How John Tax Effectively Created a Diversified $3.13 Million+ Portfolio and Passive Yearly Net Income of $30,963

Before Tax Effective

John came to us in the summer of 1998.

• At the time he had one investment property purchased for $110,000 in 1992
• This property provided him net $9,200 per year in rental income
• His investment property had only grown $20,000 in value during that period
• He had savings of about $15,000
• And he wanted to be able to support his parents when they retired

The Challenges

Strategy #1 - Tax Effectively Expand John’s Property Portfolio

The key to accelerating John’s wealth creation was being able to hold a high value asset for a small monetary outlay per annum. With that in mind we found him a home and land package in Sydney’s north-west. The total cost, including land, building costs, stamp duty, and legal fees was $219,000.

The equity in his existing investment property allowed him to purchase this new property by borrowing 100% of the purchase costs including the purchase price, stamp duty, and legal fees. The right structure lead to a combination of tax savings and rental income that would cover the bulk of his ongoing costs and his out-of-pocket expense would be $1,822 per annum.

With this, he was able to claim $10,549 in tax deductions that provided him $3,323 in tax refunds per annum. In comparison, placing that $1,822 into a savings account with a 5% interest rate (at the time) instead would provide a yearly return of only $91 and much less after tax.

Now he was holding a $219,000 investment property with the same amount of money.

Strategy #2 - Diversifying John's Overall Portfolio

18 months later, John benefited from a slight salary increase and managed to pull together a further $24,000 in savings. We advised him to place $20,000 of his savings into a portfolio of managed funds with an ongoing monthly contribution. This contribution allowed him to take advantage of dollar cost averaging - which is a good way of managing risk.

The rest he placed into an offset facility associated with his investment property. The offset account is essentially a tax-free bank account which totally offsets the interest. This made his property cash flow positive while still obtaining the benefits of negative gearing.

In 2006, we advised John to increase his contributions and make an additional $30,000 investment into his existing portfolio.

This allowed him to:

• Increase diversity and provide a buffer should the property market stutter
• Have liquid funds on hand that he could call on if his circumstances changed
• Obtain more capital growth from his portfolio and further income down the line

In 2004, John’s original run-down investment property had increased in value from $130,000 to $288,000. We opted to sell this and use the money to place a deposit on a new investment property.

We helped John find a premium property in Sydney’s inner-west for $420,000. He used $247,000 of the proceeds from the sale of his existing investment property as a deposit, meaning he only had to borrow $190,000.

In all, John was able to claim $27,040 per annum in tax deductions and a tax refund of approximately $2,777 per annum. Providing John, a negatively geared property that was cash flow positive to the tune of $3,452 per annum.

Fast forward to 2010, John’s income increased to about $100,000, and his now positively geared properties generated about $4,400 in positive cash flow. This gave him the borrowing capacity he needed to buy another investment property.

Using his equity again, he bought an off-the-plan property in Sydney’s inner-west, borrowing the entire purchase price and costs. As a result, he was able to claim an additional $22,412 in tax deductions and receive a further tax refund of $7,307.

This meant that the ongoing cost to John was only $1,890 per annum, which was paid from his surplus investment income.

His investments were now funding not only themselves, but new investments too.

John now has:

• A property portfolio valued at over $2.55 million dollars
• $220,000 saved in an offset account
• $355,876 in managed investments, which will keep growing over time.
• A strong passive investment net income of $30,963
• This net income could easily increase to over $51,501 if John decides to pay off the two investment loans with his managed funds and offset savings

The more his portfolio grows, the greater his capacity to accumulate wealth efficiently increases.

We continue to monitor his progress and look for any opportunities to help him get further ahead.

With the good amount of surplus income John now receives, he continues to build his offset facility and managed funds, and can freely gift money to his parents, siblings, nephews and nieces.

At 46 years of age, John would say life’s good.

Are you ready to take the next step?