Negative & Positive Gearing

Hi Novice,

Actually your deal is not as bad as you may think.
From the quick calcs that I have done it looks like it will cost you a bit over $2,000 dollars to keep AFTER tax. (If the interest rate doesn’t go up etc…)

Make sure you depreciate the property and claim all expenses. (including interest. The stamp duty is a capital cost NOT an expense.) (See your account to see what you can do.)

Positive geared properties are nice but hard to find. I personally think that negative gearing has its place in property investing.

Put it this way. The property you have bought will be worth say $550,000 in 7 years time (7% growth p.a). It would have cost you 7*2000 = 14,000 to keep over this period but your capital gain will be 550,000 – 340,000 – STAMP DUTY (This is where you get some back) – Agents comission – adverstising etc… = 180,000. (Ok you will have to pay tax on this too.)

So your net profit of this period will be around 165,000. (without tax. To avoid the tax don’t sell the property!)

Let’s say you buy a positive geared property for $80,000 which puts $1,000 in your pocket every YEAR. (Yes PER YEAR, and I am being realistic, maybe a bit generous…)

In 7 years time the property will be worth $140,000 so your net profit will be $67,000 (without tax.)

However with this method you could have 5 or 6 or whatever positively geared properties, whereas you can’t afford to have too many negatively geared properties.

What I am saying is: the deal you made is not bad. (You will still make a healthy profit (hopefully) in due course.) However there might be better stratergies. It all depends on the invester.

Also for positive geared properties you will need to have 4 or 5 to make it worth while and therefore a lot more admin work.
It all depends on you, your goals and your situation !

APIM

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Australian Property Software

Coming very very soon…
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Hi Novice,

Thanks for your post and welcome to the forum.

First off, let me say that while you have purchased a property that I probably wouldn’t have, at least you are in the market and will now benefit from practical experience.

So, to that extent, congratulations on making a decision. Now it will be important to maximise your investment rather than just letting it drift along. I’d be looking to answer the question -“how can I add maximum value for minimum cost?”

Now, to answer your questions:

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1) what will be the tax implications or cashflow effects of having a negatively and positively geared IP?

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You will be able to use your property loss to offset your assessable income and reduce the income tax payable on your salary income.

A quick crunch of the numbers:

Rent: $16,952
Interest: ($20,895)
Rates: ?
Insurance: ?
Property management: ?
Repairs: ?

It looks like you will need to pay $100+ per week for the property. A portio of this will come back to you as a tax benefit, but the majority (that is 1 – your marginal tax rate) will be lost and will need to be recouped through capital gains.

quote:

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2) will the loan interest on stamp duty be tax deductible?

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The loan interest will be providing the property is used for investment purposes. As I understand it, the stamp duty is a capital cost and must be accumluated into your purchase price.

A good post on the topic is:

https://www.propertyinvesting.com/forum/topic.asp?TOPIC_ID=1174

Thanks again for your post and have a wonderful day.

Bye,

Steve McKnight

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Remember that success comes from doing things differently.
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Hi,

You can get a little more value out of that property if you claim depreciation. (Assuming you’re not already).

For the building itself, you can claim 2.5% of it’s value until the building is 40 years old. There is a slightly different rate if that property was built between ’85 and ’87 but thats a long story.

Also, things such as carpets, blinds, fittings, chattels are also claimable.

In order to claim this you need to get a Quantity Surveyor to check out your property. http://www.deppro.com.au is one such QS, there are many others. They will give you a report, which you can show your accountant – and s/he will know what to do with it []

Hopefully you’ve already done this. I’ve seen on some $350k properties an $8k per annum deduction – just for depreciation. This helps [8D]

– Regards

Dave

Hi Novice,

Congrats on your 1st purchase. I have recently bought a house in melbourne as my IP and want to fix the loan for 5 years as well. You seem to be getting a very good deal. Could you please tell me which which bank offered you 5.97% for 5 years and what are the other charges on this loan like estd. fees, account keeping fees etc.

Thanks in advance
-D-

Hi

In reply to your question

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Now, if it’s not too much to ask – how can I add maximum value for minimum cost????

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There a number of simple things you can do to maximise value in terms of increasnig rents which will hopefully drop your weekly out of pocket expenses.

Things like give the tents a ‘free’ fridge or dvd player but increase their rents by say $10 p/w – you can pick up god DVD’s for aound $150 these days and will be paid off in 15 weeks and you then get the extra $10 p/w as cashflow.

Basically any way to increase percieved value is a great way to increase rents and the added margin will put a little extra in your pocket.

Hope this gives you some ideas….

Pete

quote:

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Hi Novice,

Congrats on your 1st purchase. I have recently bought a house in melbourne as my IP and want to fix the loan for 5 years as well. You seem to be getting a very good deal. Could you please tell me which which bank offered you 5.97% for 5 years and what are the other charges on this loan like estd. fees, account keeping fees etc.

Thanks in advance
-D-

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We got 5.97% fixed for 3 years through the commonwealth bank. There are no fees, because we qualified for the wealth package (owe more than $250K) which gives you no fees on loans or mastercard and 10% off bank products (insurance) – but you pay $300 per year (which I feel I more than save on interest). Plus they gave me .5% off the variable rate if I want to go variable.