There is also the fixture and fittings of the building, such as dishwasher, carpet, kitchen cupboards etc.
These all have different depreciation "lives".

For example; I think carpet has a "life" of 5 years, so the cost of the carpet is depreciated at 20% per year over the 5 years and so on.

Then there is a "pool" where a number of the items which are low cost, such as a kitchen flickmixer are all pooled together to make one amount and then depreciated.

As Terry said; contact a Quantity Surveyor who can do a Depreciation Schedule for you. The cost is around $500, is tax deductible and will pay for itself in the first financial year.

Dean;

First of all; you need to get a tan, buddy!

Second, after you move out, I'll come and stay for a month free to help you get sorted out.

But seriously –  you are in a very good position and it was very lucky for you to have met that lady when you did.

I don't have a clue what a Euro is worth in Aus or US dollars, so I will call it a "dollar".
 
Based on what you've posted, the rent return of $2,500; assuming you can get it, is a very good return against the MORTGAGE of $140,000.

It works out to be;

$2,500 x 12 = $30,000 per year. (based on a permanent rental).

You still owe $140,000.

Divide $30,000 by $140,000, and then multiply by 100 = 21.42% This is an excellent rent return. Depending on the holding costs, and the loan interest rate, this is a positive cashflow amount. This means you get money left over AFTER all the holding costs and the loan are taken out. Probably enough to travel the world (maybe kick in some cash of your own as well) without selling.

On top of this, you will have $30k by early '08. Using the $30k on its own as a deposit will not allow you to buy a lot of property, unless you borrow more from the Bank, which may incur Loan Mortgage Insurance (avoid if possible).

In my opinion, this house is a fabulous asset, and you should not sell, so based on that, you would go with OPTION 4, but with a twist. I think a permanent rental is more reliable income; you may get a higher monthly rate with holiday rentals, but there are usually higher vacancy rates and the fees for cleaning etc are higher.

Here are my thoughts;

Without going into lots of detail to explain, let me say that the $30k will be far better used by paying it into your Mortgage and decreasing the amount owing. The less you owe, the less interest you will pay long term, and the more positive cashflow you will have for you to spend (in my opinion it should be re-invested back into the asset).

You then use this $30k along with the rest of your "equity" for more investing later on.

There are 2 ways to do it, and it depends on how your loan is structured and what your plans are for the house. As I said; I think you should NOT sell, so we'll assume that for this example;
1. Structure your loan so you have an "offset account" with either a "line of credit" (LOC) or a "redraw"  as well that you can use for more investing.
In this scenario, the $30k is put into the offset account. The offset allows you to redraw the $30k if you need it at any time, but while it is sitting in the offset, it is reducing the interest you need to pay on your mortgage each month. The LOC is basically credit which is made available through the "equity" in your house – how much of it you actually own after you discount what you owe from the VALUE of the house. For this purpose you would need to have the house revalued by the Bank.
2. Pay the $30k into the mortgage, then structure your loan so you have a "line of credit" that you can use for more investing. You can still redraw the money if you need it, but you need a separate sub-account to separate the personal use and the investment use.

The LOC or redraw allows you to access some of the equity in your house (80% of the VALUE is the usual amount you can access), which is used to pay the deposits and purchase costs of another (or more) properties. Normally you would need a deposit of around 20%; anything less and you would have to pay Loan Mortgage Insurance (avoid if possible). The Bank funds the rest (80%).

What I have put forward here is a bit basic, and you really need to get together with a property investment savvy Mortgage Broker to set up the right loan structure.

But basically; do not sell; rent it out and go travel. You have a lot of equity which you can use for more investing when you are ready, without having to sell to access the money.

The owner may have got tired of fixing things and then having them broken again soon after.

Also, being a block of 8, it will be considered a commercial property by the Banks, and will require a bigger deposit from you, as they usually lend on a lower LVR for commercial.

I think in towns like this, you would want to look only at the best part of town.

I had a quick look at that site Andrew, and of course; you can't use it unless you subscribe, but It seems to have all the info you will need. Certainly better than nothing at all, and way cheaper than your account by the looks of it.

You will still need him (or another one) to do your tax returns though.

Another thing to do is read all of Margaret Lomas' books; there are 5 now and they are all fantastic.

The best thing though is there is tons of nuts and bolts stuff in her books, as well as (in the last book from memory) there is a quick-calculator for some of the different property types such as 2 bed inuts or houses, 3 bedders etc.

Her website is;
http://www.edestiny.com.au/

If the areas you are looking at have gone up by 20% recently, then either they are booming now or have almost run out of steam.

It's your call, but you might want to look at other areas that haven't boomed and are showing good signs that they might.

The strategy that you are wanting to do can work in virtually any suburb, so don't limit your view.

Hi Bicky,

In the model I posted, I was actually being a bit general and used a bit of quick mental arithmetic for some of it. There was no figure for depreciation, and I can't remember what figure I used (probably guessed), and it's difficult to work out exactly as the fixtures and fittings have different depreciation "lives" than the building anyway, so let's use this; the building, fixtures and fittings cost $100k in total, so the first year is 2.5% of this @ 30% tax margin gives approx $14 p/week approx.

Keep in mind that this is simplistic. In reality, the income (rent) is added to personal income to create a new taxable income, then the expenses and depreciation are applied to that figure to give a new taxable income and the difference in the original taxable income's and the new taxable income's tax amounts is the tax return.

So, the numbers would be;

interest = $200 p/w
rent =   $170 p/w
depreciation  = $14 p/w

I always allow for 20% of the rent to be used for holding costs such as insurance, maintenance, management, rates, and even 4 weeks vacancy. This has never actually occured for me, but you never know. The figure is probably closer to 15%, or even less with some properties.

So, nett rent is $136 p/week.
Then there are the tax deductions applied to the holding costs. If we take out 4 weeks vacancy as a cost and round the expenses to 15% of rent, which is $25.50 p/week approx. This gives us $1,326 p/year @ 30% =   $8 p/week in deductions there. 

                               Interest   =  $200      
                  minus nett rent  =  $136      = -$64 p/w   cashflow

Now, add back the depreciation, the holding cost and interest deductions.

                                   cashflow                =  -$64 p/w
               + interest deduction                =    $60 p/w        (-$4 p/w)
               + depreciation                          =    $14 p/w        (+$10 p/w)
               + holding cost deductions     =    $  8 p/w         (+$18 p/w) cashflow p/w.

Allowing for a few variations in how the taxable incomes are worked out by the accountant, I would guess that the property was pos cashflowed by the above amount, but let's say $10.

I always like to under-estimate income and over-estimate expenses.

There may be an accountant on the forum who can correct this if it is drastically wrong, but I think it is close enough.

But for me; if the cashflow is somewhere between -$10 p/w and +$10 p/w I don't care. It's good enough and I would buy the property if the cap growth prospects looked good for the area.

It's one shout at the bar (not even; with my drunken mates).

You can access up to around 90% of the value of the property which is $207,000, minus any outstanding loans ($115k).
So, you could theoretically access $92k; depending on loan serviceability.

However, in view of your current financial position, you wouldn't want to buy anything negatively geared just now.

maybe an established and profitable business, or high yield shares etc that are positive cashflowed to offset the negative of the I.P.

The interest on the draw downs is NOT tax deductible for personal use. If they are used for further investing then they can be tax deductible.

You would need to have the loans set up in a way that allows personal draw downs while retaining the separate loan/s for the I.P portfolio to keep the records for tax purposes separate.

This strategy only works when the draw downs aren't affecting the cashflow in any significant fashion. You can still go 'backwards' in equity doing this, as long as there is plenty of room to go backwards, but I don't think this is the purpose of the exercise.