Calculating Returns



From: Firefrog .

My Wife and I are going to begin investing, the question though is when. I have read Building Wealth thru IP's amongst other good books. Jan recommends using equity in your own home to begin your investing, I have been planning to buy an IP before my own home but am unsure which is better.

My question: Is there a method I can use to determine the best way to go from a money point of view, if I buy my own home versus buying an IP now.
I want to do my homework and run the numbers just not sure how to approach it.
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Reply: 1
From: GoAnna !

Regardless of how you do your numbers there are two things you may want to take into account.

1) Do you have an emotional need for your "own" home?

2) If you own your home own a strange compulsion to replace the carpets, build an extension, put in a pool etc will overtake you at no warning. This is the biggest expense of owning your own home.

GoAnna !
(aka Anna before she got real)
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Reply: 1.1
From: Sergey Golovin

May be software from Somerset Fin. Services will help?

You can put all sorts of data (parameters) such as repayments, interest rate, depreciation rate, etc. in to it and forecast (predict) the outcome...

Ask Jan or Ian.

If this is what you are after.

Serge G.
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Reply: 1.1.1
From: Sergey Golovin

The other question is - can you buy an investment property (as first one) and lease it out back to your self. And then buy more IP for investment purpose only. So you can move on to next property (relocate your family) whenever required and live previous one as rental one behind. I do not know.

This is what I am trying to find out as well.

As Anna said earlier - are you emotional attached to that property?

I am personally not.

I guess it would be advisable to have some sort of structure put in place - company or trust. But, how to do it, I have no idea.

Would you get any finance from lender if you will set up such Co..? And what sort of finance they will give you – prime and interest or interest only?

Or are you prepared to pay whole amount for that property with cash? If you pay with cash you can do what ever you like with it I guess…

I do not know, I….do….not…..know….

But it is always hope out there.

Serge G.
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Reply: 2
From: Firefrog .

I currently rent at $135 a week $7020 a year. Can I afford to remain renting or should that $7020 p/a go into my first home.
Options - Purchase a home to live in @ 120-130K & put off buying an IP for a while.
Stay renting and buy first IP @ 85-110K.

I can afford large weekly repayments on either option, maybe up to $400 p/w.

Is either option better from a wealth creation view point.
No emotions here, I just want cashflow so I can stop working one day and hang out with my Wife - She Rocks!!
Remember I'm in SA so I can get quite a nice place for the money :)
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Reply: 3
From: Les .

G'day Firefrog,

Just thought I'd throw in an extract from the Archives. It doesn't point you toward the "numbers" and/or how to calculate them - but the thoughts in that whole string (dated 9/14/99, so it's real early forum stuff) could be useful.

This was just one answer to Sue (from me):-

"As I see it, these are SOME of the reasons that rentals first are better than own home first.

1. Banks will take a percentage of any rental income into the lending equation so you can afford a rental earlier than your own home (see Jan's 101 stories about the two blokes that bought each other's units).

2. Losses are reimbursed - borrowing costs, maintenance, rates, insurance, etc. Even some personal costs, insurances are Tax deductible when purchasing rental property.

3. Tax relief of up to $100 per week (or more) can appear in your pay packet. With 2 or 3 rentals, this extra can be effectively paying the rent on the property you occupy, or paying off your mortgage - but you must own rental property to do this.

4. You can rent in an area to "check it out" before buying your home there and still be having equity growth through your rentals.

5. You will spend less on consumables for someone else's property than on your own home. Thus, money you may have spent on landscaping, a patio, air conditioner, etc. can go instead into real assets (like another investment property).

6. Your investment properties don't have to be near where you live, or work. So you can buy them in areas where rental demand is high.

7. We are less inclined to "pay off the principal" on a rental than on our own home. This leaves extra cash available for more investments.

8. As equity grows, you can re-borrow against the gain to buy more rentals. This applies to your own home too, but we usually feel less concerned about re-mortgaging a rental than our own home.

9. At some stage down the track, you can borrow against a rental property to provide a deposit for your own home - and then have the rent excesses and Tax relief help pay off your home mortgage.

10. "getting involved" with property BEFORE buying your own home will stand you in good stead when it comes time to buy your "dream home".

And, against Rentals first? I can only think of two

1. CGT will apply when you sell a rental - but this only applies when you sell - so DON'T!

2. Tenants from Hell - I've heard they make up less than 1% of all renters. You can protect against them via various Insurances, and Jan outlines some smart ways of preventing them from spoiling your chances.

I hope these thoughts help you in deciding which way to go.

And I leave with one thought that helped clarify my thinking on the above - and that was "We pay a high premium for wanting to purchase our own home". I can't remember the author, but with all of the benefits we DON'T get when purchasing our own homes, I certainly understand where they were coming from.


Me again (in the present ;^) - the story mentioned is #79 in "Building Wealth - story by story"

Hope it helps,


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Reply: 3.1
From: Crystal .

Thanks Les,
Your informative posts helped me to have the courage to buy my first IP. Seven months later I've refinanced and will settle on my second IP in a few weeks.
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Reply: 3.1.1
From: Les .

G'day Crystal,

Great to hear!! You kicked a goal with that first one. Is #2 in the same league, or are you trying something else?

Will you be at GeeCee's "Rocks" do in May?
If so, I'd love to hear all about #2. I'm keeping my fingers crossed for my next one at the moment (one of those situations where trying to get everything done within the requisite time-frame is like getting a quart into a pint bottle - with apologies to Generation X-ers who don't have a clue what I'm talking about here ;^)


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From: Sergey Golovin

Thank you Les!

Ofcourse! If it is genius it must be simple. And it is. How could I forget about that one - Buy rental while you are renting your self. Oh-man…

How simple and how effective. Excellent.

And we can set it up as company or trust and run it as business. Yes!

By the way folks I have purchased that book - "Family trust" N. Renton 2nd edition 3-4 days ago and in Appendix D page 249 it says "Company taxed at flat rate 34% present time and will go down to 30% (next year 2001-2002) and trust taxed at flat rate 48.5%....."

Thank you for reminding us once again about rental arrangements.

Serge G.
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