The analysis of property investing

The Analysis of property investingSMSF vs. Individual

Case Study – Starting Point• Acquisition of an off-the-plan apartment for $450,000• Acquisition to include borrowings• Establishment costs of $4,000• Yearly expenses of $3,000• Depreciation/Capital works deductions of $16,000• SMSF investing supported via concessional contributions• Salary increments at 4%• Sale costs (today’s value) of $10,000• Starting assumption of retirement in 9 year’s time• Do you buy personally or using a SMSF Limited Recourse Borrowing Arrangement (LRBA)?

Case Study – Variables• Loan-to-value ratio (LVR)• Repayments - P&I or Interest-only (I/O)• Yield (rent and occupancy)• Capital growth• Lender type & interest rate• Term of loan• Expenses, Depreciation & Building Allowance• Ability to contribute to super / servicing• Timeframe to retirement

Case Study – Variables

Case Study – Variables IRR to anticipated sale date, includin g CGT Required support – contributions or reduction in take home pay

Case Study – Variables

Impact of Loan to Value Ratios Comparing the impact of loan-to-value (LVR) ratios between a SMSF vs. individual borrowing to acquire property

Loan-to-Value (LVR) Impact – I/OLoan-to-Value (LVR) Impact – I/O IRR to projected date of sale - LVR 40% Capital gain in 8 accumulation phase (CGT 10%) 7.5 7 6.73% % RoR 6.5 Identical IRR to 46.5% individual taxpayer 6 5.5 5 5 7 10 Years to Sale SMSF Individual - $50k Individual - $100k Individual - $150k Individual - $200k © The SMSF Academy 2011

Loan-to-Value (LVR) Impact – I/OLoan-to-Value (LVR) Impact – I/O RoR to projected date of sale - LVR 60% 8.5 8 7.5 7% RoR 6.5 6 5.5 5 5 7 10 Years to Sale SMSF Individual - $50k Individual - $100k Individual - $150k Individual - $200k © The SMSF Academy 2011

Loan-to-Value (LVR) Impact – I/O Rate of Return Analysis to projected date of sale - LVR 80% 11 10.5 10 9.5 9.17% 9% RoR 8.5 Capital gain in accumulation 8 phase (CGT 10%) 7.5 7 6.5 6 5 7 10 Years to Sale SMSF Individual - $50k Individual - $100k Individual - $150k Individual - $200k © The SMSF Academy 2011

Impact of Loan Repayments Rate of Return Analysis - P&I vs. I/O Comparing the impact of: 12 • Running an interest-only (I/O) loan; or 10 • Do you make principal and interest (P&I) repayments? 8 KEY ANALYSIS POINTS:% RoR 6 • Comparison after 10 years • High MTR taxpayer 4 benefits from I/O due to deductibility 2 • SMSF significantly superior with P&I 0 – 85c in every $1 available for SMSF Individual - $50K Individual - $100k Individual - $150K Individual - $200K loan repayment (30%) (38%) (38%) (45%) – Income concessionally taxed Interest Only - 70% LVR P&I Repayments - $30k

Impact of Interest Rates Rate of Return Analysis - Interest Rate changes 14 KEY ANALYSIS POINTS: 12 • Comparison after 10 years • Higher interest can be 10 equally beneficial to SMSF as high-MTR taxpayer 8 – If it can be supported by% RoR concessional contributions 6 • Lower interest rate is 4 superior within SMSF due to acceleration of 2 repayments – 85c in every dollar to repay loan 0 SMSF Individual - $50K Individual - $100k Individual - $150K Individual - $200K (30%) (38%) (38%) (45%) Interest Rates at 7% Interest Rates 2% higher (9%) Interest Rates 2% lower (5%)

Impact of Yield/Occupancy Rate of Return Analysis - Impact of Yield/Occupancy 14 KEY ANALYSIS POINTS: 12 • Comparison after 10 years • Yield overall only has limited 10 impact for a SMSF – Mostly uniform IRR with 8 Individuals% RoR • Higher-MTR taxpayer benefits 6 through negative gearing • Lower-MTR needs cash flow to 4 support loan repayments and lower negative gearing benefit 2 • SMSF with concessional 0 contributions will potentially SMSF Individual - $50K Individual - $100k Individual - $150K Individual - $200K have limited negative gearing (30%) (38%) (38%) (45%) Yield $350 p/wk Yield 2% lower - $180 p/wk Yield 2% higher - $520 p/wk

Impact of Capital Works/Depreciation Rate of Return Analysis - Impact of Capital Works deductions 10 KEY ANALYSIS POINTS: 9 • Comparison after 10 years 8 • SMSF significantly better off 7 where little or no capital 6 works/depreciation% RoR 5 • The longer the time 4 horizon, high-MTR taxpayer 3 will benefit from tax 2 deductions 1 – SMSF ‘claws back’ via CGT 0 benefit when in pension phase SMSF Individual - $50K Individual - $100k Individual - $150K Individual - $200K (30%) (38%) (38%) (45%) With Capital Works deductions ($16k) No captial works deductions

Impact of Capital Gains Rate of Return Analysis - Impact of Capital Growth 16 KEY ANALYSIS POINTS: 14 12 • Comparison after 10 years 10 • Capital gains within SMSF% RoR 8 clearly beneficial 6 – No CGT in pension phase 4 • If capital growth is 2 low, taxpayer may benefit 0 more outside of super SMSF Individual - $50K Individual - $100k Individual - $150K Individual - $200K (30%) (38%) (38%) (45%) with tax deductions Capital growth of 4% Capital Growth 2% less than expected (2%) Capital Growth 3% higher than expeected (7%)

Conclusions Conclusions • There is an optimal exit strategy time • Requires regular analysis to maximise benefit of property investing – Need to connect the inflows and outflows to the IRR calculation (e.g. concessionally taxed contributions) • SMSF provides a highly tax-effective structure to borrow – Maximise repayment capacity due to concessional tax treatment – Compulsory savings built into strategy (9% SGC) – 2 inflows : 1 outflow to support SMSF loan – Significant capital gains tax benefits (especially pension phase) • Visit http://thesmsfacademy.com.au/smsf-calculators/ to access the SMSF Property calculator

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The analysis of property investing

by The SMSF Academy Pty Ltd

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