[OPMMember@opmJoin Date: 2003Post Count: 110]

April 19, 2003 - 5:08 pm

I definitely think you should be focusing on neg gearing properties that will show good cap gains for 2 reasons.
Firstly, being on a high tax bracket will bring you some tax relief, and secondly because cash flow +ive properties will further increase the amount of tax you already have to pay.
I think this is pretty obvious, so i’m not sure why AD is recommending something that isn’t beneficial for your particular circumstances. And i don’t think AD’s use of the word “wrong” to describe my suggestions is correct from the 2 reasons i have just stated.
If you invested in cashflow +ive properties now, you’d be paying more income tax.

I guess AD is saying that having cashflow +ive properties will allow you to retire earlier. But at your age, you have another good 30 years to invest in property. If you buy a fully financed IP that is neg geared and located for cap gains, you’ll find that this will turn around down the track when you have paid some principle off and your interest deductions are reduced. At this point you’ll find that you are cashflow +ive and will then be paying more tax rather than receiving a tax refund.

This exact same thing happened to me in the space of about 8 years. I bought an old Victorian house that i renovated and let out. I was neg geared and getting tax refunds back of about $4,000 to $6,000 each year. I then got to a point where i had paid off too much principle and was becoming positively geared because i had reduced the size of my loan. I was in a situation where i had more equity through a combination of reducing my loan size and cap gains.
Nothing at all wrong with being cashflow +ive except that i now had to start paying provisional tax.
So i decided to go out and borrow more money to buy another property. I then started getting tax refunds back as well as building up equity in another property.

My point is that your neg geared properties today will benefit you now, and they will also benefit you in the future when they become cashflow +ive when you want to retire earlier.
You can have your cake and eat it too! [][8]

It’s difficult to find cashflow +ive properties in the current market mainly because of the strong cap gains we’ve had recently. Rents haven’t been keeping up and that’s why cashflow is not so positive. [xx(]

Example, the last property i bought in Melbourne for $112k. That was in 1998 and after renovating it, i was able to get a tenant for $190 pw. At that point it was cashflow +ive. In fact it still is for me, but because it’s now worth $220k and the rent hasn’t changed, if i sold it the new purchaser wouldn’t be buying something cashflow +ive.

If you were to actively seek cashflow +ive properties, you’d be looking in rural areas where cap gains aren’t so easy to get.

Some things to ponder…

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April 19, 2003 - 4:02 pm

Leigh, great thread to start as i’m sure many people wonder about this when they start to invest in property.

From what i understand, the 2 main reasons for a trust are asset protection and tax bonuses.
As you’ve pointed out, a trust is especially beneficial if you are in a litigious career and you’re seeking asset protection. If someone sues you or your business, and you own the assets personally, you could lose everything.

I’ve also been told that it’s always best to set up a trust (with a company as trustee) to invest through, even if it’s your first property and PPOR. The reason being, that it provides a lot more options down the road if you want to develop or transfer ownership of the property for whatever reason. And of course there are also the tax benefits.

If you control a trust that owns the assets, you officially “own” nothing, but you have complete control. For followers of Richard Kiyosaki, this is what he means when he says you should control your wealth, not own it. I’ve heard of a surgeon who owns nothing. His only personal assets are a few suits…but the Brighton mansion, 5 IP’s, shares, yacht, Mercedes Benz, Rolex watch etc. are all owned by a trust.

When you control a trust, just about every expense can be tax deductable. Dale Gatherum-Goss, an accountant, wrote up a list of “unusual” tax deductions that can be claimed. A few that i can remember off the top of my head include:
– xmas presents to relatives
– movie tickets
– cd’s + sound systems
– travel allowance
– sex toys (now THAT got your attention!!)

Most people know that you can claim travelling costs to visit your IP. For example, My 2 flights a year to Queensland and Melbourne are claimed on my tax because i am inspecting their condition… plus i also make a little holiday out of it.
But with a trust, a travelling allowance can be paid to you which is effectively receiving tax free money! The background to this is politicians are paid an allowance for travelling away from home that is shown as income, but they can then claim the same amount as an automatic tax deduction. The same laws apply to us as well.
So, the trust can pay you a daily allowance for any travel away from home and this allowance is a tax deduction to the trust that will reduce it’s profit. That allowance is income to you and your accountant will offset this income by the automatic tax deduction so that the income is effectively tax free to you. This tax deduction is regardless of how much you spend. That is, you might be paid an allowance of $200 a day but only spend $20 on food and $40 for a hostel for the night, but you can still claim the $200 per day as a tax deduction. And the best bit is that no receipts are necessary at all!

As willi pointed out, it’s also not good to buy property through a company name as they’re not exempt from the 50% discount on CGT, but trusts are.

The main advantage of a trust is that it does not pay tax on a profit or positive income. Instead, it distributes the net income to the beneficiaries of a trust who then pay tax on that income at their marginal rates of tax. This is usually done in such a way as to distribute the net income to those beneficiaries who will pay the least amount of tax…which is especially good for families.

If you look at the way the politicians spend our taxes, you’d be a fool not to minimise your taxes.
That’s why every single politician, wealthy business owner and most accountants operate through a trust/company structure. I personally think it’s worth doing and hope to do so soon.

It would be great if Steve could reply to this post and give us a rundown on options available and pros/cons of each…i believe he’s an accountant?

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April 19, 2003 - 2:25 pm

First thing you need to do is write down your goals for the future.
Break it down to short term (12 months), medium term (3-5 years) and long term (10 years plus) goals. Under each of these goals and time frames, write down what action is required to achieve these goals.

Perhaps if you told us more specific details such as what your property is worth, what you owe (current equity) and your gross income, we may be able to provide better information.
This will also give you a better idea as to how much you can borrow based on your equity and DSR.
See a mortgage broker to see how much you can borrow, and then look at what type of property investing you want to do. You need to decide on what niche area of property investing (buy & hold, wrap, flip, renovate etc.) you prefer and which strategy is best for you so that you can move towards that.

You say “From reading through some of the info on this site, it looks as though I am going to have to start focusing on +ve cash flow properties…”

WHY?

Only you can decide which area you’d like to invest in and what is comfortable for you.
Don’t let a forum such as this influence what is in your best interests. At your age, you should be seeking out quality property that will show cap gains and perhaps negatively gear if you’re on a high income. It doesn’t sound like +ve cash flow properties are suitable in your situation.

You have to remember that this forum is dedicated to selling Steve’s products and the emphasis is on cashflow +ive properties and wraps.

If you want really good, unbiased information from friendly people who are knowledgeable and have plenty of experience, log onto Jan Somer’s forum at:
http://www.somersoft.com/forums/

You should also be investigating what structure is best to buy your future IP’s in, depending on the strategy that you use.
It’s unfortunate that Steve is an accountant yet he won’t give people on this forum any information on what options are available, and what structures he recommends. You have to buy a product from him to get this information!

There are several excellent accountants, financial advisors and mortgage brokers who moderate on Jan Somer’s forum and provide excellent advice to specific questions.
For example, you may want to buy an IP in a trust structure and then rent it back to yourself.

Check it out – repost your question there and you will be pleasantly surprised at the response you get.

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April 16, 2003 - 2:48 pm

$175 x 52 weeks = $9,100 p.a.
$9,100 / $205,000 x 100 = 4.43%

That’s a pretty average gross yield so i’d expect the property to be in a great location, probably within a few km’s of the city centre and with expectations of high cap gains.

Unless you have a big deposit, this property will mst likely be neg geared depending on how you finance it.

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April 14, 2003 - 3:25 pm

Hi walkernick,
Yes i think you’re better off investing for cap gains than cashflow when you’re young.
However if you’re in a situation where you don’t have the cashflow to service the debt, you’d be better off with something cashflow +ive or neutrally geared.
The main thing is at least you’ve made the decision to invest in propery which i believe is the best asset class to invest in.
Congratulations on making the decision to invest at your age and don’t be sucked in to buying a fancy car or anything else that is going to take up your income.
As we all know, cars depreciate highly in value and it’s important that your debt is not bad debt.
Always remember to borrow for assets that appreciate in value (like property) and not depreciate (like cars). You can always buy the fancy car down the track.
If you’re worried about interest rates rising, maybe you could consider locking in something from 3-5 years. Interest rates are at an historic low, and it’s unlikely they will be coming down much further. If they do come down any further, it’s likely that it won’t be more than .5 – 1%.
From a tax point of view, your rental income will be taxed but hopefully it won’t be that much if it’s about $2k – $5k p.a.

---

Hi Scott,
No worries mate. Good to hear that you’ve thought about how you want to achieve financial independence. If you’re looking at a buy and hold strategy, it’s important to invest in quality property that has lots of nearby infrastructure to help minimize vacancies.
Don’t get too stuck on the “11 second solution” as it’s simply a yardstick to ensure something is cashflow +ive based on current interest rates. If rates increase a lot, this figure will have to be fiddled with.

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4%
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%, and commercial is typically 10%.
If you see a yield like this on a residential, you can pretty much bet that you will have minimal cap growth as this is the tradeoff. It’s very hard to find a high yielding property that will also have strong cap gains – especially in the current market.
However, if the yield comes anywhere about 8%, i think it’s worth a closer look.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%
Don’t pass up a good property just because it doesn’t qualify under the “11 second solution.”

You can also work out the “purchase” price of a property if you know it’s income. Divide the annual rent by the yield and it will tell you what the “purchase” price should be.
Example:
Weekly rent is $145.
Annual rent is $145 x 52 = $7,540.

$7,540 divided by 5% = $150,800
$7,540 divided by 6% = $125,666
$7,540 divided by 7% = $107,714
$7,540 divided by 8% = $94,250.

Of course you should have a good knowledge of what the typical yield is in that location to work out a ballpark price.

Hope some of this helps.
Quentin

PS: Yes, you can reduce the principal on I.O loans by making payments off it. Go into your bank with the money and say “i want to pay this money off my principal“.

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April 13, 2003 - 9:18 am

As Peter Parker has mentioned, cash flow +ive properties are good for those nearing retirement age who need the income. There’s not much point investing for cap gains if you’re gonna be dead and not be able to realise those gains.

Those who are younger would be better off with low yield/high cap gain properties.

As i’ve also mentioned, the basis for increasing your wealth is cap gains, NOT cash +ive properties.

[OPMMember@opmJoin Date: 2003Post Count: 110]

April 13, 2003 - 9:09 am

Scott,
I will answer your questions even though i am cynical about your reasons and some of this info has already been mentioned in this post and others.
Perhaps it will give some credence to the information i offer.

As i mentioned, i bought my first IP at age 19 in 1990 – a “renovator’s delight” in the form of a Victorian cottage in Brunswick.
Over the years, i have bought and sold property in South Yarra, Middle Park, St Kilda West, South Melbourne and Richmond.
In Queensland i have bought and sold a small block of 3 units in Coloundra (Sunshine Coast), Surfers Paradise and Labrador.
My latest Queensland purchase was an old block of 5 units with water views and only 30 metres to the ocean.
I intend to develop this property and provide basement parking, 2-3 shops on ground level, a cafe/restaurant and 6-8 boutique type apartments on top with water views.

I currently have the 5 units, another apartment in Surfers Paradise, the house in Brunswick and 2 other properties in South Yarra and St Kilda; and i just sold another South Yarra property at auction 2 weeks ago.

Yes, my property does add to my income – approximately $93k gross on property worth about $1.8m. My LVR is about 40%. Some properties are cash +ive and others are neg geared – they help balance each other out and provide me with a gross yield of about 5%.
My property is all well located and will achieve strong cap gains. I have never had a vacancy since 1990 (13 years) when i first began to invest because my properties are all in excellent locations.
As i mentioned earlier, people who rent usually work nearby and that’s why i always buy something that is in big cities, close to public transport, shops and other infrastructure like hospitals, libraries, parks etc.

Re: your post, i’d advise you to go I.O. and not P&I on your IP loans. Your cashflow will be greater, plus you can always pay some principal off seperately if you want to. As you may know, 99.99% of repayments on a P&I loan are comprised of interest, not any principal. It’s only towards the last 5-10 years of a P&I loan do you see any of your repayments reducing your principal. And of course, only the interest component of your repayments can be deducted from your taxable income.

PS: i find it amusing that you suggest “Investing in positive cash flow property is about staying ahead of the herd. Once the herd arrives it’s very hard to buy for postive returns!”
The herd has already arrived and that’s why cash flow +ive properties are in hick towns that show minimal growth. As i already mentioned, the only reason they’re getting a cap gain is because they’re coming off a low base and are considered cheap compared to cities on the east coast.

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April 12, 2003 - 4:29 pm

Relax Hilary, [8D]
My point was that you must remember that people rent in a certain area because they are usually employed nearby. When the economy slows and people don’t spend as much, small towns will usually feel it first when local industries cut back and/or close down. This leads to a higher than normal vacancy rate with a transient population.

I believe you are better off investing in an area that has a history of strong cap gains and also show nil/minimal vacancies.
I’d rather have 2 tenants than 10 anyday in quality property that shows good growth.
You must also remember that the basis for real wealth in property is capital gains and not cashflow.

I was also suggesting that $50k IP’s in 5k towns were risky when the big picture is considered as these places don’t often show any cap gains, but rather cap losses. The only reason they’re doing better than normal is because they’re coming off a low base and are considered cheap compared to cities on the east coast.

Historically, capital cities in Australia will show strong growth first before this ripples out to country towns. This was seen once again with this boom as Melbourne & Sydney first kicked off followed by Brisbane and elsewhere in rural areas. Melbourne & Sydney have now slowed down but Brisbane has continued to show gains of 20%+ in the first quarter of this year.

I’m not really sure what you’re on about re:
“7.7% fixed – haha – read Your Mortgage mag and it will tell you that over time, those on fixed will outpay those on variable – remember last year when the experts predicted a bust? where is it? remember last year when the experts predicted interest rates in May to increase???”

I’m not sure you can take the word of one writer in one magazine about locking in % rates!
Of course this will happen if variable rates continue to fall, but when i locked in at 12% in 1992, I was glad i did as rates continued to climb towards 16%.
Most of the big 4 now have 3 & 5 year rates that are less than the standard variable. Surely that must tell you something about what the banks consider the RBA will do next?

Chill out and ponder these thoughts of mine with a glass of red wine while you unpack the dishwasher.
[][][8D][][^]

Thanks Dot, I hope you’re gaining some knowledge through this forum. It’s important to be well informed when you decide to invest, especially in the current market.

If you’re keen to read a great forum with plenty of knowledgeable people that contribute regularly, check out Jan Somers forum at:
http://www.somersoft.com/forums/

It’s not as biased as this forum (too much focus on wraps) and isn’t continually trying to sell stuff to you.

Ciao,
Quentin

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April 11, 2003 - 2:28 pm

I.O. rates are the best as interest is the only component of your repayments that can be deducted from your taxable income.

Repayments on a P&I loan are 99.99% interest anyway in the first 10 years or so of the loan. It’s only towards the end of the loan that you actually start to repay any principle.

If you want to reduce the principle, you are better off going into the bank with some $ and saying “please pay this off the principle on my loan.”

The best way is to get I.O. and maintain your repayments at the same amount even if %rates do fluctuate. Anything extra that is not paying the interest automatically goes towards the principle.

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April 11, 2003 - 2:23 pm

I’m not sure what Hilary is on about either re “because there are too many people like us who have done the research, and are now aware of how to access our existing equity to leverage to more and more properties.”

I’ve been investing in property since 1990 when i bought my first IP at age 19, and I have also seen my parents doing this since the early 1980’s.
Using equity to help secure the next property is old hat and common knowledge for those with any brains and common sense. It’s not like a newly discovered thing.

I don’t say i’m an expert as i’m always learning, but it seems obvious to me that a lot of people on this forum are amateurs and beginners at property investing. Most of these people have never seen a slump in the cycle and it will be interesing to see how they react when they don’t see the magical cap gains continue as strongly. This is especially so as it seems most of these people buy crappy $50k properties in hick towns with a population of 5,000.

It’s basically been herd mentality in the last few years when a lot of newby investors jumped in after seeing such good growth. The FHOG, low interest rates and a declining equities market combined have also contributed to this.

The main reason the bubble won’t “pop” is because of low interest rates.
However, the market will platuea out as can already be seen with auctions having lower clearance rates and less bidders. It’s mostly home buyers, not investors that are buying at auction these days.

If rates remain low, or don’t exceed 10% within the next 5 years, it’s likely the market will continue to show modest growth. You can actually get 10 year rates fixed for 7.7%!
People who will get burned are those who pay a premium for OTP in generic inner city blocks and those who over commit.

The wisdom of Quentin – 2.2 cents (includes GST)

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April 9, 2003 - 5:23 pm

Is it a unit or a house?
First you say it’s a unit, then a house, then a unit again?
Not that it really matters re your loan, but if you intend to renovate it, be aware that you cannot add as much value to a unit than a house for obvious reasons.

You can buy this unit/house if you have enough equity or cash for a deposit, AND you can also service the loan.
These are 2 seperate things that you will need to satisfy the bank with.
If the LVR is greater than 80%, you may need to pay MI as well.

[OPMMember@opmJoin Date: 2003Post Count: 110]

April 7, 2003 - 3:48 pm

Hi Susie,
Firstly, i wouldn’t recommend managing your own property unless you have the time and can deal with tenants without being too soft. I’d rather pay my Property Manager a small commission (4% in Melbourne and 6.5% in Queensland) to do this for me as my time is too valuable.

But if you do, i’d recommend reading some books on it first. There’s a couple of good ones out there written by Australians that may help you through the legalities and process.

Re: your questions:
1) This is negotiable and should be written into the lease. Personally, i pay for any excess water usage.
2) I would also pay for the bottle rental. I imagine it doesn’t cost too much plus of course it’s tax deductible. If you wanted to divvy it up between tenants, you’d have to split it pro rata to be fair.
3) Go to your local Real Estate Institute – they should be able to provide you with a copy of a standard lease. Or else go to a local agent and they may let you copy one of theirs if you ask kindly.

Hope some of this info helps,
Quentin.

[OPMMember@opmJoin Date: 2003Post Count: 110]

April 7, 2003 - 3:37 pm

Some tips for an improved forum:
1) I agree, the ability to post PM’s (Private Messages) to other members would be excellent.
Not sure why you can’t do it with this forum because it’s a standard feature on heaps of other forums i’ve visited.
Maybe Snitz don’t have that function or it’s been disabled for some reason?

2) Under member’s profile, it would also be great if you could provide some fields to enter things such as interests, hobbies and occupation to let other users provide more informative replies that are more relevant. Members could also put in their e-mail address if they chose, so that private messages could also be sent this way.

3) The ability to attach files would also be great, eg before and after pics of renovations, spreadsheets for rental management etc.

4) A function to allow users to see any posts they’ve made or responded to.

That’s it for now, but keep up the good work and let’s try and get a great forum going like the more popular ones such as Jan Somers and MSN:[]

http://groups.msn.com/PropertyInvestment/messageboard.msnw

http://www.somersoft.com/forums/

[][][8D]

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April 7, 2003 - 3:11 pm

Hurricane, so…what is the best structure to use according to the “Wealth Guardian?”
And what will you be telling your accountant?

It would be great if you could share with us forumites this tit bit of information about what the “Wealth Guardian” recommends as the best structure to invest in property.

After all, the whole idea of this forum is to share and exchange information and advice, isn’t it?

Waiting in anticipation.

Ciao,
Quentin

[OPMMember@opmJoin Date: 2003Post Count: 110]

April 4, 2003 - 5:01 pm

Yes, settlement is when the title has been transferred into your name and ownership takes place.

However as Steve pointed out, the purchaser has a legal obligation to insure the property from the date of contract, not settlement date. This is also the case in QLD.

Capital gains is worked out from contract date of purchase and sale, not settlement date.

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April 4, 2003 - 4:49 pm

I agree with Stonewall and darren b.
Forget about it. It’s a small amount of money that you should’t waste energy on and lose sleep over.

Consider it a learning experience and move on…don’t look back in anger. You’ve also gained 20% in equity so why complain?
I’m sure he did a runner for a good reason if he lost equity in the deal. Let’s just hope he’s not out there cold and hungry sleeping in a gutter.

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April 3, 2003 - 5:21 pm

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%. Commercial is typically 10%.

If you see a yield like this on a residential, you can pretty much bet that you will have minimal/nil cap growth.

You should keep in mind that the “11 second solution” is someone’s way of calculating yield. You don’t have to be a sheep and be so pedantic about this “rule”. If it comes anywhere over 8%, i think it’s worth a closer look.
The “10.4% rule” is also only applicable with low interest rates, as it’s simply a yardstick to ensure CF +ive based on current interest rates.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%

I call it the “10.4% rule”.

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April 3, 2003 - 5:14 pm

It sounds like a typical case of the house being half built by a family before someone went psycho and killed everyone, burying their bodies in the backyard.

Happens all the time.

Have you checked the kids room for the moving rocking horse and jewellery box that plays music?

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April 3, 2003 - 5:02 pm

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%. Commercial is typically 10%.

If you see a yield like this on a residential, you can pretty much bet that you will have minimal/nil cap growth.

You should keep in mind that the “11 second solution” is someone’s way of calculating yield. You don’t have to be a sheep and be so pedantic about this “rule”. If it comes anywhere over 8%, i think it’s worth a closer look.
The “10.4% rule” is also only applicable with low interest rates, as it’s simply a yardstick to ensure CF +ive based on current interest rates.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%

Don’t be a silly billy and pass up on something just because it doesn’t work out to be exactly the “11 second solution” or “10.4%”.

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April 3, 2003 - 1:08 pm

I concur.