Hi All
First post… please bear with me!!!
My husband and I are currently looking at buying an IP. We have previously had 2 IP’s, but struggled financially and ended up selling one. The other one, we are now living in
I will add that we were on a much lower income when we had the IP’s too.We are trying to reduce his taxable income as he is currently paying approx $60k a year in tax. We have a bit of equity in our PPOR ($150k approx) and have been talking with a gentleman by the name of Mike Rooter from Concor (anyone heard of him/used him?)
It’s been suggested to us that we buy a couple of investment properties (new to maximise the depreciation). In order to fund the IP’s, we would have a buffer account which would pay for the investment mortgage (and any other fee’s involved – rates etc), which would be with the same bank as our PPOR and the IP mortgage would be separate from our current mortgage and with a different bank.
The income received from the properties would be deposited onto our PPOR mortgage, and a taxable variation (monthly) would also go off our PPOR mortgage. This would then drive down our mortgage in less than 5 years according to his calculations.
I realise this isn’t something new (but it is to us!), but I keep thinking in the back of my mind there HAS to be a catch… I realise that the buffer account will increase in value, and an obvious risk would be if we weren’t careful with the redraw (and so would therefore draw down the mortgage on a regular basis), I also realise there is a chance the properties didn’t increase much in value and if we decided to sell after the 5 years then we might not make much money. BUT, the main goal for us is to clear our untaxable debt and this seems like a good way to do it.
I will also add that Concor doesn’t charge us for this service, which entails them organising the investment strategy, which IP’s are suitable and also putting in contact with all the professional people needed to see this thru (solictors, quantity surveyors etc etc). They do however, get a fee from the people who’s services we use.
Does all this make sense?! And does anyone have any advice for me, what to look out for etc etc? I would appreciate it for sure!!!
Many thanks, Pumperjs
Hi pumperjs,
What I am about to say is NOT advice. It is from personal experience, so I am bias. My personal experience is NEGATIVE GEARING is a huge NO, NO. It is the quickest way to perdition. I have learnt my lessons so only invest in positively geared property now.
If paying too much tax is your problem, you can solve it by some other means. A financial planner can assist with this. Or an accountant with knowledge of SMSF.
This has been my experience. I am sure there are many who benefited from negative gearing as well. You must bear in mind, negative gearing, is not friendly when financial circumstances change.
Take good care.
Angel
Pumperjs,
The idea of a buffer account is great. In fact its an unmentioned that you should always separate out your accounts per site for easier accounting. So .. have a dedicated account specifically for a single site property. It means that you dont have to flip between several folios of service and rental receipts to justify the figures. And the other thing .. regardless of how pricey your property is .. allocate between 2% and 3% for the purpose of having a buffer. Surprises happen, and when they do .. you need to be able to have backup.
Manageable negative gearing is never an issue. The issue you should be looking at is the fact that Mr Nice Taxman is getting his hands on 60k of your hardearned. Now, wouldnt you prefer that .. in your pocket?
The mistake that most people do with negative gearing is one of the two. They gear to the maximum taxable benefit, which of course leads them to financial hell when the interest rates rise, or income falls. Second, they use the cheapness of a variable loan over a fixed loan. Again .. when the interest/income problems kick in .. the brick wall hurts.
I have friends in investment who rely on 3 months worth of rent (equivalent) as backup for their investment, but i think thats too much held in store. Aim for 3% of the initial property value and you should be ok.
A financial planner / property manager investor breaks my basic rule on property investing. That is .. for decisions and control, it should all be in your hands. Some people like the idea of having someone they can trust managing their funds. Then again the number of scandals where mis-management or poor body corporate control happens .. too many for my liking.
Get a comfort level which you feel is acceptable for you regarding your property investing. With a 60k tax burden to ATO, you could probably stick 35-40k safely without feeling out of pocket or close to the margin. FIX your rates, so all you worry about is the paying of them. A percentage point wont make the difference in the long term. Oh .. also just interest only to start with. The tax deduction is allowed on the interest component paid .. not the principal being paid back. By the time the fixed period lapses and you revert back to interest + principal .. your own figures should have changed in the meantime.
Hi pumperjs
Just some advice as i also work in the IP field, test the water by investing in 1 IP to begin with. Circumstances change overnight these days and you dont want to over commit early on. After 1-2 years if all is going well then invest in second IP. Make sure you also get independent advice regarding solicitors, accountants etc, etc.
Regards Paul
I would have to agree with angel, investing in positive cash flow property can often be the best way to go.
It seems silly to me to invest in property just to reduce your tax. Why wouldn't you prefer to invest in property in increase your non-taxable income. A positive cash flow property can deliver non-taxable income if the depreciation of the property offsets the income of the property.
You goal seems to be flawed. To simply reduce your taxable income isn't an investment strategy. Does it make sense to you to lose $120,000/year in interest repayments on your IP's just so you can save $60,000 in tax? If you negatively gear you are still going to be out of pocket and you will have to work harder just to maintain your properties.
None of this is financial advise, it is just my opinion and doesn't relate to your specific situation but it sounds like you are in an incredible position to start building passive income through investing in real estate. If you buy properties that produce you income then soon enough you guys may be able to quit your jobs and just live off the income from your properties. You can't eat negative gearing, but positively gearing can buy you food every month.
Just some food for thought. Don't think about reducing tax so much as about increasing your passive income through investing.
Ryan McLean | On Property
http://onproperty.com.au
Email MeUnder the new NCCP it is not be possible to capitalise interest.
Sorry Kent that statement is clearly 100% incorrect
Under the new NCCP it is not be possible to capitalise interest.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
My apologise, I don't think I made myself clear. If you still have the income to service the loan then there shouldn't be a problem. However, if you are looking to solely capitalise interest without an income (living off equity) then you won't be able to do this.
Kent,
Yep good clarification.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
While you are thinking, and asking, you will win…..
Capitalising interest is allowed and is a very useful tool, this goes hand in hand with capitalising expenses….. These tools allow an otherwise cash strapped investor to live a fruitful life.
Negative gearing works very well. I had a very decent income and retirement fund at 33 years of age from negative geared property. Intelligent investing, utilising well thought out strategies will contribute to this…Negative gearing although not the item that makes you wealthy, it is a tool that enhances your investment career. Reduce tax by all means, but use this tool with other with the many other strategies….
The strategy discussed above must be used with caution- consider part iv(a)- Tax avoidance/evasion.
But Yes to the buffer account…You are heading down the right track….
To original poster Pumperjs, what did you decide to do and did you go with the advice originally provided?
Hi all,
Sorry for the late reply, but thank you for all your comments, they have been taken onboard and provided us with some more of that ‘food for thought’!!
We are definitely moving towards a greater knowledge of the investment options open to us, which is pretty exciting when we realise what we can potentially achieve, and will be seeing a financial planner to chat with them too shortly, but one thing is for sure… listening to my gut feeling about the guy that spoke to us defo paid off. A bit of delving around (once I’d spelt his name correctly… always helps
) provided us with enough information to quickly withdraw from any further dealings with him or his associates.Thanks once again, it’s a great forum and a great place for information!
pumperjs wrote:Hi all, Sorry for the late reply, but thank you for all your comments, they have been taken onboard and provided us with some more of that 'food for thought'!! We are definitely moving towards a greater knowledge of the investment options open to us, which is pretty exciting when we realise what we can potentially achieve, and will be seeing a financial planner to chat with them too shortly, but one thing is for sure… listening to my gut feeling about the guy that spoke to us defo paid off. A bit of delving around (once I'd spelt his name correctly… always helps) provided us with enough information to quickly withdraw from any further dealings with him or his associates. Thanks once again, it's a great forum and a great place for information!Hi again pumperjs,
Unfortunately I don't know how to send a PM on this forum, however, I am very keen to hear of your concerns as we have very recently had a dealing with the same person and are weighing up our options. We are in a very similar postition to yourself and would appreciate any advice or information that would prevent us falling into a potential trap.
I will add that we were on a much lower income when we had the IP’s too.
) provided us with enough information to quickly withdraw from any further dealings with him or his associates.You must be logged in to reply to this topic. If you don't have an account, you can register here.
