Howdy Fellow Investors!
As you can probably see its my first post and I have a few doubts in the investment I’ve just commenced with. Ill tell you all a bit about myself. Okay in 21 working full time and studying as well (tough!), Ive been actively looking for properties for a few months now, and have finally had the stones to go ahead with it. But now faced with a few dillemas~
If anyone could give me some advice as to what to do, it be much appreciated.
Okay here i go!!! I bought an investment property from the developers at about $270,000, with rent of $310 weekly rent subjected to cpi. Now here is where the problem lies…
– approved for the loan
– sent and vendor have accepted letter of offer
– loan repayment for IO is approx $1,600 monthly
– monthly rent $1,200 (rounded off)
– monthly contribution $600The idea was to use the IO and pay the minimum loan ($1,600, with both the rent income and $200 from contribution), then leave the other $200 left over in a separate account for other costs, repairs etc… I was going to hold it for 3-5 years then sell it back to the market.
Here are my questions:
But from what i read IO payments are from 5-10 years. So does that mean my new monthly repayments are going to be a lot higher?
When i sell the IP, will the Capital Gains Tax be 50% of the rent income earned over the duration of the investment (a student in my uni course told me this)
So say for argument sake using hypothetical figures, the IP sold for $330,000. So I’d make a profit of $60,000. Does that mean the CGT will be deduced from the $60,000?
Guys and girls i know as you read this, rolling your eyes and thinking to yourself, this guy has probably done the bare minimum of research before venturing into this investment. I want you to know that I’ve read all of Steve’s Books, but i still have so many questions without any answers.
Much appreciated if anyone can help. Ill be looking forward to contributing to other topics with my vast knowledge in PI HAHAHA
Hi there
Firstly welcome to the forum.
To answer some of your questions:
1) Some Interest only loans can be evergreen which means they are a revolving interest only facility. Other range from 5 -25 years.
2) Wow dont take any advice from fellow students it could be very expensive.
CGT can be calculated a couple of ways but to make life easier it is 50% of your marginal tax rate based on the net profit after expenses. You can add to your original cost base the cost of the stamp duty but need to also adjust it for any depreciation claimed.
Remember you will get the 50% of marginal tax rate concession on the basis that you hold the asset for 366 days from the date of the original contract.
This assumes you have purchased the property in your personal name.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
“But from what i read IO payments are from 5-10 years. So does that mean my new monthly repayments are going to be a lot higher?”
No. It just means that you are only allowed to pay interest only for 5 to 10 years, after that you must pay capital. At the moment interest only on $270,000 is about $20,000 if you go to the right bank.
“So say for argument sake using hypothetical figures, the IP sold for $330,000. So I’d make a profit of $60,000. Does that mean the CGT will be deduced from the $60,000?”
No, you get considerably more deductions. For example lets say it make $60,000 in 3 years. In this time you would have paid rates 3 times, about $6,000. Money lost each year (making up the difference between rent and interest) totalling about $13,000. Other losses like sales commision on the $300,000 of about $6,000. So your total expenses were about $25,000 + maintainance. So your real gain is only $35,000 and you would only have to pay about $17,500.
Remember making money on an investment house isn’t always completely easy. Paying interest only is only a good idea when you are sure that the rental income and tax breaks, cause a decrease in the effective interest rate, such that the house values above the interest rate you are paying on the debt. In this cause the debt would be about 7.5% and the house typically about 4%-5%. The profit is made because 3/4 of the interest is paid through the rent, making the effective interest rate only about 2%.
Sorry dacium but you are incorrect.
Statement For example lets say it make $60,000 in 3 years. In this time you would have paid rates 3 times, about $6,000. Money lost each year (making up the difference between rent and interest) totalling about $13,000
Answer This is inaccurate as rates and annual interest are claimed on an annual basis and not reduced from the capital gain made on the sale.
The reduced cost base of a CGT asset includes:
1) money or property given for the asset
2) incidental costs of the CGT event or of acquiring the CGT asset
balancing adjustment amount –i.e Such as Stamp Duty
3) capital costs to increase or preserve the value of the asset or to install or move it.
4) capital costs of preserving or defending your title or rights to the asset.Once the Reduced cost base has been calculated then the Capital Gain can be worked out. You may use the Discount method which often works out better for the owner of the asset if the asset has been held for more than 12 months. This allows you to discount your capital gain (by 50% for individuals and trusts, and 33 1/3% for complying superannuation funds.
Assume a capital gain was $60K then applying the Discount Method then $30K would be added to the individuals Tax Return.
Apply a marginal rate of 30% then 30K x 30% would be the CGT payable.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
Hi, great that you’re so enthusiastic. Not to pour cold water but watch these points:
1) The yield: do you have a secure lease for the weekly rent of $310? What about vacancy rates & waiting time for tenants?
2) Outgoings: insurance, rates, management fees etc?
3) Interest rates can change.Do you have enough room to pay down the debt? It might help if you can put some money away in an offset account.
Having said all that, well done on taking the first step. Good luck,
Kum YinThanks so much for your replies!! Much Love
Now kum yin lau Im still recovering from your icy cold water splash you wacked on me HAHA. But i am have been aware of these things, and ready to take them on head on.
Looking at the replies, im sort been assured but at the same time still a bit iffy.
Just a quick clarification for Queensland’s 007. So the CGT will be 50% of the $60k earned = 30k. Here comes the noob question… where is the 30% marginal tax from? is that the standard rate for individuals etc?
Thank so much guys!
Your ‘marginal tax rate’ is the rate of tax you pay on your personal income.
So if you make a cap gain of $60k, sell after 5 years; your cap gain liability is $30k.
You pay tax on that at your marginal rate. If you pay 30% of your income to tax, then your tax bill for the cap gain will be $10k.
On another issue; as you are buying a brad new property, make sure you obtain a DEPRECIATION SCHEDULE.
A quantity surveyor will prepare one for around $500 (which is tax deductible) and the depreciation schedule is used by your accountant to minimise your tax. A brand new property has very good depreciation as a rule and can save you several thousand dollars per year in tax.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
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