Having recently purchased a IP i still go through hi’s and low’s as to wheather ive done the right thing. Especially when people quote anything under a 7% return as not good. This is how i crunch my numbers,let me know what you think.
Our PPOR has over $140 in equity and we have another appreciating asset worth $80 grand which we can axcess if things get rough.
The property is a 2 bed town house just having a major and very tasteful reno and extention in town cbd on south coast nsw.(local area slowed over the last couple of years allowing me to buy it at around $50 grand below 04 prices but area has stabilised and showing signs of improvement.
(purchase price$295,000+12,500 upfront costs)
Repayments $428 pw fixed
Rates $25 pw
REA costs $18 pw
Insurance $10 pw
Maintenance $10 pw
TOTAL COSTS $491 pwRENT $260 pw (probably more)
Tax return IP $120 pw (confirmed by accountant min)
Tax return Normal $60 pw (normal return past five years)
TOTAL $440OUT OF POCKET EXP $51 pw
Now i know the above cenario will never be cash flow + and may vary up or down a bit but the reasons i purchased are the following
1# Wanted to buy now before kids arrive in a few years[crying]
2#Prices have dropped but appear to have stabilised
3# We have a large desposible income that we waste if not tied up
4#I want to reduce taxible income as i am in top tax bracket
5# i believe the property will be the best in area for capital gains.
Basically the last few years we have been cruising and felt it was time to do something instead of wasting our money. I am not after assurances as i have done my research and can handle anything that comes our way like rate rises,further price drop or even a job lose.Just want general comments good or bad,i have broad shoulders, Though em at me[suave]To me when you add the rent and tax return that gives about a 7% return.(although i do need the tax portion to get it up there). Is that right. We also bought the property to maybe move into a few years down the track and add two bederooms and a ensuit to increase value.(slab is already prepared for extention by old owners)Having a carpentry background means i can do this for under$30,000 and that makes it a four bedder town house in central town.I honestly believe the property would be wortth around $400,000 with the added bedrooms and with a improved market maybe more.
Devo
Only you knwo the area so I won’t comment there.
The figures appear ok and If you can do the work yourself saving $$$ then you will certainly add value.
To avoid a potential rate rise why not look at a fixed rate especially if you still have a PPOR loan. Assume you partner is not working so assume you will buy it in your name solely or in Trust with you as the Trustee and Unit holder.
Dont forget dont X collaralise the loan or the lender will have a field day with you. Fund it as 2 separate projects and keep the loans separate. You could always pre-pay the interest to get the full deduction into this year dependant on what you think will happen next Financial Year.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
As far as x,ing the loan i didnt do it so i guess thats my first stuff up in property investing. The loan is locked for 5 years. Is this too long??. The wife is working but loan is in my name for negative gearing.My ideal situation would be to renovate using my building skills but the wife is against it. She only likes nice shiny houses unfortunately. that is why i picked a renovated house in a nice cbd area with room to extend fairly cheaply.Extending from 2 bed to 4 bed is only a idea and returns would have to make it worth while.I am basically sitting on it for 5 years and then re avaluate my situation. By then i want my PPOR paid off and either some of my current IP paid of or buy another one depending on the market.Does it sound like i am heading in the right direction
Devo
I might be slightly confused and you may want to take the answer off the forum.
If i read it correctly is your IP loan fixed for 5 years and X collaratised. Depending on who it is with and what the interest rate was you may still be able to untangle.
Why would you not buy the next property in Trust ?
Asset protection is always important and there is always the secondary Tax consideration.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
Yes you are right with those details. although the lock in period of five years and interest rate will not be fixed until settlement in about two months so they may be able to be changed.When you say untangle do you mean the five years or the x ,ing. I was under the impresion that fixing the interest rate for a longer period was the go for IP.As for the crossing of the loan. Trust’s etc were only something i discovered after finding this forum but unfortunately the deal was done so its something ill have to fix down the track or if i swap lenders.
TOTAL COSTS $491 pw
RENT $260 pw (probably more)
I don’t know about your tax return calculations. From that the weekly loss is $231, which means you get back 45% * 231 = 104$, so the net weekly loss is $127, or $6604 per year.
The definatly increase in value of the house is 3% of $295,000 = 8850. Minus 25% capital gains results in 6637.50 minus 2% sales commision is $6,504.
So there is a net loss of $100 per year if the house only increases in value with inflation. You are essentially backing on the fact it will go up more than inflation. I recommend you start paying far beyond the minimum interest only repayments. This is the only way to start making more profit out of it.
Actually your calculations have lost me.I have gone to my accountant with the details of my property and my salary. He said with depretiation,Loan interest,capital works right off etc i will get back about $6,200 or $120 per week safely possibly more plus with my normal return im willing to put back into the property instead of wasting($3000 or $60 PW approx) which is a total of$180 so
All up expenses $491
Rent+ tax= $440
Left over = $51. Is that right.???
Truth be told we could pay $500 extra and still live easily. AS far as house value going up.I except that prices may not move for a long time.I bought the property for tax minimisation first.Capital gain second.If i can get this property costing me minimal money per year. I am happy. Thats what i wanted and hopefully see a capital gain above cpi in the future.As far as paying extra off.We have a PPOR that we still owe $200,000 that we are currently paying off at $1000 a week to get it down.I want to owe more on the investment for negative gearing so all extra payments go of our PPOR.
If i find that the IP is a bad move and we struggle due to our situation changing we could sell our PPOR, take the$140,000 profit.Move into the IP which is nicer than the house we live in.Add the two rooms sell and make a profit(what ever that is).Or if we are really in fiancial crap we could stay in the IP,i have another asset worth $80,000 and climbing by the day And pay that money of the loan. That would put us in the IP town house and only owe$87,500. So i think we should be ok.Thanks for your imput dacium. It may not be the best investment option but im in and ill make the best of it.
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