Forums / Property Investing / General Property / Truly a beginner question

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  • Profile photo of patrickrajpatrickraj
    Member
    @patrickraj
    Join Date: 2004
    Post Count: 6

    Hi Folks,

    I’ve just been reading a couple of property investment books and most authours advocate renting the house u live in while buying property.
    What i don’t get it is, u let your IP out to rent so that u can get recurring positive cashflow but at the same time while u are renting, are’nt u paying more out as well? Coz your landlord might be wanting the same thing.

    Can anyone pls point me in the right direction pls.

    regards,
    Patrick

    Patrick Raj

    Profile photo of MonopolyMonopoly
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    @monopoly
    Join Date: 2004
    Post Count: 1,612

    Hi Patrick,

    I believe the theory behind that is to actually get more rent for your IP than what you are paying to someone else eg. you rent your IP for 250 p/w whilst paying Jo Average say 200 p/w thus you just made 50 p/w. Sounds simple enough doesn’t it? But it’s not that straight forward, people often overlook the finer details.

    It is a one way of doing things, especially when you are starting off, but not for me I’m afraid.

    BTW….even though I have been investing property for years (trust me, many many years)….I still feel like a “beginner” when I talk to people such as those in this forum.

    All the best,

    Jo

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Patrick,

    One of the key reasons (if not the key reason) is that all costs associated iwth your own home are not tax deductible and as such owning your home is accomplished all by yourself and without the assistance of tax refunds or reductions.

    Whereas as soon as you convert your home to an investment property all (most?) of the costs are deductible either as immediate deductions or depreciable items depending upon the nature of the expenditure incurred.

    As such you can own your home slightly quicker this way as the taxman is helping you too. The tenant contributes tooif your rental costs are less than your tenants.

    Such a move does take a leap of faith by yourself and is a little ‘different’ to the norm. But some successful investors I know do not own their home.

    In the current market Monopoly’s point ocmes into play in many metropolitan markets at the moment where it is cheaper to rent than buy the same house.

    Me – I still like to call somewhere home[exhappy]

    Derek
    derekjone[email protected]

    Property Investment Support Available. Ongoing and never stopping. PM welcome.

    Profile photo of JustAllanJustAllan
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    @justallan
    Join Date: 2003
    Post Count: 168

    I’ve found this a strange way of thinking too – but I guess it depends on the value of your PPOR. I mean, if you’re living in a $30,000 house, I don’t see the point. But if was a $450,000 one…

    I think they’re saying that you rent your own home out, but you in turn rent yourself for less than that rent you’re receiving. This gives you more free cash to use for investment purposes.

    Also thinking about it, if you “transferred” your home from yourself, to your business asset (IP – investment property), you can now claim all sorts of tax deductions – that – if it was still your PPOR – you would have had to pay for out of your own pocket. Also, because you’re now renting yourself – you don’t pay those where you’re renting either – your landlord’s does (or his tax deductions do).

    Allan.

    Profile photo of AceyduceyAceyducey
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    @aceyducey
    Join Date: 2003
    Post Count: 651

    Right now rental returns are so low that you can get a nicer house through renting then you can get through mortgage repayments.

    Also why tie up your equity in a PPOR when you can leverage it into IPS.

    Frankly there are plenty of good points on both sides of the fence of this discussion – and you can get there following either a PPOR or rental approach.

    For myself, we used to own our PPOR, now we rent one of our own properties (held in a Trust).

    I have a great landlord!

    Cheers,

    Aceyducey

    Profile photo of MiniMogulMiniMogul
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    @minimogul
    Join Date: 2002
    Post Count: 1,414

    I totally get this question and agree with the book’s advice. We rent an 800K house in Sydney for the poor landlord’s (had they bought the property today) 2 percent yield.

    Meanwhile I have properties which earn me 20 percent yields in good old NZ which more than cover my half of the rent.

    And here’s the amazing bit, my properties are worth only a tenth of the value of the place I am living in – the amount of a deposit on where i live now! And the rents from my investment properties completely support me living in a place in Paddington, Sydney which I could no way afford to buy.

    mind boggling huh. Cause i did the numbers, see!…..let’s say I bought this 800K place, I would have had to have 80 to put in as a deposit, had interest only of probably 1200 a week, plus maintenance and rates….which would have cost me approximately…hmmm….6-7 times what I am paying now!!!!!! Less the income from my rental properties, make that 8 times!

    in case you’re still not convinced-

    Like someone mentioned above, Mortgage interest on own home has no tax benefits. It’s paid out of tax-paid dollars, the worst sort! But interest on investment properties is tax deductible.

    the gov’t’s way of kicking back investors for helping them solve a problem which if not for investors would mean state housing would have to spend a whole lot more money.

    There’s more reasons for it too – i.e. I work from home full time, and so a portion of my rent and bills are also tax deductible. Even if you are an employee you can start a home-based business on the side I think (property investing!!) and take advantage of the tax laws.

    In fact… I can’t imagine one single financial reason to own one’s own home first. The only reason is an emotional one as far as I can see.

    All of this is just my opinion of course…I love a debate so bring it on. Anybody?

    “Coz your landlord might be wanting the same thing.”
    Not quite….me wanting to make money, as in, real cash not just ‘equity’.

    Landlord wanting to lose money, actual hard cash they pay into their property out of their pocket each week, in the hope of either ‘legally minimising tax’ OR capital gains.

    If all things were equal and you for example rented an identical house to the one you had as your investment property, you’d still save with tax write-offs.

    cheers-
    Mini

    Profile photo of glenettiglenetti
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    @glenetti
    Join Date: 2004
    Post Count: 44

    Hey Mini

    No argument. You just made me feel really stupid, now that my own house is almost paid for. Unfortunately I only discovered last year that my own house is no investment.

    Having trouble convincing the wife NOT to add that extra room to our house, cause it is no investment – until I realised I can add the room, then get a re-valuation and take the cash out again and invest it appropriately. Sounds like win-win-win.

    Acey – I loved your comment about your landlord.

    Glenn

    Profile photo of SonjaSonja
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    @sonja
    Join Date: 2004
    Post Count: 338

    Some things are worth more than money. In my opinion one of them would be my own home. Somewhere that I can’t be evicted from because it is being demolished to build a duplex/the owners son is comming back from overseas or whatever reason or whim strikes the owner of my rented “home”.

    I want my kids to grow up in one place – last two moves broke their hearts (well the eldest anyway -my baby is too young to care… yet).

    That’s my opinion, however I just can’t do it right now. I also believe that, if you are more like my husband (not at all sentimental about the “home of your own” thing”), then there are definite financial benifits in renting while you build an IP portfolio.

    Regards
    Sonja

    Profile photo of patrickrajpatrickraj
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    @patrickraj
    Join Date: 2004
    Post Count: 6

    Hi Folks,

    Its starting to make more sense. Does this mean that if i were to have a IP that rakes in $300 and say my principle repayments etc comes up to $250, the $50 excess that i make is not going to be taxed because it is an IP??

    regards

    Patrick Raj

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Patrick,

    Not quite – but you are getting there [exhappy].

    Deductible loan cost do not include principle repayments. Assume you are paying $1000/month with $800/month interest. Only the $800 is deductible as the other $200 goes towards loan repayments and is not considered a cost of the loan.

    Any income in excess of expenses will be taxed and this is calculated over the course of the year.

    So assuming your property is making you $300 month and is costing you (excluding principle repayments) $250/month – this means you are makng a profit of $600/year. This would be added to your other income sources and taxed accordingly.

    If however the numbers were reversed and you made a loss of $600/annum this would be deducted from your taxable income.

    Derek
    [email protected]

    Property Investment Support Available. Ongoing and never stopping. PM welcome.

    Profile photo of zizziz
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    @ziz
    Join Date: 2002
    Post Count: 90

    Hi glenetti

    Absolutely spot on. By not redrawing the money used to pay down your PPOR you are literally using the pile of cash sitting under the bed.

    Obviously one needs to invest this money correctly to maintain your safn (sleep at night factor).

    Unfortunately the marketiers are starting to get hold of this concept and pushing people to use the ‘equity mate’ to make lifestyle purchases and simply blow their mortage on doodads.

    Cheers

    Profile photo of melbearmelbear
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    @melbear
    Join Date: 2003
    Post Count: 2,429

    The other ‘benefit’ of renting vs owning, is that you don’t pay rates/land tax etc. etc. on your rental – the landlord does.

    So your rent (plus utilities) are your costs of living in the house. If you in turn rent out your PPOR, you get to claim the costs of these items that you are paying in your tax return.

    Cheers
    Mel

    Profile photo of sizzling_ducksizzling_duck
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    @sizzling_duck
    Join Date: 2004
    Post Count: 129

    How does the tax office view for example,

    Say my brother lived in what was my PPOR paying rent and I lived in his property paying rent. The rent paid to each other was well below the average for the area.

    Are there any real limits to this method?

    Profile photo of luckyoneluckyone
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    @luckyone
    Join Date: 2003
    Post Count: 148

    As far as I know you can’t claim on an IP unless it is at market rates. This is especially prevalent if you are renting to relative. The tax office looks very harshly on this.

    Thanks,
    Luckyone

    Profile photo of SuperTedSuperTed
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    @superted
    Join Date: 2003
    Post Count: 205
    Originally posted by MiniMogul:

    I totally get this question and agree with the book’s advice. We rent an 800K house in Sydney for the poor landlord’s (had they bought the property today) 2 percent yield.

    Meanwhile I have properties which earn me 20 percent yields in good old NZ which more than cover my half of the rent.

    And here’s the amazing bit, my properties are worth only a tenth of the value of the place I am living in – the amount of a deposit on where i live now! And the rents from my investment properties completely support me living in a place in Paddington, Sydney which I could no way afford to buy.

    mind boggling huh. Cause i did the numbers, see!…..let’s say I bought this 800K place, I would have had to have 80 to put in as a deposit, had interest only of probably 1200 a week, plus maintenance and rates….which would have cost me approximately…hmmm….6-7 times what I am paying now!!!!!! Less the income from my rental properties, make that 8 times!

    in case you’re still not convinced-

    Like someone mentioned above, Mortgage interest on own home has no tax benefits. It’s paid out of tax-paid dollars, the worst sort! But interest on investment properties is tax deductible.

    the gov’t’s way of kicking back investors for helping them solve a problem which if not for investors would mean state housing would have to spend a whole lot more money.

    There’s more reasons for it too – i.e. I work from home full time, and so a portion of my rent and bills are also tax deductible. Even if you are an employee you can start a home-based business on the side I think (property investing!!) and take advantage of the tax laws.

    In fact… I can’t imagine one single financial reason to own one’s own home first. The only reason is an emotional one as far as I can see.

    All of this is just my opinion of course…I love a debate so bring it on. Anybody?

    “Coz your landlord might be wanting the same thing.”
    Not quite….me wanting to make money, as in, real cash not just ‘equity’.

    Landlord wanting to lose money, actual hard cash they pay into their property out of their pocket each week, in the hope of either ‘legally minimising tax’ OR capital gains.

    If all things were equal and you for example rented an identical house to the one you had as your investment property, you’d still save with tax write-offs.

    cheers-
    Mini

    Agree 100% with Mini.

    A different perspective I think all young people (when i started, last boom, crash ;-) buy an investment property as it funnels their money into something worth while instead of latest fashion, clothes and axcessive amount of p#ss. Staying at home with 2 investment properties was the best thing i did when i started out (thanks mum).

    I think like mini now but it is easier when you have set yourslef up a fair bit.

    Profile photo of sizzling_ducksizzling_duck
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    @sizzling_duck
    Join Date: 2004
    Post Count: 129
    As far as I know you can’t claim on an IP unless it is at market rates. This is especially prevalent if you are renting to relative. The tax office looks very harshly on this.

    ‘Market Rates’ sounds like a very large grey area. How would they determine the rates for a place that could in fact have reasons for being so cheap to live in.

    – rental doing work in the garden or some other CG (potential) increasing activity.

    – a particular issue with the very localised area that means the rental income would be lower. A good example would be a terrible neighbor.

    Is there a specific article I could read on this issue to see how it would work for me?

    Profile photo of aussierogueaussierogue
    Participant
    @aussierogue
    Join Date: 2003
    Post Count: 983

    when you have a rental property you are generating income. on yr ppor you are not. therefore this allows you to keep borrowing to buy more properties. so for me its all abt cashflow. plus as some of the others said i can live in a 700k house (renting) with the cashflow eing the same as servicing a mortage on a 400k house. so even though you may like living in your ‘own’ house you are infact living in 50pct less luxury…

    Profile photo of thefirstbrucethefirstbruce
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    @thefirstbruce
    Join Date: 2003
    Post Count: 133

    Acey, have you checked out renting a house from your own trust rigorously with your acct? Seems like something the ATO wouldn’t look favourably on. How long have you been doing that for?

    Bruce
    Mooloolaba, Qld

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