Forum Replies Created
Another thing to ponder.
Save, save, save. When you are ready to purchase an IP, if you don’t have 20% plus costs, you will need mortage insurance. Mortgage insurers will need to see 6 months worth of savings. Savings account like ING are pretty good, decent interest rate and can be set up on the net, with periodical payments from your bank account.
Get a copy of your credit history from Baycorp. http://www.mycreditfile.com.au – Make sure there isn’t anything that might impede you from borrowing. ie old unpaid bill of some description.
James
Anastasia,
Thanks for the question because after doing some searches on the ATO web-site, I think I have an answer for you. (And added learning for my benefit!)
This is an exert from Taxation Ruling 93/32 Income Tax: Rental Property – Division of net income or loss between co-owners.
If Mr and Mrs X owned the property as tenants in common with Mr X holding a 30% interest and Mrs X holding a 70% interest in the property, they would be assessed on any profits or losses from the property in accordance with their respective interest in the property, i.e., Mr X on 30% and Mrs X on 70%.
Therefore it sounds like your advice is consistent to what the law is.
James
Ezy,
Guide to Capital Gains Tax – http://www.ato.gov.au/individuals/content.asp?doc=/content/31570.htm&page=1#H1_1
James
Hi Techa,
No doubt the power of leverage.The numbers you have assumed about capital growth of shares and property, how did you determine the 3%. Over the long term, many of the studies I have seen, pretty much have return on both investment classes very similar and around 8%.
The only difference being that you are able to borrow more on property than on shares.
Consequently, if you assume negligable difference on returns between asset classes, you can still implement your plan but on property alone.
Of course, if you have knowledge and skills in share investment, than maybe a 10% return can be achieved. I think that is one the high side to assume.
On the issue of leverage, you use 60k to get a margin loan of $150k. With property, you could potentially purchase property to the value of $600k (90% LVR). Even on your return assumptions of 3% for property and 10% for shares, the following outcome is
Shares – 210k @ 10% return = $21k
Property – 600k @ 3$ return = $20kOf course, there are loan margin calls for shares, which you would need to have spare cash. The only time it has happened in Australia, is in the early 90’s, although to commercial properties. (Happened in the UK during the 90’s to residential admittedly).The point is, the likelihood of a financial institution calling in a loan or asking for additional funds into a residential investment property is almost zero.
Ultimately, I agree with your concept, I think it would be far more profitable in property. However, that is me.
Whatever you end up doing, good luck.
James
UNCHANGED
James
Just a different opinion regarding mortgage insurance. Kay mentioned ‘i disagree about paying lender´s mortgage insurance- that`s money down the toilet’.
Saving for the first deposit is definitely the hardest part of purchasing property, be it for investment or PPOR. LMI enables you to enter the market much more quickly than if you needed to save the additional 10%. It also allows you to leverage greater borrowings and therfore, theoretically more purchases, if you so choose.
For example, to purchase an IP in the following example (I have excluded costs)
IP Purchase Price: $250,000
Loan 90% LVR: $225,000
Deposit: $25,000
LMI (1.9%): $ 4,265
Total: $29,265Loan 80% LVR: $200,000
Deposit Required: $50,000Annual Salary: $50,000
Annual After Tax Income: $38,078Assuming you can save 50% of net income
1 year $19,039
Time taken to save $29,265 is approx 1.5 years
Time taken to save $50,000 is approx 2.6 yearsAssuming 5% capital growth, then waiting another 1 year in this scenario would add another $12,500 to the purchase price, thus adding another 1.5 months to save the additional deposit amount.
Assuming you can save 75% of net income
1 year saving $28,559
Time taken to save $29,625 is approx 1 year
Time taken to save $50,000 is approx 1.75 yearsWaiting another 0.75 years for the 20% deposit, would add another month for the deposit.
I have used 50 & 75% as savings ratio of net income, to underscore the point that, even with a exceptionally high saving rate, LMI allows you benefits that outweigh the actual cost.
Whilst not everyones cup of tea, they have a place in your financing strategies, and from personal experience have and will be paying asignificant role in mine.
James
Is the tenants business secure? Fiancial position of the company, individual etc?
Do you have the ability to absorb a 3-4 month vacancy?
Could the building be re-leased to another company/indiviudual without work being required on it?
James
Do you have to sell? Can you simply use a line of credit against current IP to purchase next one. Serviceability an issue??
James
Lee,
When you go for a deposit bond application, you will essentially be placing an application which is on par to a loan application. Therefore, you would essentially have to qualify for a loan to settle the property before being given the deposit bond.
In addition, bond insurers want approximately 5 times in equity for the deposit bond required.
eg Purchase Price = $400k
Deposit Bond (10%)= $40k
Net Equity required =$200kSome builders (smaller ones admittedly) are more reluctant to accept deposit bonds because of the abuse of then in the last few years. At the very least, ensure they re-insurers are a reputable insurer like, GE Finance.
James
Steve,
I am looking at the same appraoch as you. From what I have been able to find out, there is no stamp duty on property purchase. There is no CGT either, however, haven’t confirmed but I would think it would be captured by Australian tax laws as foreign income.James
Welcome Debs, as you mention, the more you learn, the less mystery property investment holds. (It not rocket science really!). Just need to forearm yourself with knowledge.
Good luck.
James
Agree with comments by Mel.
The last point is very relevant, not only would you have the ability to use the funds against the equity from the increase in value (as long as servicebaility is OK), you still have the asset. No need to sell and therefore you still have the asset in your hands for future growth and further investing.
James
The formula so to speak that the banks use, is pretty much a part of their lending policy, so I wouldn’t bother. Read no chance. However, when you speak to a mortgage broker there are many different lending products and lenders, so they will able to advise the lender best for your needs.
For example, I think St george & CBA when calculating serviceability, add back in tax benefits (from investing), whilst most others do not.
James
Punter,
Usually, the tenant would pay all the outgoings, however, like all contract negotiations, it depends on the parties and what they deem to be applicable to them.For example, a family member owns a commercial building in mebourne CBD and upon commencement of last lease, the lessee had to undertake extensive internal renovations/upgrades. Part of this was an element of repairs. In consideration of this, a reduced rental for the first 6 months was negotiated.
James
Terry,
What did you pay for the privelage? Was it worthwhile?James
There might be no CGT in NZ, but you would still be liable for it in your Aus tax return, wouldn’t you??
James
Terry, if you were using funds from an existing LOC to fund the deposit, then essentially, you would have full deductibility (as long as it is an IP) for the interest component on the complete purchase price.
James
So where do you want to end up?
My view (a little different from most) is to invest, and continue to rent. Ultimately the rental you pay for the property you would like to live in is usually, less than what you would have to pay as a mortgage, council rates etc and you don’t need a minimum 10% deposit.
However, most people are more comfortable with owning their own home. So if that is where you are, ultimately I don’t think it matters in the longer term in which order you purchase, financially. PPOR or IP first.
Depends on what sort of residence you want to love in and what you can afford. If you have desires on something a little more luxurious, maybe an IP first, to build equity through renting it out and time to appreciate. Save in the mean time and re-asses in 12 months. You would be in a better position to buy that more pricy ‘dream home’.
James
