Forum Replies Created
- PeppersGhost wrote:In November last year, iI decided it was time to get off my rear and head into the 'property investing' market – my superannuation is less than 'super', and if I don't start making wise investment decisions now, by the time I get to my twilight years, I'll become one of those old dears on Today Tonight, complaining about the price of bread…. I'd rather take control now, than later. I'm only 40 by the way.. I may have left it late to get into this game, but as a wise man once said to me, the best time to plant a tree was 20 years ago, the second best time is now… So I'm now 3-4 months in, I've had advice from every angle, so much advice in fact, I'm now in a more confused position than when I began.. blissfully ignorant of all the ways in which I could make… or lose a significant amount of money. Weirdly enough – it is not the potential loss of an investment that haunts me the most – it is the possibility that I make an investment, and then someone tells me "You shouldn't have made that decision, you could have made twice as much had you done this instead..".. and I realise they are right.
Why you are in a sense of inaction is because you need to work out your tolerance to risk
Return is proportionate to risk taken. The higher the risk the higher the return
So if you are a low risk taker then you invest in lower risk investment and realise a lower return is achieved.PeppersGhost wrote:So a twopenny overview of my situation: – We have a relatively high income – around $250k per year and likely to climb – We own a house – worth $650k, with a mortgage of $180k (Equity of $470k) – We would prefer a bigger house –Don't make this mistake – Borrow 900,000 for the bigger house and then rent out original house and then expect to be able to claim the interest on $900,000 against the original house you are now renting. The ATO love this common mistake and audit people who try to claim a deduction this way.
You have to have a nexus (Direction connection) between the loan and the income producing asset (Investment property)
So the old mortgage of $180,000 would be directly connected to the original property being now rented out.
If you rent out the original property you are not able to claim the full tax deduction on the $900,000 used to buy the larger house.
Better strategy Buy an investment property using a Line of Credit Loan against the original property equity you are living in.
DO NOT CROSS SECURITISE loans on Both houses.
Use a LOC for getting a deposit for investment property.
Pay off main dwelling/ PPOR loan as fast as humanly possible as it is not tax deductible.
If you want to live in a bigger house you have to decide what is important to you. Your living comfort or getting ahead.You need to do is get your head around is this concept
What do you pay off your PPOR main dwelling loan with?
Answer : After Tax dollars.
What do you pay off an investment property with ?
Answer: Before Tax Dollars.
So if you Earn Rental income it pays off some of the investment Loan before TAX
If you pay towards the investment loan from your pocket it is before tax due to future tax deduction.
So lets say you have a marginal rate of 40% you would need to earn $1668 to pay off $1000 off your PPOR loan
If you pay off $1000 off your investment loan you need to earn $1000
So if you needed to pay $200,000 in interest you need to earn $334,000 before tax if it is a PPOR type loan
Where as if it is an investment loan you need to earn 200,000 as it is not taxed.Good Debt and Bad Debt
Good Debt – money borrowed to buy asset that increases over time.
Bad Debt – money borrowed to buy assets that depreciate over time , eg Cars, Holidays, TV's Pool, Ect.
PeppersGhost wrote:but only if it is not at the expense of 'not making the right decision (see above)' The potential strategies I have been provided so far: 1. Just increase your mortgage, move into a big house, and enjoy it!You could do this and struggle to pay off a bigger mortgage with after tax dollars but it is capital gains tax exempt.
PeppersGhost wrote:2. Stay where you are. Buy a 'fixer upper' – renovate/modernise it and sell it. Helps if you are handy around the houseDo you love doing this as you have to have a real passion to spend all your spare time working on the house ?
What is your time worth as you earn a high income?
Do you value your time is it better spent earning the high wage or working on your house?PeppersGhost wrote:3. Buy a unit (s) and rent it out – better return on units, keep on buying themIf there is more than 2 units in the location you have to deal with body corporate.
What sort of return are you referring to . Income yield or capital gain.?PeppersGhost wrote:4. Buy land – build on it, then sell it – massive profit, because you have done all the workYes but don't forget the establishment of fences and gardens.
Some people buy a big block with a house on it and develop it by sub dividing it – risk is higher if you can't sell two houses it at the price you want. Also 10% GST tax will be involved.
A strategy I have heard of is buying from a later release stage in a rising market as by the time you have to settle you have made a capital gain.PeppersGhost wrote:5. Keep your existing house, buy a unit – rent them both out. Then rent the house you want to live in.This is not such a dumb idea. Your original house could end up positively geared and help you to pay off the unit.
Also any expenses on the house you are renting are not your problem but your landlords.PeppersGhost wrote:6. "leave me alone, I'm sick of talking about property investing" I understand there is a certain 'art' element to this, but surely there is a mathematical answer to this – which strategy is likely to make the best return, based on property prices increasing, and the tax laws as they are currently? I'm in Western Australia by the way.. if that makes any difference. Would love to hear a definitive answer here – even if the answer leaves me with only two potential strategies to consider. Your help is appreciated
Mathematical Equation.
Return = Risk Taken * Amount invested.
Or
Wealth = Other People's Money ( leverage / borrowed money) * (1+.07)^N N being the number of years your OPM compounds.You should be more worried about doing nothing . You have to be in the game long term to win.
Leave me alone is like an ostrich sticking its head in the sand.
Take advise from People who own a lot of property. I do not own a lot of property but I do read a lot of books and have listened to other investors who do have lots of property. That is why reading is important.
Concentrate on building wealth (if you pay off the loans as quick as possible you build wealth)
Property investing is really a long term investment strategy.
Some people do active investing which is improving an asset and then selling it. Requires Time and Problem solving.
Some people do a passive investing and sit and hold property
There are two approaches with passive investing.
Negative Gearing – Interest Rate risk and Stable Employment required. Relies on Capital Growth . No Capital growth equals a loss as you pay the negative loss each year but didn't gain capital value in the long run.
Leap frogging – Value goes up on existing properties so you borrow against the increased equity to buy next investment property.
– Read More Wealth book if you want to know more.
Positive Gearing – May get low capital growth but property doesn't cost you any thing to hold. You can pay it off quicker as it costs almost nothing when tenanted to own it. Advantage bank will lend you money readily as you pay down loans and operate on a lower LVR figure.Suggest you buy Australian Property Investor Magazine and read the case studies.
Also you may wish to buy property investing books from http://www.businessmall.com.au
I know you might have a headache and seem overwhelmed but knowledge = wealth.
It is better to know all the different methods and decide which one you are going to choose to follow, that suits your risk tolerance and life situation..Another Formula for wealth building I came across
1. Buy income producing Asset
2. get income
3. use asset's income and your other wage income to help pay down loan
4. after paying down loan to a cash flow neutral point
use asset's income plus newly acquired property income and equity to buy another income
producing asset.
5 go to step 2 and repeat 2 – 5
