Hi Ozpatin,
My loan repayments are not based on interest only loans, it is a P&I loan of 25 years, the yearly repayment on such a loan is $11,535, i used the calculator on http://www.loan.echoice.com.au/pages/h_propinvest_basics.html to get this solution.Also wouldn’t depreciation be the same no matter what plan i used? Also isn’t it only houses built after 1985 that are applicable for depreciation?
Regards
Fudge111[
]Hello again everyone!
In many of the replies to this post people have mentioned how i left depreciation out of my calculations, oz had this in his post Cash Flow = (-$989+$14280+Depreciation?)-($9520+$800+$400+$1285+$170)= $1116 PA or $21 PW
What would the depreciation be, and i don’t understand how it is a cash flow, you can only claim dep’n on your tax i thought?
Please could someone give me some answers, I am slowly understanding more and more about property investing and very soon i will not sound like such an idiot anymore,
Thanks guys and gals
Fudge111[][][][][]Hi Guys,
It’s me again, the one whose still learning, but still tries to answer questions anyway?Depreciation is a tax deduction on paper. You can claim depreciation through your employer in the form of a reduced amount a PAYE tax being taken from your pay. There is a form you need to fill out through the tax dept.
Depreciation (construction) is only available on houses built after 1985. You can also claim depreciation on some fixtures and fittings, such as furniture in the property.
I also have been told that if you do a major renovation, including an extension, you can claim dep. for new section.
I hope this helps, I got most of this basic information from Margaret Lomas’ book.I haven’t got it with me, but I think it’s called “Creating an income for life”Good luck,
Sue []“Be careful not to step on the flowers when you’re reaching for the stars”
Thanks Sue, I’m so glad you are always willing to answer questions, it really doesn’t matter how much knowledge you have, every little bit still helps.
Anyway I pretty much understand all that about depreciation, i just don’t think it is a big thing to do with the differences between my plan 1 and plan 2 which was in an earlier post in this topic, anyway, if anyone wants to add anything, feel free
Thanks heaps
Fudge111[]Hi again Fudge,
Yes I agree, depreciation wont affect plan 1 or 2 differently. But if your reducing debt quicker than normal and relying on cash flow, depreciation is a big part of it. It could turn a neg geared property into +ve CF. Yeah before 18 July 1985 you cant claim the special building allowance for residential property. From July 85 – Sept 87 you can claim 4%, from Sept 87 – current you can claim 2.5%. All these figures are from Margaret Lomas’ book too. The dates and figures are different for commercial , tourist and structural improvements as well. You can always claim Plant and equipment depreciation regardless of when it was built.
You asked what the depreciation figure would be, its whatever figures your Quantity Surveyor has drawn up for your property. Its all Tax deductible and would be like leaving out any other tax deduction like rates or management fees. For example I have a depreciation schedule for a property I may be buying. In the first year I can claim $1613 for Division 43 (special building allowance) and $1452 for Division 40 (Plant and Equipment)= $3065 (for year 1). Using your plan 1 your weekly CF was $21 PW, factoring in depreciation takes your CF to $49 PW. This would be your after tax cash flow. Im quite sure you can only claim the Interest on your loan as a deduction, so your repayment figure of $11,535 in your first year would include principal repayments which arent deductable. If im wrong on this someone please correct me
Cheers
Oz
Ok Fudge,
I am only new to this myself, but I see it the following way.
The issue is not, which is the better way to get the most out of this investment.
The issue is, is this a good investment.
First of all, forgetting all about depreciation, inflation etc and all those other complicated things that may or may not change during the next 25 years, you are absolutely correct that you will make more money long term if you pay out the loan as quickly as possible. This is due entirely to the hugely reduced amount of interest you have to pay. In 3 years you will pay roughly $14,700 while in 25 you pay $151,700, or $137,000 more.
In example 1 you have allowed 1 week per year of non-occupancy. If this is two weeks per year, you actually lose money. Either way, all it really does is break even. Return on your $40,680 outlay – 0%.
In Example 2
Initially outlay = $40,860
Repayments 3 years = $50,391 x 3 = $151,173
Other expenses 3 years = $2,655 x 3 = $7,965
Total expense 3 years = $199,998Income @ $280/wk x 50wks x 3 years = $42,000
Total outlay = $157,998
From this point
Rental Income = $280 x 50 per year = $14,000
Expense = $2,655
Profit = $11,345
% Return = $11,345 / $157,998 = 7.2%This is after 3 years of no return.
Return after 10 years – ($11,345*7 / $157,998) / 10 = 5% / yr
Quickly checking the NAB web site, term deposits for this sort of money are running at between 4.7% to 5%.
Put your money in the bank on compound interest for a lot less risk, effort and heart ache.
Look for things that will generate cash flow substantially better than bank interest on your outlay.
Dino
“If you don’t know where you are going, every road will take you there.”
Hi Dino,
You give some good points, i spose i will just have to do my sums and see. The main difference in putting in a term deposit is that there is no chance for capital gains, with a $170,000 house, you would expect it to have doubled in value over a ten year period to $340,000. Also rents will increase but the initial outlay will remain the same, therefore giving higher and higher annual returns as years go by, so really 5% over 10 years is probably not the actual return you would get.
Fudge111[8D][
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you are absolutely correct that you will make more money long term if you pay out the loan as quickly as possible. This is due entirely to the hugely reduced amount of interest you have to pay.SIGH……[
] Thump…Thump…Thump…. That’t the sound of Jim’s head banging against the wall!Also Dino, as Oz pointed out in an earlier post, there could be up to $3000 depreciation benefits each year which are tax deductable, increasing cash flows by $1400 each year.
Also in the first 3 years too you pay around $15,000 in loan interest which is another $7,500 increase in cf’s for the first 3 years, which would put your initial outlay down from $157,000 to $149,500.Fudge111[
]Hey Jim,
Was that post meant to say “That’s obvious” or is the quote “Incorrect”
Please elaborate
Fudge111[
][][]Jim,
Sorry, didn’t mean to frustrate you. I agree with everything you have said, and I’ve read many of your posts, not just the ones here.
I am looking just from a straight maths point of view.
Fudge seemed to be suggesting that it is best to pay off the loan quickly because it saves you money. This is true.
But from my point of view, investing is not about saving money, it is about making money.
From his last post, he says that capital gains will give him an extra $170,000 over ten year,
Assuming this is true and a consideration in his strategy, my strategy would be to buy four similar properties from the initial 3 year $158,000 outlay. This way in ten years I would have a capital gain of $680,000 from the same investment.
Finance really is an area where 1 + 1 can equal what ever you want it to be.
Dino
“If you don’t know where you are going, every road will take you there.”
Sorry Dino, but you wrote that you make more money by paying a loan off. I believe that this is fundamentally wrong, simply because interest is tax deductable. If you are in the 47.5% bracket, then you’re only paying 3.09% interest after tax, and that’s so close to inflation. This means that you are getting the benefit of all that bank’s money for virtually FREE!.
Jim.Good point Jim , i see how Steve’s approach is alot better in making cash overall, but it is alot of work!
As I mentioned earlier i’m sure i’ll find a few +cf properties which for obvious reasons it is better to leave them as Steve does, but however, i know that Broz and myself will definately benefit from a few properties paid off very fast. They will be more based on capital gains most likely, they will provide alot of passive income after they are paid off and they won’t be too hard to find unlike the +cf investments!
Thanks to everyone for all the great info, it has been a rather successful topic, i never imagined i’d get over 30 replies!Fudge111[
][^][][]Hi, everyone
“For example I have a depreciation schedule for a property I may be buying. In the first year I can claim $1613 for Division 43 (special building allowance) and $1452 for Division 40 (Plant and Equipment)= $3065 (for year 1)”.
Oz, could you please elaborate on more specifics about this property, like when it was built, price etc, I would like to work out a ballpark figure for depreciation for a 160k home, like the average, i know it would vary a fair bit but i just need an average figure
Thankyou
Fudge111[]Hi Fudge,
This property is off the plan, so the figures are higher than if the property were older or residential. Its commercial tourist property so 4% applies. Its $123750 inc GST. The Building allowance is $1613 for 25 years. the Plant and Equipment starts at $1452 in year 1 and goes down to $15 in year 40, so they would be using the diminishing value method for the latter.
Cheers
J
Thanks Oz
Sounds like for an 160k home you would be looking around $4000 @ 2.5%, is it is built after 1987, and i spose the rest depends on the furniture and fittings,
Fudge111[
]Hi Fudge,
The model you are proposing is one that Paul Clitheroe advocated on his “Money Money Money” TV program some years ago. His idea for retirement was that you needed 4 freehold houses. You live in one and rent the other three out. One pays your tax etc and the other two are your income.I was planning to use his model, and well on the way to achieving it when I met my hubby. He follows Kevin Young’s model of +cf plus capital gains. He is therefore an interest only man. That is OK tho as we can use the substantial equity we both have to get more properties.
With the model tho, I do not believe that income from 2 properties was enough. Depends where they are but say they were $200 per week, could you retire on $400 pw? You may be able to answer yes to that. I guess it is up to each o9f us to determine how much we need and then find the best model to meet that need.
Fibejebe.
[]Thanks Fibejebe,
Well, i have already based a model on how we will invest, and it basically is the first property is fully paid off in 3 yrs, then the 2nd in 2 years, and then from there on you can purchase a property and fully pay it off mind you every 1.5 years from then on.
It requires alot of your income initially but then by around the Property7 or property8 you have enough passive income to pay off the $90,140 annual repayment without using any of your own income, it takes alot of dedication early for great rewards later, and because we are both young (20) and we both know we can sacrifice our living for a few years (i might even stay living at home a little longer to free up more of my income) to eventually come out with masses of passive income by the time we are in our early 30’s,
The model is based on properties worth 160k with weekly rent $280 a week. It ends up being $11,635 of passive income for each property after you have paid it off, and obviously in the periods when you are repaying the loan it is even higher profit due to the loan interest incurred.
I think it’s a winner! But it takes alot of dedication, in fact, around 6-8 years of solid saving, but it will pay off, i know it!Thankyou
Fudge111[][^][]Hey fudge, houses built after ?a certain date? in 1985 attract building write off. Renovations and additions done after 1985 – eg bathrooms, new building work etc – on houses built before 1985 will also attract building write off.
Houses built before 1985 still have depreciable items in them – Hot water systems, garden sheds, curtains, carpets, stoves, light fittings, etc etc etc. Whatever house you buy, you should get a depreciation schedule done so you can maximise your claimable deductions on tax.
Cheers
LisaRYeh, i understand that Lisa, i was just refering to the 2.5% depreciation on a house built after 1987. There is 4% for houses built 1985-1987, does anyone know why?
Fudge111[8D]
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] Thump…Thump…Thump…. That’t the sound of Jim’s head banging against the wall!
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