Hi Steven,
Totally right re “Cashflow being more important than Growth”. The whole scenario has been pretty well presented, so well done. There is one area I think needs a little more focus though, or maybe I am missing something:-

b) Next, comes Capital Gain Tax, so bye bye 25% of my profit.
c) Finally, the remaining profit is treated as my personal income.

To me, b anc c are actually combined. i.e. CGT is arrived at by calculating the actual profit you have made (removing costs of buying and selling, etc), then taking 50% of that profit and adding that reduced figure to your Income for the year of sale.

If you happen to be on the kind of wage that brings you near 50% Tax, then this will indeed equate to “25% of your profit” as you mentioned. But only once! So, if you have said byebye to your profit in “b”, you don’t say byebye again in “c”.

Or did you have some other profit in mind when you wrote that?

Other thoughts I had on reading your post were these:-

1. Having BOTH Growth and Cashflow is best, as Growth can grow your equity far quicker than most of us can save. So maybe start by having a portfolio that is “cashflow positive”, then as cashflow permits, add the occasional negative geared “Growth” property to balance things.

2. By buying properties that require a reno, one can often add way more in dollar value than is spent on the actual reno, thus lifting both the Equity and the rental income.

3. Stamp Duties (or Transfer Duties today) vary between states so do your calcs depending on where YOU are buying – e.g. Qld is currently 3.5% for $500k properties (with GST added too?? I’m unsure… but I would hope NOT !!)

4. There has been a tendency for marketeers to oversell the benefits of Negative Gearing to wannabe investors – and, as you mention Steven, those who know little about investing might “rush to buy into a booming area”.

5. For those starting out, cashflow certainly is King. Without it, life gets hard and scarey.

Anyway, good thoughts there Steven, and thanks for sharing that info, :)

Benny

Good to hear they are covering that too. For mine, doing that for a FIRST IP is a good way to get you moving. The more things on your side, the better. And, if it works well, do it for your second too.

But you are right – if the deal is good, it should stand alone even in a bad market. And yes, cashflow is King !!

Playing devil’s advocate though, if I were selling property to my students, I wouldn’t want them to ONLY buy properties that are in an upward trend cycle either!! That could cruel my chances of selling 70% of the properties I want to “move on” !!

(Benny’s finger touches his nose…..)

Benny

With those flips, I think the way you do them is important (and I haven’t done any at all, so I am flapping my gums here, but other members might be able to step in…..)

e.g. I think it can work out if one takes out an option, then onsells that option to someone else. In that way, you never do take possession of the property, so you don’t need to pay Stamps – at least, I think that is how it goes(???)

There are a small group on here who do this kind of thing (flips etc) who might be able to add much more value…. Fingers crossed.

Yes, I caught your PM and will answer in kind,

Benny

Hi Rachel,
Sounds like you have them sussed – if it is simply lack of experience on the part of the PM, then that can be overcome (but only if their Manager gives a stuff). i.e. Is there anyone more senior who can guide the current PM? Maybe you are going to flick them anyway, but it would be good to share your concerns with the Manager (if they care at all). Certainly finding a good PM is one of the thing that can assure your success in property investing. I’ve found PM’s should be at least 30 years of age before they “come into their own” – any younger than that, and their inexperience lets them down.

The tenants do seem to be the main problem …

Benny

I hadn’t heard of them, so thanks for sharing. How did you find them, Steven? Or did they call you? Certainly sounds expensive to me, but then, if they are providing value …..

Obvious questions that arise (to me) would be to discover how much they gain from each property you buy through them – I am always just a wee bit more suss when they are finding the properties, providing the “team”, charging you the earth, etc.

I am sure that weekend experience has added heaps to your knowledge of RE investing, so good work.

Benny

Hi Rachel,
Even as I was reading your post, I was wondering about the integrity of your Property Manager.

… and she tends to side with the tenants, or in some cases has gone ahead and authorised items that I’ve said no to.

If you don’t already have such in place, DO set a maximum repair cost the PM can spend without calling you to affirm a payment (anything above that figure – say $200 – they MUST call you).

Some PM’s (with no integrity) seem to live really well by employing their “tradie mates” on a regular basis, and collecting a kickback from them for each higher-than-usual-cost repair done.

It seems to me you really need to take back control from all of them – and that could include advising the tenants that you won’t be renewing their lease in three months time (and that you will look favourably on them leaving early too – i.e. you would not invoke “broken lease rules” – you want them out as quick as possible). And be looking out for your NEXT Property Manager at the same time (the current one might need 90 days notice in writing prior to the expiration of their service.

It sounds to me like they have all been taking you for a ride – time to tell them to “Get off the bus!”

Benny

Hi Diceman,
I can see the benefit of using the higher interest loan if it allows you to “settle quickly” in return for a nice discount on the purchase price. But if there is no immediate benefit for you, take the time needed to set up the better loan right off.

As always, if not meeting them on price, give a bit on terms. Or, if meeting their terms, then don’t give in on price. Good luck,

Benny

Thanks for that Terryw – probably little to worry about then if a lender goes belly up?

Benny

Hi Steven,
I applaud that you are keeping an open mind, and are “taking a look” at other options. Certainly, if this person has an “in” to distressed sales, that might have some merit and benefit for you. but hey, as always, it is Buyer Beware (caveat emptor).

I tend to agree with the others who are guiding you away from accountants recommending real estate, apartments, and student accom. But then, contrarian views can sometimes win out – so long as you have covered off all of the likely problem areas and can still make monmey. Don’t forget though, that aggravation can override some profits – if you are making a profit but it is driving you nuts to do so, do you really want that?

Anyway, you mentioned your parents having been using this accountant for years. Have they actually taken up any of those “deals” she has mentioned? If so, then you might have the inside running that can help you win as they can show how well those deals have gone for them, and can discuss any failures or concerns.

Deals are “out there” – if this person has the opportunity to buy at a sizeable discount and can pass on the opportunity to you, then it might be worth a further look. I would want a screaming deal before I bought an apartment in any tower block, and I would want to know a whole lot more about the negatives of renting to students before I committed.

Good luck with your search,

Benny

Hi Vick,
You asked this three months ago, and received a very comprehensive answer at the time. Of special interest is the link that Terryw provided you in one of his answers to you.

Can I recommend you go back and re-read the topic :-
https://www.propertyinvesting.com/topic/5037777-asdvise-re-ppor-and-ip-loan-structure/

… and pay special attention to the link in Terry’s reply. In there, he outlines some thoughts re what you might choose to do.

This is unfortunately quite a common occurrence – where a PPOR has had its mortgage all but paid off, and a home-owner then wants to move to another PPOR and keep the old one as an IP. For your future use, DO learn about Offset Accounts and the good they can do you into the future (e.g. who knows, your NEW PPOR might also become an IP in ten years time ….)

My thoughts would be to look at the PPOR (the one you are thinking will become an IP) and run the numbers from two sides – i.e. cost of selling up, or retaining. In selling, you get to keep all of the Equity built up (with no CGT to pay). But there other selling costs that you need to be aware of. What if you sold, maximised your cash, allowing you to put a huge deposit down on your new PPOR, then borrowed against the new PPOR to buy another investment property? That new loan against your new PPOR is then deductible !!

Then again, it could be that the old PPOR CAN become an IP, using its Equity to buy further IP’s, and by borrowing against it to pay its own expenses, etc. Even though it means paying a bit more Tax right now, that may well be offset by any likely Equity jumps. e.g. if it is costing you $2k per year in extra Tax, but it is increasing in value by $20k each year, is that a good trade-off in your eyes? And each time you borrow against it to buy another investment, that new mortgage would likely be tax deductible, thus less cashflow and less tax to pay. Can that work for you – over time?

Terry had commented in that other topic that it is the “purpose of the loan that denotes deductibility, not the asset itself”. What that means is this – simply the act of borrowing against an Investment Property DOES NOT make a new mortgage deductible. It is the purpose that is deductible or not. i.e. what is the loan for?

As an example, if you borrow against the IP (your old PPOR) to pay down the mortgage on your new PPOR, the “purpose of the loan” is to pay a personal debt, not an investment debt – thus that new mortgage would not likely be deductible.

Hope that helps,

Benny

PS Do get a valuation of your current IP prior to making it your PPOR. That is to assign a value in the present day to help in providing its Cost Base when paying CGT way in the future when you finally sell it. CHeck all that with your favourite accountant type.

PPS I’m not an adviser, so usual disclaimers apply!! This is simply my opinion, to get the wheels turning.