I agree that tenants can pay off all the loan. I found an old budget from 1998 including the house my husband bought in 1984. After he moved in with me it was rented for considerably less than $100 per week so it was negatively geared. By 1998 the rent was $200 per week. The $35K loan repayments were about $100 per week or a little less.
The house doubled in price twice over the 14 years – cost $54K in 1984 and we sold it for $208K in about 1998 to reduce debt and put the funds into our present PPOR, but if we had kept it the loan would be considerably less than $100 per week because the loan was P&I but the rent would be around $320 to $340 per week.
I wish we still had it, but children and lifestyle have to fit in with our investing, so we made the hard decision to take the profit and sold it.
If we still had the house we would have about $250 per week in our pocket from just that one house. That lazy $250 per week would more than compensate for several years of slightly negative gearing in the early years. So I am a great believer that holding long term can be a great strategy for huge capital gains and continuing income.
Wylie.
Originally posted by gmh454:Foundation you keep forgetting that property doubles every 7 years
Absolutely….nice bit of tongue in cheek there as we all know F’s philosophy and data on that subject.
With what we’ve jumped into over the past two years, the values have doubled in 1 year….not 7. This is great from a capital growth perspective, which is our main objective of course, but with the doubling of values, it has pushed the rental yields down from a nett 10% to only 5% nett yield…..but then we have no plans to sell and so calculate the rent we receive from what we have actually outlayed….in our case nothing. Dividing by zero certainly makes the figures look good.
Negative gearing on a 3% gross yield really does look challenging from an accountanting perspective.
Originally posted by Dazzling:Quote:
Negative gearing on a 3% gross yield really does look challenging from an accountanting perspective. [/b][/size=2][/navy]
Yep, sure does, opinon apprecated as always.
Originally posted by Wylie:I little less.
The house doubled in price twice over the 14 years – cost $54K in 1984 and we sold it for $208K in about 1998 I wish we still had it, but children and lifestyle have to fit in with our investing, so we made the hard decision to take the profit and sold it.
Ahhhhhh the 80’s, I remember my bosses never used to calc clients bills on a time basis , just add 10% per annum until the late 80’s where it was 15-20%.
Nowadays if the bill goes up $10 we have to explain value added.
Wages went up around 10% as well, wonder how property is going to continue the rise, when :-
Inflation and wage growth is around 3%, thoughts of 4%+ cause the Reserve to give investors nightmares,
the exceptional growth that came from the deregualtion of banking cannot be reproduced
Households have run out of productive capacity, although we currently let mums have 3-6mths off after children, maybe we can adopt the russian model, that will give property growth, some legs, they can go back to work the afternoon after birth with the baby on their back.
Good post and comments, my views
Our strategy is to only invest in high quality performing properties, and over the years our top list goes like this;
1
Only buy in the top 4 streets of any suburb – the other streets perform less from our research.
2
Houses first with large land and future possibilities – duplexes second for higher income and town houses last, no high rise
3
Well located commersial suites less than 100m/2 and furnish them charging a higher rent there by increasing the valuation and yield on the property
4
All investments must be with in short level walk to bus/shops/train etc if it isn’t we don’t even look at it
5
Buy some one elses bad luck (divorse/over committed vendors) and turn it into good luck
6
Knock down old homes in quality ares close to CBD’s and build nice two storey project homes – some times sell with da/ba
7
Purchase close to shopping centres in quite off streets and do cosmetic renos
8
All properties must have substantial equity to allow for market changes.
9
Land banking for the next 10 year boom – 5/10 achre lots in south east queensland – also looking at Mackay, Whitsunday areas
10
If the numbers don’t work don’t rework the numbers!!There are lots of opportunities across the property spectrum to make good clean money. We look at each deal and ask this one question “is it a good INVESTMENT’ I feel that most of the bad stories out there if annalised would give the same feed back – wrong property bad research no experience jumped in bla bla – negative gearing is only a bad thing if “you can’t afford it”
D
curr_01,
You’re forgetting that the tax cuts actually reduce the amount of tax payable so you have more money in your pocket before any negative gearing kicks in. So although the tax deduction has been eroded because of the lower tax rates, the negatively geared investor actually has more money in there pocket to start with.
Here’s some examples based on various gross incomes and 13K of deductions from a -ve geared IP:
Using your suggested $65K gross income – $13K deductions = taxable income of $52K:
Current rates: Tax payable incl. Medicare = $12,240 leaving net income of $39,760
2006/07 rates: Tax payable incl. Medicare = $11,730, leaving net income of $40,270Consider the same scenario, except this time the investor has an individual gross income of $100K:
Current rates: Tax payable incl. MC = $26,145 leaving net income of $60,855
2006/07 rates: Tax payable incl. MC = $23,955 leaving net of $63,045It also works for lower income levels, this time someone with a gross income of $40K…
Current: Tax payable incl MC = $4,365, net income $22,635
2006/07: Tax payable incl. MC = $3,855, net income $23,145As you can see, the ability of the -ve geared investor to service the -ve geared loans has actually improved. I think its a fair assumption to say that most -ve geared investors look on the tax breaks only as a tool to aid servicibility and reduce holding costs whilst they wait for capital growth on their investment. -ve gearing for the sole purpose of reducing tax payable is not in itself an investment strategy but even if this was ones motivatation, th reduced tax rates will still put more money in their pocket.
On a personal note, we have a combined income of $150K so the new tax rates will put about $55-$60 a week more into our pocket. This comes very close to covering our out of pocket cash expenses associated with our most recent -ve geared IP of about -$75 /wk. Outcome is we’re now searching for another IP which will probably also be -ve geared.
Flatout.
As Flatout said..there’s good news as well
You may find that your borrowing capacity has increased with the budget enabling you to borrow more
However the value of personal tax relief could be undermined by this month’s interest rate rise and the increasing cost of petrol prices
Any positive impact on your household budget and consumer spending power from the tax cuts may have an inflationary impact on the economy as well..be interesting to see what lays ahead
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorOriginally posted by flatout:You’re forgetting that the tax cuts actually reduce the amount of tax payable so you have more money in your pocket before any negative gearing kicks in. So although the tax deduction has been eroded because of the lower tax rates, the negatively geared investor actually has more money in there pocket to start with.
Yes, but then the investor will be assessing the value of a variety of investment options, and negatively-geared property will be that much less appealing.
I’ve had an offline comment suggesting that my scenario is ignoring the income tax payable annually on the interest from a cash/secure investment. This is true, but I’ve done the sums for myself, using salary sacrificing into a cash/secure superannuation fund, and the results are mind-bogglingly nice. I’ll need to run the scenario past an accountant, but it would appear that the gov’ts new rules for superannuation have increased the attractiveness of low(er)-risk investments enormously.
Food for thought.
F.[cowboy2]
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