Increasing Portfolio

[WebBoard]

From: Mike .


increasing portfolio
From: Chris H
Date: 12/7/99
Time: 7:04:10 PM

We've just bought property no 3 to live in as family home. Property 2 is at a stage when rented will pay itself and property No1 thus making them neutrally geared. We intend reducing the mortgage on No3 to a level that if rented would be neutral.

We are dropping to one wage and can handle No3's payments fine. We didn't want to sell Property 2 as its in a very good capital growth area and only 2 mins walk to the beach.

Tax rebates are great but we would rather not have to pay it out in the first place. Is this a good way to increase our portfolio on one wage? Properties 1 and 3 are also in good areas and this seems to us to be a good way to increase our holding without much input. Any comments greatly accepted.

 

[WebBoard]

Colin

Reply: 1
From: Mike .


Re: increasing portfolio
From: Colin
Date: 12/8/99
Time: 8:43:02 PM

I am confused as to why you would want to be neutrally geared?

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: increasing portfolio - #4 on its way !!!!!
From: Les
Date: 12/9/99
Time: 5:06:19 PM

G'day Chris,

Mark Noonan said it a couple of months ago - that is "Any mortgage when renting your old home is not Tax deductible - and since you can't claim the mortgage interest, then any rental gain will be taxed at your Marginal rate." Possibly 48.5%!!!!

I note your comment "Tax rebates are great, but you'd rather not pay it out in the first place." And I'm with you on that!! But the way to "not pay them in the first place" is to arrange a 221D (if you are a PAYE employee) or arrange an "Application to modify Provisional Tax" (if you are self-employed).

I have to agree with both Colin and Mark - you can do FAR BETTER by creating some negative gearing. The way you are going so far is certainly GOOD - but you are now in a position of some POWER, and can add another rental to your portfolio AT NO COST TO YOU!!! Sound good? (Of course, I'm GUESSING here, but your position sounds REAL HEALTHY, except for the "neutral gearing" part).

From your earlier entry, it appears you have more than 50% Equity in property #2 (your old home) - you gave no figures on #1, so I can't comment. It appears you are in good shape with your current home, so no worries there.

Now, Chris, you are obviously well in control of your money to have got where you are today. My suggestion is to go see your accountant, or Finance Adviser, and have them tell you how to structure things to legally minimise your Tax payable. Quiz them about 221D, (or the self-employed one, if that applies to you), and find out whether property #4 is waiting for you. You've GOT to be close to it - but THIS time, buy it outright as a Rental (DON'T move out of your current home to get #4 - because THAT way costs you HEAPS!!!).

There is no denying you have DONE WELL so far - but you can do even better by creating some LOSSES (which will probably NOT COST YOU ANYTHING - and you GAIN another property growing in Equity). You seem to be happy doing the Rental property thing - other options could be shares, etc. if you felt so inclined (but you can't get tenants to pay for them ;^)

Go for #4 - with Equity borrowed from #2 - that will allow extra claims on #2 to offset some of the income. THAT could allow you to receive more dollars in your pay packet. If you are unsure of this, let me give you my scenario - I make losses on my properties, but actually receive $$'s per week out of each one - the "non-cash" losses make that difference. And a 221D lets your Paymaster put the amount of Tax Payable each week DOWN to compensate you for your losses.

I note, too, that you have bought in good areas - one at least is near the beach - that is smart. Don't sell any of them.

Change NOTHING else with what you are doing, but do look seriously at changing your thoughts about Tax. YOU should buy your Rentals with Before Tax dollars - you've been buying them with After Tax dollars. Change ONLY that for your future and you will be amazed just how quickly #5, #6 and #7 are available to you.

Good luck, Les