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  1. #1

    Default Gearing, Yield & Tax Offset

    Hi all

    Pretty new to all this so will try lay out our situation and some questions I have around financing rental property and checking if I haven't missed anything.
    All mortgages are Principal + Interest. 27 - 30 years for the Rentals, 5 years left on Property 1.
    Properties self managed by ourself.

    Our strategy is to own newly built properties, with average yield, to hold for the very longterm i.e. 30+ years.
    We see it as a way by utilisng a small amount of our income, combined with the majority leveraged from the bank, in 30 years time (retirement) will give us several properties fully paid off generating income. Not chasing the capital gain - as long as it keeps up with inflation we are ok.

    Property 1 - Owner Occupied
    Mortgage 180k, RV 800k

    Property 2 - Rented
    Mortgage 660k, RV 690k
    $570 per week

    Property 3 - Looking to purchase
    Mortgage 380k, RV 480k
    Rent will be $460

    From my calculations:
    Property 1 - owner occupied, no tax loss etc etc
    Property 2 gives us a slight positive return (2k) after paying the interest and expenses on the property.
    But after accounting for the principal repayments we end up topping this mortgage up approx 8k p.a.
    Property 3 will be similar to property 2, however just on break even for interest and expenses cover. Top up 6k p.a. of our personal income basically to cover the principal.

    Because the rental income on Property 2 & 3 covers the interest portion on these property we cannot claim a loss (actually declare a small profit) nor receive a reduction in our income tax paid.
    Am I correct or am I missing something?

    Looking forward to your replies.

  2. #2

    Default

    Edit

    Property 2 - Mortgage 460k, RV 690k
    $570 per week.

    Not 660k as per original post.

  3. #3
    Join Date
    Jun 2004
    Posts
    10,247

    Default

    You're not missing anything.
    The 8k and 6k pa payments are your increasing investment - they aren't a 'cost' as such.
    It is 'forced savings' really - your net worth is increasing each year because of it.
    If you were to go I/O on the loans you wouldn't have to pay anything off the capital but, of course, the capital wouldn't reduce either.

  4. #4

    Default

    Thanks Wayne

    Yes, apologies for the wording - We use the term forced savings also. Of which, we are comfortable doing these "top ups" to the investment.

    Bear in mind they are only opinions, what do people think of our strategy?
    The next one we have in the pipeline is:

    Property 4:
    Mortgage: 500k, RV 720k
    Weekly rent $780 (duplex property 2 x $390)

  5. #5
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,518

    Default

    Hi Kept,

    1) Property 2 cashflow - i get
    4.3% gross yield = quite low
    Based on my estimate of expenses, includes small repairs, some travel, subscriptions, accounting etc, I get $4316 negative on interest only. Are you allowing for all the costs?

    2) Over 10 years - With my prediction of interest rates rising, I get $77,209 cash loss, after tax refund over the 10 years, or just under $8k per year average cost. Again on interest only.
    this is a reasonably big loss, so you are gambling on capital gains. Without them you will be losing.

    3) Based on my points 1 and 2, do you really want to buy another like this? What happens if interest rates go up?

    4) Property 3 - I presume you are going to put in $100k cash when you buy? If so, I would put this into your personal mortgage first, as no tax deduction on that.

    5) for 2018 and 2019 years, I would have you at a loss for tax, and therefore a tax loss. Include all expenses and chattels valuation. Perhaps look at getting a property accountant to help
    2020 and onwards, ring fencing is being proposed, so no tax refund

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  6. #6
    Join Date
    May 2004
    Posts
    2,650

    Default

    Ross, the Bill proposes start date of 1 April 2019.

  7. #7

    Default

    Hi Rosco

    Thank you for both of you replies -

    Annoyingly I'm too new so my edits to the original post have not been approved by the moderator.

    Critical Mistake on property 2 - Mortgage is 460k on property 1 - I have gross rental at 5.4%?

    Mortgage on property 3 will be 380k, we will put 30k cash in, total land + build cost will be 410k

  8. #8
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,518

    Default

    Quote Originally Posted by artemis View Post
    Ross, the Bill proposes start date of 1 April 2019.
    Yep the 2020 tax year. ie 1/4/19 to 31/3/20
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  9. #9
    Join Date
    Feb 2015
    Posts
    347

    Default

    Sorry to be blunt but if you are making losses at such low interest rate environment, what if rate rises , can you still cope if continue making losses year after year and what if you lose your job etc ? Buy cashflow IP from the get go.

  10. #10
    Join Date
    Mar 2015
    Location
    Brisbane Wellington Auckland
    Posts
    727

    Default

    Also are the rentals quoted market ?


 

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