that is not good. It's not good to have
to open an SMS just to buy an investment property.
That is that is in some expent again, but that's it.
That's amst at its worst. That's the worst side of
the market. Yeah, okay, that's right.
Speaker 3 (17:53):
The concentration risk is high where the majority of your
super is exposed to one property, and the banks were
looking at their loan book where they were self managed
super fund loans going geez, these properties are going down
in value and if the borrower defaults, we might lose
some money here. Because under superannuation law, the banks are
limited to what's called limited recourse. The loans are called
(18:14):
limited recourse borrowing arrangements or lrbas as an acronym, which
means that you can only as the blender, take back
that property. And if the property is going down, well,
then your loan is becoming risky if there's a default.
So the bank said, we don't need this risk. We're
getting out of the market. So the major banks all
stopped writing self managed super fund loans, which left the
(18:34):
second tier lenders as the primary lenders in that market.
And interest rates today, I think my rates high sevens,
but arranges anywhere from that sort of high sevens through
to mid nines as an interest rate, And you contrast
that to a normal non super investment loan which would
be below six percent. So you do have to pay
(18:55):
a premium because of the lack of competition there with
the lenders.
Speaker 1 (19:00):
I used to pay a high rate to borrow for
your property inside the super fund. The highest rate in
the market because it's higher than commercial. It's it's exclusively
high for smsfs, and negative gearing is not as good,
right because the tax isn't as high, So the negative
gearing is diluted if you like. So why would anyone
(19:20):
do it?
Speaker 3 (19:21):
Well, if I look at an investment property that I
buy my personal name, if I want to pay down
the principle I every dollar of income that I make,
I'm taxed forty seven percent, so I only have fifty
three cents in the dollar to then pay down that
investment property loan. If I contrast that to Super, depending
on my income, if it's above or below two hundred
and fifty thousand dollars, I'm taxed either fifteen percent or
(19:42):
thirty percent or my SUPER contributions, which means that more
of my after tax dollars can go to pay down
that same mortgage if it's in SUPER versus outside SUPER.
Speaker 1 (19:51):
I suppose you have that terrific thing that you can
put a deposit out from your super fund, but you
you know, which is money you don't have hanging around. Basically,
most people don't have the deposit of an investment property
hanging around in their every day account.
Speaker 3 (20:04):
Yeah, and so it helps people that have restrictions or
limits around their borrowing capacity personally, maybe they've purchased a
home and they've got a home loan and they don't
have the ability to purchase another property as an investment.
But interestingly, superannuation, when you apply for a loan, it's
assessed separately to your personal borrowing capacity, So you may
(20:26):
be capped out personally to buy a property, but you're
super fund if you were to set one up. How
they assess it is that they look at super contributions.
They look at is your employer putting in regular contributions
into your super account and it doesn't have to be
the self managed It could be that the retail or
the industry fund, which predates having a self managed super fund.
So they're just looking at the contribution history and they
(20:48):
use that for what we call serviceability. And then they
look at equity, so they look at how much you
have in your superannuation account and then based on those
two things, they'll make this independent assessment as to how
much you borrow inside of super.
Speaker 2 (21:01):
So that's another benefit of buying property in super.
Speaker 3 (21:04):
It unlocks in some cases the ability to move down
that path of purchasing another property where they couldn't do
it outside in their personal name.
Speaker 1 (21:11):
Yeah, so it's entirely autonomous. Basically, it's it's an issue
your super fund has got is separated from you, and
they judge it on this fund wants to buy a
property and they want to look at the cash flows
into this fund, which would be your contributions obviously coming
in all the time. And if they're comfortable that there's
a that that is that cash flow is there, then
(21:33):
the service ability is there, then they can sign it
off regardless or autonomous of your personal finance circumstances, what's
going on with your your credit card or your mortgage
or whatever. That's well worth knowing. That's a very interesting
piece of information which I'm sure our listeners will now digest.
We will have a short break, we'll be back in
(21:54):
a second. Hello, Welcome back to The Australian's Money Puzzle podcast.
James Kirby here with James Girard. Well, we've been talking
buying off the plan, which I thought was pretty interesting.
I must say, ah, yes, I think there's a lot
(22:21):
of cons. You listed the pros and cons. I feel
there's a lot of cons basically working against buying off
the plan James on balance, and I also thought on
the smsfs, that's very interesting and it's also very interesting
to know, folks that the smsfs, which we talk about
all the time, and I know many of you have smsfs,
(22:42):
it's nice to know that it wasn't just this year
you did better than the big funds. You've done better.
It would seem for several years in a row if
we judge very deep dive done by Tim Toohey at
Yarra Capital, which you can have a look at. It's
on the web Arra Capital. Just have a look there
all right now, and you'll see he's quite persuasive arguments
(23:04):
about the power of SMS investments, which I thought was
very important James, that he didn't just say it was
tax because someone who would say, oh, yeah, sure, well
they get you know, they're playing their Frank dividends and everything.
But he actually showed that in terms of asset allocation
on that basis alone, the smsfs were more successful than
the big funds, which I thought was very very interesting.
All right, Corinn, Hello Krinn asks listening to your last
(23:29):
episodes in relation to index funds, with one guest liking
to follow the Australian top two hundred in index funds.
And just when I thought, okay, that's the way I'll
go and I'll forget about my SMSF buying property, and
another guest points out that the index is heavily weighted
towards banks and resources, and then there is this dependence
(23:50):
on shares that I come on my bank. Sokriinn puts
forward the idea, would she and our answers never advise
its information. Only could she construct her own index fund,
basically a top fifty Currin's top fifty index fund, and
then she would buy proportionately so many stocks. What do
(24:11):
I think of the strategy. I think it's very elaborate strategy.
It's quite sensible in some fashion. I remember Doug Turek
on the show explained that you could build your own
index funds. But I think for a word to make sense,
with all the fees you'd have and all the trades
you'd have to do, I think it would have to
be on scale. By that, I mean you'd have to
stick with it for a long time I think for
it to pay off, and you'd have to track it
(24:31):
very carefully and just separately. Kurin. You know, one of
the things if you listen to the show again, we
talked about most industries are straight market cap indicies, but
there are now variations like equal weighted indices, where they
try to get away from the from the problems of
the same for instance, the banks and minors dominating the
(24:52):
top stocks, and they try to get a more equalized,
more representative index. So there is there are people almost
doing that, are doing versions of that without you having
to go and do it by yourself. But in principle
it's not crazy. What do you think, James, you're looking
Are you looking skeptical there? I'm not sure.
Speaker 3 (25:13):
No, no, because you don't have to reinvent the wheel.
It's been done for you ETFs. So just use one
of those. Because if you go buy fifty stocks and
you manage your own equal weight portfolio, oh jeez, your accountant,
I don't know if they're going to be angry.
Speaker 1 (25:29):
Your count will cry and you need a software package
to follow it all. But also the fees, the fees
will be higher than any TF wouldn't they That's right?
Speaker 3 (25:40):
Yeah, at first, the account is not going to be
happy for the transactions, but then they may be rubbing
their hands together and all the extra fees are going
to be charging you to administer this.
Speaker 2 (25:48):
Equal weight portfolio that you've constructed for yourself. So I'd
say go buy the ETF. There's multiple ETF companies that
do equal wait ets.
Speaker 1 (25:54):
Yes, but look closely at the ETS crew and they
are they are now of a variety and they're not
all strictly market cap. Some are what we call equal weighted,
and have a look at that and how they get
around that issue. That was a failing which was highlighted
on the show about the index funds. But good on
you and very interesting notion. Certainly shows that you understand
(26:16):
it very very well. Thank you. Okay, question from Ashley
there you want to read that one.
Speaker 3 (26:20):
So Ashley, he's talking about bitcoin. While bitcoin can be
expected to remain volatile in the shortter medium term, it
seems that AMP has doubled their investment into it and
more companies and people will want to have a greater
understanding of why bitcoin was created, how it's used, the
implication for current monetary systems.
Speaker 2 (26:39):
Like every other.
Speaker 3 (26:40):
Bitcoiner, the AMP journey is on a one way street
and growing institutional adoption reflects that process.
Speaker 1 (26:47):
Yeah, well it's a powerful point actually, which we can't
really get around amp representing, if you like, the big
end of town establishment Australia, establishment money, a very old
Australian virtual providence society as it was. So the definitive
establishment incumbent player in our market went and put twenty
(27:07):
seven million into bitcoin and they have done very well
from that, and we had Shane Oliver on the show
explaining why they did it. At a certain point, I
felt that the most powerful notion was that they bought
it because they thought it was going to go up.
Now he rejected that out of hand, but it has
gone up, and I think it's still largely the attraction
(27:30):
is still largely the concept that it could be an
alternative store of value, that it could be something like gold,
and clearly mainstream investors are starting to think that way.
There's one point six billion in SMSF money in bitcoin
and crypto. That's an ATO figure, by the way, so
that's not speculation to say to you. So I think
(27:51):
it's here to stay. I think it's an ascid class
that is on the table. What do you think, James?
Speaker 3 (27:55):
It was set up well back in two thousand and eight,
two thousand and nine in response to feelings around central
banks and traditional banking systems post global financial crisis, and
there was this desire to have this what they call
decentralized digital currency, and up came along Bitcoin as the
first one, and there's been thousands that have followed. Now
fast forward to twenty twenty five, we've got black Rock, Fidelity, Vanek,
(28:19):
we've got big US pension funds that are investing money
into it. So it is gaining mainstream adoption. But my
personal feeling is that it needs to move to the
next stage of actually having some use other than being
something that's cool to buy and say that you've got bitcoin.
So unless it does become a currency used, I find
my feeling is that it may become something like those
(28:41):
I forget the names of them, those digital artworks that
you could buy linked through crypto and fts. That's all right,
I can't remember their name, the Dancing Monkeys, or yet
there was this particular epe I think it's called the
Board eight Yacht Club, where they were going millions of
dollars and now they're selling for hundreds of dollars. I
feel that there needs to be stage two bitcoin. It
actually needs to be used in practice in economies, otherwise
(29:04):
it will decline.
Speaker 1 (29:05):
You're searching for intrinsic value. But Shane Oliver Chief Economists
today and he said he didn't. It didn't require intrinsic
value for them to make them move.
Speaker 2 (29:13):
Yeah, I get that.
Speaker 1 (29:14):
What do you say to clients who come in now?
Has your advice changed to clients on crypto and bitcoin
over the last two or three years.
Speaker 2 (29:23):
It hasn't.
Speaker 3 (29:24):
It's put money that you're willing to lose to it.
And the more that you hear about it in the media,
the more that you hear James Kirby talk about bitcoin
with guessed like myself, the later it is in the cycle,
because when it's out of favor and down and out,
that's when people should be buying. But when it's in
the newspapers, it's the mums and dads are buying it,
(29:46):
and the prices are really elevated and there's not too
much more to go. And that's just my opinion based
on previous cycles.
Speaker 1 (29:52):
Oh, it's so true. And it's one hundred and twenty
thousand to hit a new record. Why am I paying attention?
Because it's one hundred and twenty thousands, it hits a
new record. That's unfortunately the nature of the beast. Yeah, okay.
One very interesting thing I thought about bitcoin is that
the more people buy it, the less volatile it becomes.
And as it becomes part of the institutional framework, it's
(30:13):
less volatile. But that also means that you won't get
those big surges anymore. They didn't want do those amazing
run ups. So I think that's part of reality for everybody.
Last one from Mark.
Speaker 3 (30:26):
Yeah, so, Mark says, I'm an avid fan of the
podcast and love the variety of topics you cover. Given
the tax advantages of salary packaging and electric vehicles, I'm
looking into a novaated lisse option and have discovered that
there is an option for a self managed novated lease
as standard novated liases in bed charges and interest in
their fees. As an accountant, I find it hard to
(30:46):
determine the effective loan interest rate. Would you be able
to cover this topic and explore?
Speaker 1 (30:51):
All right, Mark's accountant, Remember everybody might be easy to
copy him. What exactly is he talking about? James?
Speaker 2 (30:56):
Sure?
Speaker 3 (30:56):
So there is this scheme available where you can finance
the cost of a vehicle, plus pay the ongoing maintenance
and running costs of that vehicle through this arrangement that
involves your employer that's called a novated lease. In the past,
you would use roughly half of your pre tax income
towards this lease and half of your post tax income.
(31:19):
But go back a couple of years ago, the federal
government said, we want more people driving electric vehicles. So
if you buy an electric vehicle less than circle ninety
thousand dollars, you can use one hundred percent of your
pre tax income to be able to fund the finance
plus the operating costs of that electric vehicle.
Speaker 1 (31:35):
That has been spectacularly successful.
Speaker 2 (31:38):
Yeah, fantastically.
Speaker 3 (31:39):
I've got one of my driveway vehicle that's in a
novated lease and I was one of the first to
do it because it's one of the best tax breaks
going around. To facilitate this, if you're an employee, you
need to speak to your HR department and they'll either say, look, no,
we don't offer that through this employment arrangement, or they
(32:00):
may say, yes we do. Go see these people over
here at the x y Z leasing company now markets
saying rather than go see x y zed people at
the leasing company. He wants to pick the provider for
the finance, which you can do, but that's again subject
to your employer saying, ah, okay, we're going to deal
with the extra administration of you picking your own finance
company rather than dealing the one dealing with the one
(32:22):
that we've signed up a deal with that makes it
all streamlined for our payroll purposes.
Speaker 1 (32:27):
Okay, I see, yes, I know. And most corporations have,
like Newsport here, they have a you know, they have
the deals, no vated lease, and they haven't arranged with
whoever it is. And I would imagine if you rank
the pay office and said could I go and do
one outside, they really would groan. But Ashley is an accountant,
(32:47):
so perhaps he could go fair better than the rest
of us non accountants. I would imagine as the majority
of listeners. Okay, very good, very good. And how's that
novated lease working out? Would you bought an electric car
without it?
Speaker 3 (33:03):
I probably would not have an electric car without the
novated lease. Now, the the interest rate wasn't too bad,
and that's something that they don't tell you about when
you go get yournvated lease. They're just like tax benefits,
saving next amount per month, per year, but the interest
rate that they hired, and you have to actually work backwards,
and in most cases it's not too bad. It's a
few percent above what you would expect to pay on
(33:24):
your home loan, so at the moment it's probably seven
or eight percent interest, so it's not too bad. But
what really drew me was that using your pre tax
income to to find this vehicle taket me of the
line so important.
Speaker 1 (33:35):
So a few things you as an everyday salary owner,
there are so few things that you can do pre tax.
You know. Obviously your super contribution maxed out at thirty
thousand a year is the big one. And after that,
really it's what it's about you doing something like an
investment property or whatever. You're looking for your negative gearing,
and then there's very little less. And this was the
(33:55):
first new thing for many years, wasn't it? That one
hundred percent and basically tax concession pre tax if you
take an electric car lease as opposed to a petrol
car lease, which is roughly fifty percent or there thereabouts. Interesting, Yes,
that explains all the byd utes buzzing around my neighborhood. Flashy,
(34:19):
brand new zippy they're zippy. I've got to say, the
speed these guys moving around on these big, awkward youths,
it's alarming, really, and they get away with things because
they don't make any noise. That's my personal theory that
if it was petrol that makes so much noise, everybody
would jump, But it's they've kind of gone past you
by the time you realize the outrage that has been
(34:41):
committed in front of you, you don't go around to
one of those.
Speaker 2 (34:44):
I died. I've got a little Volvo Electric.
Speaker 3 (34:46):
But finally, I've been in a few electric vehicles where
the speakers for the cast Aeia system make little car noises.
So you guys, when you put the accelerator down to
limitate as if you were in a petrol vehicle.
Speaker 1 (34:58):
Yeah, really to tell you what you doing. It is
very interesting. Just one last thing, resale value of these
electric vehicles is it on tested? Is it is it
reliable with any idea?
Speaker 3 (35:10):
Yeah, So we've had teslas around for ten years now,
so that there is market based evidence around the resale values,
and they are poorer than the equivalents and internal combustion
engine vehicle, so that that's no doubt. People are concerned
about technology because technology for evs has moved really fast
over the past ten years. The battery technology as well,
(35:31):
so the range that you get on the evs, and
also people are concerned about the life that they're going
to have left on the battery if they're buying one
that's seven or eight years old. The manufacturers are saying, well,
you know, after ten years, you may need to replace
that battery, which could cost ten fifteen thousand dollars.
Speaker 1 (35:46):
It's an argument to Lisa, isn't it really rather than
buy them?
Speaker 2 (35:49):
Yeah, that's right.
Speaker 3 (35:49):
At the end of the novated lease, there is still
that reckoning event where you need to hand it back
and pay this residual or buy it. So you can't
get away from the fact that there is that depreciation
there on it.
Speaker 1 (36:02):
Yeah, yeah, I wonder I'd love to see the figures
and whether whether there is a propensity if you'd like
to lease an ongoing basis electrics. Why wouldn't you if
that packete, if you're in the same position, in the
same salary sort of frame, the same arrangements, why wouldn't
you extend the least rather than buying the car, which
you know had to appreciated more than a petrol car.
(36:22):
Interesting stuff thoughts for another day. Okay, terrific. Thank you
everyone for your questions, keep them rolling the money puzzle
at the Australian dot com dot au. And thank you James.
We're talking again soon.
Speaker 2 (36:33):
My pleasure, James.
Speaker 1 (36:35):
That was the other James, James Gerard of Financial Advisor
dot com dot au. Talk to you soon.
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