Recommendation for my situation

[rhino80]

So here goes my questions ..

2 years ago my wife and I built a lovely house - a little way out from Brisbane CBD. House is valued at around 480k, current outstanding loan is $409k.I am currently paying P&I and have an offset account.

Our situation has now changed and we now have a 5 month old son, however my wife's family and friends live a little way away which has made it harder for support etc due to the travel required. At the time we thought it would be manageable however its proving a little too difficult in these early years.

We do not want to sell our house as its an awesome area, and just a great house. We can see ourselves possibly retiring in this house or giving it to our son one day.

My thoughts are to rent this house out, and move closer to the CBD/family friends and rent a place that would suit us better.

Who would I be looking at talking to for some quality advice and crunching numbers etc to see what is viable for us ? And recommendations in Brisbane ?


Really appreciate any advice

Cheers

 

[Anh]

First thing i would do is to convert the P&I to Interest only and put the spare fund to the offset account to maximise the deductibility of this house if you were to rent it out, and if you ever need to withdraw some of the fund to purchase another house to live in.

I would go and see a broker, there are many on this forum who can help you.

Ta

Anne

 

[Terry_w]

Yes, change to IO quickly.

This could work out well as you may be able to negative gear and avoid CGT and rent cheaply.

 

[wylie]

What they said...

And maybe take yourselves to some rental open houses in the area you would be keen on renting. If you can manage to rent something for less than your house would rent for, you have an opportunity to stash any spare cash (don't spend it) into your offset. You will be able to claim rates, insurance etc on your PPOR once you are renting itout, and your landlord pays it where you are renting.

There is the six year rule where you can go back and live in it, move out again and start the six years again...

This would work well (as long as you are disciplined).

Of course, you might find you have to pay more rent closer in than you get further out, so get a rent appraisal for your PPOR so you know where you stand.

You might decide down the track to buy closer in, and you can then pull the cash from the offset and you'll still have a big loan on the IP. I believe you can then decide which house to nominate as your PPOR but don't have to do that until you sell one or the other (but please check this carefully as it is something I've learned here on the forum, and I'm just repeating as I understand it... I could have it wrong).

Plenty of scope though if you are prepared to head down this path.

 

[rhino80]

Thanks for the tips here.

Just so I can get my head around some of the basics before talking to an accountant etc

Tell me if I'm on the right track here or not.

Current Loan amount is $409k
at IO approx $802 per fortnight in interest only repayments (approx 21k per year)

We rent it out at $450 per week
Rental income 900 a fortnight

+ rates/insurances/management fees gives an approx total of approx $1040 per fortnight.

We are out of pocket $140 per fortnight to cover the difference

So per year I would be able to claim the following ? (and how much - what percentage of this ?)

* Interest paid on loan $21k
* Expenses such as rates, insurance, management fees etc of $3.7k
* Depreciation on the property

I guess I also need an understanding on how the rental income effects my taxable income. Say if I earn $40k per year in my job as an example - would the $23k I receive in rent each year mean my taxable income is 40k + 23k ?

Do I then take 63k and work back with the deductions from there ?

Just after general advice here so I have a basic correct understanding of the structuring of this

 

[Terry_w]

Thanks for the tips here.

Just so I can get my head around some of the basics before talking to an accountant etc

Tell me if I'm on the right track here or not.

Current Loan amount is $409k
at IO approx $802 per fortnight in interest only repayments (approx 21k per year)

We rent it out at $450 per week
Rental income 900 a fortnight

+ rates/insurances/management fees gives an approx total of approx $1040 per fortnight.

We are out of pocket $140 per fortnight to cover the difference

So per year I would be able to claim the following ? (and how much - what percentage of this ?)

* Interest paid on loan $21k
* Expenses such as rates, insurance, management fees etc of $3.7k
* Depreciation on the property

I guess I also need an understanding on how the rental income effects my taxable income. Say if I earn $40k per year in my job as an example - would the $23k I receive in rent each year mean my taxable income is 40k + 23k ?

Do I then take 63k and work back with the deductions from there ?

Just after general advice here so I have a basic correct understanding of the structuring of this

Income of property - deductions = net tax position of property.

This will be negative from what you say above. So you then deduct this from your other taxable income.

Work what you would have paid on the original income and then what tax you would pay on the reduced income and that is your tax savings.

 

[rhino80]

Thanks for the info
So it doesn't really work out to be too much of a negative amount (based on some rough figures)

Rental income per year = $23400
minus deductions of 21k of interest + general expenses = $24900

Total - negative -$1500

Our rent in the other house will be about 21.5k per year

So I could consider this almost a neutral investment move in the shorterm ?
We rent our place out, rent somewhere else and not really spend alot extra for the privilege however we would still have our house, could move back within 6 years and avoid CGT and sell if we wanted to and make a profit.

Am I on the right track or am I missing something here ?

 

[Terry_w]

what about depreciation? did you pay LMI?

Excluding the above if there is a loss of $1500pa then you may save $675 in tax if the owner of the house is in the top tax bracket.

Plus you would be renting some where where it will cost you about $3000 pa less in outgoings than you are paying now.

Note that this is just initially as rents will rise so the loss on the IP will become a gain and the rent you are paying will increase so you may only be ahead for 1 to 2 years.

 

[rhino80]

I haven't included depreciation - I guess I could roughly say 2k or so
We did pay LMI but it was reduced by 50% by the bank for us.

I guess we would still be ahead in the fact that at the moment we are paying p&i. The difference is quite considerable - which means those excess funds can be placed into the offset account.

Over the long term however - I would assume we would be better off holding the property (15 years time) as the loan amount would be the same, however the value of the property would of increased ?

 

[Terry_w]

I haven't included depreciation - I guess I could roughly say 2k or so
We did pay LMI but it was reduced by 50% by the bank for us.

I guess we would still be ahead in the fact that at the moment we are paying p&i. The difference is quite considerable - which means those excess funds can be placed into the offset account.

Over the long term however - I would assume we would be better off holding the property (15 years time) as the loan amount would be the same, however the value of the property would of increased ?

Yeah, factor those in and the tax savings increase. Change your loan to IO with offset now.

Better to keep an asset that is growing in value generally. if it costs you say $1000 per year to hold then it just needs to growth in value more than this amount for you to be ahead. i.e. Not much

 

[rhino80]

I certainly will be changing to i/o - however one portion is fixed until mid Feb so I am a little stuck there. I'll have to merge it and then change it I guess.

My immediate goal is to ensure our lifestyle isn't hindered any further - so a small gain in tax refund $$ will lead to a higher gain in happiness I think for us

 

[Ed Barton]

I haven't included depreciation - I guess I could roughly say 2k or so
We did pay LMI but it was reduced by 50% by the bank for us.

I guess we would still be ahead in the fact that at the moment we are paying p&i. The difference is quite considerable - which means those excess funds can be placed into the offset account.

Over the long term however - I would assume we would be better off holding the property (15 years time) as the loan amount would be the same, however the value of the property would of increased ?

Depreciation on a 2 year old house is likely to be way way more than $2k pa. I'd be shocked if it was less than $5k pa and not surprised if it was around 10.

 

[rhino80]

So maybe a QS report - but should that be done before or once its actually advertised for rent ?

 

[Angel]

Hello Rhino80

I cant answer the QS question, but I would like to comment on a couple of other things.

Firstly, you asked about your taxable income from your day job. What about your wife.... Is the loan and the title in joint names? If so, the tax deductions are split according to the ratio of ownership, which is likely to be 50/50 unless you consciously set it up differently at settlement.

Secondly hold off asking your bank to merge the fixed/variable component of your loan before going IO. You will most likely be up for substantial fees. Please ask first about what it will cost now compared to once it comes off fixed in Feb.

And check your other costs. Rates, water, insurance and management fees cost me a lot more than what you suggested for a nice big house on the outskirts of Brisbane that rents at $470 per week.

 

[rhino80]

Good point regarding the title etc. I will double check but I believe the title is under my name and my wife is the joint tenant 50/50 ownership.

my wife will probably only work 2 days per week. She is paid well but won't earn as much as myself as I work full time.

yes won't be changing until the fixed portion lapses in February as they wanted to sting me $1500 for the privilege last time I checked.

the only thing I don't know is how much property management will be. Rates are $700 a quarter which includes water.

apart from the tax deductions we will be better off by approx $5k per annum purely from not paying for as much petrol and car costs.(also downsizing to 1 car)

we have zero debt apart from our mortgage.