Forum Replies Created
With a $100k cash you can do a few things. It will depend how aggressive you want to be, but given that you have a fair amount of after tax income, being aggressive may not be such a problem or a danger for you, as opposed to someone on less income, family etc.
Option1; More aggressive;
use the $100k to leverage into as much cap growth property s you can. These days, you can borrow up to 95% (some lenders even go 100%) of the purchase price, so technically, you could buy property worth around $900k. The $100k would be used to cover the deposit of 5% plus purchase costs and Mortgage Insurance. Property purchase costs are approx 6% of purchase price.
The price point of the properties will have an impact on how much rent return you get ususally. For example, 5 x $200k properties will usually return more rent that 2 x $500k properties. Or you may even get a small block of units for this amount somewhere.
The more you borrow, the more neg geared you will be, and will need to use some of your personal income to hold the properties.Option 2; More safe;
use the $100k as deposits on property, but borrow only 80% of the property price including purchase costs. This will limit you to around $400k or so; probably only 2 properties worth $200k each, or 1 property. Again, the higher price point doesn't always produce the better rent return. the bigger deposit will improve the cashflow and lessen the burden on your after tax income.In both options, you can select property that are cap growth focus, or go for better rent returns and hopefully cap growth as well. I would also suggest looking at properties with good depreciation as well to help with the tax return.
Option 2 is the option that I would suggest; it is safer, you have more protection from vacancies and bad rent returns which can impact on your cashflow, and if well selected, and have add value potential the properties can still deliver excellent cap growth.
This will vary from suburb to suburb, city to city etc.
When you do your due diligence you need to research the area you want to invest in and find out what type of properties are in demand for rent.
For example; single bed apartments may not be in demand in a suburb 1 hour drive from the city. Most people out there are families in houses who want land, and are prepared to commute. On the other hand, in the city you have a lot of younger people who need to be close to work, can't afford to buy just yet so have to rent, and maybe don't earn a lot so a 1/2 bedder is more popular. Families tend to not live there.
If you talk to the local agents you will soon find out what is in demand and what isn't in that area. A good sign may be that there are a lot of 3 bed houses for rent; this means there is not much demand for them. There may be very few 2 bed units for rent, so these would be what the area wants.
Also look at the demographic of the area. You can see this simply by driving around; look at how many old people are out and about. if there are a lot, you know the area has a disproprtionate number of retirees, there may not be a lot of younger families or singles to rent your property. A place such as this is Rosebud on the Mornington Peninsula – full of old pensioners now, but slowly this will change. They may not be renters, so there may not be a big demand for units there. On the other hand, older people these days do rent, so you would need to question the agents to find out.
Also, how many schools, universities, employment places are there around; is there good public transport and freeway access.
As a general rule, 2 bed units are always in demand within a reasonable commute to the CBD, and near public transport such as train lines. Private parking is a big plus. Somewhere near the cafe strips is also promising, as younger people who are more likely to rent units also like to eat out and spend time in cafes etc.
My advice is to try and maximise EVERY factor pertaining to the investment. By this I mean don't just chase cap gains and struggle along with a pathetic rent return for 5 years until the property goes up. That is no fun I can promise you.
Here's a few criteria to follow;
1. Try to look for areas that have a good likelihood of cap growth, or an over-flow suburb near a more expensive one with good amenities.
2. have some decent rent returns,
3. units that have some ability to add value through some renovations,
4. built after 1987 so you can get some decent depreciation to maximise the cashflow,
5. under-cover private off-street parking.
6. look for smaller more private complexes of less than 20 units.
7. located in quiet streets, near amenities such as public transport, shopping malls, parks, hospitals etc.
8. interest only loans for cashflow.Scottybe wrote:Yeah, that was my post.
I am still not quite getting it. Silly i know. I adjusted/changed the figures a bit from what they were.
Another silly question, is depreciation income or expense? It could be viewed as either!
Another thing i have just thought of , how are I/O repayments calculated into the equation?
I can follow your example, but when it comes to apportioning each bit to the expense or income column, i get confused.I consider every dollar that comes back to me from the property as income. Every dollar that goes out is an expense and is tax deductible.
Depreciation, if it is only an 'on-paper' depreciation deduction in my book is income. The reason I say this is because the money comes back to me by way of tax return. This is money that I did not need to actually spend in order to get the tax deduction, therefore it is free money. I'm talking about the existing building, fittings and fixtures.
I don't intend to ever sell the properties, so I won't ever have to add it back onto the cap gain.Another type of depreciation comes from having done some renovations, which you have had to physically pay dollars from your pocket first to complete. In this case, you have the renovation costs, which are an expense, and then you have the depreciation on those costs, which is, in effect, income.
In a similar context, it is like an electrician buying a new drill. The cost of the drill is an expense, and he gets to depreciate the cost through the tax return. He would normally have to pay tax on his income, but the depreciation on the drill saves him some of that tax. This is, in effect, income.
Consider the building on the property as the tool you use to create the income (rent) and the depreciation of that building is saving you tax, which is money back in your pocket (and not little Johnny's) – income.
The interest only payments are an expense, from which you will get some money back via tax refund at your marginal tax rate – income.
Money out; expense. Money in; income. A bit simplistic, but takes away the confusion.
Here's a post I did a couple of days ago about a similar thing. Just substitute the numbers for your scenario:
"I'm no accountant, so don't take this as gospel, but from memory it sort of works like this;
Say you earn $100k and pay 48.5% tax on it (Yuk!!)
Your rent is added to your earned income, which then means you have a new taxable income to pay (more than you have already).
$100k + $20,500 = $120,500. You have already paid $48,500 in tax, the tax on the new taxable income is $58,442; you now owe an extra $9,942.Now you subtract all the expenses for the I.P, and they are deducted at your marginal tax rate.
Total expenses (including Loan Interest and depreciation) = $27,000.
(I haven't added other expenses such as insurance, management, maintenance, rates – I assume they are in your $6k expenses figure? If not, add them to the other expenses. If you don't know the total, we can assume a conservative 10% of rent would be the amount).So, new total expenses is = $29,700 (including 10% other expenses)
Deducted at your marginal rate of 48,5%, you can claim back = $14,404 ($29,700 @ 48.5%)
This is deducted from your new taxable income of $125,500, which you still owe tax of $9,942.
Your tax return should be approx = $4,462.
There is a calculator in one of the Margaret Lomas books; she has 5 books now; read them all, and the calculator can help you guestimate this figure. Or, talk to your accountant for a more accurate figure, but I think what I said was about right.
I hope this helps"
Hey Mingling and Corhig,
thanks for the support. We are at present in the process of getting a publisher. It isn't as easy as everyone thinks, but now we have an agent so we are one step closer. The website will be good advertising for it.
The book is, I believe, a good read and will help anyone who reads it.
The book isn't for sale yet, but if you would like to fill out the customer survey and send me any questions you have about your golf on the Golf Doc page I'll answer them.
I am hoping to build up a clientel through the website for a newsletter which will have golf tips etc, I hope you guys would like to be on the mailing list?r1trackday wrote:I'm with masterREL
"If it’s so easy and they make so much money why not become one?"Its so easy to complain. the price is the price…
If your angry about how much tradies can change and inturn, how much money they are making….. try the other option and get your self a trade and earn all this money yourself.. The problem is, no one wants to get there hands dirty in this day and age.. its much easier to sit behind a computer all day.
Travel, quote, travel
travel, unpack, complete task, pack up, travel…… in addition the material price. The job might take 5 mins and $20 worth of material but theres so much more involved… oh, and the customers attitude.. hehehe
Are we back on the customer's attitude AGAIN? I thought we had a gutful of that a few weeks ago with you and crashy.
Customer attitude is an external factor and should not have an influence on your professionalism in your job.
I worked in retail for 30 years, and if I had let the customers' crappy attitudes dictate how well I worked, I would have had a very unsuccessful business.Make sure you have Landlord's insurance as well. You should be able to get a cover note over the phone today.
If you don't have an insurance broker, try CGU, or Property One; your Bank may even provide it.Doesn't sound that great a deal. This is a business transaction, and emotion should not be a factor, and if the deal doesn't stack up FOR YOU you shouldn't do it.
If he needs to sell as you say, you are giving him a win by buying it at all.
You could always tell him it is only worth $260k and offer him $250k (assuming he needs the cash as you mentioned) and still with the 7.5% lease back. There's nothing to stop him from re-negging on that down the track though.
Especially if you reckon it will only be worth $260k in 2 years; why would you pay more than $250k and then sell for $260k in 2 years; the cap gain tax will wipe out almost any gain.
If you don't sell after 2 years, and then have to rent on the open rental market, you may not get a return anywhere near 7.5% and the cap gain hasn't been that good.
I can only see the upside being a short-term decent rent return with some good on-paper deductions. Your only hope would be a better cap growth than you've predicted.
If you could get it for around $220k with the 7.5% leaseback then you may have a decent deal. Be prepared to make a very short settlement on that offer though.Can't help you with trusts.
I guess if there is a pre-tax profit this would be a benefit as you can disribute the profits amonst the beneficiaries, and there may be some asset protection through one.
Maybe Richard or Terry could comment on that for you? Over to you, boys!
Did that Petrol Station Boycott thing really ever happen?
I've never ever heard anyone actually talk about it anywhere – except in the emails I received about it.
Sounds like an urban myth to me.As for the credit card thing; we have one, pay for every thing with it, then write a cheque at the end of the month. Lots of lovely frequent flyer points!
I'm the Bank's worst customer I suspect, and we don't have any other accounts with that Bank – ha! ha! ha!
It's N.A.B by the way, and we took all our investment loan business away from them years ago, so I'm loving it that they make no money out of me anymore.devo76 wrote:I have made a good profit off muscle cars recently but i believe they are reaching there peak. If i see prices stall i will put my car on the market quick as at just under going rate to move it quickly. Then ill invest the money in either my PPOR or another IP,depending on the marketJust don't wait too long.
Warren Buffet said; "I made a fortune from buying too late and selling too early".We have properties interstate that I've never seen, and up until now we have simply let the P.M get quotes and get the work done, then deduct the payment from the rent.
Works for me.Something larger like that is different I guess, but maybe it can still be handled the same way.
Talk to your P.M and ask them if they have had any experience with other Landlords in similar situations, and what they did to get the work done.
Im no accountant, so don't take this as gospel, but from memory it sort of works like this;
Say you earn $100k and pay 48.5% tax on it (Yuk!!)
Your rent is added to your earned income, which then means you have a new taxable income to pay (more than you have already).
$100k + $20,500 = $120,500. You have already paid $48,500 in tax, the tax on the new taxable income is $58,442; you now owe an extra $9,942.Now you subtract all the expenses for the I.P, and they are deducted at your marginal tax rate.
Total expenses (including Loan Interest and depreciation) = $27,000.
(I haven't added other expenses such as insurance, management, maintenance, rates – I assume they are in your $6k expenses figure? If not, add them to the other expenses. If you don't know the total, we can assume a conservative 10% of rent would be the amount).So, new total expenses is = $29,700 (including 10% other expenses)
Deducted at your marginal rate of 48,5%, you can claim back = $14,404 ($29,700 @ 48.5%)
This is deducted from your new taxable income of $125,500, which you still owe tax of $9,942.
Your tax return should be approx = $4,462.
There is a calculator in one of the Margaret Lomas books; she has 5 books now; read them all, and the calculator can help you guestimate this figure. Or, talk to your accountant for a more accurate figure, but I think what I said was about right.
I hope this helps
Congratulations!
The answers to these questions really should be known as much as possible before you buy; especially about how much rent to ask for after a reno.
The information is relatively easy to find; call or visit all the local agents and ask them what they have for rent in properties the same as the one you have. You will be able to get an idea of the rent for an unrenoed and renoed properties this way, they may allow you to go and see the vacant ones (if there are any) to get a comparison – especially if they think they may get your property management business.
You can also check out the properties for rent on Domain.com.au or r/e.com.au; there are usually photos and the asking rent amount.
Back to the first question; everyone likes a clean, attractive bathroom and kitchen, so start there. Being a bit dated is not a problem, as long as it is clean, neat and doesn't smell of old dogs or urie etc.
Don't go top dollar on the reno as it is being used as a rental, but things like;
Bathroom – modern tapware, repainting, new tiles, vanity, ixltastic, extra mirrors, good storage space so maybe an extra (or bigger storage cupboard/shelves for things like towels etc. You only have one bathroom so maybe do a little bit extra.
Kitchen – re-do benchtops/splashback, tapware, repaint or replace cupboard doors, new tiles/lino/floorboards, good lighting, maybe even a new cooktop.
Rest of house – repaint, recarpet, maybe update blinds (Ikea is the go), efficient air con/heating, smoke alarms, good door locks.
Also; don't forget the Landlord's Insurance – MUST have.
What…. you mean you haven't been trying to keep up with the Jones, Simple?
Don't forget; property investors are the minority, so most people you see are just blowin' it all.
You can't compare the interest on a bank account deposit to a property investment. There are many more factors with property investment that can increase your returns exponentially.
$120k @ 7% is $8,400 per year profit invested in a cash account.
With a bank (or online) account, you are being paid interest on cash. The cash is eroded each year by inflation at around 2.5-3%, and there is no capital growth on cash.
You are also being taxed on your interest at your marginal rate (say 33% for argument) because it is a profit that you get paid.
Your nett return on your cash may be as little as 3-4%. say; $4,800.With property you can use leverage, tax deductions, on-paper tax deductions, cap growth on the investment (unlike cash), rent to increase returns.
Even if you have a neg geared property that costs you $100 per week from your pocket (god forbid), if the property cost you
$400k, and you used the $120k for deposit and purchase costs, and it goes up by an average 5% per year cap growth,
your return on your $120k is;outlay; $120k plus $5,200 for out of pocket neg cashflow = $125,200.
Property increases in value by 5% = $20,000 (no tax paid as it is on-paper cap growth). That's 6.2% return.If you then include the tax refund due to the neg gearing and on-paper deductions, you could effectively wipe out any neg cashflow, and re-invest the proceeds into the loan tax free. The return goes up even more.
This is very simplistic, and with $120k cash you can invest in more than $400k of property and with better rent returns etc, thus increasing your returns even more.
Kenzel,
Your nett useable income after the rent has been considered (and not the cap growth as this is not useable income), loan repayments as a percentage of your after tax income is quite high, which for me is a concern.
A good rule of thumb is to allow 20% of the rent to be swallowed up by holding costs (other than loan interest), and also factors in 4 weeks vacancy. In actual fact it is always less (in my experience) but it is good to over-estimate expenses a little.
Don't forget the possibility of a Depreciation Schedule which will provide a good sized tax deduction through 'on-paper' deductions.
If your property was built after 1987 it will be worthwhile getting the D.S done; a Quantity Surveyor does this for around $500, is tax deductible and will pay for itself in the first tax return.
Also, allow around 6% on top of purchase price for purchase/finance costs and stamp duty. Again; this is a slight over-estimate.
You also need to factor in the rent etc you will need to pay on another place for you to live in while your I.P is rented.Your nett income (earned) will be: $2,900
The nett rent will be: $752. (allow 20% of rent of $940 for expenses other than loan, this includes 1 month vacancy)
TOTAL USEABLE INCOME: $3,652 (cap growth is not useable income at this stage)
Loan repayments will be: $1,700
TOTAL NETT USEABLE INCOME: $1,952 PER MONTH.This leaves you $450 per week to live on for rent elsewhere, food, living. After tax return will be more of course, but it is an unknown, and you should re-invest the tax return back into the property loan anyway in my opinion, so it is not money for you to spend on living expenses.
I hope this will be enough for you to live on. You would have trouble buying another property if it had similar figures to the ones mentioned in your post due to the neg cashflow.
$1 million for a first home?
And 5 bedrooms on a 500sq/m block? Sounds like a McMansion.
I hope you have lots of kids. If not, why the bedrooms; is it going to be used as an I.P where you rent out the rooms?This whole equation scares me. If you want a good investment you can do it by spending FAR less than this, or spend the same money over a couple of properties and improve your return and spread the risk in the process.
This sounds dangerous what you are trying to do; you will have very high debt , and even though you may have the income to cover it, what happens if your property goes down in value over the building time (there is no guarantee the property will go up when it is completed), and what if your job disappears, what if you get sick and can't work? These are all worst-case scenarios, but they need to be considered to minimise your risk; especially with $1 mill tied up in one property.
As the others have already said;
1.don't buy on emotion.
2.check the recent sales of comparable properties (not the off-the-plan sales; the RESALES),
3.builders/developers load the price to make a profit,
4.you could buy now and find the property is worth less on completion; especially in that price range.
5.6% lease back is not doing you a favour; finance is over 7% now. The lease-back is just another cost for the builder factored into the price (that you ultimately pay).With the deposit you've already saved, you could buy a very nice EXISTING cheaper property in another suburb that will enjoy good growth, good 'on-paper' deductions, use it as an I.P and it will be pos geared from day 1. You will need to keep renting where you are of course.
Newspapers are usually late to the party. You need to dig deeper and harder yourself, trawl the r/e websites, drive around and look for clues.
However, Residex have good reports on what you are looking for.
You can buy a report for predictions for a specific area and it will include many suburbs.
Then you need to do some in-depth research on that area yourself to qualify the precictions; talk to agents, do searches on the towns's website (if they have one) for their activities and development, ring the local council or check their website etc.Another good indicator for future growth is to look for 'over-flow' suburbs. These are affordable suburbs very near, or next to, suburbs that have become expensive and un-affordable, so people move to the next closest affordable suburb that will give them access to the same amenities and proximity to work, good transport, shopping etc.
For example, when L.A had their boom recently and the prices became ridiculous (still are), many of the outer-lying suburbs started to boom because they were cheaper. Then while the L.A market slumped, this is still continuing. I'm talking suburbs with 1.5 hour commute!
Sydney and Melb wil no doubt go the same way as the inner-city areas get more expensive to rent or buy. Look for suburbs that are developing, have good access to transport/roads into town, good shops, schools, parks etc, but are still affordable for the average Joe. Frankston, 45 mins south of Melb is one such example; affordable, good amenities, transport, a new freeway link being constructed etc.
Mystery wrote:Hmmmm … scored 734, this would give us enough income to survive on current combined income for 2 years. I imagine the score will improve greatly over the next couple of years as we have added another 4 IP's to our portfolio since April this year and in 2-3 years we should see some good capital growth in the areas invested in ……. Well, that's the plan anyway ….Martin
4 since April! Good work!
pos or neg?
