Hi all,
First of all I’d like to thank all the contributors of this website and forum. Over the past few weeks I’ve been digesting a lot from these forums and my initial naive strategy has matured up a little.
Right now I have a certain strategy/outlook in mind but would like some guidance in case I have overlooked and oversimplified my assumptions. If you guys could provide any feedback and comments I would highly appreciate it.
Just to provide some information on myself and my partner:
Combined income: Approx 200k before tax
Savings: $60k
Superannuation: Approx $70k total
No debt or mortgages1 – For our first purchase will it almost always be the smarter decision to buy an IP, rent it out (most likely negative geared) and pay rent for a different property as our PPOR. To me, this seems to be a big YES based on tax benefits. I know you don’t have the comfort of living in your own home but we understand that in the long term our first property will eventually become an IP.
2 – The strategy we’re leaning towards is purchasing an undervalued, old house in Sydney that we can do a cosmetic renovation on. That way we can slightly increase the rent and also see strong CG growth over the duration of many years. I know that Sydney is not the highest growth area but my partner would like our first property to be within the heart of Sydney for reassurance and security.
Regarding this strategy though we are both full time workers and won’t have much time to do the renovations ourselves. We are however willing to spend time to do the research, meet the builders/renovators and reach deep into our pockets to pay professionals for the renovations. Is this enough or do most people who take this strategy do a large chunk of the renovations themselves?
3 – With our first IP we are thinking of setting up an interest-only mortgage with an offset account that we can dump our monthly savings (7k) into. After about 3 years we’re hoping to purchase either a PPOR with our savings, or another IP. If we were to invest in another IP we’d pay off the principal with our savings, increase our equity and then borrow against the it for tax deductions/benefits. Is this a sound strategy or are there alternate, more effective strategies?
4 – This is a somewhat independent strategy I’d like to kick off in a few years when we have more funds in our superannuation (I’ve been told 100K should be a minimum). I’d like to set up a Self Managed Superannuation Fund and start investing in properties in parallel to to a property portfolio with our non-superannuation funds.
Thanks!
DruHi Dru
Why not
1. Buy a place to live in and then rent it out. You can retain its CGT free status for up to 6 years. CGT could be considerable if you are sucessfull in adding value so it may be worth the hassle of moving in and out.3. Def do the IO with offset. But, you say you want to pay down the principle of the second one – this is not adviseable as if you were later to buy a property to live in again then your cash would be tied up.
4. Yes, good idea. The only problem with super is that the equity in the properties cannot be used. ie you cannot borrow against the first one for the second. But it is still a good strategy as the properties can be CGT and income tax free once you hit pension phase or meet a condition of release. Super is also a great asset protection vehicle and generally falls outside your estate and there are tax benefits to your depenants if you were to die too.
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
Hi Terryw
Can you explain step 1 please
KarenMove in. move out.
under s118-145 ITAA 1997 a person can be absent from their main residence yet still count it as their main residence for it to be CGT exempt for up to 6 years. To get the full exemption you need to live in the house initially and establish it as your main residence. You can then rent it out and claim all associated costs – yet still retain the CGT exemption.
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
Thanks for your reply Terryw!
1 – We’re first home buyers so we’re planning to live in our property for the first 6 months and then rent it out after that. Would 6 months be enough time period to be eligible for the “s118-145 ITAA 1997”?
3 – I probably didn’t make myself clear on this one – I would pay off the principal on the first IP and then borrow against this increased equity for deposit on the second IP. I think I read somewhere in the forums that if you do this that you can claim certain tax benefits? As opposed to this if you were to pay the deposit on your second IP with cash savings you can’t claim any tax benefits. I need to do more research for this but is this correct? And what kind of tax benefits can you claim?
4 – Oh ok I didn’t know you couldn’t borrow against your first property for your second. Good thing I asked!
So could I say that in general my strategy is on the right track?
Thanks
1. The legilsation doesn't have a time limit, so basically as long as you can establish that it is your main residence you should qualify.
2. Best not to pay off principle but to put extra in the offset. It should save the same interest (unless u r tempted to spend). If you pay down principle then you will be paying more interest if you need to buy a new house to live in – your funds would be tied up and you would need to borrow more.
4. No, you can borrow against equity in the first to buy the second.
Yes, you are generally right on track, but you could tweat the strategy a bit to improve it. Paying down debt is good – but could lead to tax complications later.
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
I think sydneydru got confused about point 4.
I think you meant that you can borrow against equity for the second. This is okBUT you can't borrow equity for a second IP if it's within a self-managed super fund.
Is this what you meant Terry?
Oh, sorry, yes with a SMSF you can restricted and cannot borrow against a property more than once – they can only borrow to acquire a single asset.
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
Thanks guys.
I’m glad point 4 was clarified. I had thought that you could grow your property portfolio within a SMSF.
Regarding point 2 – If we keep our savings in the offset account and decide to purchase a second IP, what would be the best strategy to purchase the second IP?
Thanks,
DruWhen you have money in the offset and are buying your second property you need to reassess at that time.
Ideally you would want to keep your money in the offset and borrow the lot to buy the second IP. But you may not have enough equity at that stage. So you could either
1. use the cash in the offset or
2. pay down the existing loan and reborrow it.2 may be preferrable if you were going to move back into the first property at some stage.
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
Terryw wrote:Move in. move out.under s118-145 ITAA 1997 a person can be absent from their main residence yet still count it as their main residence for it to be CGT exempt for up to 6 years. To get the full exemption you need to live in the house initially and establish it as your main residence. You can then rent it out and claim all associated costs – yet still retain the CGT exemption.
Terry
Just wondering about the impact of doing this in relation to the 1st homeowners Grant – I understand the CGT benefits but don't you have to be in a place for 12 months to be eligible for/retain the First Homeonwers Grant??Yep, FHOG would require you live in the place at sometime during the first 12 months and stay for at least 6months.
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
I have brushed up my property calculator I have made many years ago. Since I am trying to get some ideas on website design I have attached link to a picture on my test website. You can download it. I have inserted comments in excel cells so it is easier to follow.
When you open it you will see that there is only around $300 difference extra from your pocket between buying $1mil property versa $420k. Depreciation and rent and lower maintenance fees makes a big difference. Figures in calculator are for $1mil but it is easy to change to any. Building new also gives you control of how much you spend on high depreciation costs. So what realy counts is:
* How much money you make instantly – buying under market or wanted property etc.
* Once market starts rising again strongly it is than better to buy multiple properties to take a ride on more than just one. Otherwise waiting for another rise may take some time again.
* Is market currently rising and what is prediction (this is for choosing entry point/timing)
We are all competing against term deposit performance (currently it is 6%). If your propety is not able to make same amount of $$ as if you would have your savings ($7k in term deposits monthly) than it is questionable if timing is correct or property/price is good.Please do not take the calculator for granted. It is approx. but good tool for quick checks.
Here it is:
http://www.aac-eurohouse.com (just click on the picture to download – hope it works)
P.S. Not to also forget offcourse that your accountant calculates depreciations etc. for applying tax exemption and so your salary will be increased by that amount every month so you can pay more. Good for cashflow and no need to wait till end of June…
I could not figure any other way on how to share excel file
* Knowing what is the split between no tax deductions portion of property cost, 2.5% depreciation cosnrtuction cost of property and plant depreciation cost (higher depreciation cost 5% or more). It is often hard to get this information from real estate sellers but I never buy unless they tell me in writing.
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