What structure to use??

[agent 86]

Hados,

I know Naracoorte is a bit of a drive from Adelaide, but just incase your heading that way ...

http://www.somersoft.com/forums/showthread.php?p=196860

 

[Leandro]

Hey Rixter, interesting post.

Can you explain this point, i.e. how do villas/townhouses have greater tax advantages & effectiveness than houses or units?

4/ greater tax advantages & effectiveness.

If you dont mind answering, what point in your strategy are you? Year 2? Purchased 2 properties? And did IP 1 come after a PPOR or do you not own one of these?

Thanks

 

[Rixter]

Hey Rixter, interesting post.

Can you explain this point, i.e. how do villas/townhouses have greater tax advantages & effectiveness than houses or units?



If you dont mind answering, what point in your strategy are you? Year 2? Purchased 2 properties? And did IP 1 come after a PPOR or do you not own one of these?

Thanks

Leandro,

New or near new Villas/Townhouses are more tax effective due to the higher level of depreciable claims achievable compared to a house.

When you purchase a property the purchase price consists of Buildings component & land component. As there is a higher ratio of buildings to land content in the purchase price you can effectively depreciate a higher percentage of the purchase price, compared to a house with a larger land component.

As a Villa/townhouse lends to a lower entry level into a high growth area compared to a house in an area, it allows you to hold a greater number of properties spread across your portfolio. As you can image by increasing your depreciation across you portfolio this helps one to maximise your total portfolio cashflow.

In relation to your 2nd question im currently at year 6 in my strategy and currently hold half a dozen properties. I used the the equity in my PPOR back in 2000 as the foundation to springboard into my 1st.

Hope this helps.

 

[NigelW]

Good work Rix!

Simple plans (supported by sound fundamental principles) are always the best.

Cheers
N.

 

[Leandro]

Hey Rixter,

Sorry if we are going off topic, but this has become quite an interesting thread

When you purchase a property the purchase price consists of Buildings component & land component. As there is a higher ratio of buildings to land content in the purchase price you can effectively depreciate a higher percentage of the purchase price, compared to a house with a larger land component.

Alright so this means that you are getting a bigger tax deduction, but in terms of the bigger picture wouldn't you prefer to have something such as land that is not depreciating but rather appreciating, even if you get less deductions. Wouldnt you be better off when it comes to revalue the property. Or are you thinking purely from a serviceability point of view?

In relation to your 2nd question im currently at year 6 in my strategy and currently hold half a dozen properties. I used the the equity in my PPOR back in 2000 as the foundation to springboard into my 1st.

Thats fantastic!

Again sorry if im prying, but with the PPOR had you been paying that off for a while to achieve the equity used to springboard your plan or where you helped by moving house prices at the time?

Do you think your plan would work as well in say Sydney, where quality properties even towhhouses/villas are much more than 200K. I guess not really that important as one can invest interstate, but still interesting to compare i think.

And lastly! Im guessing you had to use the cashbond because your servicability had become difficult with your current earnings not being high enough for PPOR/IP holding costs?

 

[alexlee]

Alright so this means that you are getting a bigger tax deduction, but in terms of the bigger picture wouldn't you prefer to have something such as land that is not depreciating but rather appreciating, even if you get less deductions. Wouldnt you be better off when it comes to revalue the property. Or are you thinking purely from a serviceability point of view?

Not necessarily. Units also go up. Maybe not as much as houses in the long run due to redevelopment potential, but you can still get rich with just units. Depreciation also has its own benefits: namely that you claim depreciation at your marginal tax rate, and you then pay CGT on it (because depreciation reduces your cost base) in the future at 1/2 your marginal rate.

So say you claim $50k in depreciation over 10 years at a marginal tax rate of 30%. That's cashflow of $1,500 a year or $15k over 10 years. At the end of year 10 you sell, and pay 15% (half your marginal) on the depreciated portion of $50k = $7,500. Even ignoring the time value of money, you just made $7,500 from the government.

Do you think your plan would work as well in say Sydney, where quality properties even towhhouses/villas are much more than 200K.

Start in Parramatta and work your way further west. I see good units going for <$200k at 5% yields in Harris Park, etc.

Im guessing you had to use the cashbond because your servicability had become difficult with your current earnings not being high enough for PPOR/IP holding costs?

Depends. I'm also about 6 years into my investment plan, and for example the first property I got is now yielding 8.7% based on purchase price, so that helps my serviceability. As long as your new properties are reasonably high yielding you should be able to maintain your serviceability from increasing rents. You can also diversify by buying some high-yielding shares.
Alex

 

[Rixter]

Alright so this means that you are getting a bigger tax deduction, but in terms of the bigger picture wouldn't you prefer to have something such as land that is not depreciating but rather appreciating, even if you get less deductions. Wouldnt you be better off when it comes to revalue the property. Or are you thinking purely from a serviceability point of view?

Again sorry if im prying, but with the PPOR had you been paying that off for a while to achieve the equity used to springboard your plan or where you helped by moving house prices at the time?

Do you think your plan would work as well in say Sydney, where quality properties even towhhouses/villas are much more than 200K. I guess not really that important as one can invest interstate, but still interesting to compare i think.

And lastly! Im guessing you had to use the cashbond because your servicability had become difficult with your current earnings not being high enough for PPOR/IP holding costs?

The bigger picture for me is that Im holding a greater number of IPs spread across a greater number of areas/suburbs & marketplaces thereby minimising the chances of over exposure risks compared to if I held IP in smaller number of areas - in other words im not holding all my eggs in one basket. If one area is under performing chances are others areas I have exposure to are offsetting this & appreciating along nicely. Plus I'm maximising my casflows via depreciation

You see its not the size of the land component that determines the level of capital growth, its the area/suburb itself and in particular the supply & demand for it and dwelling type.

In relation to my PPOR question, I purchased it in 1993 and basically paid it off over the following 7 years. Then as previously mentioned used it as the foundation to continue purchasing. Over those 7 years it took me to pay it off house prices remained fairly stagnate with less than average growth attained.

As my CGA strategy relies upon capital growth it works in capital city metro areas and the speed in which you can attain properties is dependent upon capital growth achieved and your level of serviceability in allowing you to continue purchasing.

Correct I use a Cashbond/Annuity as a tool which increases my serviceability by converting existing portfolio equity into cashflow income to meet the banks lending criteria and allows me to break through the banks wall to continue purchasing.

Hope this helps.

 

[Leandro]

Not necessarily. Units also go up. Maybe not as much as houses in the long run due to redevelopment potential, but you can still get rich with just units. Depreciation also has its own benefits: namely that you claim depreciation at your marginal tax rate, and you then pay CGT on it (because depreciation reduces your cost base) in the future at 1/2 your marginal rate.

So say you claim $50k in depreciation over 10 years at a marginal tax rate of 30%. That's cashflow of $1,500 a year or $15k over 10 years. At the end of year 10 you sell, and pay 15% (half your marginal) on the depreciated portion of $50k = $7,500. Even ignoring the time value of money, you just made $7,500 from the government.

I understand that units go up. They have to, as you do own land and a part of the building no matter how old it is. I guess if you were going for capital growth and cashflow wasn't as important then houses still seem a better option don't they?

Start in Parramatta and work your way further west. I see good units going for <$200k at 5% yields in Harris Park, etc.

Thanks for that, i'm not looking for an IP at the moment, but rather a PPOR. But was more just asking the question, but i guess that does answer it.

You see its not the size of the land component that determines the level of capital growth, its the area/suburb itself and in particular the supply & demand for it and dwelling type.

I understand that. Do your townhouses/villas generally have more than 30% land content? Do you buy stata titled properties or only torrens title?

In relation to my PPOR question, I purchased it in 1993 and basically paid it off over the following 7 years. Then as previously mentioned used it as the foundation to continue purchasing. Over those 7 years it took me to pay it off house prices remained fairly stagnate with less than average growth attained.

Thats fantastic, being able to pay off your PPOR in 7 years!

 

[Rixter]

I understand that. Do your townhouses/villas generally have more than 30% land content? Do you buy stata titled properties or only torrens title?

Leandro, my preference is for townhouses/villas with around 30% land content and that are Strata Titled .

 

[Rixter]

Not necessarily. Units also go up. Maybe not as much as houses in the long run due to redevelopment potential, but you can still get rich with just units. Depreciation also has its own benefits: namely that you claim depreciation at your marginal tax rate, and you then pay CGT on it (because depreciation reduces your cost base) in the future at 1/2 your marginal rate.

So say you claim $50k in depreciation over 10 years at a marginal tax rate of 30%. That's cashflow of $1,500 a year or $15k over 10 years. At the end of year 10 you sell, and pay 15% (half your marginal) on the depreciated portion of $50k = $7,500. Even ignoring the time value of money, you just made $7,500 from the government.

The secret to true wealth is to never never ever ever sell !

 

[Leandro]

Leandro, my preference is for townhouses/villas with around 30% land content and that are Strata Titled .

Im guessing you also try to avoid complexes that have pools, and other high maintenance facilities etc?

 

[Rixter]

Im guessing you also try to avoid complexes that have pools, and other high maintenance facilities etc?

Nope not really....my Qld IP's have heated pools & Bbq areas around them as these type properties are whats in demand from tenants - it all helps to minimise any potential vacancy factors.

I do however avoid complexes with a high level of Lots.....Small complexes are rarer and as you know the scarcety factor rules in relation to property

 

[alexlee]

I understand that units go up. They have to, as you do own land and a part of the building no matter how old it is. I guess if you were going for capital growth and cashflow wasn't as important then houses still seem a better option don't they?

Yes, becuase of the land content houses might be a better option. However, in certain areas houses might be too expensive. e.g. Sydney lower north shore houses would be astronomical but a good unit is affordable. A bit of geographical diversification is good.

As your portfolio grows, the rent from your properties becomes more and more important in terms of getting more loans. Also, my objective is to live off my cashflow, so having massive assets that doesn't generate me any income isn't as attractive. You can sell, but then you'd have to pay tax. If you don't sell, as Rixter suggested, you get the depreciation for 'free'.

For a PPOR, my own choice (will be buying when I come back to Sydney in 2-3 years) is Epping / Ryde / Eastwood / Marsfield. Great suburbs that will continue to be popular. For investment houses, I'd also look out west (between Parramatta and Blacktown - older houses on big blocks with future redevelopment potential - cheap entry point in the $200's after Sydney drops a bit).
Alex

 

[goddessk]

Hi Rixter,

I have been following this thread with interest and you seem to have a very sound strategy, enviable really! Congratulations on your hard work. Having just bought a house and land and then a unit myself I am considering again buying house and land. However you have raised some good points re the benefits of townhouses/villas.

My only concern is the strata fees and the difficulties with common property in strata blocks. My PPOR is a unit and I am the secretary of the Owners Corporation so I see first hand some of the expenses and issues that go on in my block. A lot of them have to be funded by the Owners Corp funds.

My Perth unit was only $150K yet costs me around about the same amount to run as my $200K regional NSW house and land because of strata fees (plus PM costs are higher in WA). So I am tempted to stay away from units for that reason.

Now it could be just unlucky with some blocks that have more issues than others, but over time have you had many costs where you have had to pay over and above your normal strata fees, and any particular concerns that might drive you away from purchasing townhouses/villas in the future. I am guessing not as you are continuing to stay with this form of housing, but interested to here any comments you have on this.

This type of housing would fit my purchase cost criteria however I have my hesitations.

 

[Rixter]

Hi Rixter,

I have been following this thread with interest and you seem to have a very sound strategy, enviable really! Congratulations on your hard work. Having just bought a house and land and then a unit myself I am considering again buying house and land. However you have raised some good points re the benefits of townhouses/villas.

My only concern is the strata fees and the difficulties with common property in strata blocks. My PPOR is a unit and I am the secretary of the Owners Corporation so I see first hand some of the expenses and issues that go on in my block. A lot of them have to be funded by the Owners Corp funds.

My Perth unit was only $150K yet costs me around about the same amount to run as my $200K regional NSW house and land because of strata fees (plus PM costs are higher in WA). So I am tempted to stay away from units for that reason.

Now it could be just unlucky with some blocks that have more issues than others, but over time have you had many costs where you have had to pay over and above your normal strata fees, and any particular concerns that might drive you away from purchasing townhouses/villas in the future. I am guessing not as you are continuing to stay with this form of housing, but interested to here any comments you have on this.

This type of housing would fit my purchase cost criteria however I have my hesitations.

Hi Goddessk,

Thank for your congrats.

Since building my Property Portfolio I have only had one addtional expense to my BC fees. This was for a once off extra pest control preventative treatment within a complex. Apart from this no others in the last 6 years.

I relation to your second question here is a copy of a recent post of mine in relation to why I choose Townhouses/Villas -

I purchase new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions

2/ To minimise my maintenance & repair costs

3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates

4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr for several reasons to purchase Townhouses & Villas with around 30% land component thereby eliminating multi story units and high rise apartments.

The mains ones being (in no particular order) -

1/ Lower maintenance & upkeep for the tenant

2/ Lower purchase or entry level into a Higher capital growth suburb area.

3/ Rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons -

Lifestyle & Economic.

4/ Greater tax advantages & effectiveness.

5/ Able to hold more individual properties spread across different markets in your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak.


Hope this helps to answers your questions

 

[goddessk]

Thanks for sharing Rixter. Appreciate it.

 

[Leandro]

Since building my Property Portfolio I have only had one addtional expense to my BC fees

I would imagine that this is the case because the townhouses/villas you have bought are new. I lived in apartments when i was younger with my parents for most of my life. They were older apartment buildings 15+ years, small lots, 6-12, strata titles. There was always troubles, as things start breaking/wearing down (shower bases start leaking, window sashes that need replacing, balcony doors that no longer roll, etc) and all owners have to chip in.

I guess though, by the time you reach this situation Rixter, your capital gains should outweigh these costs.

 

[Rixter]

I would imagine that this is the case because the townhouses/villas you have bought are new. I lived in apartments when i was younger with my parents for most of my life. They were older apartment buildings 15+ years, small lots, 6-12, strata titles. There was always troubles, as things start breaking/wearing down (shower bases start leaking, window sashes that need replacing, balcony doors that no longer roll, etc) and all owners have to chip in.

I guess though, by the time you reach this situation Rixter, your capital gains should outweigh these costs.

Correct Leandro, thats why I buy new or near new - less maintenance more depreciation.

Like I've said before, I always work towards minimising risks & maximising cashflows. Buying new/near new achieves this.

 

[Leandro]

Like I've said before, I always work towards minimising risks & maximising cashflows. Buying new/near new achieves this.

Would you ever consider buying an older house if you found it in a suburb for a cheaper price than a new townhouse/villa that you were looking at. Giving you the oppurtunity to purchase and renovate it for about the same cost as purchasing the townhouse?

This would allow you to achieve the things you look for now; depreciate all the new fixtures and fittings, avoid maintenance problems etc as you have renovated, still attract many renters as the place is in good condition, but now you own more land and you may be able to redevelop later?

I ask because im pondering this situation myself now

 

[Rixter]

Would you ever consider buying an older house if you found it in a suburb for a cheaper price than a new townhouse/villa that you were looking at. Giving you the oppurtunity to purchase and renovate it for about the same cost as purchasing the townhouse?

This would allow you to achieve the things you look for now; depreciate all the new fixtures and fittings, avoid maintenance problems etc as you have renovated, still attract many renters as the place is in good condition, but now you own more land and you may be able to redevelop later?

I ask because im pondering this situation myself now

On the surface it appears to me as if you don't have any set investment plan in place, & you're also without a set time frame for why it is you are investing in the first instance. Maybe Im barking up the wrong tree forgive me if I am, but if i'm not maybe you need to sit down & think long & hard as to why it is you are looking at buying property for investment in the first instance & what you are ultimately wanting to achieve from it.

Once you know this you need to ask yourself does this Property fit into or full fill those investment objectives. Then if you can comfortably acquire & maintain it without any real duress then why wouldn't you go for it.

Success in what ever you're trying to achieve is all about having the correct Mindset & then applying strategy/s that fulfill your requirements, needs & risk profile.

Hope this has provided you with some food for thought