Just Bought My First House

I

Infest

Hey guys, as you may remember I posted on here last year regarding me wanting to buy my first house when I was 18.

I finally have done so :)!

Now my plan:

I am going to live in this house for six months to claim the FHOG ($14,000). After that, I wish to rent it out.

Now I need a few things explained to me.

1. Is this a good idea?
2. What is negative gearing? If I rent it out, will I be doing this?
3. I was told by a Mortgage Broker to pay interest only and monthly while I live in it to maximise my tax return. Is this the best way to go? Or should I pay principal and interest?

I need help.

Ta :)
 
Infest said:
I finally have done so :)!
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Congratulations - well done!

Infest said:
1. Is this a good idea?
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Yes
Infest said:
2. What is negative gearing?
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Where you rental income is exceeded by your costs i.e. PM fees, rates, interest on mortgage etc. So it costs you $ to keep the property.
Infest said:
If I rent it out, will I be doing this?
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Dunno. You have not provided figures so we can work it out :)
Infest said:
3. I was told by a Mortgage Broker to pay interest only and monthly while I live in it to maximise my tax return.
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He's a good MB
Infest said:
Is this the best way to go?
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Yes
Infest said:
Or should I pay principal and interest?
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Never
 
Propertunity said:
Congratulations - well done!
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Thanks :)
Where you rental income is exceeded by your costs i.e. PM fees, rates, interest on mortgage etc. So it costs you $ to keep the property.
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Can you explain to me what PM fees are.

Dunno. You have not provided figures so we can work it out :)
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What figures do you need? The house cost me $317,500, my mortgage is $260,000 and I hope to rent it out for around $300. I'm not sure what rates and stuff are yet.[/QUOTE]
 
Infest said:
Can you explain to me what PM fees are.
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Property Manager - yep as Y-man says.


Infest said:
What figures do you need? The house cost me $317,500, my mortgage is $260,000 and I hope to rent it out for around $300. I'm not sure what rates and stuff are yet.
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OK so costs are:
Interest (IO) on $260K @ say 5.2% = $260 per week
PM @ 7.7% (say) of rent = $23 per week
Repairs & Mtce allow = $20 per week
Rates @ $1,400 pa = $27 per week
Total costs = $330 per week

Now income:
Rent = $300 per week
Depreciation (allow $5K pa and you on 30% tax rate) = $29 per week
Total income = $329 per week

This property (if the assumptions are correct) costs you the grand sum of $1 per week to hold.
So you are negatively geared.
Oh which means you get a tax dedn for your $1 loss = 33 c

Therefore you are neg geared to the tune of 67c per week. :)
How many of these can you afford? ;)

edit: I forgot landlords & house insurance - but you will get back tax for this expense as well - but I think you get the idea.
 
Sort of confusing. I don't understand where you got some of those figures from.

With what you have said, is it pretty good for a first home?
 
Infest said:
Sort of confusing. I don't understand where you got some of those figures from.
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Please feel free to ask about what you don't understand & I'll do my best to explain.

Infest said:
With what you have said, is it pretty good for a first home?
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Yes, pretty damn good :)

Your holding costs are less than the cost of an insurance policy - allow $700 pa and this first house of yours costs you a measly $9 per week after tax.

Like I said - how many $9 a week can you afford? = how many properties you can negatively gear = a lot!

You just need to save 20% deposits :)
 
Propertunity said:
Please feel free to ask about what you don't understand & I'll do my best to explain.


Yes, pretty damn good :)

Your holding costs are less than the cost of an insurance policy - allow $700 pa and this first house of yours costs you a measly $9 per week after tax.

Like I said - how many $9 a week can you afford? = how many properties you can negatively gear = a lot!

You just need to save 20% deposits :)
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Oh ok... I wasn't able to save 20% for this house, as I wanted a few thousand incase of emergency. Thankyou so far for what you have told me. I still do not understand the use of numbers. $700 pa insurance? House cost me $9 p/w? Holding costs? All of which I don't understand. If you could start from the beginning RE: How my house is so cheap / I'm in such a good position. That would be nice...

EDIT: With the scenario you posted earlier, if the rent was say $310, does that mean I'm positively geared?
 
Cost of holding your home:

Interest Only (IO) on a $260K loan @ say an interest rate of 5.2% pa = $260 per week
Property Manager charges 7.7% to collect your $300 per week of rent = $23 per week
Repairs & Mtce allow $1,000 per year to fix stuff that breaks = $20 per week
Council Rates @ $1,400 per year = $27 per week
Insurance - landlord and house @ $700 per year = $13 per week
Total costs = $343 per week

Income when you rent it out later:
Rent = $300 per week
Depreciation because your house loses value and the Tax Office allows you to "write it off" over a period of years (allow $5K pa and you on 30% tax rate) = $29 per week tax back
Total income = $329 per week

So you are negatively geared to the tune of $329 - $343 = $14 or in other words making a loss -$14
And you get a tax dedn for your $14 loss @ your 30% tax rate which gives you back another $4.60 in tax

Therefore your holding costs are $14 - $4.60 = $9.40 per week

So if you could afford $9.40 per week for each and every property (like this one) that you wanted to buy, assuming you can save the deposits, then you can buy a lot.

If you got $310 per week rent then yes, it would be cash flow neutral and any more rent or fall in mortgage interest rates would make it cash flow+ve so you would be positively geared and have to pay some tax on the profits. This is a good thing. :)
 
Ok cool, thanks for that!

So, once I move into my house. I should pay monthly and interest only?

Also, are rates $1400 pa?

I just can't wait for this week to come to see whether my loan gets approved or not. I'm borrowing 82% and had a $40,000 deposit earning $38k p/a.

I Should get it right? It's stressing me out Lol.
 
Infest said:
Ok cool, thanks for that!
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You're most welcome

Infest said:
So, once I move into my house. I should pay monthly and interest only?
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I think you'll find that monthly payment is the only option the bank will offer you :) but you need to make sure it is IO.

Infest said:
Also, are rates $1400 pa?
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Around that is a safe bet. Ring the local council and ask them - it is not a secret.

Infest said:
I just can't wait for this week to come to see whether my loan gets approved or not. I'm borrowing 82% and had a $40,000 deposit earning $38k p/a.
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Relax ;)

Infest said:
I Should get it right? It's stressing me out Lol.
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I don't know. I don't do finance. What did your broker / lender say?
 
Propertunity said:
You're over-stimulated. We'll get some beer in you and get you straight to bed (Simpsons).

PS - Got your e-mail too late - all answered on here :) Cheers.
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Hehe, while you're here, I might as well ask you. With rental properties what should I do garden wise? Little as possible or what?

Is it free to get an evaluation on how much rent you can get?
 
Infest said:
Hehe, while you're here, I might as well ask you. With rental properties what should I do garden wise? Little as possible or what?
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Tenants love gardens but they don't like working in them. Brissy still has water restrictions too. IF you do anything - make it low maintenance and drought tolerant.....and don't drive past & cry when they cut your trees down or let it die - it has happened to many here - and me.:(

Infest said:
Is it free to get an evaluation on how much rent you can get?
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Yes it is free. Just get a couple of PMs out to give you a rental appraisal. They do it all the time.
 
Infest said:
I am going to live in this house for six months to claim the FHOG ($14,000). After that, I wish to rent it out.

....

3. I was told by a Mortgage Broker to pay interest only and monthly while I live in it to maximise my tax return. Is this the best way to go? Or should I pay principal and interest?
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Hi, I just wanted to double check this:

If I buy a property as an IP and it is my first property, so I live in it for 6 months to get the FHOG, and pay the interst on the IO loan then will this interest (and other running costs during this time) be fully tax deductable?

Is stamp duty, mortage registration, transfer fees etc also tax deductable on an IP?

How do I prove that I bought this as an IP and not bought it to live in then changed my mind? I know if I bought it as a PPOR I cannot.
 
Electro said:
If I buy a property as an IP and it is my first property, so I live in it for 6 months to get the FHOG, and pay the interst on the IO loan
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You buy a property as a PPOR to get the FHOG. Then you change your mind and make it an IP after you live there for 6 months minimum.

Electro said:
then will this interest (and other running costs during this time) be fully tax deductable?
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The interest only become deductible when the property becomes available for rent. (i.e you out and "For Lease" sign up). The expenses are private and non-deductible when you are in there.

Electro said:
Is stamp duty, mortage registration, transfer fees etc also tax deductable on an IP?
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Not ded immediately no. But tax advantaged yes and probably added to the cost base. Ask your accounting professional.

Electro said:
How do I prove that I bought this as an IP and not bought it to live in then changed my mind? I know if I bought it as a PPOR I cannot.
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You don't need to buy it with the intention of making it an IP. Its use changes when you do make it an IP.
 
Do a search on realestate.com / newspapers for rental properties around where this is & compare.

Property managers will also give you an idea of what they think they can rent it out for, but i gues syou wold have to approach them & et them to come out & see it, so definitely no harm in finding out a ballpark yourself & seeing how they go - if you see nothing under $300n the area, and theres nnothing uniquely lower quality about your place and a pm suggests $200 (!), you might decide to double check with another pm. Not quite sure of the process, I took teh word of somoene & got the pm out to look at the place with the intention of signing with them, didn't turn out wrong, but next time, I will have a better idea
myself first

The rough figures look good, having a deposit puts you in this position - I borrowed 106%, still costing me more per week !

You can get accurate figures by ringing the council & water corp for example as mentioned.

Well done !

One thing though, my understanding is just that whilst living in the property, you wont be able claim any of the expenses, only when you start renting it out.

Mate sounds good to me. In 6+mths time, rent might be up a tiny bit & you find that after tax return, you dont have to fork out anything ! Just keep some $ aside for good measure !!
 
I was about to edit my post & include something like Propertunity worte about the gardens

There you go, the PM question is also answered !

Full steam ahead mate, nothing to worry about, you're on the right track to the right place !
 
Propertunity said:
The interest only become deductible when the property becomes available for rent. (i.e you out and "For Lease" sign up). The expenses are private and non-deductible when you are in there.
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Thanks Propertunity. Thats what I thought but I just got confused with what Infest said about his broker saying to go IO while living in it to maximise his tax returns? and you agreed with this.

Propertunity said:
Not ded immediately no. But tax advantaged yes and probably added to the cost base. Ask your accounting professional.
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What does tax advantaged mean?

If I buy the property as and IP from the outset then would the morgarge registration and other non stamp duty costs be deductable?
 
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