Cashflow Analysis

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From: G V


Hi Mike,

I am new to property investment in fact i am new to any type of investment. I have been going through the posts of this forum for the last 2 months. I enjoy reading and i am grateful to everyone in this forum for giving valuable information. I am also grateful to Jan somers for creating such a great site. I had been to few seminars and free consultation.Please excuse me if i sound stupid in asking for a few more clarification. I have been thinking of asking this question in this forum for sometime and your post has given me the opportunity to address my queries.
This is regarding the cashflow analysis in apprentice millionaire guide.In your post you have mentioned "In general I look for capital growth in preference to purely high income return (even though return is important - it pays the mortgage.) But capital growth is where you make the big money and its tax free (until you sell and you probably shouldn't.)".

When we say tax free here i think you are talking of revaluation of the property after some time and taking further loan from the finance company on the latest valuation.
1. If so then we have use the tax free money for investment purpose otherwise the interest on it will not be tax deductible. 2. In doing so we are increasing our liability towards the finance company.
3. If we are increasing our liability towards the finance company how are we supposed to reduce our liability at a later stage (say when we plan to retire).
4. I can see(i am only a naive person)only few ways to reduce our liability-
a. By selling a few properties (in which case we have to pay CGT).One more concern I have regarding CGT is if
suppose i buy a new investment property for $200000.
after a few years i revalue my property for say 500000.(say i have claimed depreciation for 15000)and i have in total borrowed 400000 (against this property)
if i decide to sell my property before i retire to offset some of my liabilities and i am able to sell it for 550000 they i have to pay CGT on
550000 - (200000 - 15000)
i.e. on 365000 .I think CGT on 365000 is 91250. so net money left is 273750.but i have liability of 400000.

b By having high rental income.

5. I feel unless we reduce our liability our investment may not generate sufficient income to cover our liability as well give us a life style after our retirement.

The above questions are only my concerns. Please do not treat this as a challenge to your post. i am in no way near to challenging anyone in this forum.i would appreciate if you or anyone in this forum can clarify my above concerns.

Thanks in advance

GV

 

[Sim]

Reply: 1
From: Sim' Hampel


I'll answer the first part of your questions...

>When we say tax free here i
>think you are talking of
>revaluation of the property
>after some time and taking
>further loan from the finance
>company on the latest
>valuation.

Actually, I think it's a little more simple than that.

I believe that the idea is that while you pay tax on income in the year it was earned, you only pay tax on capital gains when you realise that gain (ie. sell).

This means that, although you still pay tax on your gains, you can defer that until some time in the future, and even indefinately if you never sell. This allows you to compound the growth much more effectively than if you had to pay tax on it along the way like you do with income.

The other advantage with growth is the 50% discount on capital gains for taxation purposes when the property is held for more than 12 months. Whereas you pay tax on 100% of the net income.

 

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Reply: 2
From: Miakat .


GV.

You wrote: "if i decide to sell my property before i retire to offset some of my liabilities and i am able to sell it for 550000 they i have to pay CGT on 550000 - (200000 - 15000) i.e. on 365000 .I think CGT on 365000 is 91250. so net money left is 273750.but i have liability of 400000."

I write: "You have been able to sell it for $550000 and have paid $91250 in CGT. What's left over is $458750."

Miakat

 

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Reply: 2.1
From: Rasputin .


On 6/2/01 8:09:00 AM, Miakat . wrote:
>GV.
>
>
>
>"You have been able to sell it
>for $550000 and have paid $91250 in CGT.
>What's left over is $458750."
>
>Miakat


whixh when you pay off the 400000 liability is net return of 58750 !!!

 

[Mike]

Reply: 3
From: Mike .


Hi GV,

The person you quoted from is Michael Yardney from his post entitled, "How do decide which Investment Property?" Perhaps Michael should answer your query.

May I say, however, that your point regarding liability to the Lender is very good and I'm surprised that you picked that up since you're new to investing concepts.

You're right in that we increase our indebtedness to the Lender by borrowing heavily to finance our wealth creation via investment property. This is also known as Leveraging or using Other People's Money (OPM).

At some stage in the future we expect to retire and live of the rental income which is called passive income. At that point the banks won't lend us any more money for further property acquisitions because they say we are too "rent reliant". They can't say we're too old!

At that stage, as you say, we will want to maximize our income by paying out all the loans even if that means selling properties and paying Capital Gains Tax to do it.

Our rental income will be taxed and so we may have to restructure our assets to minimize tax.

That's all from me, now, but keep asking questions. We encourage newbies to research the old posts, as you have done, and ask clarifying questions. Good stuff.

Regards, Mike