Hi, am looking for something fairly positively geared as the rising interest rates are scaring me. Worried we're in over our head (a 2% increase will increase our annual interest repayments by over $40,000, and we don't have much of an income to negatively gear.)
We've bought 7 properties in the last 12 months (have 10 all up,) and while I knew rapid ncreases were possible, I was banking on rates being low for a long time, and increasing rent, increased savings in our off-set account, and improving incomes to off-set the increases when they happened. Hmm…maybe not such a great plan.
Hoping for some advice – is trying to buy something positively geared without worrying about potential CG a good strategy to try and 'mop up' some of the defecit, or would that only dig us in deeper?
If it is a good idea, would buying in the Newcastle area, but on a busy road, or buying in a country area, be a safer bet?
Would appreciate any ideas (and also to hear if anybody else is worried about being able to hold onto their IP's if interests rates rise too rapidly.) I always knew it would be risky to max out our borrowing capacity while propertywas well-priced and times were good, and promised myself I'd have no regrets about 'giving it a go'morgan1 wrote:Hi, am looking for something fairly positively geared as the rising interest rates are scaring me.Worried we're in over our head (a 2% increase will increase our annual interest repayments by over $40,000, and we don't have much of an income to negatively gear.)
.
Consider fixed interest rate loans if you think you are in stable employment or reducing your borrowings
Say as an example you are on a marginal rate of 40% tax this means you spend say $10 in expenses to get $4 dollars back. This is a loss of $6.
You have to make a capital gain of $6 after capital gains tax to be even.
So you are very reliant on capital growth. It can be done but what happens if no growth and higher interest charges.
morgan1 wrote:We've bought 7 properties in the last 12 months (have 10 all up,) and while I knew rapid increases were possible, I was banking on rates being low for a long time, and increasing rent, increased savings in our off-set account, and improving incomes to off-set the increases when they happened. Hmm…maybe not such a great plan.
Don't get too down on yourself it was a reasonable strategy but where you may have gone wrong is expanding too rapidly without letting the rents increase over time (1 to 2 yr time frame between each purchase) while at the same time increasing your equity through capital gain and by paying down loans or saving money. A lot of property investors have a LVR limit as a control on this as it is easy to get carried away if you have the investing bug. So they might say I will have an 80% LVR limit on my borrowings or it could be a 70% LVR limit.
morgan1 wrote:Hoping for some advice – is trying to buy something positively geared without worrying about potential CG a good strategy to try and 'mop up' some of the defecit, or would that only dig us in deeper?
If it is a good idea, would buying in the Newcastle area, but on a busy road, or buying in a country area, be a safer bet?
Usually its one or the other. As you are negatively geared you may find a positively geared country property will add as an example $40 a week into your pocket. It is not going to help your deficit much but the $40 a week would improve your cash flow.
Ask your self these questions
(Q1) How many positively geared properties can you afford to own from a cash flow view point?
(Q2) How many negatively geared properties can you own from a cash flow and equity view point?
Answers
(Q1) Heaps they are not costing you anything to hold them.
(Q2) 10 in your case and now you are having a hard time maintaining the cash flow loss and soon the bank will say your maximum loan amount is reached.
Another strategy when mixing negative with positive is to own enough cash flow positive properties to have enough positive cash flow cover the negative cash flow of the negative geared property.
But in your situation you are more negatively geared than positive.
morgan1 wrote:
Would appreciate any ideas (and also to hear if anybody else is worried about being able to hold onto their IP's if interests rates rise too rapidly.) I always knew it would be risky to max out our borrowing capacity while property was well-priced and times were good, and promised myself I'd have no regrets about 'giving it a go'If you fix the interest rate on your loans you then have a definite interest cost for a defined period to work out your figures from.
You may wish to split the loan and have 10% variable and 90% fixed
This allows you to pay off 10% of the loan.You may consider as another method what is called interest averaging.
You split the loan
and do the following
30% fixed for 5 years
30% fixed for 4 years
30% fixed for 3 years
10% fixed for 2 years
in two years time you can decide if you want to fix 10% for another 5 years
in three years time you can decide to fix 30% for another 5 years
in four years time you can decide to fix 30% for another 5 years
in five years time you can decide to fix 30% for another 5 years
So each year a small amount of your loan is becoming variable and you can then decide if you pay it off or fix the interest rate again.The draw back is that you may pay penalties called break costs if you break the loan before the fixed interest time period.
You may decide to Fix a maximum % to allow you to sell a certain number of properties if you get into troubled due to a percentage of your loan amount being variable interest rate.Another thing to be wary on
What if scenario
What happens if a tenant trashes a place – landlords insurance policy – Do you have each property insured?
– 3 months or more without rent during repair phase?
– $20,000 repair bill can you borrow it or have cash on hand in an emergency !I had to add some more comments in !
You are on low incomes.
Lets take an example of you earn $50,000 and your partner earns say $45,000
Now with the tax scales
$0 – $6000 is nil
$6001 – $34,000 is 15%
$34001- $80,000 is 30%
$80,001 – $180,000 is 40%
see http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htmLets take an extreme case you both lose $30,000 a year
you
$50,000 – 34001 = $15999 * 30% = $4799 in tax
$ 34,000 – 6000 = $2100 tax payable Note $4200 in tax max amount achievable on more loss made
Total tax = 4799 + 2100 = $6899
So you lose $30,000 so you can get back $6899
You have room for another $14,000 loss to get $2100 back before you hit the $6000 mark in the tax scales
(This could be depreciation costs , you could employ a quantity surveyor to claim depreciation – may help your cash flow but may increase your capital gains tax!)
Partner
$45,000 – 34001 = $10999 * 30% = $3299 in tax
$ 34,000 – 6000 = $1649 tax payable Note $4200 in tax max amount achievable on more loss made
Total tax = 3299 + 1649 = $4948
So you lose $30,000 so you can get back $4948
You have room for another $23,000 loss to get $3450 back before you hit the $6000 mark in the tax scales
(This could be depreciation costs , you could employ a quantity surveyor to claim depreciation – may help your cash flow but may increase your capital gains tax!)Now you do know about a tax variation form from the tax office to increase your weekly cash flow ?
http://www.ato.gov.au/individuals/content.asp?doc=/content/00188348.htmNow what if you made say an extra $20,000 between you from a portfolio of positively geared property
$10,000 * .30 = $3000 tax each
So you make a total partners profit of $14,000 after paying tax compared with
A total partners negative geared loss return of –$48153Now what if you made say an extra $60,000 between you from a portfolio of positively geared property
$30,000 * .30 = $10,000 tax each
So you make a total partners profit of $40,000 after paying tax
Assuming joint ownership.I hope this highlights that negative gearing is not as attractive under the lower tax scales being introduced.
I know that this is heresy but if reasonable capital gains have been made on one or two of the properties, a tactic which could be used it to (dare I say it) sell one of these properties in order to pay down debt and get the interest beast under control. The thing to be aware of is timing, in order to qualify for a 50% discount on CGT you must have held the property for 12 months.
The other thing to be aware of is that variable interest rates are generally lower than fixed rates even in a rising market so there may not be a point to fixing rates if the banks have factored in the interest rate rises already.
Thanks for the comments guys. Really touched how helpful people are here, and the effort you put in even when there is seemingly little return for all the time it must take you.
Duckster, I'll sit down and re-read your information when the (6!!!!!) kids are in bed tonight and I can think straight. Our income is even lower than the examples you used – I work part-time for $26,00, and my husband is a Uni student on no income! How the figures kept working out for us to borrow I'll never really understand – our PPOR is paid off, so equity wasn't a problem, and we had 2 positively geared properties, and whenever we presented a deal to the bank that was returning around 6% (7 times in a row!) the figures seemed to work for them. I don't even know what our LVR is (although on the last house we'd well and truly run out of serviceability and had to add some to the buying and reno costs.)
Scott, we've tried to crunch the numbers to see if anything is worth selling yet, but given that we borrowed 110% on them all exccept the last one, and for 2 borrowed extra to renovate, I'm pretty sure CG wouldn't be enough yet to even pay off the loans. When we had the renos re-valued by the bank, they only came back at what we'd spent on them. Maybe that's different to what we'd actually get if we sold, though.
At the moment, we're torn between trying to sell a few so as not to have to sell when interest rates are higher, and there are less buyers, or waiting to see if things really do get dire for us. There's always the chance we will be able to hang on for a while and it would be kinda painful to miss out on a boom by a year or so (if indeed there is one coming.) It's hard because it all depends on the employment situation of my husband after Uni, which at the moment is a big unknown.
Anyway, thanks for the chance to have a bit of a 'chat,' and thanks again for the kind replies.
I would start to plan ahead a bit and make sure you know what you will do when rates hit x%, how will you cope etc. You don't want to be caught out at the last minute and have to sell urgently or suffer a default and be unable to refinance etc.
Also I don't think it is a very good idea to buy a property without any CG prospects. Even if it is positive geared, what if rates rise and it becomes negative or a new hotwater system is needed etc/.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Also if at University be careful if on
Austudy as if you sell in the same financial year as the Austudy and make a capital gain Centrelink wil deem you earned income and take back some of the Austudy as it will be deemed over payment.
Been there
Done
that !Thanks Terry. Makes sense. The one we're considering would return 8 – 9%. It's in an okay area of Newcastle where CG has been 10% over 10 years, BUT it's on a very busy road and even worse, right next to an intersection. Near the Uni though, divided into 2 flat, and in an area where rentals are tight, so should usually be tenanted. While properties with obvious drawbacks like this has would be under the growth rate of the rest of the area, I'm assuming it would still grow somewhat (that is, if properties gained $50,000, it would still gain, say, $40,000???)
Hi Morgan, in that case it could be in for some CG – but becareful the high return doesn't mean the owners have increased the price to compensate. Maybe you could buy something elsewhere and create a second flat or split it in two and rent each separately.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Hi Morgan, in that case it could be in for some CG – but becareful the high return doesn't mean the owners have increased the price to compensate. Maybe you could buy something elsewhere and create a second flat or split it in two and rent each separately.I agree with Terryw. It would be better if you buy another property in somewhere else and rent these separately. I think this might be a good solution for you.
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