As the title suggests, what would be a realistic IP value I should target? ie. 500K 750k. I am trying to minimise tax, as at the moment, payiong tax on 120k is not pretty, and would like to negative gear using my equity in my home. I am 33 and so looking to a long term plan, not just a quick term solution ie. margin loan for a quick fix. Any idea? BTW I am looking at property in the SE seburbs of Melb. Would people go for land value or new units (ie. to maximise the depreciation and minimise the tax)? Thoughts would be greatly appreciated.
Why pay others for their efforts by buying their new units? I would buy an older style median priced (or less than median) house on decent land that has subdivision potential. In the S/E of Melb follow the new Eatsern Link. Ringwood/Heathmont has excellent amenity and also look at Frankston central. Buy and hold (rent out) for a year or so and seek DA for you to then develop your own portfolio.
You will find that by manufacturing another backyard for nominal cost and then building two (or maybe three depending on size)on the block your holding costs will be lower (thanks to depreciation and the higher rent for newer dwellings) than just holding the old one as a renter, even though borrowings will be higher for the overall development.
You then will have more properties to increase in value and create wealth by way of capital growth whilst the tenant and the tax man help along the way and also addressing your tax situation by gearing into growth assets. I guess it follows that you should not just buy one (above median priced) property. In case of liquidation a lower priced property will be easier to sell and also will be more affordable to more people to rent. Perhaps look at two $350 K properties and adopt the strategy above.
Hope this helps
Cheers
MIchael
Yep, there are a million ways to skin a cat or spend your money.
I believe that Michaels advice above is sound provided that you want to give yourself another job or pay someone with experience to assist with the many pitfalls associated with attempting a development project – no matter how small. The reality is that there are real benefits with this form of investing.
I am also sure that some will advise on Houses over Units (because houses have land and units are built in thin air)
Othere will suggest that you buy a renovator (again more work if you want it).As my title implies, I preferr units over houses as close to CBD as I can get. However in saying that, I would never buy a $700K unit but would suggest two $350K units. The problem that I face when I attempt to explain this to Investor clients is the age old problem that every person has to contend with and that is – People buy on emotion and then justify with logic. That is, the $700K unit is sure going to be a nicer place than the $350K units and you may well say 'Hey! I could live here' but that's not the point. The fact is that almost everywhere in Australia the young buyers are trying to purchase around that $350K mark, therefore the market is more secure in this price range should you ever have to sell. I would also suggest that capital gains is higher by percentage on a cheaper property than an expensive property. (10% on two x $350K properties equals $70K while 8% on $700k equals $56K)
My 2 cents worth, but as I said previously, there are many options and you have to hoose the one that best fits your lifestyle, experience, desire and beliefs. Good Luck
Jon
Hi Cadan
Remember your sole motive for purchasing property should not be for the Tax benefits as these can change over time with Government policy. Consider a property portfolio as a long term investment.
Secondly you are only able to claim the net interest shortfall at your highest marginal Tax rate and at $120K PA your highest marginal rate is 40 cents in the dollar. Of course Non cash deductions such as Depreciation and BWO can aid the cash flow situation.
Diversification of risk is my preferred strategy so 2 cheaper properties would be the way to go rather than having all of your eggs in 1 basket.
Richard Taylor | Australia's leading private lender
Consider how much can you afford to fork out each week in interest, council rates, water rates, insurance minus the rent income. Use a guess of what similar properties in http://www.realestate.com.au receive in rent and work out an interest rate of about 12% for a safety margin due to the trend of rising interest rates. Also you might want to consider fixing your costs by fixing the interest rate of the loan for a certain time period. Also consider how to pay these costs if you have a three month vacancy. If you pay say 40% tax you are paying for each dollar of expenses to get 40 cents back and making a 60 cent loss.
Hi Cadan
Remember your sole motive for purchasing property should not be for the Tax benefits as these can change over time with Government policy. Consider a property portfolio as a long term investment.
Secondly you are only able to claim the net interest shortfall at your highest marginal Tax rate and at $120K PA your highest marginal rate is 40 cents in the dollar. Of course Non cash deductions such as Depreciation and BWO can aid the cash flow situation.
Diversification of risk is my preferred strategy so 2 cheaper properties would be the way to go rather than having all of your eggs in 1 basket.
Richard Taylor | Australia's leading private lender
Quote:As the title suggests, what would be a realistic IP value I should target? ie. 500K 750k. I am trying to minimise tax, as at the moment, payiong tax on 120k is not pretty, and would like to negative gear using my equity in my home. I am 33 and so looking to a long term plan, not just a quick term solution ie. margin loan for a quick fix. Any idea? BTW I am looking at property in the SE seburbs of Melb. Would people go for land value or new units (ie. to maximise the depreciation and minimise the tax)? Thoughts would be greatly appreciated.Everyone has been saying buy 2 cheap ones but why not go for a well located penthouse maybe in the CBD. Usually they have much better growth than 1 or 2 beddas and your depreciation will be high aswell.
Going for tax benenifit only is sucide. So make sure you invest in something that will appreciate in value as well.
I did an Investment Analysis for you by using a penthouse as an example. Now remember if you buy a brand new penthouse you'll be paying atleast $1mill. If you buy one OTP in Melbourne then you can get away with the building stamp duty. That's savings of atleast $30k. 3beddas in a higher level is also a good option.
I had a look at Melbourne Docklands Penthouses and they are renting atleast $1200/week so I'm using that as a guide.
I think your tax payable should be $35k something but it says $37,500 so we'll just go with that.
If you multiply $358/week by 52 weeks then you'll have to pay $18,616 out of your pocket. That might seem alot but if you add that up with the NEW TAX PAYABLE it adds up to (18,616 + 13,246 = $31,862 ).
(Old Tax Payable) $37,500 – $31,862 (New Tax Payable + Repayments) = $5,638
So you’re actually better off by $5,638 by investing than if you don’t. But if you do invest then the guys at the tax office definitely wont be happy since you’re gonna rob them of precious tax money.
Also if we calculate the growth of your property at 10% p/a then in 10 years time your $1mill property will be worth $2,593,742. That’s a cool $1.5mill by doing nothing.
If we break that $1,593,742 in to 10 years then on average you would have made yourself $1,593,74. Let’s say your property also works 52 week every year so we’ll divide it by 52 week which comes up at $3,064/week.
Now lets say your property works only 5 days a week like yourself I’m assuming. $3,064/5 = $613 per day. Even though your property is working 24/7 to make you money but lets say it also works 8 hours a day from 9-5. $613/8 = $76.6 per hour. Your property is actually making more money than you are by earning $76.6/hour.Now imagine if you have 5 of these over the next 20years. $76.6 x 5 = $383/hour. If you buy one every 2.5 years and nothing after the 10th year.
Obviously the analysis below is just an example. If you want me to make any changes to it then let me know.
And dont tell me Masih you just happen to be sellin g some of these over priced penthouses as part of your current stock.
Richard Taylor | Australia's leading private lender
Thanks for input everyone, much appreciated.
Masih, no offence but I am not warming to paying $1m on a docklands apartment. With the amount of activity going on in docklands, there will be an oversupply of stock there for quite a while still. I had a friend who just sold his docklands apartment and made a capital loss of 80k after holding it for 4 years (an off the plan special where he thought he was getting it cheap), and not to mention his interest cost.
Just to clarify, I am a qualified professional in the financial services industry so understand about depreciation, tax etc. I am leaning towards land with an average house on it I can rent out. Most of you mention units about 350k, but say in the bentleigh area, most blocks with run down houses go for 700k plus, new 2 – 3 bedroom units are 600k plus. Its fine to diversify, but this is entry level in the bentleigh area.
I would like to minimise tax, and I did mention I am looking at long term, so I am not just in it for the tax gains, but also want growth. Back to my initial question, if blocks in the (again, the bentleigh example) say are going for 700k plus, even on my income, do you think I am over stretching myself?
michaelparis wrote:Why pay others for their efforts by buying their new units?What a silly thing to say!
It comes down to:
1) What is your strategy
2) What are the numbersExample, I prefer passive IP's. I have no desire to redevelop sites, etc. I am not that aggressive and I dont have the interest. I buy primarily OTP units / appartments so I dont have to worry about any maintenance (usually), I get full depreciation allowance and they are easily tennanted. Furthermore, I get capital growth over the time of the build for the cost of a deposit bond (virtually nothing)
To further illustrate, my last purchase was an OTP 2 bed 2 bath unit in Cairns. Bought in June 07 for $289k. Settles in 2 weeks from now. 2 other vendors in the 18 unit complex have already flipped at $335k and $340k for the same floorplan. $320/week tennant already confirmed.
Now, if i sell today (which i wont), I have made a 17% return in 6 months approx on a deposit bond, I have a 5.5% RR approx, I have no maintenance issues and I have full depreciation allowance
Why is this a bad strategy?
Obviously depends on how you feel and where you are on the spectrum, some people will invest at all costs and live off nothing whereas some people want lcd tvs when they cant afford it.
From some quick sums if you earn 120k.
Weekly figures
Take home pay $1600
Likely rental after costs(4.5%) $600Repayment on loan $1250
So all things going smoothly, you will be living on $950/wk instead of $1600.
Lifestyle choice ?
Obviously come tax time you wil receive a nice return.
I think its a moderate approach rather than aggressive and would not be over stretching yourself.
Congratulations……so what are you waitng for.! g….o for it…….. Here are a couple of suggestions…..
1) Do the 'buy one, two or three' cheaper properties, (don't have to be in Melbourne) spread the risk, (ie maybe buy in different areas) and you will have a few tax concessions and probably not even know you have them…until you enjoy growth in a few years time.
2) alternatively, with the amount of money are are looking at spending, and with what I assume (perhaps wrongly) on your income in your job you possibly do not have a lot of time spare on your hands, perhaps look up someone that is experieinced as a buyers agent in Melboure (a forum contributor, and very knowledgable Michael Yardney would come to mind as someone to have a chat with about this) and get them to get your first one, and enjoy some tax beneifts anf capital growth long term.
All the best.Don't listen to people who say 'you have to diversify'. If you do your homework correctly and know your market then you CAN put all your eggs in one basket and make a killing.
Diversification is only for people who have no idea what they're doing.
As I intimated in my earlier post, there are many options, however it appears to me that you have already made up your own mind with your comments:-
.Just to clarify, I am a qualified professional in the financial services industry so understand about depreciation, tax etc. I am leaning towards land with an average house on it I can rent out. Most of you mention units about 350k, but say in the bentleigh area, most blocks with run down houses go for 700k plus, new 2 – 3 bedroom units are 600k plus. Its fine to diversify, but this is entry level in the bentleigh area.
As you are a qualified professional, I probably don't have to tell you that you should only purchase the investment that you can afford to maintain and to that end, I strongly suggest that you invest in Jan Sommers PIA program and work out your own short falls.
A couple of suggestions I will make.
1. Don't buy 3 bedroom units for investment
2. Visit your local Real Estate Offices and ask what rents are being achieved on a $700k house and on a $350K unit
3. Find out the difference between Council rates for a House and a Unit.
4. Find out insurance for a $700K house (Insurance is covered in the Body Corp for the Unit)
5. Be honest with your self and work out how much it will cost to maintain the house per year (even if it is new there is still garden and painting maintenance.Put all of the information in the PIA program and find out which one shows the best rate of return on your investment. If it turns out to be the House – buy it. If it turns out to be the Unit – buy it. Or don't
Jon
Qlds007 wrote:And dont tell me Masih you just happen to be sellin g some of these over priced penthouses as part of your current stock.
Unfortunately we havent got any penthouses from my knowlege. Would be alot of commission though.
cadan wrote:With the amount of activity going on in docklands, there will be an oversupply of stock there for quite a while still. I had a friend who just sold his docklands apartment and made a capital loss of 80k after holding it for 4 years (an off the plan special where he thought he was getting it cheap), and not to mention his interest cost.First of all your friend bought at the wrong time and sold at the wrong time. Because while you have a case of Docklands being oversupplied in last 2-3 years, things are changing now. According to Colliers International "Annual demand for apartments within the city of Melbourne (Docklands included) is expected to outstrip supply over the next two to three years, underpinned by strong population growth".
To prove that, a project we launched last thursday in Docklands; over 110 of the units were snapped up in just over a week. No advertising whatsoever. I've never seen a project sell at that rate before. If that's not demand then I dont know what else is.
Quote:I am leaning towards land with an average house on it I can rent out.An average house wont minimise your tax. So maybe you should first workout your strategy whether it's to minimise tax or buy an average house on a land which you might want to renovate or knock down and redevelop later on.
Jon Chown wrote:1. Don't buy 3 bedroom units for investmentDid you know the higher the number of bedrooms the better the capital growth? Mainly because of the scarcity factor. There are heaps of 1 and 2 bedroom units on the market but not many 3 bedrooms. The rental return is abit less than 1 or 2 bedroom apartments but better capital appreciation.
What makes you think 3 bedrooms are no good for investing?
Dean1974 wrote:Don't listen to people who say 'you have to diversify'. If you do your homework correctly and know your market then you CAN put all your eggs in one basket and make a killing.Diversification is only for people who have no idea what they're doing.
After successfully; run private businesses, invested in stocks and real estate, these words send shivers up my spine. Find me a person who has weathered many seasons and cycles and they'll tell you that advice is bunk.
Take an option you are keen on (say regional houses or inner city penthouses) and focus all your energies on it for the next two weeks. You will find your answer.
Look Sharp, Learn Well, Be Light, Go Hard.
Investing to get a tax deduction is not what you should be looking to do. Why invest to make a loss?
To minimise your tax through neg gearing IP's it means that you have taken a cashflow loss. You will be spending $1 to get back 50c.
With the financial position you are in, you could invest in something like a small reno/subdivide/sell and make clear profits. This is what I am moving towards with our investing.
Or maybe buy cheaper IP's, put in larger cash deposits and have pos cashflow from day one. Don't be fooled by big ticket IP's; cheap ones can still give excellent returns.
Or, my favourite; buy IP's that are initially cashflow negative, but are cashflow positive after tax. That way, you still get your tax deductons, and there is no drop in your cashflow. read Margaret Lomas's books to learn more on this strategy.
If you are looking in Melb's s/e suburbs it would be wise to look at properties that have good land content. This will allow you to do sub divs (depending on zoning), or build units etc later on.
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