Hi everyone,
I am very new to the world of property, and I come from a very low income household where my parents are unable to provide investment advice (as they’ve never owned property or any other type of investment).
I have been very lucky to work my way up in the corporate world quite quickly – I am 29 and my income is just over $200k. Given this, I’m paying a lot of tax. In January 2013 I purchased my first property – the apartment that I now live in. It is in an inner city location with high rental potential. Since this purchase, I have been able to accumulate $80k in an offset account. I’ve been trying to put as much in this account as possible, to lower the interest on my loan.
My question is, given my situation (high tax), would this money be better invested in another negatively geared property? I’m sure there are a number of variables that I haven’t taken into account, but I’m interested to know what others would do in my situation.
Thank you in advance for any advice.
Liz
Hi Liz
Welcome aboard
I wouldn't invest in a property primary to reduce your taxable income – it's a flawed concept. It means you need to spend $1 to get back 40 cents.
Instead, I'd only treat any tax concessions associated with property investment as a bonus – and focus more so on purchasing the right property that fits in with your longer term financial plans.
Are you thinking about renting out your current apartment and purchasing another property to live in? If so – the loans need to be structured correctly to avoid cross collaterisation (something the banks love to do) and also maximise tax effectiveness.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks for your advice Jamie.
I don't really have any long term financial plans, aside from trying to build as much equity as possible while I'm on a high income (this may change if I decide to move roles). My partner also has saved $50k, so together we have $120k that is readily accessible.
What would be the difference between staying where I am and buying another smaller investment property, versus changing my current home loan to an investment, and moving into another home?
Or should I simply focus on paying off as much as my mortgage as possible? I feel like my money could work harder for me but I'm not sure how
Thanks,
Liz
Hi Elizabeth,
And welcome to this place. here is an absolute wealth of knowledge available to you here. I'm sure you will get a lot of benefit just by trawling around and reading. More to your question though, I must agree with others who say "It doesn't make sense to spend a $1 to get 40c back – BUT, it can be helpful if you are reasonably sure that it will advantage you down the track (with growth, either engineered or just buying the right property in the right area).
Have a read of this thread, and do help me populate it with any threads YOU have found useful :-
https://www.propertyinvesting.com/forums/general-property/4349450 (post #3 may turn on a light for you….)
For now, that Offset account sounds like a good way to go – it allows you to "take out" that money without upsetting things later. i.e. your current PPOR might make a worthwhile IP of its own – but that will depend on what you choose to do.
Do come back in Reply with any further questions too – who knows, maybe THIS thread will become a "go-to thread" for other new members down the track. I am still looking for useful threads to add to that "big picture" one.
Benny
As Jamie mentioned, the purpose of investing is not to claim money back come tax time, it is to make money in the long run whether it be through rental returns and/or capital gains.
The offset account you have gives you the possibility of going two ways. You can buy a PPOR using the money in the offset as a deposit and turning the current property into an IP. This allows the current loan to become deductible. Or if you want to stay in the current property long term and buy a new IP instead, you can use the money in the offset to pay down the current loan and then use the new created equity for your deposit on the new IP to maximise your deductibility. All structured correctly of course.
You just need to make a plan on what your long range goals are and then proceed accordingly.
Cheers
Tom
Hi Liz,
I'm was in your situation a few years ago (I'm 33 now), and had similar questions. I can tell you what I did, and why-
– I bought a new PPOR, and rented my existing place. I did this because I was married, and wanted to have kids. So I bought a bigger, nicer family home that we could live in for 10+ years. The existing property was also cash flow positive straight away since it had a fair bit of equity already. There are downsides with this, but I couldn't stay in my current place for much longer. So while there were tax advantages with other options, being that I wanted a family etc I decided on this one.
– I now have a 1.5 children, with private schooling, and holidays etc it takes a bit of extra $$$. But I'm about to buy another IP. I also put a few $$$ into super to take me as close to the $25k limit as I can get.
In general, I would consider myself to be relatively risk adverse, but letting your cash save you interest isn't the same as having your cash make you money. So I would definitely be looking at other options than just paying off your PPOR. Plus, if it's on your offset account you're more likely to spend it!
Out of curiosity, can you answer the following:
– Your current loan amount
– The value of your property
– The likely rent for your current property
Elizabeth .. you are striking out to achieve something that your parents could only have hoped you'd achieve .. and they would have dreamt about.
My incentive has been an orange box. A wooden orange box (try finding one these days .. its harder than you think). I actively sought one out and purchased it as a reminder.
My father came to England from Europe .. and his first piece of furniture he ever used was a rented table and a wooden orange box.
I found one and keep it as a reminder of how far I can fall back to where I could be.
The rules for property will change around you, and they always do. As such .. you are going to have to delegate what your exposure to property is .. and how much risk you are prepared to take. A strict strategy of negative gearing is actually already a losing position, as you are starting out with a loss (granted at the time an allowed deduction) and reasonable gearing to achieve results. The same can be said about overgearing .. as your leverage relies on several degrees of rate stability just to hold the property let alone make a profit on it.
As a high earner .. the banks are much more willing to lend with a reasonable degree of gearing and even to a higher level than you can probably as you represent a lesser risk to them for repayment. A high salary at anytime should be treated as a temporary measure no matter how permanent you think it is. Utilise your capabilities with borrowing .. but also setup your property portfolio to start paying its own way sooner rather than later.
The true key to successful property investment for someone who has never invested before is to aim at a risk situation you'll be satisfied with .. and graduate to a supplementary income from at least one of your properties as soon as possible.
It makes the worrying and stress of holding a tenancy or paying for a property less painful .. and you can get on with living like you are actually earning well and not living like a pauper on the potential of becoming rich one day.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
