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It is well documented that you will be better off to keep renting rather than live in a PPoR, as long as you invest the difference between the rent and a likely mortgage payment, but many renters never invest the difference.
Most people have an issue with renting while they have a perfectly good PPoR with tenants in it, so if you can get past this mindset you will do well.
Rather than buy another I.P or PPoR, why not build on the block of land when you are able to finance a construction loan and turn that into option 1. You will have considerable on paper deductions from the new building and you will have a tax deductable loan on the land and building. Loans on raw land are not tax deductible.
There are a couple of statements in your post that worry me CJ;
I don't think your sentence referring to "rent under market value is tax free, so no need to claim" is correct. As far as I know, there is no limit set by the ATO on what is taxable or not; all rent is income and therefore is applied to your personal income when you are making claims. Also, there are many people who hide their rent and miss out on many thousands of tax deductions, and, above all else; it is tax EVASION which is illegal and you can go to jail.
Also, the only time you are not liable for stamp duty as far as I know is on an off-the-plan purchase, but quite often these properties are overpriced anyway, negating any stamp duty savings. You are also liable for mortgage duty – where did you here that these two items you mentioned you will be exempt from?
Good point there;
But why not do both things; word your own clauses and then run them past the solicitor. They will hopefully point out any changes needing to be made.
The reason I say this as many solicitors and accountants are not proactive – they do what you ask and no more. It is vital that you educate yourself as much as possible and try to be on a par with the suits.
I think I would rather find out before hand that my solicitor is not on the ball than after signing an unconditional contract.
With a bank account you also don’t get any tax deductions (maybe on the fees) and you get taxed on your profits every year (cap gains tax).
With property, you can create a tax-free profit, and as long as you don’t sell, you can use the cap growth to further invest in more of same without ever paying cap gains tax.
There are ongoing problems with property with tenants, vacancies, repairs etc, but a well selected property with ‘good numbers’ will have all that covered.
No contest really.
On your combined income you could buy a pos cashflow property every year without raising a sweat – use more cash as a deposit to minimise loans and improve returns, and buy properties that are not too expensive.
Hi crystalleez,
firstly; “too” should be “to”.
With clauses, you want to be as detailed as possible, otherwise a smart lawyer in the event of a dispute will twist things.
For example; “subject to finance” could be;
“Subject to the purchaser obtaining written approval for finance from XYZ Bank in the amount of $XYZ, on or before XYZ date from the signing of the contract to purchase XYZ property by both the Vendor and the Purchaser. Finance not obtained from the aforementioned XYZ Bank by the aforementioned date will deem this contrat void immediately, and will be verified in writing to the Vendor or their agent by the Purchaser within the end of 2 business days of the expiration of this clause”.
Something like that.With the building clause; list as many parts of the building to be in “‘fair and reasonable condition with respect to tha age of the property’, and in the event of the building inspection not being to the satisfaction of the Purchaser, the Purchaser reserves the right to void the contract, or deduct the estimated cost of repairs to XYZ to return it to a “fair and reasonable condition given the age of the property” from the purchase price, or the Vendor will repair the property to the satisfaction of the Purchaser. The building inspection will be conducted by a suitably qualified building inspector, chosen by the Purchaser, and must be completed by XYZ of the date of both the Vendor and the Purchaser signing the contract etc”.
Something like that.The agents will try to persuade you to use their “standard clauses” – these are designed to favour the Vendor and the agent to get a sale. Never use them.
Agents don’t like these types of worded clauses, but who’s taking the risks?? If they don’t like your clauses, take your chequebook somewhere else. Another deal of the century will turn up in about an hour.
Protect yourself.Borrowing the full amount is not a prob, but you will have higher interest payments, probably mortgage insurance (a total waste of money; if you can avoid it do it).
These costs cut into your returns and your cashflow.
Use a cash deposit if you’ve got it.
It also protects you in the event of a downturn and you may need to sell.It can be done online; ask the agent for photos. Tell them you want photos of inside and out. They may not want to do it, but if they are keen to make a sale they should. If not, you need to make a decision about taking the chance without the photos.
A good building inspector with a building inspection report can tell you a fair bit.
Buying online requires even more D.D than the ones you can go and see. It can be done safely.The best thing to do is hire a Quantity Surveyor to prepare a DEPRECIATION SCHEDULE for you.
They will itemise every item and more you didn't even think of. Worth every cent.
This costs around $500, is tax deductible and will pay for itself in the next tax return. You then give the schedule to your accountant and they apply it to your tax return each year.
This sounds as though you are paying the interest on your I.P loans with another LOC Loan and not paying any of the interest on the LOC?
Are you paying down the loan on the PPoR as well and not paying down the LOC you use for investment?
This is called "capitalising" the interest; the tax deductible interest is allowed to accumulate while you pay down the non tax deductible debt. I believe at this point in time it is allowed by the ATO, but the argument seems to be continually raging about it,and there was a case a few years back where a guy was fighting the ATO over their ruling to disallow his tax claims when he was adopting this practice. They eventually allowed the claim, but I would err on the side of caution and not do that just in case the ATO changes it's mind again.
As for the interest on the LOC that you use to pay the I.P loans; this is not tax deductible unless part of the LOC funds were used to fund part of the purchase of the I.P's – the interest on the I.P loans is.
It may work, but I think the Topic would become clogged with ads as it is a free site.
Steve would have to start charging to thin out the numbers.
Now that's what I call a passive income stream!!
Hey, Xenia; I'd let you advertise only your CFP properties for free!
Hi Terry,
thanks for that. The ATO not allowing the tax deduction is my concern too.
I actually do already have a trust set up which is attached to the company name I have. Neither have been in use for a few years, along with the ABN, although I know for sure it is still active.
If I do this using the trust, how will that affect the ability to acquire the loan, given that my wife and I are out of the country and there is no Aus income?
The stamp duty concessions would not be a factor as we intend to keep this property as an I.P and never sell it, so the 6 year window as a PPOR will expire.
Would buying the other half of the house in a trust affect the "for love and affection" clause. I thought this only applied to partners transferring the Title across to their Spouse in their name?
All you need to do is compare the resale prices to the original selling prices.
Keep in mind that In Melb over the last 5 or 6 years there was a fairly large over-supply problem, and many investors went for the off-the-plan strategy to flip, or get some cap growth before settlement, and many did their dough.
The resale prices for that period were mostly terrible, so they won't give you a really good indication. Be careful.Terryw wrote:Hi Have a talk to a financial planner regarding which funds. I would be reluctant to name them in case they bomb out. There various sites where you can search past returns. one is http://www.morningstar.com.au I think. Terryw Discover Home Loans [email protected] Send an email to get my newsletter.The Defense rests, your honour.
Great returns – everyone is raving about the great growth in them, but can't say which ones "just in case".
HMMMM.
Always remember that when someone calls you (cold call) they are trying to sell you a product that will make THEM money, and make you spend yours.
Thank God for the invention of the answering machine.
Hi Golderneye,
sorry to hear your start in our great country has been a bit tough. Hang in there mate.
An option may be for your wife to work full time to pay the rent while you be Mr. Mom for a while. Keep your eyes and ears open and jobs always turn up for those who want them.
Putting your $200k into an investment that will give you a return that will allow your wife to cut back after only 12 months is highly unlikely, and if it was; it would be highly risky I'm betting.
Have you heard of the ING SAVINGS MAXIMISER ACCOUNT? It is an account that you transfer money into from your existing Bank account, except it pays a much better rate than any "normal" bank – about 6% currently. There are no fees and it is totally safe, and you have access to your money with 24 hours notice.
The address is http://www.ingdirect.com.au.
The interest on $200K would be $12k per year; this would pay a few bills while you are getting on your feet.
There are a couple of other institutions offering the same product now; Bank West, N.A.B. I have been with ING for several years.
Once you're settled in and working you can then do something more serious with that $200k.
Thanks for the "heads up" Dinah.
Sorry this experience occurred. The good news is it wasn't too expensive and you learned a lot.
Better luck with the next one.
It is good to have mentors – this forum is full of them that will help you for free. I am happy to help where I can. I have some mentors; my Mortgage Broker and accountant are part of the team.
You will learn all you need to know to begin and with safety by reading many investment books and reading the posts here, and asking questions. You can email us privately, or ask on the open forums. No question is stupid.
Working out the numbers to qualify a prospective property is not that hard. Working out whether the area and the future of that area for cap growth is harder.
You will need to get the right finance structure set up if you are intending to be serious and long term investors, so a good Mortgage broker will be important.
You will need a good property savvy accountant.
You will need a reliable solicitor and conveyancer.You will need to get your personal finances in order as well. By this I mean you need to start treating your household like a business; with budgets, projected cashflows for the year. Track every cent and reduce personal debt as fast as possible.
Look for ways to improve your cashflow for freeing up funds for investing and debt reduction. Lenders like financially literate clients; it gives them confidence in you and they will lend you more money for investing. Not only that; the more in control of your money and the more financial knowledge you have, the more you can invest to get better returns with more safety.
Here are a few books to start you off. Personally, I have read over 100 investment books – some I have read 3 and 4 times.
1. All the Robert Kiyosaki books – to improve your mindset especially. Rich Dad, Poor Dad is a favourite.
2. All of John Burley – same as above and some more detail.
3. All of Jan Somers books – mindset and lots of "nuts and bolts"
4. All of Margaret Lomas books – same as above.
5. All of Noel Whittaker – fundamental money management.
6. Al of Paul Clitheroe – as above
7. Steve McNight – the first book is a little outdated in today's market, but still a great read.
8. John Fitzgerald – nuts and bolts and developments.
9. "Think and Grow Rich" – Napoleon Hill; mindset.
10. "The Richest Man in Babylon" – mindset, money management. My favourite book.
11. "The Millionaire Next Door" – Stanley and Danko; mindset, money management. Another favourite.This will keep you going for about 6 months or so. While you are reading, start studying a target market/area for values, rent returns, rent demands etc. When the time comes you will know a bargain when it appears.
One last thing; when we started, my wife and I weren't on the same page. It was a bit frustrating, but she came around and now it's exciting and fun.
Don't kid your self about cars. It is going up in value now, but unless it is a very limited classic edition it will go down in value eventually like most cars do.
I remember when the Subaru WRX (I think it was called) was introduced in Aus. They were selling for more second hand because there was no stock of new ones available for several months. Now they're worthless. Same with the Ford Sierra Cosgrove – another Dinosaur.
No one ever went broke taking a profit, so I would recommend taking the money now; you've doubled your money – that's a great return.
No need to be greedy, and put those funds into your PPoR loan; then use the equity to buy more income producing investments that will keep going up in value long after the car has died.
This is very common with off the plan developments. Developers structure contracts to favour themselves.
The developer will cancel contracts with the purchasers if they think they can get a higher price on the open market when settlement time comes near. It is called the "sunset clause" in the industry.
Read your contract carefully and I think you will find they are within their legal rights to do this unfortunately.
Next time delete the sunset clause from the contract.
Do some research to establish ACTUAL rent for this type of renovated property in the immediate area. Never go on agent's opinions about rent returns.
Hey mum2five,
why not learn how to invest in property from this forum, then go out and get rich on your own.
The super will be a nice little bonus at the end to spend on a cruise – if there is any money left when you retire after the Govt finish dipping their fingers in it, or if the stock market crashes… again.
