Actual cost to own/operate IP?

[bradwilks80]

Hi,

I am looking at purchasing a 2nd rental property soon. I have only had my first property for 18months and don't really know how to work out what it is actually costing me a week. Things are financially under control but I want to know the weekly cost after tax breaks I will get etc...

I have a taxable income of $55000.

Current property:
Purchase price: $187000 (expect $220000 now), Rent return: $185p/w.
Owe: $100000 on loan (costs this year including interest were ~$8000).
Have done a depreciation report giving me ~$1500 return at this stage.

New proposed property:
Purchase price: $240,000 Rent: $220
Would owe full amount of $240000 (I have cash to pay legals/stamp duty etc).

Both IP's are in NSW state.

If someone who has been in my position before could break things down it would be awesome.

Brad.

 

[TheCamel]

if you have a look around, there's some spreadsheets about cash flow and stuff

try the uhm, resources subforum.

 

[steveadl]

Hi,

I am looking at purchasing a 2nd rental property soon. I have only had my first property for 18months and don't really know how to work out what it is actually costing me a week. Things are financially under control but I want to know the weekly cost after tax breaks I will get etc...

I have a taxable income of $55000.

Current property:
Purchase price: $187000 (expect $220000 now), Rent return: $185p/w.
Owe: $100000 on loan (costs this year including interest were ~$8000).
Have done a depreciation report giving me ~$1500 return at this stage.

New proposed property:
Purchase price: $240,000 Rent: $220
Would owe full amount of $240000 (I have cash to pay legals/stamp duty etc).

Both IP's are in NSW state.

If someone who has been in my position before could break things down it would be awesome.

Brad.

Somone will correct me if I'm wrong, but at a quick glance, it looks like your IP1 is slightly cashflow positive. If your TOTAL costs are $8k for the year (does this include interest, council rates, water, PM fees etc?) and you're getting $9620 income - you basically increase your personal income by $9620, then take it back down by $9500, to arrive at the same taxable income of about $55k.

IP2 influence would depend on all the variable ie. interest rate, council etc. all mentioned above, and any deprecaition on it.

 

[bradwilks80]

Steve,

That's my dilemma at present. I am making double repayments on IP1 at present. My plan is to reduce this loan to minimum repayments whereby with rent included I should only be out of pocket ~$50p/w.

This would then give me at least $450p/w to pay off IP2.

At present at the rate I am paying IP1, I should own the property in 3years and paid around $17000 in interest in that time. If I make minimum payments over 30years it would be $100000 or more in interest.

Am I better off paying IP1 off first or slowing down repayments???

 

[ralph wiggum]

Interest only or minimum payments on IPs. This allows more $ to put towards further purchases.

 

[bradwilks80]

Mr Wiggum,

I am not being rude. Is this a statement or question?

I am paying interest and principal on IP1 and planned to do this on IP2 also.

Any further comments?

 

[steveadl]

Steve,

That's my dilemma at present. I am making double repayments on IP1 at present. My plan is to reduce this loan to minimum repayments whereby with rent included I should only be out of pocket ~$50p/w.

This would then give me at least $450p/w to pay off IP2.

At present at the rate I am paying IP1, I should own the property in 3years and paid around $17000 in interest in that time. If I make minimum payments over 30years it would be $100000 or more in interest.

Am I better off paying IP1 off first or slowing down repayments???

You would definitely be well within your means then. Hopefully IP2 would have a higher level of depreciation for you? This is where you get to save tax without any pain as there is no out of pocket expense. Whilst the cash lost on interest etc. will help you claim some of the tax from your job back - it will never equal the cash outflow.

Personally, I would definitely do (and actually do) what you're talking about with decreasing the IP1 loan to interest only, as the extra cash flow can get you into more IP's sooner. Is this $450pw you mentioned your total income you have left over for the week, or just the portion you're willing to put towards IP's?

Cos if that's the amount you can set aside for IP's, then you can afford to get quite a few IP's very soon assuming equity build up etc. allows you to.

 

[steveadl]

Mr Wiggum,

I am not being rude. Is this a statement or question?

I am paying interest and principal on IP1 and planned to do this on IP2 also.

Any further comments?

Brad, do you have a PPOR? If you do, pay all your extra cash into that loan, as that's not deductible. If you don't have a PPOR, do you plan on getting one in the future, as perhaps you would rather put that cash into an offset acc. on one of your IP's, then when you do buy a PPOR, take the whole sum sitting in the offset, and apply that to the PPOR loan.

If you have already paid off your PPOR, or don't plan on getting one, then perhaps you should do one of the following:
- Pay all extra $ into only one IP on P&I and keep the others IO. This way you can knock one loan out of the way quicker.
- Put the extra into an offset acc. in one IP and build up a deposit for the next IP quicker.
- Keep the IP's on IO, and put the extra $ in the mean time into income producing assets like dividend shares, MF etc. So they can build up and one day help you offset the cash outflows on your IP's (ie. think in 10yrs time when you have 7 IP's and the cash drain on each of them starts to add up to a fair bit more than now)

 

[bradwilks80]

Steve,

Yes I have considered Interest only for IP1 from here but with the rent of $150 (after costs) I will only need to top up the loan with $50 to do principal also.

I am currently paying $500 off IP1 p/w, so if I bought IP2 I would pay $50 to IP1 and $450 towards IP2 p/w. This will also leave some $$ over to actually live.

Any comments/suggestions?

 

[bradwilks80]

Steve,

No I don't have a PPOR. I still live at home.
But would be looking at a PPOR in around 5 years.

 

[steveadl]

Steve,

Yes I have considered Interest only for IP1 from here but with the rent of $150 (after costs) I will only need to top up the loan with $50 to do principal also.

I am currently paying $500 off IP1 p/w, so if I bought IP2 I would pay $50 to IP1 and $450 towards IP2 p/w. This will also mean some $$ to actually live.

Any comments/suggestions?

I think what you have planned sounds quite good, just be aware however that if you don't pay this extra towards the first IP's, you could have additional IP's sooner. The sooner you get them, the longer you will own them and have their equity increasing for you.

You sound like you're in a great position cash wise to be able to afford the shortfalls, I'd take advantage of that to get your portfolio growing faster, sooner. But everyone is different, that's the beauty of property, there's no one size fits all

 

[steveadl]

Steve,

No I don't have a PPOR. I still live at home.
But would be looking at a PPOR in around 5 years.

Then I'd seriously consider one of the options I mentioned above. Putting the extra $ into an offset acc. on the IP will save you the interest in the mean time, but you can redraw it out again one day and have the balance of your PPOR debt reduced dramatically, and the deductible IP debt goes straight back up again.

eg. in 5yrs time you have $70k sitting in one of the IP offset acc's which has a debt of $250k, but you're only paying interest on $180k. You then buy a PPOR for $400k, and whack the extra $70k straight onto that loan, and your deductible IP debt shoots straight back to $250k - you're in the same total debt position overall, but your NON deductible debt is a lot less than what it would have been.

 

[granev]

its all good

Steve,

No I don't have a PPOR. I still live at home.
But would be looking at a PPOR in around 5 years.

brad
i dont think ralph was joking , and in IMHO i agree with him
hope you are doing plenty around the house for your parents - im sure you are

 

[alexlee]

Interest only or minimum payments on IPs. This allows more $ to put towards further purchases.

Mr Wiggum,

I am not being rude. Is this a statement or question?

I am paying interest and principal on IP1 and planned to do this on IP2 also.

Any further comments?

Statement, and a basic tenet of buy and hold property investing.

Instead of P&I, go IO and put the extra (P payments) into one account. It isn't as big a deal for you now but say you had 5 properties. It would be easier to have all the principle amounts in one account (say, an offset) instead of scattered across 5 mortgages when you'd have to refinance.

Also your objective should not really be cashflow at this stage, but as much gross assets as you can comfortably service. And going IO increases your cashflow.

If you're young (and I assume you are) you can afford to eat a bit of negative cashflow: instead you get decades of capital gains on more IPs. I know what I would (and did) choose.

You sound like you're pretty fixated on the 'I'll pay more into my loan to get the balance down so I'll pay less interest'. Not a bad thing as such, but at your age and this stage, not the best idea. Instead you should be thinking 'how to I maximise the returns on my money?'

Think of it this way: you use $100 to pay off a loan, your return is 7% a year, SIMPLE interest. You use the $100 to buy another IP, and you get maybe 5% rent + 7% COMPOUND growth. Note paying off a loan on a property DOESN'T affect growth: the property will grow at whatever it does regardless of the loan against it. As I'm sure you've read, when you're young you should go for as much growth as you can. So why pay off loans to save 'simple' interest, when you can instead invest more at 'compound' interest?
Alex