Hi All, I’m new to the discussion board & new to property in general so I seek your collective advice on ‘where to now’… here goes!
I’m a 22yo female, last February I purchased a 3brm townhouse in a suburb ~ 4km north of Brisbane for just under $150K. An identical unit in the complex just sold for ~$170K and land value in the area has gone up $5K in the (almost) 12 months since purchase. I’m currently living in it myself (as I used the $7K FHOG to cover my legals & stamp duty & have to live there for 12 mths minimum) with longer term plans to rent it out. I have ~ $15K sitting in a saving acct earning ~3% interest (woo hoo!!! LOL). I have no other loans or major expenses and am on a salary (before tax) of $45K. My partner pays me a nominal $100 p.w. rent to help me out, but I’m told that up to $220 p.w. is possible in this complex.
My questions are as follows:
1) What can I do with the cash to earn some $$ without causing me major tax headaches & tying up the cash too much
2) My fixed interest period runs out soon – is now the time to lock it in to another fixed period or should I let it convert to variable?
3) What tax breaks should I be angling at when I rent it out? How does negative gearing work?Ideally I really want to be able to afford to purchase a second property within the next 2 years as a principle home and rent out the unit… how can I do this effectively?
The long term goal is to set myself up for retirement but at the moment I have not paid much attention to my super… should I? I’ve heard it is better to invest elsewhere & just let your employer contributions mount up?
Thanks to anyone who replies…
BellaHey Bella,
Welcome to the forum.Wow. What a lot of questions. Where to begin.
What do you actually want out of your investing (quantify) and when do you want it? Why do you want to negative gear when you can positive gear. As far as Fixed interest periods I think everybody will give you a different answer because everybody has a different opinion and risk tolerance. you have to answer this one yourself in my opinion.
AS to super again this is a personal matter. I personally don’t like super. I am only 32yo and feel that by the time I get there it could be any kind of system….I’d rather have the control in my hot little hands. Again depends on what you want as some people love super. I am an medium to aggressive investor and feel that I can control my financial destiny better than suits in a super fund.
Here are my first thoughts I hope they help. If you need any more help be sure to keep posting.Enjoy
AD [:0)]Success is not the result of sponataneous combustion. You must set yourself on fire.
Reggie LeachThanks AD… glad to see at least one reply [
]I guess you made me realise that I don’t really have a clear ambition as far as quantification goes… I’m just sort of bumbling along with my fingers crossed at this point in time. I guess it’s hard to know what you want when you don’t know what is within the realms of possibility. I know I want to get into a house & rent the unit but I don’t know enough about it all to know what is realistic to expect to achieve… I was just asking about negative gearing because that’s a term I’ve heard bantered around & was wondering how all that worked… since reading up a bit more yesterday I don’t really think that is what I’m after – who want’s to lose money to save tax? Seems weird to me… especially as I’m not in the top tax bracket.
It seems though that the more you make, the more you’re taxed and you’re really no better off?!?! Am I missing the point somewhere?
If for example I were to rent out the unit clearing $220 p.w. (let’s work with 50 weeks allowing 2 wks vacancy) that equates to $11K per annum… now take off rates, body corporate management fees, mortgage repayments and say $1K for miscellaneous maintenance etc – that’s over $15K already not considering any other expenses like landlord’s insurance etc… clearly I’m running at a loss unintentionally and also unintentionally negatively gearing because I assume I can claim these losses off my income? How can I turn this around to be a positive cash flow situation? Am I pushing it up hill with a piece of string? I can’t up the rent because that’s pretty much the maximum I could expect, and that alone doesn’t cover the mortgage repayments?? I’m really confused.[
]I agree with you wrt the fact that it is a personal decision about fixing interest rates & super funds etc… I was just hoping to get an idea of other people’s thoughts and what they were doing. As I said I’m of the opinion that super is a waste of time & like you I would prefer to have the freedom to invest where I want to & access my $$$ when I need it (not when the gov’t says I can have it!)
Hi Bella, I’m fairly new here too (less than a month) and I’ve been using my time so far to research and learn about how the property investment game is played. I haven’t bought my first property yet (waiting for a couple of small hitches to be resolved first) but I have learned a lot so far. First of all, you’ll find that pretty much everyone who frequents these boards is against negative gearing. The reason for this is that negative gearing creates consistent loss in exchange for potential long term reward, and pretty much everyone here is focussed on the cash flow from day 1 investment solutions. Mainly, these are:
1. buy-and-hold, using Steve’s 11-second solution (i.e. divide the loan amount by 500 to get the minimum rental you should be receiving each week; this ensures your mortgage is completely covered by the rent)
2. wraps: this is where you buy a property and on-sell it to someone else at a slightly inflated interest rate, thus giving yourself cashflow from day 1 and helping out the person in that they don’t need to qualify for a bank loan.
3. lease options: this is where you buy a property and lease it to someone, giving them an option to buy at a set price after a period of time.options 2 and 3 don’t allow you to keep the property indefinitely but they do allow you to make both lump sums of cash and effectively get above-market rent while you are in control of the property.
I would suggest, like AD said, that you take a look at the fast track tape in the resources section, and also that you start researching options 2 and 3, as they are where you’ll be able to create financial freedom for yourself sooner rather than later.
Also, to find out more about negative gearing (pros and cons) check out:
https://www.propertyinvesting.com/strategies/negativegearingThe other strategies are at https://www.propertyinvesting.com/strategies
And don’t forget that you can ask as many questions as you like, people here are very friendly and usually more than happy to answer your questions.
cheers,
Nathan
email: g e n e r a l g h e r k i n @ y a h o o . c o m
phone: 0405 411 098Oh, I forgot to mention, I’m 24 years old… hoping to get my first property shortly!
email: g e n e r a l g h e r k i n @ y a h o o . c o m
phone: 0405 411 098Hi Nathan,
Thanks for your words of encouragement… I had actually been reading over your previous posts (& replies) with much interest. You’re asking all the questions I probably should have asked…
I have also formed a similar opinion about negative gearing, however I think that my choice of investment doesn’t really lend itself to that… one of the pitfalls of buying property before you do your research!!! Hmmm… note to self “shake one’s shoulders vigorously & tisk tisk loudly at one’s self!” LOL [
]Hi Belladonna,
Sorry I have not answered your post specifically b4 now, but I’ve been busy on the product development side of things getting WealthGuardian finished.
Thanks for making your post and indeed welcome to the community. I hope to see more posts from you again soon.
Now, down to business….
Firstly, congrats on getting in the game. I wished I’d started at age 22 as I’d be a lot further than I even am now. Still, better to start at age 27 than at age 67!
Re: FHOG. Check this out as I was not under the impression you had to stay 12 months. I thought all the legislation said was that you must have an intention to live in the property… something that you have clearly done.
Also, well done on your financial situation. To owe no debt places you in a prime position to really get going fast.
Re: your unit. At the prices you are talking about it is still likely to be -ve cashflow / -vely geared. Can I encourage you to can your focus to +ve cashflow properties? You will find that it will be much easier to own 5+ when they make you money rather than cost you money!
Now for your specific questions:
quote:
What can I do with the cash to earn some $$ without causing me major tax headaches & tying up the cash too muchHmmmm – be sure to understand that with reward comes risk. You might find that the best short term use of the money is to temporarily pay down your mortgage (check fees for redraw first) as you will get a better after-tax return doing that than leaving your money in a 3% term deposit.
In the longer term I’d look at wraps.
quote:
2) My fixed interest period runs out soon – is now the time to lock it in to another fixed period or should I let it convert to variable?See comment above. But I think that if you worked out the after tax interest on your deposit vs. the interest saving off your loan by setting up a redraw facility… you’d be much better off with the latter option.
ie: you have $15,000 which at 3% per annum will be pre-tax interest of $450 p.a. You will pay 30% tax on this, so after tax it is really $315.
Let’s now say you have a loan of $130k at say 6.5%. The interest you pay on this (assuming it is interest only) is $8,450. If you pay off $15k, then your interest is $7,475… that is, $975 less, plus you don’t have any tax to pay.
Does this make sense?
quote:
3) What tax breaks should I be angling at when I rent it out? How does negative gearing work?I have written an extensive article on negative gearing that can be found as per Nathan’s post. You actually have a -vely geared property as your expenses will be more than your income.
Negative gearing is a strategy that works well in times of capital appreciation, but the side-effect is that it will keep you in a job in order to earn enough money to fund the tax breaks (ie. make use of the depreciation) and also the -ve cashflow.
The way to owning more property in the short term is to continue to save and then look to buy properties around the 50k – 70k level that are +ve cashflow from day one.
My thoughts on super is that for someone you age and your plans, it would be better to contribute the minimum and keep control. Don’t let the tax tail wag the investing dog!
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
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Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Thanks for your advice Steve…I will take it all on board & churn it over in my mind.
I keep thinking to myself ‘if only’ I had stumbled upon this site earlier!!! All I knew about property investing was capital growth & negative gearing (and even then I didn’t know much about it!)… sure this unit is in a good area for capital growth ($20K in 12 months is not bad… but the growth can’t last forever in this market!)
One more question I have is why have an ‘interest only’ loan? What is the benefit? You (or your tenant) is just paying forever & a day… you never actually get to own the property. Sorry if this seems trite but I just don’t see the point. Is this system relying on capital gains so that you can later sell off the property at a profit?
Oh yeah and the last thing I wanted to ask was where on earth does one find $50-70k properties that are worth the investment??? Everything I’ve seen in that price range is either a shoebox or ready for demolition! How does one find the balance between rental return and purchase price? Are there any good sources of market information on such things available to the average Joe like me?
Hi,
Last post for the day as my fingers are starting to hurt from all the typing [
]Interest only was just to illustrate the point in the example. Would have required more time to work it out P&I. Personally, all my residential loans are P & I and most of my commercial loans are I/O (I’ll explain why in a newsletter sometime soon).
As for properties… just like the X-Files… they are out there, just start looking in unfamiliar places.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Belladonna
My wife and I are up in Toowoomba and were dealing with the same issues as you … what to do with some funds that are really too small to invest in property but not doing really well sitting in the bank.
What we’ve done is grab hold of a great options risk management program put together by Index Options in Melbourne. With it we’ve reduced the risk of trading options to below 5% while still making returns in excess of 40% per annum (when annualised) on an trading bank of only $10,000.
Check it out for yourself at http://www.prophetpro.com.au, and good luck.
We’re now so confident that Prophet Pro can help us manage the risks associated with trading in the market that we’re taking over our super funds and manageing them ourselves. Naturally we’ll end up with a mix of both property and market investments, but we can make great returns right now with our limited funds, giving us the seed capital we’ll need for property investing quickly.
Hope this helps …
Garry Hansford
Hi Belladonna,
Received the latest edition of insider, and it has inspired me to have a better look at your post.There have been some great responses so far, but hope my two cents worth can help you out. The fixed vs variable option is an interesting one. I have had a look the rates that are offered by the banks on fixed term facilities, and have not found one that beats on line providers such as ING (currently at 4.75%) with no fees and the flexibility to access your money whenever you need it.
Having said that, since your property is currently owner occupied (an hence debt associated with it is non-deductable), then a good strategy would be to reduce your debt as quickly as possible. A better strategy would be to find an investment that returns you more after tax effects, than what your current mortgage is costing you in interest. This is a good benchmark to use when deciding whether to take up the investment oportunity. Also look at the risk involved in a competing investment oportunity – usually there is a trade off between risk and return. This is not always the case (e.g wraps)
Have a look at your current mortgage facility to see if it offers you the ability to pay extra into your loan without excessive expense. Steve talks about a mortgage offset; other mortgages allow for extra repayments directly off the principal borrowed. Most of these mortgages allow you to redraw those extra payments when you need them.
In terms of qualifying for the next property, you may find that you have enough savings/ equity in your current property and enough income to do this already. This might be worth further investigation to find out where you stand.
You mentioned negative gearing in your post. Now is probably a good time to broaden your horizons on the differnent types of property investment techniques available, and find one that suits you.
Once you are clear on how you want to invest, and you have defined your own niche you can plan your legal and taxation srtucture around it.
Good luck in your future investments!!!
Nathan M 0412 253 456
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