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Sorry Gez, been away for a while. The concept is a lot more general than just one property. Borrowing to the maximum possible simply means buying as many properties as you can within the limits of your equity and debt servicing capability. You are simply trying to maximise the total capital you control. The exact percentage borrowings for each property are just details.
Kidd1 you've got the right idea, but you need to clarify it a bit better. You need to write something like: Owning $10Mil of property with a debt of $9Mil is better than owning $1Mil with no debt. If you say you own 10% of $10Mil, it implies you only have a 10% share on the deed. You have to own the whole $10Mil as far as the deed is concerned, even though you owe $9Mil on it. (I know that's what you meant, ie you meant the bank kinda owns $9M worth)
Cheers, S/C.
Hi Sandy, Stuart has good info on this in his latest newsletter: http://www.prosolution.com.au/news/newsletter.htm
Cheers, S/Cgezzy wrote:I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
GezHi Gez, I'll put my 2c worth in and try to answer that: Borrowing the maximum means you have the maximum possible value of property in your name. If all your properties increase in value by say 5% pa, then if you've managed to stretch your borrowings to own $2M worth of property, then you've made 100k of CG after a year. If you've been more conservative and only borrowed enough to own $1M then you've only made 50k of CG.
S/C.It's pretty simple DodoL; you just look at your net income (ie after tax) with the property compared to your net income without it. It should be greater with the property if you are CF+. The reduction in tax you pay if you're negatively geared, or the increase in tax you pay if you're positively geared is just part of the bottom line, ie your net income after tax. The change in your net income will vary with your personal exertion income, as it changes your marginal tax rate.
Hope this makes sense. SC.I've been thinking about buying my next IP in my wife's name, for asset protection reasons and because I've just crossed over the land tax exemption threshold, so I've done a bit of an analysis which shows the cumulative cash flow after tax for various incomes, ie 0, 15k, 60k, and 100k, and various number of years, ie 5, 10 15 and 20. I'll paste it below:
Shame I can't set it to non-proportional font eg Courier. (Years ago we had a "code" setting which would keep tables aligned)
You'll just have to count the spaces.—Cumulative Cash Flow Totals– (positive = cash out, ie total cost)
Income , Loan, Interest , 5 Yrs , 10 Yrs , 15 Yrs , 20 Yrs
0 400000 6.5 51929 80229 77923 36199
15000 400000 6.5 43727 62294 55690 18996
60000 400000 6.5 22750 31137 18575 -15958
100000 400000 6.5 13488 18293 4979 -28666
0 300000 6.5 19429 15229 -19577 -90945
15000 300000 6.5 11704 2944 -30579 -90004
60000 300000 6.5 489 -12382 -43957 -97503
100000 300000 6.5 -5525 -19733 -50868 -101901
0 200000 6.5 -13071 -49771 -115460 -213875
15000 200000 6.5 -17731 -53049 -111776 -193463
60000 200000 6.5 -21775 -54909 -105496 -178054
100000 200000 6.5 -24537 -57757 -106428 -270660
0 400000 9.0 101929 180228 227921 236011
15000 400000 9.0 93727 160216 195090 197564
60000 400000 9.0 57096 99571 116626 111343
100000 400000 9.0 43504 77558 92227 85332I've used 6.5% as the interest rate in the first three sets. Although I'm currently paying 5.21% on a pro package, it's unrealistic to use this number for a comparison based on 20 years into the future. All sets are based on a rental income starting at $400/week and increasing by 5% pa.
The first set shows the numbers for a 400k loan at 6.5% interest. It shows that you are ~65k better off after 20 years with a 100k wage compared to a zero wage, but this difference is much more dramatic for the 9% interest used in the final set, where you are 150k worse off with zero wage.
The analysis shows that for a zero wage, the only way you'll be on a par with someone on a high wage is to pay off a substantial part of your loan. The second set shows the data with a 300k loan, and the third set with a 200k loan. Even with the 200k paid off, it takes about 15 years before the person on zero wage is better off than those with an income, eg a person on zero wage is about 9k better off than someone on a 100k wage after 15 years.
The lower the interest rate, the less dramatic the difference, but you're certainly behind the eight ball if you don't have at least a 15k income, unless you can kill at least half your loan.
Perhaps I'll buy my next house in my name after all, perhaps in another state with another land tax threshold.Bomis, just to give you some perspective, I've run a few numbers through my simulator. As Terry says, negative gearing isn't that negative now interest rates have come down so much, and it's nowhere near as critical to keep the property in the higher income earner's name.
Say you purchase a 400k property that you're getting 400/w rent, ie 5.2% gross yield:At $0 income, it will cost you $125/week in the first year, and will be net positive after 9 years, paying you $17/w (assuming 5% increase in rent pa).
At 60k income, it will cost you about $34/w in the first year, and will be $54/w positive after 9 years.In the long run you'll probably pay a lot less tax for your wife's rental income and CGT if you sell, than the extra it's going to cost you in the first few years to have that half in your wife's name. Costs will be about half of each of those above for 50% ownership; I've simply plugged in the full amount for each wage. This all assumes interest rates will stay so low of course; it's a whole new ball game if they go back up to 9%.
I'd strongly suggest (assuming you're going to leave it in joint names) that you have two separate loan accounts. One will be designated as your half, and one as hers. You can then pour all excess funds into her loan (or her offset account), while leaving yours as IO, as the tax deductibility of her loan interest will be much less effective than yours will be. This may not be possible if your house is purchased as joint tenants rather than tenants in common. That's an interesting legal issue.
Cheers, S/C.
Ty, Investment properties are a much more efficient generator of wealth than a PPoR (due to tax detectability of expenses and income from rent of course), so if your main concern is building wealth as soon as possible, then as Terry says, keep your PPoR as cheap as possible. At least you won't be paying rent, and you'll have the security and stability of owning the place you're living in. After a few years when you've built up your portfolio and net worth, then you can think more about a more luxurious PPoR. You should be thinking about converting your first PPoR to an investment property when that happens, so plan accordingly, eg don't pay out the PPoR loan, ie keep it IO with all funds going to an offset account.
If you really want to live close to work where the cost of your PPoR is much greater, then maybe just keep renting while you're building your investment property portfolio.
S/C.I think the new "Green Bridge" to the uni is helping Yeronga too. Moorooka is pretty close, but maybe it's on "the wrong side of the tracks" with the Beenleigh rail line being such a big dividing line. Annerley may be a bit closer to the action, but it's already pretty expensive. I think Moorooka would be a good bet in the long term.
Of course Scott, that's the whole Idea. Instead of using their shonky system to reduce the payments in the early years, you control it yourself via your offset account buffer. You let the balance run down by not covering the interest fully. It's all about making the loan more affordable for a limited period. Whether this is a sensible strategy or not isn't the point.
The 20% deposit isn't relevant to their repayments. They are simply quoting a repayment rate for a particular loan size, assuming you've taken care of the deposit. The whole basis for their ad campaign is to reduce your repayments using your grants as a buffer. What I object to is the lack of details about how long this buffer lasts and at what return it is producing, ie what interest rate it is generating or offsetting.
Just one point about the FHB stamp duty exemption (it's 500k in Qld): (this is off topic, but who cares)
When you build a house land package with some developers, eg Stockland they give you a separate contract for the land (with them) and the house (with the builder), and consequently you only pay stamp duty on the land and not the home. The bummer is though, that in Qld you only get a 150k limit for first home buyer exemption when buying vacant land to build on. Most blocks in the Stockland developments are ~220-260k which may be enough to blow away your first home buyer exemption, so if you're a FHB, then you need a house/land package in one contract, ie a recently completed home, but if you're not a FHB, then it's best to get the land contract separate. Go Figure!
As for the low start: I assume they are somehow getting you to quarantine your grants and use them piecemeal as part of your repayments. There's no mention of what rate of return your 30k of grants is getting in the process. If it were up to me, I'd be simply letting the grants sit in an offset account that's being directly debited with the loan repayments. If you need to reduce the payments in the first few years, then you just let its balance run down while you're feeding it with whatever payments you can from your income.Strange how the banks don't even consider your CGT liability when assessing your net worth and LVR. I guess they don't care what happens to you after they sell you up and recover their principal. The ATO just has to pick over what's left.
Just those I was referring to in my first sentence:
"there are lots of people trying to package this strategy up "Richard there are lots of people trying to package this strategy up so that is it somehow acceptable to the ATO. I'm not quite sure what you are saying (as you have a few typos) but if you're saying that interest on interest is not tax deductible, then I'm sure there are several people who would disagree, namely all those people I've just referred to. It is hugely beneficial if you can get away with it, and it would open the floodgates if the ATO allowed open slather on this strategy. To me it's just simple logic that this strategy is tax avoidance regardless of how it's packaged, and I'm a little surprised that the ATO is still circling around all these private rulings that are all really about the same thing.
duckster wrote:Also you are using the dark side of the force. Compound loan interest !
As your investment loan increases so to does the force of compounding interest work against you.Duckster, that is a fairly common comment regarding letting investment interest compound while paying more off private debt.
It's completely wrong to suggest that this strategy is bad because it lets investment debt increase, because you will be paying off the private debt more rapidly. All things being equal, you would be paying the same total loan repayment each month, but more of it gets directed to the private debt, and less to the investment debt. The total principal paid off will be the same, but the dividing line between the two loans simply shifts a bit to one side.
Personally, I'll never raise my head above my foxhole and show it to the ATO by doing this strategy. You can change the structure all you like, and split it between lenders and draw little boxes around all your loans, but the end result is identical, ie reducing private debt in favour of investment debt by letting investment interest compound.
I might go as far as letting other expenses compound, eg rates, insurance and repairs, but not interest (unless perhaps I had absolutely no private debt so it could be demonstrated to be a cash flow thing, not a tax minimisation thing.)
S/CThanks Terry. It was just back in "help needed/Stamp Duty!!!" Sorry, I shouldn't cross-post.
I've checked one of their information brochures on their website. It states: "For first home concession, you must never have held and interest in other residential land in Qld or elsewhere…"
Another thing to watch: They also state that if you start leasing part or all of your land to another person within a year of occupation of your ppor, you have to lodge a reassessment form, and I assume you will have to pay a pro rata amount of your stamp duty concession back to the OSR. We've been saying you only need to live in your PPoR for six months before renting it out to keep your FHOG, but you need to live in it for a year to keep your stamp duty consession (in Qld at least).
My interest in the IP first then PPoR is that I'm in the process of helping my children buy their first property, which is an IP 50:50 owned by me. I'm not affecting their future FHOG, but it looks like I've cruel-ed their FHB stamp duty exemption. PPoR concession in Qld is still pretty generous though, eg only $3500 for a 350k PPoR vs $10675 for an IP.Tristan that property would still be considered your PPoR and as such will be CGT free for the next six years. Converting it to dual occupancy might affect that exemption. Just something to consider and maybe get some professional advice on.
Cheers, S/C.
PS Terry you never answered my query on exemption from stamp duty for first home owners who already have an IP. Perhaps I should simply phone the OSR and ask.AAMI have a combined landlords/building insurance which is probably what HG is talking about. I also had those, but I also had the normal landlord's insurance with AON. I never did investigate how much the AAMI policies overlapped. I too was a bit dismayed by the large increase in AAMI's policies. Their reasoning was that investment properties attract a premium compared to a ppor. I've since changed to RACQ because their landlord policies are basically building insurance, and the fact that they are IPs doesn't seem to affect the cost at all. They also offer me a multi-policy discount, a gold member discount, and now an age discount. Showing my age now:(
RACQ was almost half the cost of the AAMI policies after those discounts. I too had 9 policies with AAMI (ppor, 2x IPs & six! cars)Hi Terry, I know we can still be eligible for the FHOG after buying an IP (since the 1st July 2000 I believe) but I've assumed that we will also be eligible for first home owner stamp duty exemption after buying an IP. We can't really assume anything with government policy of course, especially since the stamp duty is a state government tax and the rules may vary from state to state. Have you had any experience of this?
Regards, S/C.Chris, your $1M property is way above the threshold in NSW and it doesn't make any difference if it is your first PPoR or your second or an IP for that matter, the stamp duty is the same $40490. I suggest you move up to Queensland! You get a discount if it's your PPoR, ie $31000 for PPoR (first or second makes no difference as the first home owners exemption phases out after 500k) or $38175 for an IP. Here's a good calculator that can be set to any state:
http://www.creditworld.com.au/stampdutycalculator.html?ppce=ZT1BZHdvcmRzJm49U3RhbXArRHV0eStDYWxjdWxhdG9ycyZjPTAuNA%3D%3D&gclid=CIT7zYuBppcCFQsQagod7gTkJA
In Qld at least, you only pay stamp duty on the land if you're building, and not on the house, so if you're going to be spending $1M, then It's worth considering. It all depends on your ratio of land to house of course. Vacant land has different threshold for first home owner status, but a $1M property would no doubt have land worth about $500k or more, which would be well above the threshold.There was an article in the latest API magazine which discussed the relative benefits of buying a PPoR vs IP for first home owners. I found the article really annoying however, as it showed such marginal differences compared to the huge effect stamp duty exemption can have. Stamp duty was mentioned just near the end of the article as needing to be considered, but it said this was ignored because they just wanted to compare the different methods of owning your first home/IP. This is quite silly, as stamp duty exemption is so much of a consideration in comparing the methods. Eg in Qld for a first home costing 350k, the stamp duty on an IP is $10675, compared to zero for a first home PPoR, or for a 500k IP (the max threshold for zero stamp duty for first home buyers) the duty is $15925.
With this in mind, the only sensible way to buy your first home/IP is to live in it for six months and claim the FHOG and the stamp duty exemption. Convert it to an IP after that if you wish.
One nasty side effect of renting it before living in it (apart from missing out on the stamp duty exemption) is the capital gains tax complication. You'll have to keep track of all costs associated with buying and owning the property (including all the time you live in it) so that CGT can be apportioned properly when it's eventually sold. The CGT will apply to the time when it was an IP.
The best part about living in it first is that you can keep it as a ppor even when it's being rented as an IP for six years after you move out (provided you don't have another ppor of course). There will be no CGT payable on any capital gain in that six year period. You can also reset and restart a new six year period if you just live in it for a short period after the first six years.So there are three big advantages of living in it for six months: FHOG, Stamp Duty exemption and the Six Year Rule.
Just one other thing: If you really wish to buy an IP as a first time property buyer, and still live at home, then don't ever live in your IP! All the above advantages can be done later with your first home purchase, as it's a First Home Owners Grant, not a First House Buyers Grant, ie you'll still be eligible after buying an IP.
