Newbie: First Investment questions.

1 . PPOR paid off with around $390K in equity.

2. Looking to purchase an Investment property for $220k @ currently rented at $260 a week.

My questions are around the negative gearing , trying to get my head around the Pro`s of the Tax offsets when negative gearing such a property through a Interest only loan compared to purchasing the property via Principal and Interest loan and paying off the property as quickly as possible with own funds and rental returns.
 
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negative gear the property?

So i'm interested, and i know i could ask my parents, but time to give up the act a bit..

What the hell does negatively gearing mean..?
and what are the advantages/disadvantages..?

No idea about the loan, or return situation though, sorry, had to ask..:)
 
1 . PPOR paid off with around $390K in equity.

2. Looking to purchase an Investment property for $220k @ currently rented at $260 a week.

Coming from the old school of paying off a loan as quickly as possible i keep tracking along the lines of purchase and pay off as quickly as possible with a Principal and Interest loan. I`m after some feedback regarding how and why i should approach ,Interest Only loan ? and negative gear the property ? Is this viable with the current return on the above property ?
Hi Newbie,
Its all reletive. I would enquire as your salary, how much you earn, which will assist in determining your after tax benefits with an investment vehicle. If you have no tax minimising strategies in place, then good to consider. If this is a strategy you wish to explore I'm happy to speak directly and offer my support. Interest only loan is attached to a growth or capital gains model. It assumes your strategy is not to pay off your investment but to contribute the least amount possible to recieve the best gain (growth) enabliing you to consider multiple properties (through using the monies you would have paid towards principle for another interest only loan) therefore 2 or 3 properties working for you instead of 1. The idea then to sell one down in time and end up with hopefully 2 freehold. This all depends on income and tax factors primarily so best to chat more. Good luck Pete
 
I`m after some feedback regarding how and why i should approach

There's not necessarily a one-size fits all answer, I'm afraid. You have a lot of potential options up your sleeve, of which I'm sure the forum will enlighten you.

To help with that process, though; what are you trying to achieve, what's the overall goal here...?



What the hell does negatively gearing mean..?
and what are the advantages/disadvantages..?

Negative gearing means that your property costs you more than you earn for it. Ie, in cashflow terms, you're losing money. The upside is that there's often a small tax advantage to it, and the theory goes that the value of the property will increase by more than that net loss.

Eventually, it may become positively geared as the rents increase and / or the loans are paid off (if you're into that sort of thing).
 
My Goal at the moment is somewhere to channel some funds now my PPOR is paid off , My original idea was to purchase and continue pumping funds into the loan along with the rental return and pay off the property in 8-10years to allow me then to have the rental returns as a bonus income.

Although the above is probably not the best way to invest funds. How does the Interest only loan work ? These are usually only for 5 years max ? So does this mean the negative gearing aspect is only good for the 5 years of the interest only loan ?
 
Hiya 1200

Interest only loans are generally available for 5 to 15 years, with the balance out to 30 years available as PI.

The general plan of attack for someone like you may be.

1. Get some sort of equity loan on your PPOR. ideally to 75 to80 % of its value.
2. Use that facility for the deposit and costs for a new investment property
3. Get a SEPARATE facility for 75 to 80 % of the new property value, secured only by that property.
4. If possible get an IO loan with 100 % offset account.
5. Tip all payments into the offset account rather than into the loan itself.

Depending on how fast yu want to grow and what your goals are, repeat steps 3 to 5

ta
rolf
 
Welcome 1200det,

As suggested above, the answer to your question relies on your Income Tax.
Quite literally.

The Interest and expenses will lower your Gross Income and change your TAXABLE income.

IF you drop down into a lower Tax bracket than you are currently on, the tax you will pay can be significantly lower than by Negatively Gearing.

This is the benefit of Negative Gearing.

Then you can work out how much the property is costing you in REAL terms.

Regards JO
 
Rolf

Are you aware of any webpages explaining the workings on the below Loan principals ? Just trying to get my head around it.

With Thanks
Damien

Hiya 1200

Interest only loans are generally available for 5 to 15 years, with the balance out to 30 years available as PI.

The general plan of attack for someone like you may be.

1. Get some sort of equity loan on your PPOR. ideally to 75 to80 % of its value.
2. Use that facility for the deposit and costs for a new investment property
3. Get a SEPARATE facility for 75 to 80 % of the new property value, secured only by that property.
4. If possible get an IO loan with 100 % offset account.
5. Tip all payments into the offset account rather than into the loan itself.

Depending on how fast yu want to grow and what your goals are, repeat steps 3 to 5

ta
rolf
 
rolf what are the main benefits of IO loans? or could you please provide a link if this has been discussed previously in the forum. thanks
 
So i'm interested, and i know i could ask my parents, but time to give up the act a bit..

What the hell does negatively gearing mean..?
and what are the advantages/disadvantages..?

No idea about the loan, or return situation though, sorry, had to ask..:)

OMG! I thought you knew what neg gearing was? Obviously this is the best place for you if you don't want to ask Q's at home.:eek:
 
Not necessarily.. it's possible to be cf+ after tax, while making a paper loss.

I believe James was trying to keep things in simple terms.

Basically, if you earn $50k, and you have a loss of $10k, you will only have to pay tax as if your income is $40k.

There are, of course, some other things that can give you a paper loss only. This can be quite confusing for a newbie, but to put that in simple terms, what that means is that (newer) property depreciates. Say, you purchase something for $300k, and the building componant is $100k. The building will depreciate at a rate of 2.5% for a period of 40 years (so long as it is built after a certain date).

Based on the above, that would give you a "paper loss" of $2500 each year for 40 years. So.....if the same person on $50k losing $10k has depriciation of $2500, that will now bring their taxable income down to only $37500.

In VB's above explanation it could work that you have $50k income, perhaps a loss of $500 AND depreciation of $2500. This would give you a taxable income of $47k BUT a realistic income of $52k, making a profit, but claiming a loss.

I hope that is clear as mud for the newbies.
 
According to the information about the type of property you are looking at ($220k @$260pw) a yield of around 6.15% - not negatively geared with todays interest rates even with a 100% lend.
 
According to the information about the type of property you are looking at ($220k @$260pw) a yield of around 6.15% - not negatively geared with todays interest rates even with a 100% lend.

Not necessarily so! You still need to factor into this expenses, such as:

Rates
Management Fees
Maintenance
Insurance
Water
Bodycorp (if a unit) etc.
 
I believe James was trying to keep things in simple terms.

Basically, if you earn $50k, and you have a loss of $10k, you will only have to pay tax as if your income is $40k.


Based on the above, that would give you a "paper loss" of $2500 each year for 40 years. So.....if the same person on $50k losing $10k has depriciation of $2500, that will now bring their taxable income down to only $37500.

In VB's above explanation it could work that you have $50k income, perhaps a loss of $500 AND depreciation of $2500. This would give you a taxable income of $47k BUT a realistic income of $52k, making a profit, but claiming a loss.

Thanks for this explanation skater!

I am flying blind & figured that once I have held my ip for a full financial year I'll be able to understand everything better and how my financial situation is.

I earn $50 K and am making a loss of around $5000 pa before tax. I'll depreciate $1350 in my first year and will get some money back from tax deductions of around $2000 or $3000 for the year. I'll be taxed at $43,650. Is that good to be taxed at $43 K. How much impact would that have on me in how much I'll save compared to if I was taxed at $50 K.

I thought I would get the $1350 as cash in pocket but I see now that the money is taken off my $50 K salary. Will this help me?

I'll be seeing an accountant in a couple of weeks and will talk to him. I'm sure once i've held my ip for a full financial year things will be clearer to me.

It would be interesting to see a hypothetical example somewhere. I'll keep searching! :)

Anyone have a link to an example?
 
Thanks for this explanation skater!

I am flying blind & figured that once I have held my ip for a full financial year I'll be able to understand everything better and how my financial situation is.

I earn $50 K and am making a loss of around $5000 pa before tax. I'll depreciate $1350 in my first year and will get some money back from tax deductions of around $2000 or $3000 for the year. I'll be taxed at $43,650. Is that good to be taxed at $43 K. How much impact would that have on me in how much I'll save compared to if I was taxed at $50 K.

I thought I would get the $1350 as cash in pocket but I see now that the money is taken off my $50 K salary. Will this help me?

I'll be seeing an accountant in a couple of weeks and will talk to him. I'm sure once i've held my ip for a full financial year things will be clearer to me.

It would be interesting to see a hypothetical example somewhere. I'll keep searching! :)

Anyone have a link to an example?

Based on your 50k vs 43k comparison you would save $2100 in tax
 
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