This can’t be that hard… can it..?

Hi!

Who is "we" ? Is it you and your partner, or are there others living in the house?  In other words, do you actually require this extra space, or do you just want it?  If you just want it, ask yourself what the reason is.

You'll need to work out what the cost of living will be upon your retirement.  Also you'll need to work out how much per year your super will pay you.  That will tell you what the shortfall is that property is proposed to come up with for you.

I've been running some calcs.  My assumptions have been :

That I own my own home and it has no mortgage on it.
That my cost of living, provided I don't take an overseas holiday each year, is about $30k.
That the cost of living will go up about 8% a year.
That my super fund will produce 8% growth a year (I'll be pretty ticked off if it doesn't, and am keeping a close eye on it).
That rental return will increase between 5% and 8% per year.
That there shall be at least 2 weeks per year allowed for vacancies in my rentals.
That 3% of all return shall be spent on property maintenance.
That 7% of all return is spent on property management.

I figured out that my super is pretty pathetic, and the only way for it not to be is to shovel overwhelming amounts of money into it and hope the fund manager manages it well.  And frankly, I don't wish to work lots and lots till I am 65.  So this for me is not an option.  I have decided to keep my super fund, but do the rest with property.  That way I do not have all my eggs in one basket.

Take a close look at the performance of the super fund you're in.  You might find that all your cash is in a "Balanced Growth" fund and that the performance is dismal.  Talk to your super fund about whether you can have your cash allocated in a different way in order to achieve a higher performance. 

The general idea in property seems to be buy and hold.  In other words, buy, add some value (eg renovation, or spruce the place up a bit), and rent it out.  You are on a massive salary and therefore you will absolutely be in the top tax bracket.  You  will be able to negative gear any losses on investment properties against your income.  (eg income = rent, costs = council rates, insurance, mortgage interest etc… sadly income does not exceed costs, so you make a loss, and declare it on your tax return and get some money back off your day job tax).  Also if you get a quantity surveyor to do a depreciation schedule on the property, you'll get a tax refund for that too, because your asset is depreciating in value. 

Take a look on the property websites (eg http://www.domain.com.au) to see what certain kinds of properties cost, and what they command in rent.  You will be surprised.  For instance, the rental return is often higher on a house in the suburbs, than it would have been on a townhouse on the city fringe.  This, together with the vacancy rate stats in the magazines (eg Australian Property Investor) will help you select a town to invest in.

You might work out that in addition to the super you have, you might require a rental return from properties totalling say, $500 per week, after expenses (ie insurance, council rates etc).

Sorry, I think I just gave you even more to think about!

Why you are in a sense of inaction is because you need to work out your tolerance to risk
Return is proportionate to risk taken. The higher the risk the higher the return
So if you are a low risk taker then you invest in lower risk investment and realise a lower return is achieved.

Don't make this mistake – Borrow 900,000 for the bigger house and then rent out original house and then expect to be able to claim the interest on $900,000 against the original house you are now renting. The ATO love this common mistake and audit people who try to claim a deduction this way.
You have to have a nexus (Direction connection) between the loan and the income producing asset (Investment property)
So the old mortgage of $180,000 would be directly connected to the original property being now rented out.
If you rent out the original property you are not able to claim the full tax deduction on the $900,000 used to buy the larger house.
Better strategy Buy an investment property using a Line of Credit Loan against the original property equity you are living in.
DO NOT CROSS SECURITISE loans on Both houses.
Use a LOC for getting a deposit for investment property.
Pay off main dwelling/ PPOR loan as fast as humanly possible as it is not tax deductible.
If you want to live in a bigger house you have to decide what is important to you. Your living comfort or getting ahead.

You need to do is get your head around is this concept
What do you pay off your PPOR main dwelling loan with?
Answer : After Tax dollars.
What do you pay off an investment property with ?
Answer: Before Tax Dollars.
So if you Earn Rental income it pays off some of the investment Loan before TAX
If you pay towards the investment loan from your pocket it is before tax due to future tax deduction.
So lets say you have a marginal rate of 40% you would need to earn $1668 to pay off $1000 off your PPOR loan
If you pay off $1000 off your investment loan you need to earn $1000
So if you needed to pay $200,000 in interest you need to earn $334,000 before tax if it is a PPOR type loan
Where as if it is an investment loan you need to earn 200,000 as it is not taxed.

Good Debt and Bad Debt

Good Debt – money borrowed to buy asset that increases over time.
Bad Debt – money borrowed to buy assets that depreciate over time , eg Cars, Holidays, TV's Pool, Ect.
 

You could do this and struggle to pay off a bigger mortgage with after tax dollars but it is capital gains tax exempt.

Do you love doing this as you have to have a real passion to spend all your spare time working on the house ?
What is your time worth as you earn a high income?
Do you value your time is it better spent earning the high wage or working on your house?

If there is more than 2 units in the location you have to deal with body corporate.
What sort of return are you referring to . Income yield or capital gain.?

Yes but don't forget the establishment of fences and gardens.
Some people buy a big block with a house on it and develop it by sub dividing it – risk is higher if you can't sell two houses it at the price you want. Also 10% GST tax will be involved.
A strategy I have heard of is buying from a later release stage in a rising market as by the time you have to settle you have made a capital gain.

This is not such a dumb idea. Your original house could end up positively geared and help you to pay off the unit.
Also any expenses on the house you are renting are not your problem but your landlords.

PeppersGhost wrote:

6. "leave me alone, I'm sick of talking about property investing" I understand there is a certain 'art' element to this, but surely there is a mathematical answer to this – which strategy is likely to make the best return, based on property prices increasing, and the tax laws as they are currently? I'm in Western Australia by the way.. if that makes any difference. Would love to hear a definitive answer here – even if the answer leaves me with only two potential strategies to consider. Your help is appreciated

Mathematical Equation.
Return = Risk Taken * Amount invested.
Or
Wealth = Other People's Money ( leverage / borrowed money) * (1+.07)^N        N being the number of years your OPM compounds.

You should be more worried about doing nothing  . You have to be in the game long term to win.
Leave me alone is like an ostrich sticking its head in the sand.
Take advise from People who own a lot of property. I do not own a lot of property but I do read a lot of books and have listened to other investors who do have lots of property. That is why reading is important.
 

Concentrate on building wealth (if you pay off the loans as quick as possible you build wealth)
Property investing is really a long term investment strategy.
Some people do active investing which is improving an asset and then selling it. Requires Time and Problem solving.
Some people do a passive investing and sit and hold property
There are two approaches with passive investing.
Negative Gearing – Interest Rate risk and Stable Employment required. Relies on Capital Growth . No Capital growth equals a loss as you pay the negative loss each year but didn't gain capital value in the long run.
Leap frogging – Value goes up on existing properties so you borrow against the increased equity to buy next investment property.
                           – Read More Wealth book if you want to know more.
Positive Gearing – May get low capital growth but property doesn't cost you any thing to hold. You can pay it off quicker as it costs almost nothing when tenanted to own it. Advantage bank will lend you money readily as you pay down loans and operate on a lower LVR figure.

Suggest you buy Australian Property Investor Magazine and read the case studies.
Also you may wish to buy property investing books from http://www.businessmall.com.au
I know you might have a headache and seem overwhelmed but knowledge = wealth.
It is better to know all the different methods and decide which one you are going to choose to follow, that suits your risk tolerance and life situation..

Another Formula for wealth building I came across
                        1.              Buy income producing Asset
                        2.              get income
                        3.               use asset's income and your other wage income to help pay down loan
                        4.               after paying down loan to a cash flow neutral point
                                          use asset's income plus newly acquired property income and equity to buy another income
                                          producing asset.
                        5                 go to step 2 and repeat 2 – 5

I'm just starting out too but the one thing i have learned is that 'Analysis Paralysis' can set in for analytical people.  I too have spent a lot of time researching different markets.  Adelaide or interstate, house and land or apartment, new or existing, closer to the city with less house for the buck or further out with more house for the buck, which suburb – what have median prices been doing, what are current rents…

I got to the point where i realised i was never going to make a decision for fear that i would then come across a better deal next week… This is never going to happen to me – why you ask?  Because after i decide on my first investment property i won't be looking at others for at least a little while – so i'll never know if a better deal comes up.  If you are in a position where you will be looking at investment properties the week after you buy your first one then i assume you are way more cashed up than i am and if you find a better deal – buy that too!

The other thing i have come to realise is that the longer i wait the more it costs me as prices are on the rise, so there is a 'loss' associated with waiting and doing too much analysis.

So, my theory is now:

Buy something new so i can maximise depreciation claims, in an area close to either Adelaide, or major transport corridors into Adelaide (northern expressway, southern expressway etc), with all the desirable infrastructure within arms reach – schools, shoping centres etc.  Get a tenant in, wait until the equity builds up and repeat…

Cheers.

Why wouldn't land have an income for up to 2 years?  I got a house and land package, and from the time of signing to the time of moving in was 6 months.  It would have been faster had the time not spanned Christmas, when tradies shut down for a couple of weeks.  It was a great acquisition for me.  I bought land really cheap in a new housing estate.  There was virtually no stamp duty because there was as yet no dwelling on the property.  And I got a nice new place

The ability to get finance for an empty piece of land with no particular immediate plan for construction and earning rent would need to be addressed with the bank.  I also read somewhere that you can't get the dwelling on a fixed interest rate – that it had to be on a variable rate until construction is complete.

You are right that if you are no good at, and do not enjoy being a handyperson, don't.  But it doesn't mean that your property can't be renovated.  Outsource the tasks to the pros.  Painters and such like.  And if you are not creative and can't think up a nice look for the new kitchen that is needed, steal ideas from display homes (take your camera along!).  Go and look through houses that are up for sale when they are "open for inspection" and see what other people are doing with kitchen renovations.  Get ideas from magazines.  Then simply show the picture of what you want to the relevant tradie and say "do this.  This is what I want it to look like."  Also their invoices will be tax deductable.  And also they can get paint and other supplies far cheaper than you could.  And they'll do the job faster than you could

Anyway, it is awesome that you've picked up some tips from everyone's comments   Never be afraid to say "what's that, I've never heard of that!" if someone mentions something that sounds new to you.  There's also the factor of "you don't know what you don't know", so if a particular process seems overwhelming, sometimes throwing the question out there of "why is this so hard, here is how I've done it, am I missing something?" can produce some great educational tips from others

I don't have the millions, but even though I'm somewhat unqualified, I'll second dwolfe's opinion on multiple lower value ips being a better solution than million dollar ip.  One common thought is that in times of downturn, lower end property is less affected than top end property, in terms of value, rentability, rental rate, everything.  I think we see real evidence of this in the recent downturn.  During the recent downturn, my IP (lower end freehold residential property) continued to gain value, and rent continued to rise as it has always done.  There is alot of sense in this.

I didn't read all the above, too many words….

So you have a high income, paying highest rate of tax,
You also have good equity in your PPOR, 80% of 470k is what lender normally let you use = 376k

And you are only 40 only.

Just invest in brand new apartment, in prime suburb (not city area, because lender consider them as high risk), get all your lovely tax back, also you don't need to worry about rent because it is in prime suburb and it is brand new.

Buy as much as you can afford on the weekly payment. Research to do is, how many people go to a open session for rental property in that area? how much tax you getting back? can you borrow the money to buy it?

20 years later, you will be a happy fella without even touching your super at all.

Love to be in your situation~

I reckon financial best is probably to rent a place to live (worth about 650K or less) and rent out 650K place.  Lifestyle does come into it, though, and personallly I much prefer living in my own home.  Of course, that is a very short answer and there is alot to consider and you need to confirm the answer with some maths.