Is my logic Right?

Say to borrow a $1000 at 5.95% - costs me $59.50 each year in interest (interest only loan).
Less tax (at top marginal rate) really costs me about $30.00

So I borrow and spend $1000 on renovation of a recent IP purchase This gives me a depreciation (say 10% for carpet and lino). ...allowing $100 of my regular income so then I am $50 in front each year less the $30.

Also the added renovation I hope to maximise the rent.

Is my logic right?
Scott:confused:
 
Looks ok to me. (assuming your depreciation figure of 10% is correct).
However don't forget that
* interest rates could go up - which would decrease that $20 in your hand at the end of the financial year.
* After the carpet is fully depreciated you still have the interest cost each year (with your interest only scenario), but no depreciation to offset it.

However, if you can renovate effectively to increase your rent it makes it worthwhile over the long haul. I suppose that is one way those clever DIY'ers and renovators make their money (not to mention the capital gain a good renovation can make)

Lily
 
Originally posted by scott
Say to borrow a $1000 at 5.95% - costs me $59.50 each year in interest (interest only loan).
Less tax (at top marginal rate) really costs me about $30.00

So I borrow and spend $1000 on renovation of a recent IP purchase This gives me a depreciation (say 10% for carpet and lino). ...allowing $100 of my regular income so then I am $50 in front each year less the $30.

Also the added renovation I hope to maximise the rent.

Is my logic right?
Scott:confused:
Hi Scott

You are still out of pocket the $59.50. The tax saving may, or may not, come back to you in the form of a tax refund or tax saving depending upon everything else that happens with your taxes in that year.

In your example, your cashflows will be:

interest repayment - out 60
Tax refund - in 80

Cash in front $20

Note, the tax refund is worked on $100 depreciation and $60 interest = $160 tax deduction x 50% tax bracket = $80.

And, before any jumps in, I am well aware that the tax bracket is actually 48.5% - I'm just keeping things simple for the sake of communication.

Have fun

Dale
 
Scott,

My logic works a little differently. If I have $1000 in renovations under consideration and interest rates are 6%, I gnerally put in afudge factor of 2% (to make 8%) then say OK, I need at least $80 per annum in rent to cover this (ie around $16/week). Then you can have your debt forever (and when you renovate in 10 year's time, you can pull the same stunt again!). :D

Regards,

Bob
 
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