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the problem you are having is due to the banks using a daily interest calculation and charging interest at the end of the month.
Ring the bank and ask them if interest is calculated by 360 days or 365 days it depends as US system is 360 days as public holidays are not counted.
so get the interest rate say 9% and divide by 365
take the balance each day and multiply by 9% divided by 365 and calculate the daily interest amount.
add each daily balance interest calculation for the whole month and you will get the interest amount charged. It is fairly close to what the bank works out. I have not been able to get an exact match.
I used a formula like
=D4*(H$1/100)/360*14
D4 being the previous balance over the last 14 days as they were the same each day for 14 days
h$1 is the interest rate the $ lets you change h1 for the whole spreadsheet
I adjust the formula for when repayments are made or interest is charged
the balance is the previous balance + possible monthly interest charge – repayment
there is a way of calculating the 14 from excel from two different dates but I can't remember how I did it previously.Alternatively I have found the loan amortization template in excel office 2003 to be very useful for working out this problem
rather than re inventing the wheel.
File – New – select templates on-line in right hand side of screen and then find loan amortization on web siteMy template comes up with $245.80 per month principal and $3375 interest based on monthly repayments
$56 per week principal and $778.85 interest per week
Weekly payments saves you interest over the long term as the interest is calculated daily !Having just looked at the template an interesting situation occurs that you may have not thought of.
As you pay down the balance over time the principal payment increases due to the interest being charged each month being reduced while the loan repayment stays the same with a P & I loan.
What you have to careful of is
Paying more than the market value for the property (remote buyers get taken for this trap a lot)
Use independant solicitor not theirs if offered
Get independant valuation not theirs
Buying a property that doesn't suit the tenants in the area who are mostly labourers according to the demographics below.
You only have a population of approx 5000 people to find a tenant from.http://www.domain.com.au/Public/SuburbProfile.aspx?searchTerm=Southend&mode=research
http://myboot.com.au/5280/Southend/suburb.aspxI am not familiar with South Australia but South End is over 300 km from Adelaide
.
FHOG You need to live in PPOR for 6 months
see
https://www.propertyinvesting.com/forums/property-investing/help-needed/4324086?highlight=first%2Chome%2Cowners%2Cgrant
also do a google search on FHOG or First Home owners grant
this will provide a web site for your state on the terms of FHOGHaving carpet in the house I live in I have noticed that high traffic areas wear down the carpet. This reinforces what Banjo is advising. Also a lot of tenants prefer wooden floors and I think the reason could be allergies to dust mites, needing to have carpets steam cleaned at the end of a tenancy, plus what Banjo was saying about stains and also if a cigarette is dropped on the carpet it burns.
In one house I rent out the shower leaked through the tiles and flooded the carpet in the hall way and it had to be replaced.
If you go for a raised wooden flooring option remember that it is not advisable in wet areas like kitchens, laundries and bathrooms as water damages the raised veneer wooden flooring. Ceramic Tiles or Vinyl is an option in wet areas if no floor boards exist like when a house on a concrete slab or chip board has been used for flooring in newer buildings
if you move back you need to get a valuation also as you could end up with capital gains tax for the future sales capital gain proceeds even though you live in it as PPOR. You have the onus to prove via records that when you moved back in your property was worth a certain amount. There is a mention of this situation occurring to a seller in the August edition of the Australian Property Investor magazine.
PPOR is a term created by the tax department in their capital gains tax legislation and is significant for getting a capital gains tax exemption for PPOR. Primary place of residence is also exempt in some states for land tax calculations .
you may see the term ' main residence' as the term PPOR has been changed by the ATO
see
http://www.ato.gov.au/individuals/content.asp?doc=/content/36883.htmYou can only claim expenses that are incurred from making income. This means it has to be rented out.
However under the third element of the cost base you might be able to increase the cost base of the land while it is not being rented out from the date you entered the purchase contract to the time it is rented out.
see
http://www.ato.gov.au/individuals/content.asp?doc=/Content/36557.htm&page=2#P12_2381
Once you rent it out you cannot claim these holding costs against the land cost base as you would be double claiming a deduction in the same financial yearThis is what this part below is referring to
Also, you do not include them if you:
- have claimed a tax deduction for them in any year, or
- did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.
In english
The cost base is what the land cost you to buy so adding the holding costs onto the cost base reduces any future capital gains tax liability. Hence a future deduction rather than an immediate deduction.
As the purpose of buying the land was to derive an income you incurred holding costs while getting to a point of being able to rent out the land with a house on it.It would be a good idea to talk to an accountant to see if this is allowable in your circumstance.
The information was given to give you an idea of what may be possible when you get advice from your accountant.If the mortgage is in both names you need to check if the title is a joint title in both names also. Nett rental Income will then be split into half. Look into land lord insurance to cover you for lost rent, ect.
You need to find out what the council rates are it should be coming in the mail or you have next years rates notice already.
You need to find out the water rates.
You need to work out the insurance cost.
You need to work out the interest cost of your mortgage for the time the property is rented.
The property Manager can access the likely rental you will receive for your type of house. You could also look at similar houses in the area that are rented out to get an idea of the likely rent.
You may need to pro-rata all the costs to the percentage of time rented versus PPOR use
Nett income = Rental income – council rates – water rates – insurance – interest cost
If ownership is joint you split this nett income into two
Then if negative subtract each half from each wage income taxable income earned
Then work out the tax paid for the year and then work out with the reduced figure the tax you should have paid on each wage earner.
if you want to calculate the tax payable on your wage goto http://www.ato.gov.au and search for tax rates
the amount of tax reduced depends on how much you both earn due to marginal tax rates.As you are changing the status of the property from PPOR to investment you need a valuation done to cover you for later if you ever sell and want to work out the capital gains tax due.
Contents insurance ideally would cover the fixed items like curtains, carpets, raised floors, fttings
Landlords insurance may cover these things you should look into landlords insurance.
see http://www.cgu.com.au/cgu/cgu/linkAuthContent.do?contentId=%2FOurProducts%2FPersonalInsurance%2FLandlordsInsurance
for an example
the term Liability is for Public Liability if someone gets injured on your property you could be sued.Loan balance divided by Market value of PPOR * 100 (LVR) one ratio used by bank to access how much you can borrow.
Information missing
Marginal tax rate, age of building may be able to claim building write down
Interest charged on loan, Council Rates , Water rates, insurance, repairs – Claimable deductions
nett property income = rent – interest – council rates – water rates – insurance – repairs
If this is negative it comes off taxable income from wage thus marginal tax rate determines tax back at end of financial yearWhat is your main goal.
To get a tax deduction or pay down the loan.
If you pay off an extra $200 a month you save paying compounded interest over the long term.
You may wish to have an offset account set up to place the $200 a month into a savings account to either pay off the loan later on or use as a deposit for another property. Capital gain will not pay down the loan if you wish to keep the property and avoid capital gains tax when selling.
Say your tax rate is 40% as an example. you lose say $10,000 a year as a loss you can only claim back $4000 so you lose $6000 a year . You need a capital growth of about $6000 to cover this loss each year plus probably 12% on top of this to cover the capital gains tax.Over the short term it seems you are getting no where but rents go up over time and interest rates may change. Where capital gain may be useful is that you can get your property revalued and borrow against it to get money for the deposit for the next property but this approach relies on achieving capital growth. If no growth then you end up with lots of debt.
recommend you read books on property investing.Also get a valuation on property B when it becomes a PPOR because if you sell property B in the future you will have a hard time working out which part is subject to capital gains tax and which part is exempt from capital gains tax as a PPOR .
Also you will have a similar problem with property A as it has changed from PPOR to investment property and it will also need a valuation done at this point as it is a change in the property status and is deemed as a capital gain event.
The onus on record keeping is infinitely longer for capital gains tax events as compared with normal tax records.I am 40 my wife is 40 . We had a goal of becoming wealthy through property but that was when I had a high income. Then we had two baby girls (twins). This has meant that I haven't worked full time for 6 years and have no income. So out went the negative gearing and in came the positive gearing. In 12 months the first property will be paid off entirely. Then I will probably get a no doc loan and buy another house and pay it down to a point where it costs nothing to own and then buy the next property and pay it down till it costs me nothing to hold it. I do not really have an end goal due to having my plans stuffed up by employers that don't employ 40 year old university graduates, so I will have to go slower than I had originally planned.The above plan may take longer but as we increase the amount of properties and repeat the process the effect compounds.
First property brings in $10,000 p/a
Second property brings in $10,000 p/a based on $230,000 purchase price
interest cost is approx 23,000 but total rental income is now $20,000 cost is $3,000 a year leaving room to make extra repayments plus more payments if interest rates go down or rent goes up.Get second property cash flow neutral
first property $10,000
second property $10,000 income $10,000 expense costs
third property $10,000 cost $23,000 in interest
total income $20,000 total interest cost $23,000 cost zero, cost $3000. per yearGet third property cash flow neutral
first property $10,000
second property $10,000 income $10,000 expense costs
third property $10,000 income $10,000 expense costs
fourth property $10,000 cost $23,000 in interest
total income $20,000 total interest cost $23,000 cost zero, cost $3000.As capital growth and rental growth increases over time the compounding effect increases and process accelerates.
tax deductibility of interest paid on your investment loan depends on what marginal tax rate you are on.
for an example : if you are on 40% you lose say $1000 to get $400 back on tax
if you use an offset account you save $600 in interest costs taking the $400 tax rebate into account .
Even if it was a positive cash flow the tax is $400 so you are up $200Also when you go for the house loan the lender will reduce how much you can borrow by the credit limit of your credit cards.
Sometimes even if you owe zero on the credit card.As for borrowing on a credit card you should only use it for very very short term borrowing rather than for longer term borrowing.
if you could get a personal loan at say 13.5% p/a over 7 years it would cost $127.34 a week . or $132 a week for 14.5%
plus a $150 to set up loan and a $10 a month account fee
worked out from NAB loan calculator
see http://www.nab.com.au/Personal_Finance/0,,82415,00.htmlCan you afford a higher interest rate of say 12%?
If property value drops and you find you cannot afford the repayments you may need to sell the property and end up owing the bank the difference between the loan and the lower house value.
Do you have the hidden costs covered ?
Stamp duty see http://www.sro.vic.gov.au/sro/SROWebSite.nsf/taxes_duties_land%20transfer.htm
for victoria it is different for each state.
and also mortgage insurance and legal fees.
You may find a lender who will cover these costs you will need to ask lender before committing. But this is usually a 106% loanLine of credit on first property for deposit on second property to lower second property lvr to 70% and borrow from another bank .
Thus second property is not secured by first property
Do not sign privacy release until finance is approved thus no extra adding to credit reportIf credit rating is crook borrow from a non-bank lender
do a search in google for australia on
non conforming home loan
then if needed refinance when your credit rating ok again.You state you have lived in house for a year the FHOG states 6 months.
- You (or at least one applicant) must occupy the home as your/their principal place of residence for a continuous period of at least 6 months, commencing within 12 months of either settlement or completion of construction.
- The home must be used as your principal place of residence for a continuous period of at least 6 months. You must move into the home within 12 months of the date of settlement (in the case of an existing home), or the date construction is completed (in the case of a home built under a comprehensive building contract or as an owner builder).
this is from http://www.sro.vic.gov.au/sro/SROWebsite.nsf/rebates_fhog.htm#5
if your house is not in victoria do a search using fhog or look at point 6 in web site aboveDrawback to renting out one room and declaring income is that room is no longer subject to an exemption for capital gains tax.
Yes it is possible but the repairs will be apportioned to a part amount based on how much the room is a percentage of the house. Same with Council Rates, insurance and loan interest. Probably would be a good idea to confirm with a tax accountant.Also be careful with repairs as a repair which repairs the property to a state better than when you purchased a property is actually an improvement. A repair of a whole section is also an improvement. eg replacing the whole roof or replacing all the carpet. An improvement cannot be claimed in the tax year that the cost was incurred rather it is divided by the life of the improvement and part claimed over each year. This is called depreciation. If the cost is below a certain amount you may claim it all in that year , I can't remember the figure I think it is $600 but I am only guessing.
It probably would be ok if the lender factored in a 12% interest rate rather than a 6.5 % interest rate when working out if the FHO can afford to pay the loan back.
if your purpose of doing this is to avoid tax the tax department will not allow it.
The purpose of what you are doing is also taken into account.
So if the purpose is to try and reduce your tax through paying off a non income producing asset loan
it could be seen or even a ruling may be taken that it is a tax avoidance scheme.A better scheme would be to only pay the interest of the investment loans and pay off the PPOR loan principal amount with as much money as possible without borrowing more money and see if you can pay it off each week rather than monthly as the repayment period makes a big difference to the loan over the long term.
Welcome to the forum.
Question one.
Depends on if you wish to develop property. As a new investor you may want to purchase property that has a large enough land component to do a future D/A application on. Recommend you read Unlimited Cash Flow by Craig Turnbull on development chapter. Some property's are sold as a possible future development site rather than having a d/a on them.
It is the land that goes up rather than the building.
Question two
The best deposit is what ever you can get away with. I have put down $1000 deposit and later paid ten percent as stated on the sales contract two weeks prior to settlement.
Where you may need more deposit is when the lender decides to only lend you 80% of the funds and you have to find the other 20% and also pay for the Stamp duty, legal fees and mortgage insurance. (you may be able to borrow more funds to cover these charges depending on your money (deposit) and the lender requirements.
Question three.
You will be able to claim the interest charged on $315,000 left on the loan. You can also claim over five years the borrowing costs to set up the loan, Council Rates, Insurance (Landlords insurance), Water Rates, Repairs, Depreciation of fittings / improvements (use a Quantity surveyor) and Depreciation of building if it is a new building but it adds to cost base for CGT.
How much, well a 315,000 loan would be at say 8.5% interest rate = $26775.
So $400 rent a week = $20,800
council rates and water rates and insurance say a guess of costs at $2000
So income = rent – expenses
income = 20,800 – 2000 – 26775
income = minus 7975 this is why it is called negative gearing
Depending on your wage . for an example say you earn $85,000 your tax would be worked out as follows
0 -6000 = nil (2007/08 tax rates see http://www.ato.gov.au/individuals/content.asp?doc=/Content/12333.htm)
$6001 – 30,000 =$4200
30,001 – 75000 = $18000
75,000 – 85,000 = 40% = $4000
so tax is 26200 not taking medicare into account
so you take the minus 7975 off from your $85000 taxable income and bring it down to $77025
so 2025 * .40 = $810 tax so you get $4000 – $810 = $3190
or you could have taken the $7975 * .40 = $3190 only because it falls in the 40% tax bracket.
in 2008 tax year if you earn say $70,000 your marginal rate is 30% so you get back
7975 * .30 = $2392
So it really depends on your marginal tax rate as to what you will get back for the tax you already paid while you paid tax while you earned a wage each week.
Question four
Depends on if the 800k is cash or borrowed funds. Depends on what you decide your strategy is.
Do you think property will gain enough capital growth to offset the huge borrowing costs of small deposits as you are losing 60% to get 40% back. Also you will also run out of borrowing capacity as your LVR grows higher and you have a limited earning power from your job. Serviceability will also be a problem as the debt level grows.
If you take a positive cash flow strategy you have fewer properties but each property could be costing you zero or making you money. You get less leverage but you can have a reasonable lifestyle or pay more off the properties debt because the properties either cost nothing or make you cash money each week. drawback you pay income tax unless you structure the ownership into a company at 30% tax.Read as many books as possible as it is a cheaper way to gain knowledge on what you can do. See
http://www.businessmall.com.au/store/listCategoriesAndProducts.shop?idCategory=9I have a Bonaire evaporative cooler in the house I am living in and am happy with it. It doesn't work on humid days but it is cheap to run compared to refrigerated a/c. It has a fresh air option that I have found useful when a cool change does arrive as it pumps the cool change straight into the house. It also self cleans and drains the water tank when not in use for long periods of time. As stated above the more doors opened inside the house and windows all opened the better it works. Also if you close a door and all the windows in a room you could blow out the window from the air pressure building up in the room.
On value, look at other properties for sale in the area that have such features on similar sized houses.
Mel,
Biggest problem is getting a loan for retirement properties. A line of credit will be ok but if you need to use the retirement unit as security for the mortgage the mortgage insurer may be concerned that your market for resale is limited to retired people.I have no experience in purchasing this type of investment but know this could be a problem from doing a mortgage broker course.
It would be a good idea to check your finance options before committing to purchasing it.
