Buying a second property

[raskolnikov]

I'm in the process of buying a second property as an investment. Can someone tell me how negative gearing works? If I don't make enough on rent to cover the mortgage I can claim the difference as a tax deduction. Is that right?

 

[Pilchard_Adams]

Yes I think so. Any "expense" that you cop is a tax deduction. If you get $250 rent and the mortgage is $350 you claim that difference. You claim the rates, water bills, repairs, petrol to and from inspections, car repairs on those trips, phone bills, bank fees.

 

[Scotland]

You can't claim the mortgage payments as such, you can claim the interest component of the mortgage payments.

If you pay interest of $20k and receive rent of $15k in one year your taxable income will be $5k less.

 

[SolidTiger]

Also keep in mind that early in a loan you will be paying more interest in the repayments then later. For example in the first year of a $1500 month loan you may be paying $1100 in interest but in the last year you may be paying $300 interest. What that means is that the negative gearing you can claim is going to reduce during the course of the loan. But in 30 years $1500 is going to be like $150 because of inflation.

There are some groups who would like to see negative gearing taken away from property. Providing that the income recieved when the property is positively geared is not taxed I am for it. Though politicians would not be willing to commit political suicide by abolishing negative gearing.

 

[bunsen burner]

I'm in the process of buying a second property as an investment. Can someone tell me how negative gearing works? If I don't make enough on rent to cover the mortgage I can claim the difference as a tax deduction. Is that right?

tip 1: Learn it all yourself. Don't go with a "Wealth Accumulation" company. You just end up paying over the going rate for a property in a sub standardgrowth area. You pay over the odds to get information that is reasonably simple and freely available.

tip 2: Make sure you get an interest only loan.

I've read a lot of property books and I rate this one the best:

How to Build a Multi Million Dollar Property Portfolio in your Spare Time by Michael Yardney.

Easy to follow, straight to the point, no hidden agendas or dodgy advice. Just shows you the best way to start investing in property.

 

[bunsen burner]

Also keep in mind that early in a loan you will be paying more interest in the repayments then later. For example in the first year of a $1500 month loan you may be paying $1100 in interest but in the last year you may be paying $300 interest. What that means is that the negative gearing you can claim is going to reduce during the course of the loan. But in 30 years $1500 is going to be like $150 because of inflation.

Yes and no.

1. For invest you'd be a fool not to get an interest only. Therefore payments will be the same (all other things being equal)

2. But your net loss will decrease as rent rises. Unless of course you access some of the equity to buy another investment.

 

[Simon_Nesbit]

The massively abbreviated version (this is not financial advice, speak to your own accountant, blah blah).

1. Own your home outright ASAP. Set up an off-set account against any mortgage you have left if this isn't an option.

2. Any cash/savings/etc you have available, pay off your home loan.

3. Purchase investment property with 100% finance (including costs). (How? "cross-secure" using the equity in your own home). Interest only.

4. Repeat step 3 until you run out of equity in your own home (well, avoiding Lenders Mortgage Insurance anyway - normally 80% of value).

....most banks/institutions have "portfolio" style packages - multiple loan structure under one overall debt. As you add additional properties, the rent to be generated can be added to your income, allowing you to make further investment, etc.

=====

Now each property has it's own loan, financed I/O at ~105% of value....guaranteeing a tidy negative gear for quite some time. (Standard 5% net rental return vs variable rates ~6% means you need a 25% increase in rent before interest payments are covered).

All finance is claimable as a deduction, as you have borrowed for investment purpose. If you used your own money (instead of paying it off your home as in #2 above) then some of this 'could' need to be apportioned by your tax accountant.

If you run out of income before savings/equity - then a smaller loan amount may help get "one more property".

================

Have the rents, your income, etc paid into the offset account against your own home mortgage (if you still have one), and just pay the minimum off the investment loans (I/O if you can).

Longer term, as property prices appreciate, or your offset/savings build, return to step 3.

 

[Astro_]

Step 1: Establish an offset account against your existing mortgage.


Step 2: Direct all income (employment, rental, dividend etc) into the offset account to reduce your existing mortgage ASAP. Your mortgage is non-tax deductible so should be reduced quickly.


Step 3: Use the equity in your existing home as a deposit for a new interest-only investment loan. You dont want to waste money on mortgage insurance.


Step 4: Capitalise the interest on the investment loan until your mortgage is fully repaid. (ie: dont pay the interest).


Ensuring you have a tax effective loan structure in place is as important as the underlying investment itself.


This is general advice only.

PM me if you would like further details.

 

[saj_21]

tip 1: Learn it all yourself. Don't go with a "Wealth Accumulation" company. You just end up paying over the going rate for a property in a sub standardgrowth area. You pay over the odds to get information that is reasonably simple and freely available.

tip 2: Make sure you get an interest only loan.

I've read a lot of property books and I rate this one the best:

How to Build a Multi Million Dollar Property Portfolio in your Spare Time by Michael Yardney.

Easy to follow, straight to the point, no hidden agendas or dodgy advice. Just shows you the best way to start investing in property.

Hey Bunsen, quick question for you.

I have recently bought my first house, a two bedroom unit. I'm 3 months in and will stay for another 3 months to get the FHOG. After this i will move back home to rent it out. The repayments are around $1350 a month and i could rent it out for $1200 a month.

My question is should i pump as much income as possible into the home loan as opposed to paying the shortfall in the rent and the loan? So then i could save another deposit or a mixture of the two?

My thoughts would be to pump in as much income as i can into the home loan.


My have a serach for that book and give it a read!

 

[Simon_Nesbit]

Not BB, but....

the moment you move out and the property is for rental....you want as many deductions as possible.

Setup an offset account (if you can)....pour the money into that, rather than the mortgage itself. When you move back home, use the additional income (rent), reduced costs (living with parents, many lenders will use reduced cost of living), and allready saved cash to make a second investment.

If you pay it off the home proper, you need to justify why you're pulling that money back out (for tax purposes) - otherwise it won't be claimable.

Also, if you plan on doing any renovations/upgrades to the property....either wait until after six months, or organise "future dated" receipts from tradies - you can pay in advance, but the invoice must be after the property is available for rent.

 

[Scotland]

Offset accounts are wonderful, I'm surprised they aren't more commonplace.

Even if your house is never intended to be used a rental and you want to pay it off as quickly as you can you're still much better off having any savings you have and wages you are paid effectively going into reducing your mortgage principal.

 

[Simon_Nesbit]

Here's an example of a portfolio I setup for a customer today.

They have 7 investment properties, five of which are smallish units in Melbx2/Syd/Perth/Adel, one holiday shack (Bri), and a block of 4 flats (Melb).

They have one savings account (offset). All rentals, salary income, etc goes into this account.

They each have a 'spending' account. A small amount (their "allowance") goes into these accounts......automatically from the offset.

They have one credit card (25k limit) which they use for daily expenses, and clear monthly....automatically from the offset.

Each property has it's own loan, set up for 100% LVR, Interest only. The repayments come out from the offset account....automatically.

They own their own home, but utilise the equity in it to allow them to borrow extra for investment properties. For this purpose they have a 100k Equity Manager also attached, which they use for any bills that come in against the properties, or for deposits with which to make additional purchases.

===================
As they manage all the places themselves, they claim 4 return trips for each every year for general upkeep/tenanting/etc - basically giving them "free" accomodation and travel for holidays every fortnight.

If I had the money myself, I'd probably have a very similar system. With everything automated, it's only the "allowance" that you live off, and the savings are somewhat by stealth (as the offset account grows).

 

[raskolnikov]

Thanks for the replies and advice.

 

[Rise_up_Stiffy]

This thread is fantastic for a newbie into property myself, thank you for those that have taken the effort to respond.

My question - I have just signed up to build my first property (In Andrew's Farm, SA) and I am wondering what loan structure would be good for me. Basically I'm looking to live in it for the first 6 months, then move back home to save more cash to buy more property. In order to begin my property portfolio would it be best to get an interest only loan to reduce out of pocket expense, or a P + I loan to pay the house off more quickly?

Thank you for any responses.

 

[Rise_up_Stiffy]

So far im thinking an Interest only loan with an offset account...but should this be set up strictly for IP's? This is my first property so should I be having a P + I loan to build equity more quickly?

edit: after doing some reading, I think an IO loan is the way to go because even though at this point this house will be my PPOR, I will likely want to turn it into an investment property at some stage down the track. and an IO loan + offset account gives me more flexibility.

 

[Simon_Nesbit]

What's your savings profile?

Can you handle having 24/7 access to large funds, or will it turn into a new 50-inch plasma in 3 weeks?

If you are disciplined, IO and offset. Sweet-talk the parentals and they might offer up enough equity for you to get in $0 down, also maximising your future negative gearing.

 

[Rise_up_Stiffy]

I can save. For my 335k loan I need a 40k deposit, which I need to get my june (have 35k now) So are you saying if my parents become my guarantors I can have my deposit come from the equity in their home and therefore have more cash for paying off my principle? What would be the benefits of this if I already have the deposit saved up?

Thanks for your help

 

[Simon_Nesbit]

That's the topic of your next thread: "Buying a third property"

If you've allready got the deposit saved up, only the extra freedom (and liquidity) it brings.

Get the loan for full amount (avoidng LMI), whack the savings in an off-set, and when you find the next property, you can jump in knowing you've allready got your savings behind you, and an existing (good) relationship with your lender.

 

[Simon_Nesbit]

Also as a pseudo-insurance policy against vacancy. The money in the off-set will cover quite a few (12 months?) of vacancy before you hit trouble with the bank...plenty of time to arrive at alternate solutions.

 

[Rise_up_Stiffy]

thanks simon, you're a star. Gotta get the parentals to go to the bank to see how much their house is worth )

 

[we57st]

I wouldn't mind some advice on purchasing a second property too. I currently own (with mortgage) a 2BR flat within 8kms of Melbourne CBD on which I still have around $135k owing with $66k available redraw.

My next property purchase would ideally be a house a similar distance from the CBD to owner occupy so I would realistically be looking at about $600k.

What would be my best plan of attack? I am undecided whether to sell my current flat to finance the 2nd property, or hang on to it and rent it out. If I did sell, I would have to split the proceeds probably 60/40 with my sister who I originally bought the flat with. I would expect to get around $350-$400k (conservative estimate) if I sold the flat now.

Ultimately my aim is to own a house - I'm not interested in property investment or making hefty profits etc etc etc. If anyone can help me achieve this aim in the shortest possible timeframe, that would be much appreciated!!!

 

[bunsen burner]

I wouldn't mind some advice on purchasing a second property too. I currently own (with mortgage) a 2BR flat within 8kms of Melbourne CBD on which I still have around $135k owing with $66k available redraw.

My next property purchase would ideally be a house a similar distance from the CBD to owner occupy so I would realistically be looking at about $600k.

What would be my best plan of attack? I am undecided whether to sell my current flat to finance the 2nd property, or hang on to it and rent it out. If I did sell, I would have to split the proceeds probably 60/40 with my sister who I originally bought the flat with. I would expect to get around $350-$400k (conservative estimate) if I sold the flat now.

Ultimately my aim is to own a house - I'm not interested in property investment or making hefty profits etc etc etc. If anyone can help me achieve this aim in the shortest possible timeframe, that would be much appreciated!!!

Assuming your unit is worth $380k:

Scenario 1 - keep and use equity

Your share: 0.6 x $380k = $228k

Your debt: $135k

Equity: $93k

Available redraw: 0.8 x $228k = $182k - 135k = $47k

(how did you get $66k?) i calced $135 as your portion of the debt rather than the combined debt with your sister. Is thi wrong?

$47k or $66k = deposit for $300k unit. Buy that and when it grows and your current unit grows you should be able to access enough for a decent deposit. Keep in mind that by then you will need $800k rather than $600k


Scenrio 2 - sell and upgrade

First: You have to convince your sister that selloing is a good idea(when it's not actually a good idea less she too is goin buy again. You coutel her that now she can buy a place all to herself.

Sell: $380 - Selling costs: $10k= $370k
Your share: 0.6 x $370k = $222k
222k - CGT - say $7k = $215k
$215 - $135k debt = $80k

= 20% deposit $400k unit

 

[Scotland]

I'd say sell and get as much cash into keeping the loan amount down on the new place to minimise interest.

 

[we57st]

Thanks for the feedback.

Bunsen, re: Scenario 1.......I may have used the term "redraw" incorrectly - the $66k is what it says on my mortgage account as "funds available." I have been working hard to pay off the mortgage ASAP so all my savings are on the mortgage (way more than minimum repayments). I was under the impression this $66k would theoretically be available to me should I wish to purchase a car, for example.

Where does the equity come in???? (excuse my ignorance)

The $135k is the total amount we have left on the mortgage. My sister and I are very close and have a very "loose" arrangement on the mortgage as she got married a couple of years ago and they bought a place of their own. They contribute a sum of money each month to retain an interest in the property but in reality the mortgage is pretty much my sole responsibility.

Because of this, my sister would be happy to go along with whatever decision I make in regards to selling or keeping the flat. I did speak to a broker some time ago who pretty much told me what you outlined in Scenario 2 - that at the most, I could afford a property with a purchase price of around $440k. Unfortunately this is not going to get me much in terms of where I want to live!!!

 

[bunsen burner]

Thanks for the feedback.

Bunsen, re: Scenario 1.......I may have used the term "redraw" incorrectly - the $66k is what it says on my mortgage account as "funds available." I have been working hard to pay off the mortgage ASAP so all my savings are on the mortgage (way more than minimum repayments). I was under the impression this $66k would theoretically be available to me should I wish to purchase a car, for example.

Where does the equity come in???? (excuse my ignorance)

Equity = difference between the value of your property and how much you owe

Available Equity = Approx 80% of the value of your property minus how much you owe.

So where does 80% come from? It's called an LVR and it's typically the LVR lenders will lend on property (may be a bit less during lean times, ie over the last 18 months). LVR = Loan to Value Ratio. Meaning if a lender allows an LVR of 80% then they allow you to lean 80% of your property's value.

Example:

You buy a unit for $400k. You put down 20% deposit (80k). You owe $320k out of $400k (value of unit). 320/400 = 80%. Your LVR is 80%.

Assume your property goes up to $500k. 80% of this is $400k. The lender will let you lend $400k. You already owe $320k so they will let you access another $80k against that property.

So now you have a $500k unit and owe 80% of it ($400k).


Most property investors will access this $80k and use it as a deposit on another investment property. I know you don't want to get rich, but you still need to learn this concept to get what you want in a reasonable amount of time. Otherwise it will tage you ages.