Does A IP Really Only Cost $33 Per Week??

[Watermelon Man]

Hello,

I'm not trying to run down PIA Software or anything, but a friend of mine who put his brand new unit figures, etc into it came up with that the unit was only going to cost him $33 per week (at end of financial year) - around $200 per week to service the loan now, but at end of financial year with tax return only $33 per year based on I think $95,000 income. What do others think here? Is is really possible to own an IP for just a small amount? I said to him; if it was that cheap per week; you'd sign up to buy 5 units!! Comments please.

 

[alexlee]

I'm not trying to run down PIA Software or anything, but a friend of mine who put his brand new unit figures, etc into it came up with that the unit was only going to cost him $33 per week (at end of financial year) - around $200 per week to service the loan now, but at end of financial year with tax return only $33 per year based on I think $95,000 income. What do others think here? Is is really possible to own an IP for just a small amount? I said to him; if it was that cheap per week; you'd sign up to buy 5 units!! Comments please.

Quite possible, but it depends on a lot of variables. What sort of LVR did your friend get? If it’s 80% then it costs less. If you get a decent yield (usually the further out you go, the higher the yield), then it costs less net. A newer property would have more depreciation, it might have cheaper body corp, and so on.

As a bit of history, my first IP in 2000 was purchased for 6.5% yield. 90% LVR. After tax and depreciation, it was cashflow positive. So it’s possible for a (fairly) inner city IP to PAY you to own it.

You'd probably have trouble finding finance to buy 5 at a time. But certainly after the first one you can probably get the second one soon after, if the numbers stack up.
Alex

 

[steveadl]

It'd definitely possible, but there's an endless amount of variables. What is the rent, what are the costs, what was the purchase price, what loan do you have, what rate is it at etc. That's just for the property, then you have the investor variables ie. income level, tax bracket, other deductions, other investments etc.

So every property is different, the exact same property may cost 1 person $100pw, and the next person it may only cost them $5 per week.

So yes, it's definitely possible to have a unit only costing you $35pw at the end of financial year. According to last years finances, my IP's on average are costing me $45pw each (some less, some more) - should get the updated figure of cost pw from accountant soon

 

[Mr. Fabulous]

Hi WM.

Your I.P. can cost you $0 per week if you put a large enough deposit in. To ease the cashflow, I suggest your friend organise to have his pay adjusted so that he can get his refund back every pay. I can't remember what the form's called.

Mark

 

[oc1]

Hi WM.

Your I.P. can cost you $0 per week if you put a large enough deposit in. To ease the cashflow, I suggest your friend organise to have his pay adjusted so that he can get his refund back every pay. I can't remember what the form's called.

Mark

15-15....Used to be 221D

Cheers

Oscar

 

[Ausprop]

am sure it would happen when all the stars align and the guy who dreamed up the numbers fantasy would all come true!

 

[Peter_Tersteeg]

Whilst you can set up your finances and life so an IP might only cost a small amount per week, I'm not really a fan of using this method.

My argument is that if you're cutting your affordability that close, then perhaps you need to take a step back due to the high risk. Chances are a single interest rate rise could make you start to fall behind in repayments.

I prefer to figure out that I can afford the IP without the tax benefits, then at tax time I get a big cheque in the mail which we use to catch up on a few outstanding items, or make some extra repayments, or enjoy a holiday.

 

[Watermelon Man]

It'd definitely possible, but there's an endless amount of variables. What is the rent, what are the costs, what was the purchase price, what loan do you have, what rate is it at etc. That's just for the property, then you have the investor variables ie. income level, tax bracket, other deductions, other investments etc.

The property is a brand new 3 bedroom, 2.5 bathroom townhouse with double garage; located 5 minutes drive to city - price is $360,000 - rent for $420pw; 90% loan; 8% interest rate, $95,000 income; no other investments.

 

[steveadl]

The property is a brand new 3 bedroom, 2.5 bathroom townhouse with double garage; located 5 minutes drive to city - price is $360,000 - rent for $420pw; 90% loan; 8% interest rate, $95,000 income; no other investments.

Don't take this as gospel as I Only threw it into my spreadsheet quickly and you still have unknown variables such as depreciation, council & water rates, body corp?, PM fees, establishment costs, stamp duty etc.

My figures give him a cost of $47pw on the following assumptions: $8k depreciaition in the first year (people who have townhouses can give you a more accurate figure), 8.8% & 2wks rent for PM, $4k establishment costs (spread over 5yrs), $14k stamp duty (probably wrong )

 

[alexlee]

The property is a brand new 3 bedroom, 2.5 bathroom townhouse with double garage; located 5 minutes drive to city - price is $360,000 - rent for $420pw; 90% loan; 8% interest rate, $95,000 income; no other investments.

Sounds about right, then.

The numbers look something like this. Assumptions 8% mgt fee, 8% interest (BTW if you friend IS paying 8% tell him to switch banks), $1,600 each for rates and BC, and depreciation = 2.5% of the purchase price.

Rent 21,840
Fees (1,747)
Interest (25,920)
Rates (1,600)
Body Corp (1,600)
Depreciation (9,000)

Tax loss (18,027)

Cash exp (5,416)
Cash back on dep 3,600
Cashflow (1,816)

Your friend is on the 40% tax rate so while cash expenses are net 6,435 it really only costs him 3,861 after tax. Depreciation gives him back 3,600.

The key reasons for his good (i.e. small negative) cashflow is high yield (6%), high depreciation (new property) and he's on a 40% tax rate.

In the above example if he was on 30% tax his cashflow changes to -3,619.

However, he would have had to put in a deposit + costs of around $55k cash.
Alex

 

[GoAnna!]

8% interest rate Why is he paying so much???

 

[willy1111]

which city is it 5 mins drive to?

 

[Watermelon Man]

8% interest rate Why is he paying so much???

He's factoring in the safety net of 8% even though interest rates would be lower than that. He's buying off the plan - building to be finished in 18 months time. 10% deposit now. Location in Manunda in Cairns, QLD. Complex will have around 35 units in it - 3-level townhouse with double garage. The location isn't that great, so I'm not so sure if the numbers will eventually stack up.

 

[alexlee]

He's factoring in the safety net of 8% even though interest rates would be lower than that. He's buying off the plan - building to be finished in 18 months time. 10% deposit now. Location in Manunda in Cairns, QLD. Complex will have around 35 units in it - 3-level townhouse with double garage. The location isn't that great, so I'm not so sure if the numbers will eventually stack up.

I was wondering why the yield is so high. Is the 6% based on a rental guarantee? Even assuming the vendor makes good on it, the question is whether market rent will be at or above that guaranteed level.

OTP with a rental guarantee (or rent based on the vendor's estimates, no doubt optimistic) isn't exactly the same as buying something that's already built and the numbers already exist. A lot of this is pie in the sky here.

Don't be so sure that rates will be less than 8% in 18 months time. A lot can happen between now and 2009.
Alex

 

[tremolo]

15-15....Used to be 221D

Cheers

Oscar

Have you got a link to more info for this?

 

[alexlee]

Here you go (just did mine today):

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00096490.htm

 

[tremolo]

Legend, thanks alexlee

(tried finding it on the ATO website which is easier said than done...)

 

[tubs]

Where is the 10% deposit coming from?

If its borrowed, then that will have to be factored in as well.

If its geniunely saved, it could be offsetting another loan instead, so is still effectively costing you interest.

I'd be inclined to put interest on the full 100% to see the real cost involved. That's another $55 per week (before tax). It could be tax free, if its borrowed.

 

[Watermelon Man]

Where is the 10% deposit coming from?

If its borrowed, then that will have to be factored in as well.

If its geniunely saved, it could be offsetting another loan instead, so is still effectively costing you interest.

I'd be inclined to put interest on the full 100% to see the real cost involved. That's another $55 per week (before tax). It could be tax free, if its borrowed.

10% deposit is from personal savings. Personally I think the predicted weekly rent is a bit ambitious (Sailor - who lives in Cairns may be able to shed some more light on this) considering you can get an almost new house in Cairns for $400 per week.

 

[alexlee]

10% deposit is from personal savings. Personally I think the predicted weekly rent is a bit ambitious (Sailor - who lives in Cairns may be able to shed some more light on this) considering you can get an almost new house in Cairns for $400 per week.

Do you know whether he's just quoting the developer's rental figure, or maybe there is a rental guarantee involved?
Alex