Hello
I have a few questions which i will break up below.
I am 24 yrs old and earn an ok salary (pay 30c in every dollar for tax). I purchased my first home/investment property 6 months ago – a 1 bedroom unit in the ACT. Seeing it was my first home, i qualified for the FHOG and lived in it for 6 months (min requirement for FHOG and stamp duty concession). I intended to stay in it however a good opportunity came up for me to rent elsewhere for relatively cheap, therefore I found two tenants to move in.
Q1. Gross Rental Yield:
I have read some contradictory information in various property investment magazines. Firstly, i bought the property for $335,000 brand new. I have rented it out for $380 per week, which means from my calculations the GRY is 5.9%.
Is high rental yield a good or bad thing? I read in an issue of Money or API magazine that anything above 5% is not a good investment because of the limited increase in capital growth (or something along those lines). However, I believe after looking at the market that the location i bought in is seeing an increase in unit prices (in the 6 months since i bought) and also seeing an increase in rents. The property is located in the heart of the Belconnen town centre, which is undergoing major redevelopments to the Westfield mall, the local bus interchange and there are new cafes and restaurants popping up everywhere. This is the reason i bought because it is a great location – close to government departments and the lake and only 7 km from the CBD. I personally believe it is a growth area and may possibly go through a gentrification in the next 10 yrs.
Anyway is 5.9% GRY is a good or bad figure?
Q2. Interest only loan and positive cash flow
I am currently negative gearing, however I anticipate that in the next year or so this will move into positive cash flow territory if i stay on the same loan structure (i had quite a high deposit initially). Currently i am paying principle and interest. I spoke to a financial advisor who said i should get an interest only loan and try to stay negative geared. He said i should be saving my earnings for another property. I don’t like the idea of never paying off the principle though, however i am conscious that if i pay the principle it is going to move into positive cash flow.
Does anyone have an interest only loan and negative gears their property and can you explain what the benefits for you have been in doing this? And why haven’t you paid the principle off the loan?
Why are people generally hesitant to go into positive cash flow?
Q3. Saving for another property
I am brand new at property investing however i hope to buy another property in the next 12-18 months.
My plan is to use the equity in my IP against the new property and pay for stamp duty or additional fees by redrawing anything i put into the loan up until that point. What are people’s personal opinions of doing it this way?
I don’t know whether i should redraw savings from the current IP mortgage, or set up an offset account and put all my savings into that until i decide to buy another property.
Sorry for all the questions – any opinions would be greatly appreciated.
Matt
Hi, have you done a depreciation schedule? If your unit is new, you may get a LOT of tax deductions. And if you rent to 2 tenants, are you providing white goods [fridge, dishwasher, oven, etc etc]? Curtains, blinds, carpets, lights are ALL good depreciation items. Around 25%
It means that you can whack $5000 off your taxable income, which adds $1500 to your cashflow.
Your accountant may not do the depreciation for you, mine certainly didn't.
KY
Hi
Thanks for your reply. Yes I got a depreciation report done. I probably won’t be able to claim a lot this yr given the tenants have just moved in a few days before end of June however I will be able to next yr.
Cheers
MattHigh rental yield is not a bad thing, but it is usually only possible in areas where capital growth is not so good. If you have found a place with HRY and good capital growth, well done!
The reason people use interest only loans is to free up cash flow. As you get into IP 2 and 3, cashflow will tighten so every little bit counts! Also principle repayments are not tax deductible. Investors with a buy and hold strategy are not concerned about paying off the principle as they know the property will double in value every 7-10 years. The property will become positve cashflow as rents go up in line with inflation.
You’re on the right track with you’re mortgage, most people use a line of credit representing the equity in the property to fund the next purchase. You may want to get you’re flat valued, as you might find you already have enough to buy the next IP. The general idea is to use as little of your own money to fund investment properties, because the interest on these loans is a tax deduction. The best place to put your money is in an offset account linked to the mortgage on your PPOR.
I hope this has made sense and is helpful!
Good on you for getting started young and not being afraid to ask questions!Hi, check this carefully. I don't think you need to pro rate the depreciation.
KY
matthewp wrote:Q1. Gross Rental Yield:Think about this for a second. If you lower the rent you will get a lower yield – but will this make your property grow faster?
I think what the magazine was probably saying was that generally lower growth properties, especially those in the country, tend to have higher yields.
5.9% is not bad – but it would all depend on where the property is. If it is in Sydney, then it is ok, but if it is a small mining town then it would be not very good.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
matthewp wrote:Q2. Interest only loan and positive cash flowYou should NEVER had a PI loan on an IP if you still have personal debt – otherwise you are throwing away money.
However, if you have paid off all personal debt, then you could have a PI loan, but I would still suggest you get an IO loan. You can then free up more cash to invest further. You can also pay less which will help cash flow if you ever were to get into trouble. The only exception may be if you are a spender and cannot resist spending your cash – in that cash it may be better to pay down debt.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
matthewp wrote:Q3. Saving for another property IWhy not pay IO and put all cash into the offset account and then borrow equity, rather than using the cash, to pay for the deposit on the new IP. This way you will still have access to your cash in an emergency and will also have cash available for personal expenses. If you used your cash and then decided to upgrade your PPOR and had to borrow more money, then the interest ont his won't be deductible
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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