Need your advice to see if i'm doing the right thing before its too late. My husband and i are work full time and both on the highest income bracket and get taxed heaps each year. We have one IP which we still owe about $280K valuated at $470K and a OC house which is fully paid value ($400K) . Both properties are in the South western suburbs in Sydney.
We have 2 children both under 4 years ( so not yet started school yet) but we are starting to think about their education and prob like all other parents looking to eventually move into a better area for their schooling.
We like this house in the inner west which might go for $1.2M . We are thinking if we could buy this house we could rent it out for 5 years claim NG as the interest expense to quite hefty. We also like the suburb as it is close to the city so i could do school pick ups when the start school as I work in the city.
We are planning to use the equity in the IP to finance the new property and also some cash to make up 80% to avoid LMI. The rental for the area is dismissal around $500-600 pw .
Our current IP is not NG .. its also not positive so its not helping our tax situation . We are comfortable now but if we make the purchase we will be watching every penny.
Another option for us is to buy 3 homes around $400K each ( SW sysney ) and rent them out and forget about the dreams of living closer to the city.
Sounds to me like you know full well you'll have your backs to the wall if you go with the "all eggs in one basket" strategy (the 1.2mill property).
Remember that negative gearing still involves making a loss. It shouldn't be your reason for purchasing.
Why not get 2 x $400k properties right away?
Have you looked into starting a SMSF (self managed super fund) and using it to buy property? It might turn out to be a much better tax-saving strategy if you're in a top tax bracket…. there are a number of threads on this forum about it
My partner & I are also both in the top tax bracket have found the best thing for us was to get our super into a SMSF( you dont need $200K ) & the NRAS program to reduce the tax mans take on our money. With the worlds monetary problems getting worse as time goes on, I will not be maxing out my credit.
JacM, I have heard you need at least $100-$120K in an SMSF for scale purposes…a couple of reasons:
1. Ongoing and upfront costs as a % would be prohibitive, if you had say, $50K in your SMSF. The setting up of the best structures, and costs associated with ensuring compliance with the ATO can run into the thousands every year.
2. SMSFs require 30% and above for a deposit to purchase properties on by using their SMSF. If you had $75K in an SMSF and you could only purchase an investment worth $225K (approx) plus buying costs.
How huch did your current super fund charge you in fees last year?
How much did they make you?
I did not have much in my super at all either so my partner & i combined the both of ours as you can do with up to 3 other people( trusties ). Investors pool their funds to get better market share, better returns & limit risk. My farther wants to become a trustee in our fund as well as his fund is hasn’t made much head-way for some time.
I am settling on a 2br 1bth unit for 110k returning $240pw. The SMSF will put up 30k + closings as the bank will will lend 72% LVR.
Thats 11.3 % yield gross. I think now is a great time to buy some great buys in the lower price range. And if the market does drop, the loan repayments wont put a strain on the fund. As for now, after all cost it will put about $40 pw back into the fund.
I think you would be better off buying 3 x $400k properties as IP's as opposed to 1 x $1.2m property. Rental yields on cheaper properties are much better than on expensive properties- you would likely get 4.5% yield on a $400k property but only 3 – 3.5% yield on a $1.2m property.
You could then look again at buying a more expensive PPOR once you have built up equity in your IP's. Make sure you set up your IP loans mas interest only (not principal and interest) and put excess money into an offset account- this is CRITICAL to ensure that you can then use this money for a nice inner west house to live in in 5 years time and still maintain tax deductability on this money.