All Topics / Help Needed! / Question on tax and cash flow positive property

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  • Profile photo of SabbathenSabbathen
    Member
    @sabbathen
    Join Date: 2012
    Post Count: 4

    Hi,

    I am a new investor pretty keen to jump into my first cash flow positive property.

    I think i've found a couple of cash flow positive properties that look ok on paper(using Steve's 1% rule). However whilst they are cash flow positive, they are only positive by a small amount(say $200-$500 a year). My question is what expenses related to owning a cash flow positive property are tax deductible? As this may in fact make the deal look significantly better. Or have I missed a secret, if its only after some tax deductions that the property returns a decent profit then it's probably not worth it?

    Thanks for any help in advance.

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi and welcome aboard

    All the holding costs and expenses associated with the property will be deductible – that includes the interest on the loan, property management fees, maintenance costs, insurances, borrowing costs, depreciation, etc.

    Don't jeopardise capital gain in return for a small positive cashflow though. Without some sort of capital gain – it will be difficult to grow a decent portfolio.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
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    It's great that the property is cashflow positive however also have a strategy for the Capital Growth. The last thing you want is to hit the 'equity' wall.

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of P@ttyP@tty
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    @p-tty
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    Hi Sabbathen,

    The ATO have published a rental property document with some information regarding your question. I have attached the link below.

    http://www.ato.gov.au/content/downloads/ind00313554n17290612.pdf

    Patty 

    Profile photo of P@ttyP@tty
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    @p-tty
    Join Date: 2012
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    Sorry the above link is a 40 page PDF. This is the link for the website if preferred http://www.ato.gov.au/corporate/content.aspx?menuid=0&doc=/content/00313554.htm&page=2&H2

    Profile photo of Daneo79Daneo79
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    @daneo79
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    Jamie M wrote:

    Hi and welcome aboard

    All the holding costs and expenses associated with the property will be deductible – that includes the interest on the loan, property management fees, maintenance costs, insurances, borrowing costs, depreciation, etc.

    My Question:

    Do the tax deductions apply when the property is set up through a trust structure?

    Where can I find information about what can/cannot be claimed through a trust structure?

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    You'll need to have a chat with an accountant – there's different trust types with different taxation considerations. If you're in Syd, get in touch with Terry W.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of SabbathenSabbathen
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    @sabbathen
    Join Date: 2012
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    Thanks for all the replies, this is a great forum.

    Profile photo of SabbathenSabbathen
    Member
    @sabbathen
    Join Date: 2012
    Post Count: 4

    Rather than start a new topic I was hoping I could get some opinions and guidance on this situation to see if I am on the right path.

    Using Steve's 1% rule I have started to short list potential cash flow positive properties but upon further inspection it seems I am still way off returning a profit.

    Example below:

    I can borrow at 5.54% so my 1% rule should be 6.54% minimum

    Expected annual rent of $15600 divided by asking price of 229000(hypothetically even if this property could be bought for 200k it still seems to be making a loss) multiplied by 100 gives me 6.81%

    When I start to minus strata costs, rates, loan repayments(based on 80% LVR) and property management it completely destroys any positive cash flow.

    Is this where tax deductions on owning the investment property come into play? Should I be including them in my number crunching because at the moment I am finding all the deals i'm looking at aren't even getting close to being neutral.

    Again thanks in advance for any advice.

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    When we do cashflow analysis we take into consideration the following:

    1. Strata (if its a unit)

    2. Building Insurance (if its a house)

    3. Interest payable on the loan including annualised fees 

    4. Property Management Fees

    5. Water Rates (if its a unit)

    6. Council Rates

    We don't take into consideration:

    1. Drop or increase in interest rates

    2. Depreciation

    3. Negative gearing

    4. Vacancy periods

    5. General Maintenance/Repairs

    We also take into consideration the whole purchase price (minus any grants) when calculating the loan repayments instead of just the loan itself.

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of RPIRPI
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    @rpi
    Join Date: 2012
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    Hi

    Welcome to the forum,

    Don't forget depreciation. A depreciation report will help maximise your deductions.

    Trust type depends greatly on state property is in.  Using a discretionary trust in NSW at the moment will make your land tax bill wipe out the cashflow.

    In a unit or discretionary trust structure, you can not get at the losses personally,  you distribute profits.  If you are not an employee there can be ways to make use of the losses in a trust.

    D

    RPI | Certus Legal Group / PRO Town Planners
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    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
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    Sabbathen wrote:

    When I start to minus strata costs, rates, loan repayments(based on 80% LVR) and property management it completely destroys any positive cash flow.

    Are you using another loan to cover the the purchase/deposit? If so, you should base the repayments on 100% plus costs. 

    As mentioned above, depreciation is a huge deduction that should be taken advantage of.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of SabbathenSabbathen
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    @sabbathen
    Join Date: 2012
    Post Count: 4

    Thanks Jamie,

    No I would only be looking to borrow 80% of the purchase price to avoid mortgage insurance, I have the cash for deposit and closing costs.

    Cheers.

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    When I analyse a property, I look at :

    Property Management fees

    Water bills

    Council rates

    Insurance

    Gardener

    Strata fees (if applicable)

    Annual maintenance allowance

    Annual vacancy allowance

    Mortgage interest and fees

    Depreciation allowances

    Negative gearing if applicable

    If purchasing inside a SMSF I also factor in:

    Annual accounting and ASIC fees

    Death & TPD insurance covering SMSF members

    Member contributions

    I factor in annual price hikes for each of the bills, as well as rent hikes, as well as factor in the offset account balance – so I can see when a property will be paid off (ie when the balance in the offset account is equivalent to the original loan amount, and therefore the interest payable becomes zero)

    I also take a look at the whole portfolio as an aggregate (all totalled up together) to understand what the overall picture looks like (eg one property might be cashflow positive but becomes neutral if it is supporting) and factor in tax payable.  All that allows me to see precisely how much more property a person would need to acquire to eventually be able to live off the rent surpluses, and  when that magical day will arrive.

    smiley

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of AdminAdmin
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    @admin
    Join Date: 2007
    Post Count: 25

    Hi Sabbathen, I would like to help you answer some questions. If you would like to call me on 03 8892 3800 (PropertyInvesting.com Office), I will try to assist. Regards, Jason

    Profile photo of EmilEmil
    Member
    @emil
    Join Date: 2012
    Post Count: 26

    Hi,

    I want to give you some examples from our company's financial department, so you can have an overall picture on what to expect in terms of expenses and incomes.

    Project: Sunset Dreams – Rosebery suburb (Palmerston)

    Median price $429,000

    Median weekly rental $490

    Body corporate costs per week $63

    Tax savings $9,000 per year

    Project: Evolution on Gardiner (Darwin CBD)

    Prices from $955,000

    Cash flow projection:

    1. Cash Inflow

    – Apartment Rent: $67,165

    – Tax Refund: $8,834

    2. Cash Outflow

    – Body corporate: $6050

    – Insurance: $270

    – Interest – Loan: $52,197

    – Management Fees: $4,702

    – Rates & Taxes: $1,070

    – Repairs & Maintenance: $1,500

    NET INCOME: $10,211

    Regarding depreciations and tax savings, for maximum benefits you should definitely consult a professional. We work with Rider Levett Bucknall, they provide excellent capital allowance reports.

    Cheers,

    Emil

    http://www.sunbuildinvest.com.au

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    I must admit it the property is only slightly positively geared when you are putting in 20% deposit then i think i would walking away from the deal.

    LMI is an opportunity cost and can certainly enable you to expand your portfolio quicker than saving up a 20% deposit each and every time.

    It is also a loan cost and therefore deductible over the the term of the loan or 5 years whichever is the shorter.

    Many new investors don't fully understand loan structuring and make basic mistakes which can often not be unravelled.

    If you are merely looking for cash flow and nothing else then why not balance a buy and hold portfolio with a couple of deals sold on an installment contract basis.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

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