What results did we help John achieve?
With Tax Effective Accountants, John was able to:
- Create a multi-property portfolio valued at over $2.55 million that will continue to compound in growth over time
- Build over $575,876 in cash and managed investments that’ll also compound over time.
- Accumulate $355,876 in managed investments, which will keep growing over time
- Create a passive cash flow positive investment income stream of $30,963, which could easily increase to over $51,501 if John decides to pay off the two investment loans with his managed funds and offset savings
You might naturally assume that John had a lot of money to play with to help him achieve these results.
And you’d be wrong!
John started out with a below average income. But with the right advice and strategies, he managed to build a multi-million dollar portfolio.
Now, he’s wealthier than many high-income earners who don’t have the right strategies in place.
What separates John from everybody else?
Nothing! Well, apart from the strategies that John’s put in place with our help. What you choose to do – or not do – has a huge impact on your financial security.
Let’s find out what John chose to do that transformed his entire life.
John’s Situation
When John came to us almost 20 years ago, he wasn’t a high earner at all.
He held a Customer Support role that generated an income of less than $29,000. That was below-average, even for the time.
But he’d been quite smart with his money so far.
John had an investment property that he paid $110,000 for back in 1992. At the time it generated about $9,200 per year in rental income.
Plus, he’d managed to save about $15,000.
Now, he needed advice on how to invest further and reduce his taxes.
Unfortunately, his accountant could do little but point him in the direction of other advisers.
Frustrated, John came to Tax Effective Accountants for a discovery session.
During that session, we learned the following about John:
Once we had this information, we identified the key challenges that John faced:
- He had a below average income that made it increasingly more difficult to both save and provide for his family.
- Saving as he was would lead to him paying tax on any interest that he earned.
- Once inflation diminished his buying power, the interest earned on his savings would become negligible.
- John wasn’t looking at the positive attributes of the investment property he currently owned.
Perhaps most importantly, John had no growth strategies in place.
If he kept going along the same route, inflation would eventually eat away the interest he generated on his savings.
He might even end up in a negative position after tax and inflation.
John needed some alternative strategies that fit his circumstances and didn’t present a huge amount of risk.
We helped him to develop three tax-effective strategies.
Strategy #1 - Tax Effectively Expand his Property
We showed John that saving alone wasn’t going to help him to achieve his goals. He needed to think differently.
We asked to consider further leverage into property as a means to create wealth.
At the time, John understood the basics of positive and negative gearing. What he didn’t know is how the wealthy use gearing to create wealth. We taught him about using the tax system to his advantage so that he could hold an investment property for very little money.
The right structure would mean that a combination of tax savings and rental income handles most of the cost.
Holding a large asset for a small amount of money would allow him to accelerate his wealth creation potential, just like the wealthy use.
And because John had existing equity in an investment property, he didn’t have to put a cent down. He could use his existing property as security to borrow 100% of the purchase costs, including the purchase price, stamp duty and legal fees.
John was happy with the recommendation.
We helped John to find a home and land package in Sydney’s North West. The total cost including the land, building costs, stamp duty and legal fees was $219,000.
A loan with an interest rate of 7% at the time allowed John to claim $10,549 in tax losses which gave him $3,323 in tax refunds.
The rental income plus his tax refunds covered most of the ongoing costs. In fact, the ongoing costs of holding the property started at $1,822 per annum.
That meant a growth rate of 1% would allow John to break even. A 5% growth rate would make him $10,850 per year.
A 10% growth rate would make him $21,900 per year.
Now, let’s imagine that he’d paid $1,822 into a term deposit with a 5% interest rate.
That would amount to a yearly return of $91 and his low holding costs didn’t alter his saving patterns.
Along with this advice, we also advised John to keep hold of his current investment property.
He didn’t have anything to lose as it was positively geared.
And he could use any future capital growth to make further investments or reduce his debts.
