Gidday all,
Question: I understand how to work out the 11 sec rule, but I don’t quite understand the tax return figures attached to this rule.
Example: If I buy a property for say $70,000 (hypothetical) and I borrow $75,000 (an extra 5K to cover all costs). Just say my loan repayments are $140/week but my rent is $150/week (bewdy, I’m making $10 a week already) At the end of the financial year when I claim the interest on the loan with the ATO and receive say $2600 back (I’m in the highest tax bracket) Divide the $2600 by 52 = $50
Do I add this $50 to my ten dollars a week and say “I’m making $60/week on that property” Steve says his properties make him an average of $50 a week each.My question is:
Is that how Steve calculates this or does he get $50 a week because his rent in, is, on average $50 a week more than the loan repayments out, and what ever he gets as a tax return on that property at the end of the financial year is a bonus.
The reason I ask, is that if you include the tax return at the end of the year it’s a bit easier to get properties to fit the 11 sec rulePhew, sorry it’s a bit long winded but I’m just trying to get my head around the figures.
Cheers
R2 [
]R2,
For a start the Bank will only lend you about 80% of the value of the property, so you must come up with the additional 20% to 25% yourself via additional finance or cash.
If the costs of the property (interest, rates, insurance etc)are greater than the payment you receive (rent) then you can only claim the negative difference from the ATO.
Steve uses the “Cash on Cash return” also to check the profitability of an investment, I don’t have his book with me at the moment but I think that you divide the perceived income received by the initial “Cash down” (Deposit plus closing costs) and anything above 20% is not bad.
To work out the NET return on the property you minus costs (Interest, rates, insurance, repairs etc (budget)) from the rental income.
Someone may refute what I have told you but I just read the book (finished yesterday)and this is what I believe.
I hope that it answered some of your questions……..
Steve.
Thanks milkman,
I can borrow over 100% of the value using my own home as equity, I also have Steves bookR2
Hi R2, as Milkman says, it’s only the net income or loss that is used to calculate tax. Because we are hopefully getting positive cash flow, then we will have to pay tax on the net postive cash flow.
The 11 second rule on your 70k property implies a rent of $140/wk, not $150. Assuming you’ve used equity in other properties to get your 75k loan, then with an interest rate of 6.5%, your repayments will be $93.75/wk IO, or $115/wk for a 25 year P&I loan. This leaves a profit of $46.25 or $25/wk resp. Out of this must come maintenance, management fees, vacancies etc. Any surplus after that will be taxed at your marginal rate. This profit will be increased in proportion to your initial deposit of course.
Jim.
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