Gearing, Yield & Tax Offset

[kept]

Hi Beano
Based on the tenancy govt website market rates:

Property 2 - $570 is upper quartile and currently tenanted for 2 years fixed term.
Property 3 - $460 is between median and upper quartile amount ($420 & $500 respectively), so went conservative, even though will be brand new in good area so upper quartile of $500 is feasible.
Property 4 - $780 is based on market appraisal, again, sits between median and upper quartile (again, being brand new upper quartile rate is feasible)

thanks

[Beano]

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.

Looking at your situation i am inclined to support the above view
Focus more on properties that generate more cashflow
Too hard (financially) focusing on CG

[GLin]

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.

I am inclined to think that you need to change your current accountant...

[kept]

Thanks Beano
Gary, not sure if you read the updated edit on the mortgage amounts.

Thanks for the feedback, think we will focus on increasing the equity amounts for property 2 by putting in some additional money from trades and other sources before pushing on with the next property.

And then pursue the next property when we have a larger equity portion to enable it to be cash flow positive from the outset

[GLin]

And then pursue the next property when we have a larger equity portion to enable it to be cash flow positive from the outset

You should be buying cashflow positive properties at 100% lending, regardless how much cash you put into it.

Plus any savings or cash you should put towards paying your mortgage on your own home first.

Any spare equity in your rentals, work it out with your mortgage broker and accountant on how to transfer that into your own home, and pay down your home mortgage by transferring the mortgage into the rentals legally tax wise.

[Rosco]

You should be buying cashflow positive properties at 100% lending, regardless how much cash you put into it.

Plus any savings or cash you should put towards paying your mortgage on your own home first.

Any spare equity in your rentals, work it out with your mortgage broker and accountant on how to transfer that into your own home, and pay down your home mortgage by transferring the mortgage into the rentals legally tax wise.

In general it makes sense to restructure, which means rearrange structure so that you have debt free personal house and all debt on rentals.

BUT - with up to now, it is still essential to look at cost vs benefit. Often the cost outweighed the benefit! Especially if Brightline test or building depreciation recovery.

NOW - with ring fencing it is even more important to check cost vs benefit. As the short term benefit of a restructure might be a lot less!


Overall - I would suggest getting some expert advice from a property accountant. Going through your current rentals, reviewing cashflow, look at a restructure and other options to improve set up, and also develop long term plan to get debt free personal house and passive income.

Ross

[kept]

Thanks Rosco
Personal house has 100k offsetting the 180k so sort of 80k actual mortgage.
This 100k then gives us a bit of flexibility if something comes up - emergencies etc.

By increasing/restructuring the rental property loan by 80k in order to put this into the personal home it still leaves it borderline cashflow positive (in terms of covering expenses and interest, not principal) so seems a bit redundant as no tax advantage? But that's why I'm asking as everyone's feedback has been great to hear.

We plan to have another 80k set aside for when the personal loan expires (1.5 years to go at 4.00%) and can then look to pay the majority off.

From there we should focus on paying down the rental property to a point where it is truely cashflow positive after P&I (calculate loan needs to be reduced by 140k to 320k to just be positive at current rates). Probably about 3 years for that.

Property 3 will be skipped in terms of rental and just used as a trade to help achieve paying down property 2.

[DaveW]

Property 3 will be skipped in terms of rental and just used as a trade to help achieve paying down property 2.

If you fail to sell property 3 for a profit then you may be forced to keep it, so you should have Plan B - always buy a property you can afford to hold.

However, if you do manage to sell for a profit you may have to pay tax?

Anyhow, I was wondering why are you doing a trade. You should share some numbers on that also.
Lets say after tax and holding costs you might come out with $30k net profit from the trade. All that work to reduce your home mortgage by $30k so that you save ($30k x5%) = $1500 a year in mortgage payments ($28/week). Is that what you are trying to achieve?

There are 0% balance transfers on credit cards that will achieve that result.

But seriously the capital you spend on the trade you could probably easily use on your rental property number 2 to increase your rent by at least $28/week.

You sound like you are of a young age. Have you considered renovating and selling your own home (no tax, no extra holding costs) and buying a new home where you can live upstairs (lower holding cost) while converting the downstairs basement/laundry into a 2 bedroom flat (home and income)? This will likely put you in a stronger position for you to make your next move...