Forum Replies Created
Hi Dacloud,
The rent looks pretty healthy for a $350k price and strata is reasonable at $500/qtr.
Some other things to consider is how much money is in the sinking fund and if there have been numerous
maintenance jobs done to the units in the building. If there is a history of maintenance work required in the
units, then it's not a good sign. The strata report you are about to get should tell you this.The other thing to look out for is the ratio of units leased out versus units owner-occupied. Buildings with a fair portion of owner-occupiers are generally better maintained and hence better prospects of capital growth. It might be difficult to find this out but see if you can suss this out with the selling RE agent (not that his/her word can be trusted 100% true though).
If you plan to live in your apartment for 1st 12 months before renting it out, then you will benefit from reading my article on the 6 year CGT main residence exemption rule. Feel free to shoot me an email if you'd like a complimentary copy of this article.
Hi Lizzie,
By purchasing your PPOR and living in it for the first couple of years before renting it out, provides you the opportunity to take advantage of the 6 year main residence CGT exemption.
I have written an article on this topic which you may find useful. It contains a simple numerical example to help you understand this very important Capital gains tax minimisation strategy.
Feel free to shoot me and email and I'd be happy to forward a copy of this article to you.
Terryw is correct. The interest repayments on the "mixed" LOC will have to be portioned based on the existing % between private and investment portions of your LOC principal.
Read Tax Office's TR200/2 – paragraph 20 explains how to calculate the deductible investment portion of interest expense. But you will find it is a very messy process.
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958
Kjun01,
I agree with the comments made by elkam above. You could take advantage of the $14k/$21k FHOG and also exemption from Stamp Duty (if FH is in NSW).
I have actually written an article with a simple numerical example of how the 6 year CGT exemption rule can potentially save you thousands in Capital Gains Tax. Feel free to shoot me an email if you want me to email you a copy.
Hi Gyn,
I posted a reponse in a similar thread this morning:
You also have to be careful how much you claim as a tax deduction on the "first" property you purchases (the one that will become your IP). You gotta be careful that your current loan balance on that IP is not "infected" by redraws for private usage. E.g redrawing from that home loan to pay for holidays or groceries.
If "infected" it would be hard to apportion the loan balance between investment related and private-related. Hence the interest expense each month would be difficult to apportion as well.
It depends if you have an offset account, used a redraw facility or just paid the bare miminum loan repayments since the start of the loan.
You have to be careful by taking a redraw you run the risk of creating a loan balance that is a mixture of investment related debt and private related debt (I assume the $80k is to be used to buy another home is private usage). Any future interest expense from that loan (after taking the $80k redraw) will not be 100% tax deductible. You will have to manually apportion it out each month when doing your tax return.
Numerical Example
Existing Loan balance is $150k (with capacity to redraw $80k). If you redraw $80k (for deposit on your new home), new loan balance becomes $230k. But the interest expense from $230k balance going forward is not 100% tax deductible and you have to split the expense into 2 portions: 150/230 = 65% is tax deductible and 80/230 = 35% is NOt tax deductible. So if the $230k loan incurs say $18,000 interest expense per year (8% of $230k), only 65% (equates to $11,700) is tax deductible.
The above can be easily managed if you only made one $80k redraw and no more. It gets complicated if you made multiple redraws prior to you renting the old property….then the % split calculation is not so straight-forward.
If you are taking out another loan for your next property, I suggest using an offset account to maximise your tax-deductible interest.
Its crazy times at the moment……banks all over the world going bankrupt/bailed out by Gov't, sharemarkets crashing, central banks slashing interest rates…..its probably a good thing in the long run to get excess debt unwound and asset values to deflate
if we're not at the bottom of the sharemarket, we sure are much closer to the bottom than it was 12-18 months ago……so I would take a cautious approach and maybe punt on a few stocks that may continue to profit in a slowing economy
Kev2008,
Yes you can do that as long as you have enough equity or cash to satisfy your Lender(s) LVR and have sufficient rent income + salary to service these 2 loans.
You also have to be careful how much you claim as a tax deduction on the "first" property you purchases (the one that will become your IP). You gotta be careful that your current loan balance on that IP is not "infected" by redraws for private usage. E.g redrawing from that home loan to pay for holidays or groceries.
If "infected" it would be hard to apportion the loan balance between investment related and private-related. Hence the interest expense each month would be difficult to apportion as well.
It depends if you have an offset account, used a redraw facility or just paid the bare miminum loan repayments since the start of the loan.
Feel free to shoot me an email on your speciific circumstances and I might be able to give a more detailed answer to your question.
If you've got excess cashflow and have an offset account (linked to your home or investment loan)……park it in the offset account.
It will guarantee you around 8% AFTER tax return on investment which equates to around 11% before tax (if marginal tax rate is 30%) and 14.5% before tax return on investment (if your marginal tax rate is 45%). It means you have to earn 8-14.5% before tax from other asset classes to get to the 8% after tax u can get from the offset account.
There's not that many investments out there right now, that can almost guarantee such levels of returns……..the only thing that can prevent your offset account from achieveing such high returns is if your home loan IR falls dramatically……..if IR drop dramatically then you're better from lower loan repayments.
If you fancy yourself as share market guru, yeah there might be bargains for you in the sharemarket…..those not so savvy with the sharemarket…..the offset account is a safe and sound place to park your excess cash
Besides the high strata fees associated with Sydney CBD apartments, is the posibility of having MANY uni students as residing in your apartment. Sydney CBD is a favourite location for Uni students due to its proximity to everything.
I'd hate to stereo-type uni students but alot of real estate agents I have spoken to, admit that some investment apartments in Sydney CBD have been leased to 2 people (on the signed lease) but actualy 5-10 students reside in the 2 bedroom apartment.
Hate to think what the repairs/maintenance bills will look like on such properties.
So if you have to buy inner CBD, be careful of who you sign up as tenants
Hi Kwarrior,
I'm personally not a big fan of "off the Plan" purchases as I like to see and touch the final product before putting my hard-earned dollars in such a large investment.
When I inspect properties I like to see to quality of the finished product, how my particular unit compares to the rest of the complex (and how it is comparitively priced), the natural lighting of the unit, what the common area/shared facilities look like, what's the noise level like (can you hear traffic from nearby road or noise from neighbours)….etc.
Furthermore, I would normally like to see the track record of the Strata Scheme: are the quarterly fees reasonable, is there sufficient money put aside for long-term maintenance needs, does the Minutes of Strata meetings indicate problems with the workmanship of the complex?
Yes, you may save on stamp duty and you may purchase the unit cheaper off-the-plan, but the disadvantages/risks I've highlighted above far outweigh the "potential" benefits (there's no guarantee the price you purchase off-the-plan will be lower than the market value especially if the complex turns out to be a botched job so stick to reputable builders if you really have to purchase off-the-plan).
Hope the above gives you some issues/ideas to think about
TracyD,
Underestimating your expenses in the Variation form is a wise thing to do because if you get caught with a tax liability when lodging your tax return, the ATO may disallow you from varying your PAYG tax in future years (this rule is in place to prevent taxpayers from rorting the system by obtaining the benefit of higher cashflow during the year with overestimated tax deductions submitted in the Variation form).
Regards,
PropertySeeker,
In the accounting circles, its commonly called the Section 221D form.
Its basically a form to instruct your employer to take out less tax each month in anticipation of a tax refund (due to negative gearing). Instead of getting a big refund after lodging your tax return, you may get 1/12th of your refund every month instead (via lower tax taken out rom your employer).
You don't necessarily get a bigger refund from lodging S221D form, just sooner. So you benefit from the earlier cashflow (time value of money).
Feel free to shoot me an email. I've written an article on this recently which gives you a numerical example.
Regards
Tess,
Totally agree with Richard on his comments above:
Bankwest have a track record of providing very slow service and causing delayed settlements (causing heaps of stress for FH buyers who are purchasing property for the first time). This goes to show that borrowers should not think that the loan product with lowest rate is actually best for you. Consider the Lender's service, rates elasticity (see below), structure and features as well.
I also agree you should make your first purchase a PPOR as it will enable you to get FHOG $7k plus exemption from Stamp Duty (NSW SD for $500k property is a whopping $18k!). Being a Sydney sider, you must have felt first-hand (or heard from friends in the same renting boat) the agony of finding decent proprerty to lease recently. Having 40 people competing for the one rental property, Landlord jacking up rent, Banks forcing tenants out because Landlord defaulted on investment loan…..etc. Nothing beats owning your own place with no external pressures associated with being a tenant.
Getting a loan with offset facility is probably best as you can park excess cash into the offset account (to save interest expense) and not "poison" your loan balance by making redraws (for private purposes such as paying for groceries). I geuss the Mortgage Choice guy emphasised you don't "need" an offset facility because Bankwest Rate Tracker product doesn't have one. It has a very low honeymoon rate but lacks offset facility (which is important if u plan to use equity to purchase IP down the track).With the credit crunch happening, today's lowest rate product may not be tomorrow's rate product. Lenders don't raise (or cut) their variable rates in the same amount as the official RBA rate rise/cut anymore. Bankwest rate tracker may be comparatively low now, but you can't be guaranted that they STAY low for the long term.
Tess, it sounds like you might benefit from considering the 6 year Capital Gains tax main residence exemption rule. I've actually written a short flyer/example of how this rule works. Feel free to email me should you wish read a soft-copy of it.
Kevin
tess85 wrote:Meeting a potential mortgage broker today (guy from Mortgage choice). Do you think it is worth asking for a 30% or 50% rebate on commission? My husband & I have well-paying jobs, and though this is our first property and we are young, we expect to buy a couple of IPs before we are 30.Tess, I'd be interested in how that Mortgage Choice MB replies to your question. You may find those franchise organisations have internal policies that don't enable individual MB's to rebate commission to clients.
But just bear in mind that the MB that provides the biggest rebate to you, may not necessarily provide you the best advice. You may get a short-term financial gain from the large rebate but the advice provided might not be the best available (which will cost you in the long run). Getting proper structuring advice is far more important than the short-term savings from the rebate.
But if the Mortgage Choice guy turns out to be an excellent MB AND is also willing to provide you a large rebate, then you've probably struck gold. Good luck with it all
Hi Stuart Wemyss,
I totally agree with your comment……….. "I would just say that you shouldn't act on tax or financial advice from a mortgage broker unless they hold an Australian Financial Services License or are a Registered Tax Agent".
Only registered tax agents/accountants should provide tax advice.
So if a borrower needs and wants tax advice when applying for a home loan, most mortgage brokers will not be experienced and suitably qualified to provide tax advice.Accountants that also provide Mortgage Brokering service are in an unique position that can assess a borrower's tax situation and also advise on the most suitable home loan, not just from lowest rates/fees/features point of view but also from a tax planning perspective.
D,
I'm all for regulation that aims to achieve more disclosure for consumers. Consumers benefit from understanding who gets paid what and from whom. We can all understand the motives behind every player in the process better if all commissions and profit sharing are disclosed.
All mortgage brokers have an inherent "potential" for conflict of interest. Borrowers are interested in getting the best loan possible and some MB's may not direct their clients to the best loan for the borrower (but rather the loan that maximises their commission). I'm no different to any other broker and it will require proper commission disclosure (which National Broker regulation will attempt to achieve in the near future) as well as evidence of ethical behaviour, to close that gap of "potential" conflict of interest.
Being a Chartered Accountant, I risk losing my qualification if I don't act in the best interest of my clients. With all the long, hard study hours I put through to get the CA qualification, I will do my utmost best to ensure I keep my CA qualification so ethical behaviour is personally very important for me.
But back to my original question, do the one-stop-shop real estate agents/brokers provide such disclosure? And even if they did provide full disclosure, what is it about the one-stop-shop model that is so appealling to consumers? Is it the convenience? Is it really that hard to find a separately owned broker and conveyancer these days?
D, I'm glad you can find comfort in using the one-stop-shops for your personal needs. What about the rest of the forum members out there?
Regards,
ABC-09 is correct.
Break cost refinance fees are considered a borrowing costs which can be claimed as a tax dedution over a 60 month period (5 yrs).
The other thing you have to watch out for is whether "all" of the refinanced funds is used for investment purposes or not. If you are extracting equity out of the IP and drawing down extra funding for it, you have to be sure that the purpose of that extra funding is used for an investment purpose, otherwise you have to pro-rata the BC fee into deductible portion vs non-deductible portion.
E.g IP loan balance outstanding is $200,000 and IP market value is $400,000. If you are refinancing to borrow 80% of the $400k Mkt value ($320k = 80% of $400k) and then use $200k of it to replace the exisiting IP loan with new loan and the remaining $120is used for private purpose (suc as renovation on PPOR), then not 100% of BC fee is deductible over the 5 yrs. In the e.g, the tax deductible portion of BC fee would be 200/320 = 62.5% of BC fee can be deducted over the next 5 yrs.
Whereas if the excess $120k was used to buy shares or deposit for another IP, then 100% of BC fee is deductible over 5 yrs.
Hope the above makes sense.
Hi Tess,
A good mortgage broker should be able to offer the same product (in terms of rates, fees, features ect) as all the 5 lenders you are about to meet. So you would save yourself a lot of time by engaging a knowledgeable broker that can not only offer you the same product as the lender's loan Officers/Managers but be able to highlight the pro's and con's of the entire product suite from a wide range of lenders. It would save you the time and effort (in printing out multiple copies of docs) by seeing a "good" mortgage broker.
As mentioned above, you gotta be careful as there are good mortgage brokers as well as pretty poor ones. You may wanna see a couple of brokers to compare their style, knowledge and level of advice you feel they can provide you.
Finding a good broker can be compared to the analogy of buying a can of Coke. If a can of Coke has a rrp of $1.00 and Woolies sells it for a sale price of $0.70, then any Tom, Dick and Harry can purchase a can of Coke for $0.70. So if Bank A or Bank B has a limited time special offer of low rate or low fees, all/most brokers can offer that same product to its clients. But as consumer of a can of Coke, wouldn't you value the experience of consuming that Coke a lot more if it was offered chilled, with ice, a slice of lemon and with a paper umbrella. So when you choose a broker, try find a one that offers that little bit extra (ice and lemon) such as financial analysis of your family budget, tax advice such (max negative gearing benefits, minimize capital gains tax etc), assess the impact of how rates rises on your cashflow, structuring the loan to accomodate likely changes in your lifestyle (changing PPOR to IP).
So I would advise you to a) choose a broker over directly seeing lenders, and b) assess the brokers' abiltiy to perform the above value-added services and not just engage a broker that can "purchase that $0.70 can of Coke that you yourself can purchase" by visiting the Lender directly.
Cheers
Kevin
I agree with rudo1ph, while some price estimates seem to be reasonable, other estimates appear to be way off the mark by hundreds of thousands of dollars. Not sure whether to take the residex estimates seriously or not.
In any case, the google map feature is really handy for home-buyers.
Hi Chis,
The Tax Legislation looks at the "purpose" of the loan taken out. Because you will be drawing out a loan for the purpose of purchasing your "home" (and not to purchase/renovate an investment property), the interest on this loan wil not be tax deductible.
Your rent will be considered income and you will be positively gearing while the interest on your new home loan cannot be deducted.
Hope this clarifies your understanding.
