Case Study_ Michael and Janelle from Sydney Australia.
BDPW conducted an interview with a couple who chose to invest their capital with us in our Indexed Fund. Both Michael and Janelle are happy to share their story in the hope that other people can learn from what has worked well for them. This a summary of the interview for educational purposes only This is not financial advice from BDPW or from Michael and Janelle.
TRENT:
What financial issue did you have before you chose to work with BDPW?
MICHAEL:
I didn’t even know we had an issue until we met with Trent Richards from BDPW. He introduced himself as someone who has operated financial services businesses in Australia for the past 25 years and was able to retire at the age of 44 and move himself and his wife overseas to live the island life. This sounded very appealing to both of us and we wanted to understand how he did this, as we too would love to live this lifestyle.
Trent outlined his financial training over many years and gave us more or less some tips on what we could do to get into a better financial position, from what he could see when he digged a little into our financial position. We have a home worth $850K in west Sydney and a mortgage of $300K. We are both working and our combined income is $198K. We only have $160K combined in our superannuation and its in two employer/industry funds. We have $65K in savings and two car loans in the amount o $30K combined. That’s it. That’s everything for us financially in a snapshot.
TRENT:
So lets make a summary here:
Home Value $850K — Home Mortgage$300K — Equity in home $550K — bank will lend a maximum of 80% without Insurance being $680K — less the mortgage of $350K. The total borrowing capacity based on a Loan to Value Ratio (LVR) is $330K. Now the bank will also look at the Debt Service Ratio (DSR) meaning, can you afford to pay the added loan amount.
The superannuation is $160K and sitting in employer funds that made a loss last year after further investigation.
The savings have no plan at this stage apart from a safety net for Janelle.
This gives Michael and Janelle multiple options to invest and make a solid Return On Investment (ROI). We need to plan a strategy to pay down debt and build wealth at the same time. If we can achieve both of these outcomes within the strategy then our clients wealth is going to be created a lot faster than simply doing one and not the other. Here’s the plan, provided Michael and Janelle feel comfortable with BDPW, after their research and due diligence.
Step 1: Let’s discuss the mortgage and paying this off as fast as we can. Firstly, I would suggest not having a savings account and a mortgage. I would refinance the loan to allow either a redraw facility or an offset facility allowing any savings to be able to offset the interest on the mortgage. It makes no sense earning 2% per annum on your savings and paying 6% interest on your mortgage. By setting this up correctly, you have eliminated the interest on $65K of the mortgage with one simply move.
In the next step we don’t have to physically do the above step, as we have a work around that will provide the same result. Stick with me here whilst I outline the plan. We ask our Mortgage Broker to set up an investment loan against the home for the maximum that the bank will lend. We do not touch the mortgage — this is a separate loan for tax purposes to separate investment debt from personal debt. You will need to discuss this with your accountant as their may be a tax advantages by doing this.
Let’s assume that bank agrees to a $300K investment loan “Interest Only” for 3 years at 6% interest. This means that the annual interest payment will be $18,000 (or $1,500 per month). We set up this loan and invest the $300,000 with BDPW as a loan. We also add $50K of our $65K savings to this amount. Janelle still holds $15K in cash for security purposes. The total Loan to BDPW is now $350,000 for a 3 year loan term, returning 48% ROI in 3 years time, or $168,000. The interest on the bank loan will be paid for from BDPW directly, so this $300K loan will cost Michael and Janelle absolutley nothing out of their pocket, for the duration of the loan.
In three years time the loan will be paid out in full and the additional funds will be paid directly into our Michael and Janelle’s bank account. In this case here’s the math: Loan $350,000 to BDPW over 3 years at 48% ROI — Upon maturity of the loan, BDPW will pay out $168,000 to Michael and Janelle, less the amount of bank interest already paid, being $18,000 per year for 3 years totalling $54,000. $114,000 will be deposited into their bank account of choice upon maturity. This will certainly be extremely pleasing to see!
Now let’s look at the superannuation as this needs to be treated separately to personal funds. With a balance of $160,000 combined super in an industry/employer fund, you have the option to roll this over into a Self Managed Super Fund (SMSF), if approved by the ATO. We have a team of Financial Planners and Accountants who can assist you to do this very easily and they will also work with you to complete the audits on an annual basis. This means that once you leave some funds in your employer fund to cover insurances and roll the remaining amount over to your new SMSF, you will have up to $145K to invest over a 3 year period earning a 48% ROI.
This is certainly a strategy that would work very well for your superannuation where you could see your balance grow from $160,000 to $229,600 within 3 years, prior to any additional contributions. This strategy will clearly far outperform the what your super is invested currently and I would urge you to have a look at how it is performing right now.
Michael and Janelle were more than happy to move forward setting up a SMSF and have not looked back. They also chose to invest a portion of their dead equity within their home to ensure that they could pay down their mortgage faster. We have since received two referrals from these folks as they are so pleased with the outcome.
If you would like to find out more about BDPW and our Index Fund, please feel free to reach out to us.
BDPW.IO
private@bdpw.io
