Forum Replies Created
I’m a little up in the air about LMI at the moment, I can definitely see the many benefits, however having a 20% equity buffer if the property were to depreciate would help me sleep a little better at night. Happy to be convinced otherwise!!
Did you catch this post, Anthony?
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4996934That goes into the whys and wherefores of LMI and should hold some positive reasons for using LMI. Consider that you can choose to hold any of the Deposit you DIDN’T have to pay in an Offset account as your SAN (Sleep At Night) security blanket.
e.g. Don’t pay a 20% Deposit ($80k on a $400k purchase). Instead, pay $40k plus maybe $5k of LMI (a guess) – this leaves $35k that can sit in your Offset. The interest on it should more than cover the interest on the $5k of LMI, AND you have funds available if the bad times come (or another bargain……)
Benny
Hi Anthony,
Hmm, this has the aroma of similarity about it :-
1) I’ve been told that rent I pay to a landlord is tax deductible – I can’t find a single shred of info to prove this though, do I smell a porky?
This smacks a little bit of a plan where someone with their own home chooses to go and rent instead. Though the rent they pay is NOT Tax Deductible, the rent they then receive on their PPOR (now an investment Property) IS. It works out that the new IP is effectively “paying” their own rent (depending on any mortgage payments due on the PPOR – if there is cash left over after paying any mortgage….).
Further, depending on available Equity in their PPOR, they might also be able to borrow to buy ANOTHER IP as well. Thus the beginnings of a portfolio. And, if the rent they pay is minimal (i.e. moving in with Mum and Dad for a bit) then this can only accelerate their way along the path.
Now, I have never heard of the term “Rentvesting” – but the above sounds like it could be that.
I did know one or two people who NEVER owned a home – instead they always rented, but had a portfolio of properties and shares. They believed it was WAY cheaper than owning their own home. Could THAT be rentvesting?
One final thought – could it be that you were reading an American book when you found the term, and the strategy? Their laws are way different in many ways – could having one’s Personal rent being a Tax deduction be one of these differences?
Benny
Hi Terry,
Benny trusts cannot distribute losses but what you may be thinking of is some borrowing to subscribe to units of a fixed unit trust and the trustee using that cash to pay for the property. Those borrowing to buy income oroducing units could claim the interest against their own income.
That sounded to me like how a Hybrid Trust works. It is a Hybrid Trust I was thinking of – there may be other kinds of Trusts that I have no knowledge of….
Benny
Hi Aftab,
Can you draw some ideas from what this young bloke did?
Note that his path had him add Equity to each purchase via a reno – the added equity provided the Deposit/Costs that allowed him to move onto the next property. Without the extra Equity created, his journey would have been nowhere near as quick as it was. Will that work for you too?
Benny
Hi Yew,
No – I do not need to change my life style for the moment as I still have a full time job. and drawing good pay.
OK, cool !! Then, since Terry has warned about some “gotchas” re selling a PPOR to pay down debt on IP’s, that is an area where you should talk seriously with a Broker around the financing issues. Maybe Terry himself !!
Other options (if wanting to increase your portfolio) might be to BORROW against your PPOR to provide Deposits/Costs for more IPs – but maybe look for POSITIVE geared investments such that your Income is supplemented from the extra rents and your OVERALL portfolio becomes LESS negative geared. The borrowings against the PPOR should be Tax deductible, even as you increase your income via the new IP(s).
Of course, this will all come down to your serviceability – can you borrow more? As Terry mentioned, lending is tighter right now – will you be able to “move on”? These are all good questions to put to a finance broker.
With some of my original questions behind us, maybe look to answering the other questions – or simply turn your thoughts toward them, and even expand on them, so that you proceed in the way that is most beneficial for YOU.
Good luck with your Mortgage Broker/financier and your next steps,
Benny
Hi Yew,
Sounds like you are doing well – good for you. Certainly, it sounds like there is a tonne of “lazy Equity” in your PPOR. And yes, it certainly is worth looking at “How best to proceed moving forward”.
The major question in MY mind for you, is “What IS the way forward FOR YOU?” Like, are you looking to consolidate now or are you still accumulating properties? Are you looking to replace an Income that has disappeared? Or do you want to work just 3 days a week instead of 5, so you need more Income and less Tax relief? Is your plan to change your investing slant (e.g. from property to shares)? Has something CHANGED in your life to have you looking at this option?
The title mentions “Increase Property portfolio” – so using the PPOR equity as Deposit/Costs for more IP’s, if that is the way you are wanting to go, makes sense too.
Summarised, what you propose CAN make sense, but only if it is appropriate in bringing you closer to your goals. This is such a big move – I would suggest you spend some time discussing/thinking/projecting the best way forward for YOU before embarking on that journey.
Benny
-
This reply was modified 7 years, 10 months ago by
Benny.
Hi Mido,
Congratulations on getting the approval – good work. But now, I start to question you a little bit (for your own benefit!!)I don’t know how to get loan to build 4 units bcuz I don’t have enough cash to show the bank.
1. Whoa !! OK, finance is an issue – I am sure that can be overcome, but then, do you have the experience to Project manage this build? If not, then I presume you will be paying more for someone else to do so.
2. Does the approval have a “time limit” imposed on it (e.g. Do you need to complete the build within – say – 2 years?) If yes, then that will impact on your next moves…..
3. I have heard of some folk who have approached a builder to build them using his own money, but the final outcome (who gets what when completed) is negotiated before the builder starts work. It may be that you get to retain just one or two of the units, and the builder has the other two for himself (paying him back for the money and effort he has put into the building of 4 units. I can’t tell you any more than that – I have never done this personally.
4. The other option might be to read up about a Joint Venture – where someone else provides the funds, you arrange the builder, and you agree to share the outcome with the one putting up the $$ for you. Again, all to be negotiated ahead of time.
Sorry I can’t be more specific – it seems to me like you MIGHT be able to make something work, but finding someone who HAS DONE THIS BEFORE would be vital I would think (and that is NOT me !!) Or look to spending some $$ to educate yourself so you CAN do this would be another realistic option – that way, you would KNOW for next time, and the time after, and…… ;)
Good luck with your search,
Benny
Hi Mido,
Hey, welcome aboard – you have come to a good place where we discuss a whole bunch of things to do with Real Estate investing.
Re your OTP apartment, you don’t give a lot of info about it, so I guess I can only refer you to a “general idea” kind of answer. In short though, we suggest buying problems and selling solutions. A brand-new apartment (or house) is a solution, so there is no profit in it perhaps for many years.
Instead, it is better to look for a “problem”, then YOU make it into a “solution” and sell it to someone else – that is where money can be made much more easily.
Have a look at the link below for more ideas re “buying an apartment OTP (Off The Plan)”.
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/2/#post-5027703We are discussing a 1 bedder apartment in that thread – you might have signed up for something quite different, but use the thoughts as a springboard for your own. Let’s see what other members can come up with too,
Benny
Hi Azanatta,
I just happened upon THIS link and figured you might like to contribute to it.
https://www.propertyinvesting.com/topic/5013926-fear-2/Someone else who was starting out started that thread – they too were hearing lots of “negatives” about property investing. Have a read and get heartened. And maybe add your findings for others following, ;)
Benny
Hi Parky,
Perhaps even more important than “What is the market going to do?” – I would be saying “Are they READY to sell it?”By that, I mean are they fully aware of the effect this sale will have? Have they spoken to any adviser about it? It sounds like they are not in a rush, and that is good. Maybe steer them toward checking out a few things – like:-
1. Is the sale of this place going to be initiating a CGT event? i.e. Will they owe Capital Gains Tax on it? If they will, do have them take the time to PLAN for the sale. See, it might be that next year one (or both) are due to retire – that “might” mean that next year would be a better time to sell it than this year. Have them check with their adviser just how much CGT they might be up for, and how it might be abated !!
2. If it were sold, what is their plan for the monies that are released? Do they have an alternative that will give them a similar positive cashflow?
3. Is there a way that whatever happens, it might be more favourable to “bone up” on Super and its benefits, then work out how a sale (or not) of this place might create a really positive Super answer for them.
Re Sydney itself, I have long thought it is in little danger of a major crash in property values. Sydney is the gateway to the world, and people from other countries are busting their breeches to get here. While ever Australia is deemed to be “a great place to emigrate to”, the overseas investors and immigrants will be helping to put a floor under the property values.
But then, I am not in Sydney, and not buying there (have never bought there – I wish I had 16 years ago when I first went to work there, and I could have bought a property in Beecroft for $400k. Seemed expensive at the time !!
I don’t see any need to rush on your parent’s behalf – but DO have them check out “the way forward” BEFORE they go there,
Benny
I guess I need you to describe to me what you think of as a “split loan”. That is the term I have concerns with, not so much the Offset Account per se.
Describe your “Split Loan” to me and let’s see what comes up then….
By the way, there are even right and wrong ways to spend money from an Offset, so do check back re that bit too. I think I can point you to a link – but first, let’s put that split Loan to bed eh? ;)
Hi again,
I’m just worried I may not be able to provide evidence/invoice for 40% of the project/work as it will be done by myself and my builder friends via cash in hand.
I wouldn’t be too concerned over that – I am fairly sure a Quantity Surveyor might be able to come up with values that would be suitable for the ATO.
Note that I am “fairly sure” – I am hoping others who KNOW might step in to put me right if wrong, or to agree if I did get it right. ;)
Benny
PS Not sure I like the sound of this:-
I’m in a process of negotiating a offset attached to split loan
Why would you want an Offset on a SPLIT loan? It sounds like it IS MIXING two loans together !! If it doesn’t mean this, please do explain – it doesn’t sound good to me…..
-
This reply was modified 7 years, 10 months ago by Benny.
Parky,
Do you think generally the indexation method works out to less CGT then the 50% CGT discount?
The last time I spent any time working things out like that, it was 1999, and I was trying to predict which way I might go if I needed to sell something. I don’t recall my findings from that time, but what I DO recall is that the Indexation method added just 20% of any CGT to your Income for that year to work out what Marginal Rate that took you to, and then the whole lot was taxed at THAT Marginal Rate.
e.g. If you were owing say $50k, then $10k was added to current income. If that didn’t take you into another Marginal Tax Rate, then beauty – the whole $50k was taxed at your current rate, EVEN if the addition of $50k WOULD have brought you into a higher Tax Bracket. The Indexation also played a part, as any “today’s price” was divided by the Indexed Rate to supposedly take Inflation out of any Gain you had made.
I don’t recall the actual maths around Indexation – I’m sure you would find them on the web – but it meant any gains were lower than actual buy/sell prices would indicate.
Benny
Hi BB,
Most people think 4% home loan rate is normal and will stay that way,
Hmm, I dunno who THEY are !! Wouldn’t be too many on this board that think like that…..
yet not that long ago there were warnings to people borrowing at 6-7% saying factor in at least another 1-2% minimum as a buffer.
Can’t say I have heard of that one either. I DO recall (about 10 years ago) Steve warning that rates could go up to 8% and that people would be hurting (that would have been circa 2004 or so, and I had locked in a couple of loans at 6.1%). Steve had spoken in answer to some who were warning that “Rates could go back up to 17% like in the late 80’s….”
Steve basically said “No – with the mortgages so much higher today, and wages not so much higher, 8% is all it would take to cause a world of pain for many.” He pretty much called 8% as “the top” back then (at lest, that is how I interpreted it).
And, to my mind, THAT same rationale applies today – but with perhaps an even lower rate (7%?). Prices have gone even higher than in 2005 and wages have not. Interest rates thus CAN’T even get near 8% to my mind without causing a melt-down. Which Govt would sit by and watch the population implode?
To that end, a Govt SHOULD NOT sit by while costs scream up 75% in two years. There would be rioting in the streets. So many new home buyers would be being evicted for non-payment as they are borrowed to the hilt. There CAN’T be more than a 25% increase in the next two years surely !!!
But hey, what do the rest of you think? Is BB right? or me? Or is there a “somewhere in between” that makes sense? Let’s hear it….
Benny
Hi Yet,
Re 1. – my first reaction would be to say DO NOT mix the purposes of the loans (i.e. don’t use some of the loan to buy/build a Tax Deductable granny flat, and then use the other half to pay off personal debt – keep investment and personal loans TOTALLY separate).
Re 2 and 3 – talk this through with your accountant. Keep all receipts, etc along with emails or correspondence with lenders, etc.
Talk with them re an Offset Account if you don’t already have one. You can get some idea of an Offset’s benefits here:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973Benny
Hi Parky,
Thanks everyone for all your answers and I definitely will pass this info onto my parents. I had a bit of a read and their previous PPOR is also eligible for the ‘indexation method’ of calculating the CGT as it was purchased pre September 1999.
That is a VERY important point. I always did think that the Indexation Method was a far more fair way to calculate the CGT.
Over the last 16 years, I have seen virtually nothing of the “Indexation Rate” that used to be regularly published until the new CGT calculations in 1999 commenced. I’m sure their accountant would be a full bottle on all of that though.
And Parky, your comment reminded me of yet another possibility – this one is from so long ago, that we tend to forget. I am one of those lucky enough to have bought my home pre-CGT (we bought in early 1984) so, on sale, we pay NOTHING in the form of a CGT. If your folks are my age, they might also have bought in a pre-CGT time (was it 1985 it started? Not sure…)
Benny
Hi Bomberboy,
If you mean bank rates, its already started and will accelerate much quicker in a post Trump world. My semi educated guess is 2-3% increase by end of 2018.
I can only hope you are wrong there – if not, then I foresee a LOT of pain for MANY !!
See, going by current Bank Rates (let’s say 4% right now) then even just a 2% increase would lift your mortgage repayments by 50% !! Who can handle that? Will tenants foot a further 50% impost on their rents?
A 3% rise over that time doesn’t bear thinking about (that is a 75% lift in real terms!!).
With a slow economy, we cannot afford much more than a 1% rise (really 25%) over that time. But yes, I do agree these rates are ABNORMALLY low, and that they will rise again…. but hopefully SLOWLY !!
I just hope the powers-that-be understand just how much of an impost a “0.25%” lift really is when coming from such a low base.
Benny
Hi Azanatta,
Some of the answers that sprang from the linked thread in this post:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/2/#post-5023378
…. provided some clues re “other asset protection methods”. Check it out.While in there (the “big picture” thread) do have a look around at other subjects approached in other replies to that thread. You could find some quite interesting reading…..
;)
Benny
Hi Parky,
Terry’s first answer might be what you need :-Yes valuers actually can tell you what it would have been worth at any point in time.
That might be enough for you – but please don’t ignore the other option that I have brought up – it could be beneficial for your parents to work through that path. Or not – no guarantees either way.
If nominating PPOR is a choice (as it seems to be), and a choice made on sale of one of the houses and not before, there could be quite some benefit in knowing WHICH house to nominate, based on the best result for your parents. Let them pay the legal minimum amount of Tax owing, by choosing the right house to be their PPOR.
Hi Terry,
Benny – there is no declaring of which property will be the main residence – until the sale of one of them.
Wow !! THAT is good to know !!
But that brings up another related question – I want to ask it now, as (who knows) it might also help in Parky’s situation.
I believe in Qld we had to nominate a PPOR so they could calculate our Land Tax – this is a State impost, of course.
Terry, is there any tie-up between the State-based nomination (for Land Tax purposes) and the PPOR nominated for the ATO (for CGT purposes)? The reason I ask, is that I felt I needed to call ONE place my PPOR with the OSR years ago. If I later sell EITHER place I have in mind, can I nominate differently THEN without running foul of any law?
It almost seems like the State Govt wants to know which house you actually live in, while the Fed Govt’s version of “PPOR” is quite different, and the PPOR you nominate has to be a house you HAVE ONCE LIVED IN, but you don’t need to be living in it now.
So, am I right in saying we would not be lying to nominate one place for State records, and another for Federal records?
Thanks for your help Terry,
Benny
Hi Parky,
I don’t want to speak out of turn here, but I wondered if there might be “a way around” this. Right here, we could do with the input of @terryw as I am not an accredited adviser. But I can be a catalyst perhaps ….. ;)
What I am thinking is this:-
1. A person’s (couple’s) home is exempt from CGT
2. It CAN be exempt from CGT for up to 6 years after leaving it (and it can be rented out in that time) – on conditions ……
3. One condition to 2. is that another PPOR is not purchased – you can purchase another property, but NOT call it your PPOR as well. You choose which is your PPOR.Now, there is probably much more to this, and Terryw would be the one to massage the idea, but
“What if….”
What if your parents didn’t declare their CURRENT home as their PPOR, and continued to call the one they left in 2013 as their PPOR until it sold, or until they CHOOSE to change the PPOR nomination? I believe that this might be a LEGAL option (i.e. their choice) – Terry????
What ramifications would/could that have on their NEW PPOR?
Well, maybe they can CHOOSE to not call their new house their PPOR until today or even 2019 if they are keeping the old PPOR! That could mean that there might be some CGT to pay on their current home when they sell it.Work with the values of each, and the kind of price gains that might have occurred. e.g. if the one they bought in 2013 has been stagnant in value since 2013, get a valuation NOW, and that should “lock in” a value that can help to show any “gain” since 2013 (when considering purchase price).
As I understand it, “YOU CHOOSE” which of your properties will be your PPOR, from what date to what date. This allows some latitude that could work in your parent’s favour.
Do they have any plans to SELL the old PPOR, or the new home? What are the respective growth rates of both properties? Is one in an area where values grow quicker than the other? What are their incomes (both now, and then – 2013)? What is the way forward, given that “PPOR” is a NOMINATION and not designated by where you sleep?
Someone like Terryw could sit down with them and work this through and consider ALL of the details – including, their Income NOW compared to their Income in 2013. That too can have an effect on “which PPOR to choose”.
I’ll happily welcome any comments, even if only to tell me I have it wrong – I hope not, as I didn’t want to get your hopes up, but hey, let’s work it out together. It is an intriguing question !! ;)
Benny
PS By the way, I don’t ask that you share your parent’s Income, etc on here – my comments are simply to get the wheels turning, and to get you asking more questions about possibilities……
-
This reply was modified 7 years, 10 months ago by
