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From: Mike .


Renting Own Property-Legal?
From: Leon
Date: 1/26/00
Time: 12:00:25 AM

I have been reading with interest the previous articles and comments relating to the issues of renting out your own property. The most recent comments indicate that it is possible & that the interest on the loan & other associated expenses incurred are a tax deduction ( as confirmed by ATO booklet, will get copy ASAP ).

I am trying to determine the best course of action based on our current scenario. Own property valued at $400K (Inner West Syd) Mortgage $152K 25yrs at 6.55% P&I Estimated rental return $410/week Combined incomes $95,000 We have 2 children & require a larger house. This would mean purchasing for at least $550K ie sell with net profit$215K and new loan $335K. However I don't want to sell our current property & want an alternative to committing to $2,500 mortgage repayment each month.

1.Is it best to rent out current property and find larger property & rent it for ourselves( even at $350-$400/wk) and use current equity of $248,000 to purchase 1 or more investment properties?

My calculations (rough estimates) show that renting new house would be equivalent to interest charged on $335k loan! Is this still an advantage?

2.Our cashflow appears to better ie $1400-1600 rent v's $2500 mortgage = $1100-$900 better off. Does this appear to be correct & does this put us in a better situation?

3.I have taken on board comments re Temporary absence up to 6 years. Does this mean you can relocate to a suburb 5Km's away?

4.Will the PIA software help me calculate all of this? I have already booked an appointment to see an accountant & want the facts before I go because it sounds like not all accountants understand the principles we are discussing-would that be a correct assumption?

My gut feeling is that by keeping our current home & renting it out & renting out new house to live in & investing in more property is the best possible avenue for wealth creation, but I need to convince my wife who still has her mind set on 'owning our own home' and wants to see the figures & is concerned about the legality of it all. Comments appreciated

 

[WebBoard]

Les

Reply: 1
From: Mike .


Re: Renting Own Property-Legal?
From: Les
Date: 1/26/00
Time: 11:25:29 PM

G'day Leon,

I LOVE a bunch of numbers - you have been very thorough in providing detail. And in so doing, you should find that the answer following checks out. Try this:-

Refinance your current P&I loan to IO and/or borrow up to 80% (or slightly less to save Mortgage Insurance) and you can release $165k, thus allowing 2 x $70k deposits for 2 Investment properties up to $350k each, with $25k left for expenses. Based on my observation of Sydney rentals, these $350k properties should rent for $360/week or better.

So, you now own 3 properties (all Investment) and own $1,100,000 worth of properties, with total mortgages of $880,000 costing (IO of 7%) approx. $63000 per year - with rental Incomes totalling approx. $60,000 per year.

Most authors (Jan, et al) recommend allowing 25% of rent to cover other costs (Insurances, Maintenance, Rates, etc.) so you are down by approx. $18,000 or $360 per week.

But, now comes the good part. Your Tax deductions on these 3 properties will come to over $300 per week at 47% Marginal Tax rate. These consist of Building Allowance (assuming all 3 are built after 1985 - if not, check with your accountant), Borrowing Costs, your rental costs, and depreciation of fittings.

Be aware, this latter figure will vary MARKEDLY depending on the various costs you ACTUALLY have, but I calculated them on the following (with all 3 included):-

Building Allowance $300k

Fittings $40k

Borrowing Costs $15k

Maintenance, Rates, etc $15k

I believe these would likely be conservative, thus you could likely get more of a Tax deduction than quoted.

There may be a small requirement for you to input to these 3 (my calculations say LESS than $50 per week NETT, as long as you are using 221D and putting all of the extra Tax into the equation too).

So, you now need to house your family with your quoted $350/$400 per week rent. So what are you gaining? Well, that depends on the current cost of the existing mortgage on your current home - I didn't see it quoted, but you won't be paying that now (it's been replaced, above) so that should cut down the amount you need to find for rent.

And, I've saved THE BEST for last - if property grows at 4% (how's THAT for conservative) your new portfolio of properties will be gaining equity at the rate of approx. $850 PER WEEK .... If Sydney sticks to its usual figures, 9 or 10% would be more like the true figure.

As far as "legal" the Govt. has determined that it will support anyone who is investing far more than it will support a home buyer. Check all of this with your accountant, of course, after you have verified that they seem to fit your scenario.

Hope that helps, Leon. If any queries, do come back - it is certainly more than a little "involved" ......

Regards, Les

 

[WebBoard]

Leon

Reply: 1.1
From: Mike .


Re: Renting Own Property-Legal?
From: Leon
Date: 1/27/00
Time: 11:09:34 PM

Well, looks impressive. Did you arrive at this using the PIA software? If so I will need it to do some more analysis.

1. Can I re-finance a loan to IO even if it is originally my place of residence?

2. Your figures state I can borrow ^80% - Is that of the current value of house? How did you arrive at releasing $165k and determine that I could purchase properties up to $350K -That seems quite high! Would it be better do do 4 properties at $175K?

3.I forgot to mention that I am paying about $1350/mth on current mortgage. I mentioned if we were to rent for $400/mth what is the advantage of renting?

So from your figures all 3 properties combined would cost $150/week to maintain?

Can I also ask what your relationship is to Somersoft are you employed by them ( I notice that your name appeared most) or an interested investor? Nothing personal just trying to determine what level of assistance you can provide? Cheers & thankyou for your feedback.

 

[WebBoard]

Les

Reply: 1.1.1
From: Mike .


Re: Renting Own Property-Legal?
From: Les
Date: 1/28/00
Time: 5:20:06 PM

G'day Leon,

Right up front, let me say I am just an enthusiastic, new investor who has spent a fair chunk of time reading, doing seminars, etc. I am just another bloke who found this forum, and I appreciate others opinions, and I share mine too, but only where I think I can add something.

The figures I arrived at were generated on my own home-grown spreadsheets. I believe PIA could do a lot of this too, but I've tended to "stick with what I know" - since I wrote the spreadsheets myself, I find them easy to use.

To your questions - 1. Can I re-finance a loan to IO even if it is originally my place of residence? Answer: Yes - but!! I believe that the current loan is deductible, and any EXTRA loans USED FOR INVESTMENT will be deductible. But when refinancing the original loan, I don't KNOW that all of it will be an allowable deduction, so do check this with your accountant (see earlier forum entries "the ATO will GENERALLY allow...." is a common ATO statement!!)

2. Current value of home is $400k - 80% of that is $320k. Mortgage is $152k (add extra $3k for cost of refinance) = $155k which then leaves $165k (320 - 155) available to purchase other investment properties.

Figure of $350k is an example only - and $70k is 20% of that - but you certainly could buy lower priced properties (if they are available in Sydney ;^) If you went to 4 properties at $175k, it certainly could work (and may do even better for you with 4 times the Tax deductions to claim). Of course you would then have 4 lots of purchase costs as against 2 the other way. So the $25K left over (70 + 70 + 25 = 165) to cover costs may be a little bit light ....

3. $1350 a month currently - with IO, less than $1000 a month at 7% - the difference is almost your rent money (to house your family). And with all of the OTHER benefits (previous answer) you certainly should consider going this way.

Of course, if you (or wife) think this is too aggressive, you could buy just one (350k), or two (175k) properties. It halves the benefits (rental Income, Tax deductions, Capital growth, etc) but it ALSO halves the extra mortgage cost and leaves you with PLENTY of Equity rather than the 20% that I had proposed. Some people sleep better knowing they own a fair chunk of their properties (i.e. Equity around 40 - 50%).

Also from my figures, all 3 properties combined would cost LESS than $50 NETT per week - that's for all 3, not $50 each. But that figure assumes that your 221D gains are going into the equation, not your pocket - you receive the extra in your pay packet, but that extra (plus $50) will be put towards your properties.

I'm with you, Leon - keep your current home, rent it out, purchase more IP's and rent a nice place to house your family. I am convinced it is one of the safest forms of wealth creation, given that homes can be leveraged so highly. Good luck with your accountant - let us know how it goes, won't you.

Regards, Les

 

[WebBoard]

Geoff

Reply: 1.1.1.1
From: Mike .


Re: Renting Own Property-Legal?
From: Geoff
Date: 1/26/00
Time: 10:39:31 AM

Leon have you tried the demo software for PIA http://www.somersoft.com.au/DemoSoftware.htm

Geoff

 

[WebBoard]

Leon

Reply: 1.1.1.1.1
From: Mike .


Re: Renting Own Property-Legal?
From: Leon
Date: 1/27/00
Time: 10:45:46 PM

Yes I have down loaded it & plan to purchase. I understand the negative gearing equation, it was more the comparison of scenarios using my current home & whether that was leal tax wise. Les has provided some figures for me since your note. Cheers