I’ve been thinking about getting an IP for a while now but still haven’t bought one yet. We own our house and have investment in shares that is 50% geared and the dividends that we get from the shares are more than our loan repayments. We do not intent to increase our exposure to shares and thinking about getting an IP (sooner or later) to balance our investments. Basically I have been brained washed by shares investments gurus way back but I am going to change that.
The IPs that I have in mind are around $260K, 15-20 kms from Perth CBD, one suburb away from the beach and close to railway line.
When I do the sum:
260K loan @7% = 17,500/year loan repayment (interest only)
Rental 190-200/week = 10,000/year
Misc expenses = 3,000/year (is this reasonable?)
So it will cost me about 10,500/year.
Depreciation will be very small since they are over 25 years old. It will cost me more if I also choose to pay the loan principal.Is this still a reasonable rental/loan repayment ratio?
I have read Steve McKnight book and I know he won’t get -CF property like this. But at the current market I won’t be able to get one around the areas.
I would probably up miscellaneous expenses a bit and lower the interest rate (on current rates) but otherwise seems pretty spot on.
Don’t forget to allow for tax deductions against your income and it will look even better especially if you get the benefit each week with your income.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksWhat do you mean “each week with your income?” Can you apply to the ATO to have your refund paid in advance in your wage?
AXJ
You may also wish to factor in property management & letting fee’s should you choose to use a real estate agency to professionally manage your investment.
If you haven’t already – talk to some of the local agents to get a run down of PM expenses you could reasonably expect.
I don’t know if your miscellaneous expenses include local government rates etc.
You need to also factor in purchasing costs which will include: legal fee’s, gov.t stamp duty, loan stamp duty, loan establishment costs,
The building being 25 years old, you should engage a builder or architect to inspect the property. Also I would recommend a pest inspection. (more fee’s)
Hope this helps.
Luke Woollard
Licensee
Pacific Lifestyle Property
http://www.plproperty.com.auYes, there is a form to get your employer to pay you more each week (tax you less) if you have a deductible investment property. I never remember the form number but I am sure someone will pop up with a link to it. It is very commonly used.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksAXJ – you can depending on individual circumstances.
Speak to your accountant about this as soon as possible if you own investment property.
Luke Woollard
Licensee
Pacific Lifestyle Property
http://www.plproperty.com.auSorry I forgot to mention that I will pay the stamp duty, establishment fee (lawyer fee) and other settlement costs from my savings.
The miscellaneous costs include PM fee, rates, land tax if applicable, minor fixes, insurance etc. If $3,000 is not enough how much should I put aside for these?Mortgage Adviser, what is considered as a good interest rate this day?
The gross yield is 4%. That’s before the miscellaneous expenses. If the misc exp is $3,000 that bring the yield down to 2.84%.
That’s pretty low isn’t it?Yes it sounds like a fairly weak yield – that said, I know nothing about the property market you are looking at….
Luke Woollard
Licensee
Pacific Lifestyle Property
http://www.plproperty.com.aucomments made are general information only. you should seek professional advice for your particular circumstances.
For a fully documented loan, the maximum interest rate should be no more than 6.75%. You can get down to 6.62% with package discounts for higher loan amount totals.
This disregards intro rates which revert to higher rates after the discount period.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHmmm…2.8% nett yield for a RIP in a suburb of Perth – sounds about right.
Zen, at 6.8% for the cost of money, your cashflow loss is ~ 4%. Assuming you are on a middle tax bracket, your refund will be ~ 1.5%, therefore you’ll need CG of about 2.5% to go nowhere.
Therefore, the entire business proposition hinges on what you expect the CG to be over the long term.
What has the suburb averaged in terms of CG compounded p.a. for the past 10 yrs ?? Do you have that data to hand ??
This ‘investment’ provides a certain cashflow loss…only you can decide what the future CG may be.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
In relation to the form used to have your tax reduced for each of your pay periods (if you have an investment property) is called a 221D from the last time I completed one. Hope this helps.
Yasna & Simon
221D is the old name – but I can’t determine what the new name should be. I’ve variously heard of it referred to as ITWV, or 1515. But nothing on the ATO website that I’ve found has added clarification.
Try this:
http://ato.gov.au/businesses/content.asp?doc=/content/17023.htm&page=2#P8_289I’ve found the ATO website is a good cure for insomnia,
Benny
6.8% is a good rate.
The last 5 years the growth has been 12.5%/year. I don’t know the stats for 10 years.
The yield is around 2.8-3% assuming I have no problem getting a tenant and it’s rented the whole year.
Mortgage Adviser, do financial institutions have problem with lending money to an individual to by IP under a discretionary trust? I don’t have a trust but it sounds like a good idea.A lot of them will do it with no problems. Some don’t like it. They may charge you a few hundred extra in the application fee to read the trust documents.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksZen, The form that is used to reduce tax on a weekly basis is called 2005 PAYG Income Tax Withholding Variation (ITWV) application.
The form number is NAT5422-03-2004.
I think the form that is to be used this year will start with 2006 PAYG etc. A new form is brought out each year in April or May.
This form can filled out on the website and electronically lodged.
It is desirable to have all your details to hand.
Name and adress of property, date purchased, all your estimated income from all sources as well as estimated expenses. You will need details of your employer’s address and telephone number.
You have to be careful in estimating as there is a penalty where you overestimate by more than 15%. It is better not to estimate all your expenses and only use the major ones eg interest on the loan.
Similarly with the income be very careful to take in expected pay increases etc.
This appication is in effect an early estimate of what your 2005/2006 tax return will show. The ATO does not like reducing income tax deducted without due care being taken in presenting the figures.
Your employer receives the advice approving the reduction in tax withheld. It is a percentage figure.C W Woodhouse
Thank you everyone for the helpfull information.
Hi Zen,
City council rates are obtainable from the City Council and Water Authority Rates from WAWA. This will give you an exact set of figures for you to work from – as a ball park you could allow $650 each here.
If the property is strata titled then body corporate fees will be available from the strata manager.
For property management fees allow around 10% which will give you a ball park figure of around $1000/annum – the real figure in Perth will be slightly higher than this unless you can negotiate management fees down a fair way.
Repairs and maintenance are an unknown quantity – but given the property is 25 years old these could be significant. Your depreciation claims will be severely restricted uless there have been signifcant additions made since 18/7/1985.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958
You must be logged in to reply to this topic. If you don't have an account, you can register here.
