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There are some exceptions, like you said with livining in a rental.
But I would check with your tax man to make sure you are doing it correctly. The reason for this is because if you don’t pay GCT you are liable to pay back all tax you have deducted over the years as a ‘loss’ on an investment house that didn’t end up being classed as an investment, and you will have to pay the money back with interest.
“But from what i read IO payments are from 5-10 years. So does that mean my new monthly repayments are going to be a lot higher?”
No. It just means that you are only allowed to pay interest only for 5 to 10 years, after that you must pay capital. At the moment interest only on $270,000 is about $20,000 if you go to the right bank.
“So say for argument sake using hypothetical figures, the IP sold for $330,000. So I’d make a profit of $60,000. Does that mean the CGT will be deduced from the $60,000?”
No, you get considerably more deductions. For example lets say it make $60,000 in 3 years. In this time you would have paid rates 3 times, about $6,000. Money lost each year (making up the difference between rent and interest) totalling about $13,000. Other losses like sales commision on the $300,000 of about $6,000. So your total expenses were about $25,000 + maintainance. So your real gain is only $35,000 and you would only have to pay about $17,500.
Remember making money on an investment house isn’t always completely easy. Paying interest only is only a good idea when you are sure that the rental income and tax breaks, cause a decrease in the effective interest rate, such that the house values above the interest rate you are paying on the debt. In this cause the debt would be about 7.5% and the house typically about 4%-5%. The profit is made because 3/4 of the interest is paid through the rent, making the effective interest rate only about 2%.
I always find these things work OK so long as neither of you is living in the house. For example it is usually a terrible idea to buy a house together and live in it. Buying a house together to rent out isn’t so bad, because the fact is you can simply sell it if you have too and probably won’t loose any considerable money.
If you have to go as legally as fund I think you are going far to far. There should be enough trust they you can both put your names on the loan and be joint owners and simply write your own agreement and sign it (ie that you agree to pay for the house and the expected costs for at least 4 years before selling it, otherwise you will also pay any monies lost upon being forced to sell the house to the other party).
ozinvest realty charges 8% and there are no fees for anything. So you get inspections and everything handled to do with bonds and rent etc. They also represent you in court for anything that happens over tenants etc. They seem to have alot of full time inspectors and hundreds (possibly thousands) of properties. Other ones I have seen charge 6% but then they hit you for inspection fee, paper work fees, bond lodgement fees and the it goes on and on and on.
say its $300,000 then expect to rent it for $280ish if you can. 8% of that goes to property management fees. Typically about $500 / year on maintainance. Rates $2,000 per year. Insurance $500/year.
When you get a loan you will probably be up for 4% mortgage insurance. Then when you sell, 2% in commision and 25% to 50% of your total profit to capital gains tax – reguardless of inflation over that time.
Interest will be about $22,500 per year.
I think this also flows over to people who talk about renting a house while buying an IP. Sure you will own the IP cheaper this way, but with capital gains tax you will actually come out behind someone who just brough and lived in the house. Many peopel seem to have this backwards (the assumption that an invester will make more out of a house than a principal residant can, when all taxes are considered this is almost NEVER the situation).
Woodridge will onyl have good returns for a few years until it catches upto the rest of the places around it. After all it is only cheap because of the bad name the area has, it is a bad neighbour hood.
Remember average prices might go up but that doesn’t mean that houses aren’t sitting for ages waiting for that price. Having been eyeing some houses for $400k in woodridge that have been on the market for almost 4 months now, hoping I can get it for as low as $330-$340. Profit out of the low values houses seems to have been drained away, most are now $280-$300 when they used to be $220-$250.
Yes the best a bank will do is roll it onto a personal loan. Your banks credit card company will probably do it.
Well to start with generally you should be close to it not have paid off your own house, at the minimum. That way you don’t have to rent.
Basically its hard for a investment to return more than that saved buy paying off existing debt, since the current interest rates are 8% and hosues are only going up in value 8%. So if you are already in debt, just get out of it first. Then you can loan more money for an investment and use all the tax tricks to make the real cost of interest considerablly less than 8% and return yourself a profit.
Are you saying the bank will give him an interest only loan with an offset account?
“..its kinda like saving 50k in the bank. in that 5yrs i could of just paid the interest on the loan and put that 50k into other investments and made further profits rather than it sitting on my mortgage doing nothing.”
That statement sums up the typical complete ignorance over interest only loans and why banks love people who taken them. The capital payments don’t “do nothing” they reduce your interest payments, so they are making money at the interest rate, totally tax free.
Consider this: If the interest rate is 8%, every dollar you put onto the home is making 8% PA Tax free. This is because you don’t pay interest on it which is 8% of what you owe. So unless you can use that money to make more than 8% PA after tax and all expenses, putting in onto the house is BEST investment you can make.
Consider an investment house that doubles in 10 years, thats 8% PA increase. Now consider all the costs you have paid, all the tax etc. The profit is typically between 2% and 5% PA. Where as you could have not had that extra investment at all and make 8% buy paying off your loan.
“Say if i buy a house for 100,000 and then sell that house for 175,000 in 5 yrs time creating a 75k capital gain.
If i had the loan set up as P+I i may have paid 50,000 off the principal. So i would receive a “profit” of 125k when i sold it……….. but in reality the extra 50k i paid off the principal is just my money being returned to me”Wrong. You would have saved 8% each year on the money you put into the house. For example if you just lump payment $50,000 when you got the loan, obviously that would save you 50% of the interest you paid over those 5 years (about $20,000!). But if that $50,000 is paid grandually over the 5 years the result is probably a saving of about $10,000 or so. Either way the saving is 8% per year tax free. No way would another investment house get that much! INterest only is CRAZY, please do the math, unless you can someone get an awesome negative gear than it *might* be better but in most cases , NO NO NO NO NO!!!
It seems to depend alot on what is available and it can change extremely fast.
Recently got a property near waterford west for $255,000 after it was originally asking $269,000, this wan DEC06. Now the same type of houses are asking (and seemingly getting) $280,000 to $300,000 and the one brought is already valued at $22,000 more. It seems to depend on what is on the market. When there are alot of new houses or houses with pools then the other houses are forced down below them cause they don’t sell for months. Once there are no houses with pools or lack of new developments etc. the prices come back up very quickly. Just a few months ago I could find 3 bedroom 2 path room newish house with pool for $300,000, nearly impossible to find that now, they all at $350,000.
“The interest on you PPoR is not tax deductible, and it is normally much cheaper to rent unless you own your PPoR outright.”
That has to weighed up agains capital gains tax. If he rents the place out even for 1 day as I under stand it, he waves his right to no capital gains tax when he sells the unit.
Say the rent is $250 and his interest at the moment is about $308 per week. So a loss of $68 then he gets tax back so maybe loss of $40 per week. But has to rent somewhere else for $250, so loss of $290. SO now we are comparind $290 loss renting with IP, to $308 loss on PPOR, only about $20 per week difference. Say the place values to $400k and he sell it making $150k profit. capital gains if im not mistaken will then be $25,000, thats ALOT of weeks at $20 per week…. thats like 20 years…….. so he is way better of not getting an investment mainly beacuse the rent he would get is to low.
Quite frankly I think alot of people are getting ‘hooked’ into investing when there is no real reason to. INvestors will look at his situation and say “wow he has $50k equity” . I look at it and say he has $200k debt. Remember you need somewhere to live, so until you own a house outright (or are close), I recon you should not consider investing, UNLESS you are moving to a house that is considerably cheaper than your IP. Alot of people get this wrong.If you are going to upgrdae your house, its probably best to sell this and get on withit, because $50k off the loan of a $450k is going to save you buckloads in interest that the IP would take many years to create.
I usually say for someone trying to pay off a home:
-Get 100% offset, take cash from here, get atm cards for this account, get it with no fees
-Direct salary crediting into offset account
-Have a credit card, pay for everything that is not cash with a credit card. Repay the card from the offset account before the interest free days are up. This way as much money is in the offest for as long as possible.
-Get a loan that is essentially free to change between fixed/variable or split it at will.
-No ongoing fees
-But most importantly: Lowest interest rate.But the truth is people often do little to no calculations over what makes a difference and what doesn’t. Like direct salary crediting to an offset account and living off a credit card and paying it back at the end of the month or after 30 days for each purchase is never going to put you ahead more than 1 months living expenses. For example if you are in debt $300k and living expenses are $2.5k for the month, if you follow the plan perfectly, the best you can do is basically have an effective debt of $297.5k. A saving of about $3,000 in interest. Now instead imajine you got a loan that wasn’t 7.5% but 7.0% interest rates, the difference ends up being $18,000. If you got one that did both you could save over $21,000.
Basically it comes down to if or not you believe the combined value of the 500k property and your new ppor will go up in value more than the debt you will have of 8% interest. The answer to this is almost defaintly YES they will!
At the same time you have $200k in funds, does your money actually make more than 8% per year? I doupt it (after tax and everything). The best way here might be to go for a line of credit, they should give you $350k line of credit easily. Buy a new house for say $350k. Put the $200k cash you have on it (unless your 200k cash is making more than 8% PA). So you only in depbt $150k. Rent from the 500k proeprty should cover most of thats interest payment. Then as living expense you just eat into your line of credit, slowly building the debt from $150k until your buisness starts making you an income and you can pay it down.
This happens all the time. Infact most investors can only ever afford 2 properties because they negetive gear and simply don’t have the cash to go in any more.
You often hear stories of agents who also invest and in just a year or two they have large numbers of properties. When I look into most of them I found their income is collosally huge. Like they will sell 4 or 5 houses a month and get $10,000 commision on each one. Some of them are stedily making $30,000+ after all expenses per month. On this sort of wage they are lent 1.5million straight up and they can obviously break that down to many houses.
I don’t know where you have been looking but 8% is a bad rate at the moment. This might be something to look at. Getting a rate of 7% might just save you about $40 per week on payments on each property.
Probably the best thing to do is not do interest only. Get the amount owing down so you do build equity, remember this can only help you. If you pay off some capital you reduce your interest and get it all back anyway. The result will be in a few years you should have much better equity and much lower interest payments.
I think I missed something here, can you list each property how much you owe and how much it rents for and how much it is werth. For your post I get:
IP Melb $580k, owe 300k, rent ???
IP Syd $420k, owe 100k, rent ???
PPOR $???k, owe ???k, rent $260/wkI think the safest and best way is to simply pay down your existing loan, then get another loan for an investment property. I know that sounds borring as it could take you another 10 years to pay off your house. The altnernative would be to sell your house and buy a house of around $300k. Then loan against it for an investment house.
The bank would probably lend you 300k on your house at the moment but do you really want to paying back 500k hoping the 300k investment will somehow turn that 500k interest into a profit? Because its very unlikly to. This is because interest on the 500k is going to work out to abouy 10% – 12% eqivalent interest on a 300k investment.
We all know how well online polls work…
The securities commision and the stock exchange did a full look into australia investment in interest only investment, shares, property trusts and full residential outright purchases. The returns were extremely surprising. After inflation interest only investment made 1%. Full residential was about 3% and Shares and trusts were 6%.
I hate all the big channels here, especially the a current afair/today tonight type programs.
I remember this story about some property manager at a realestate agent. An owner wanted someone kicked out and gave the 60 day notice without reason, they weren’t on a lease. Well all hell broke loose and the rental person got some TV crew in to make out we were kicking them out on the street so we could jack up the price and get a new person in at a higher rental value. Turned out the owner was in finanical trouble and had to move back in to the house. This didn’t stop the TV crew from giving the place a bad rap for kicking out a hard working ‘single mother of 3’. Turns out the mother had 2 kids over 21 and didnt even life at home and had a boyfriend who was also staying there.
