Where is the cash flow- Please help me understand

[chara79]

Hi all,

I am new to this site but it looks great, I have read a lot of threads but I am still confused.

My problem is; I need a mentor, near Waikiki WA.

My reason is I understand negative gearing, and I guess positive gearing to some degree. BUT….

I have a rental property which I owe $110, 000 on. I now am about to begin to neutral gear, soon after positive gear, and do not know what to do, we are looking at buying a home at the end of the year to live in, so we will off set it so we negative gear again on the investment.

So we will then owe $200, 000 (approx 1500 pm- we only get $960 pm rent) on the investment and approx $220,000 (approx $1700pm) on our own house. So we are out of poc $2240pm not including rates, fees etc. That is stretching our finances to their limit if not just over at this point in time…

With the interest rates how they are, how do we get another investment property, you can only negative gear to a certain extent as we would have to get another job to pay for another property….

I don’t understand how to keep buying properties as when do you get the chance to positive gear…. Mortgages these days are bigger than rent received….


If anyone has any advise I would love to hear it...Please... I am reading books, listening to CD but none of them answer this question... Where does the cash flow ever come into play..

Thanks for your time

Chara79

 

[ianvestor]

If you are negatively geared, you're basically waiting (hoping) for your IP to appreciate in value or otherwise there's not much point having an IP.

So the gains come when the IP has grown in value enough that you can access the increased equity in that property (either by selling it or by refinancing) to use for further investments or to spend on your lifestyle.

If this doesn't make sense yet, it will in 7 to 10 years' time (sorry to keep you waiting!).

 

[knightm]

The other thing is that rents grow over time (most people think roughly in line with inflation) in recent years interest rates have eaten up all the rent increases but at some point the interest rate hikes will stop, then may come down, when that happens rents will gradually grow so that they create extra cashflow. If you buy a heavily negatively geared property it may take MANY years for this to happen but it will happen in theory. If your goal is to live on cashflow then perhaps focus on buying IP's that either pay fro themselves now (cf neutral) or only cost a small amount each week rather then hundreds. The other thing some people do is buy a number (say 10 for eg) ips with debt, let them grow a bit, no cash flow coming, then when ready to retire sell half, pay off all debt and live on rent. Lots of options, all take time.

 

[chara79]

you both make sense

Thanks you both make sense. I think we may have to wait 2 years until we pay a good sum off the house we intend to buy. Or as you said get cheaper ip's. The interest rate cant stay this high for ever it is bound to lower over the next few years, or as you said income should increase....

i guess will just have to keep reading, learning all i can so when the oppportunity comes we can jump aboard I am only 28 so i have a bit of time to play with...

i am not very patient and when my mind is set its hard to back off, but in this case i think time is the answer....

Any more thoughs on this would be great and if you know of any mentors around perth i would love to hear from them
thanks

 

[marg4000]

Chara, you say
"I have a rental property which I owe $110, 000 on. I now am about to begin to neutral gear, soon after positive gear, and do not know what to do, we are looking at buying a home at the end of the year to live in, so we will off set it so we negative gear again on the investment."

Not sure what you mean by this.

Once your IP becomes positively geared, you cannot go back to negative gearing "again" unless you borrow to do improvements to the IP. It sounds as if you plan to get your PPOR and IP finances mixed up, which will lead to all sorts of problems for you.
Marg

 

[chara79]

marg4000,

I have a line of credit with the morg on the ip. (80k at the moment- i could up it to $160 if needed).

When we find the house we want to live in (we are planning to move back to Vic) then we will get a new loan for our own home (as we can use a Defence force loan where they pay 400 per month off our morg if we borrow more than 315k)

Once that is done i was planning to use the line of credit from the ip and transfer the remaining 95k (or what ever is available), and put it on our home loan....so we lower how much we owe on our home, so i can claim tax on the ip...

Does that make sense or is there a reason i can not do that...? Do you have a better way of doing it? It made sense to me,

But i am new at all this, 3 years ago we had 2 ip and 1 other we lived in, though over time we sold 2 houses (1 in syd 1 in vic) and now rent in WA, we are going backwards not forwards, as i dont fully understand how it all works.

Any advise would be great

 

[yo yo ma]

I have a line of credit with the morg on the ip. (80k at the moment- i could up it to $160 if needed).

When we find the house we want to live in (we are planning to move back to Vic) then we will get a new loan for our own home (as we can use a Defence force loan where they pay 400 per month off our morg if we borrow more than 315k)

Once that is done i was planning to use the line of credit from the ip and transfer the remaining 95k (or what ever is available), and put it on our home loan....so we lower how much we owe on our home, so i can claim tax on the ip...

What you are suggesting, is mixing investment and personal loans... not a good idea.

It is the purpose of the original loan that counts. Simpily increasing the IP loan for your PPOR, will not make it deductible. You can pay investment expenses (rates, loan interest payments- capitalise the interest) from the LOC, which would be deductible. You really need to speak to your accountant.

 

[handyandy]

marg4000,

I have a line of credit with the morg on the ip. (80k at the moment- i could up it to $160 if needed).

When we find the house we want to live in (we are planning to move back to Vic) then we will get a new loan for our own home (as we can use a Defence force loan where they pay 400 per month off our morg if we borrow more than 315k)

Once that is done i was planning to use the line of credit from the ip and transfer the remaining 95k (or what ever is available), and put it on our home loan....so we lower how much we owe on our home, so i can claim tax on the ip...

Does that make sense or is there a reason i can not do that...? Do you have a better way of doing it? It made sense to me,

But i am new at all this, 3 years ago we had 2 ip and 1 other we lived in, though over time we sold 2 houses (1 in syd 1 in vic) and now rent in WA, we are going backwards not forwards, as i dont fully understand how it all works.

Any advise would be great

Sorry to burst your bubble -- but the redraw on the IP for use on a PPOR will not be tax deductible.

It is all about what use the money is put to rather than the source. In your case you intend to use the money for your own benefit and as such renders this non deductible.

You can get around this by using a offset account against the IP loan where any extra money is paid into the offset rather than the loan. This reduces the amount owed and reduces your costs but allows you to redraw the offset amount and utilize how you like.

Normally this is used for a PPOR which may become an IP in the future, same principle, when redrawing the money out of the offset to buy the next PPOR then the original PPOR loan amount becomes tax deductible.


Cheers

 

[Viewburn]

Chara,

Once that is done i was planning to use the line of credit from the ip and transfer the remaining 95k (or what ever is available), and put it on our home loan....so we lower how much we owe on our home, so i can claim tax on the ip...


In reply to your post with the line of credit I dont believe you can claim tax on your IP if you use the funds on your home loan.

Check out this thread http://www.somersoft.com/forums/showthread.php?t=26532&highlight=capitalise+interest

 

[Perp]

Chara, unfortunately, the several posters who've said that the $95K that you draw from your IP LOC wouldn't be tax-deductible are correct. If you had that money sitting in an offset account against the IP, you could take it out of the offset and the whole IP mortgage would be tax-deductible, but once you've paid down your IP loan, you reduce your ability to claim tax deductions on its interest permanently. For this reason, my rule is NEVER EVER pay down IP debt; if you have spare equity, park it in an offset instead. It's a stupid rule, yes, but we have to work within ATO rules.

Now, as for how you ever get cashflow from investing in property, knightm said it right when mentioning the magic of time. The best way to appreciate this is to imagine you could go back in time and buy a house in the best suburb in your city 20 years ago for, say, $50K. But it's only yielding 4% (say $40 per week in rent) and you have an interest only loan at say 8% ($80 per week in mortgage interest). How happy would you be to own this property today. Would you be happy to still be paying $80 per week interest on this property, but now receiving, say, $500 per week in rent?

The problem, as you highlight, is holding it for all those years when it's not paying its way. The three ways around this that I can immediately think of are:

1) Fund it out of current income - which is what you're having trouble with.

2) Buy properties with higher yields - I prefer cashflow neutral to positive, and they are out there but you have to look carefully and be creative. You won't buy a cashflow positive 3 bed home in a prestigious suburb off realestate.com.au; that is not going to happen. You'll have to go to other areas, look at high density, do a reno/development, buy off-market at below market value, etc.

3) Buy in high growth areas where you are confident that you can regularly refinance and pay holding costs by redrawing from increased equity. This is obviously a bit risky, but less so if you're fortunate enough to have a huge growth in the first few years that gives you an equity buffer.

 

[Minxdamanx]

Tracey - that's a great post.

 

[chara79]

Chara, unfortunately, the several posters who've said that the $95K that you draw from your IP LOC wouldn't be tax-deductible are correct. If you had that money sitting in an offset account against the IP, you could take it out of the offset and the whole IP mortgage would be tax-deductible, but once you've paid down your IP loan, you reduce your ability to claim tax deductions on its interest permanently. For this reason, my rule is NEVER EVER pay down IP debt; if you have spare equity, park it in an offset instead. It's a stupid rule, yes, but we have to work within ATO rules.

Thanks tracey, (and everyone else who has given advise...) as our loan has redraw access and is not an off set account (we can access the money we have paid off but its not a seperate acc from the loan) , is it a good idea to put excess funds in a savings account till next year when we are going to buy our own property?? As our pay goes straight on the loan, so i would just pull the excess amount off at the end of each month and put it in a high interest savings account. I dont want to get into possitive gearing as i dont think it would work as well for us...

Thanks

 

[Perp]

Do NOT put all your pay into the loan! Put the absolute minimum (interest or P&I payment, depending on your loan agreement) into the loan account and keep the rest in a savings account, yes. Even immediately drawing off the excess to savings won't appease the ATO - the minimum balance you ever get that loan down to is the most that will ever be tax-deductible. So if, for example, a relative paid you $100K and they deposited that to your loan account and you immediately withdrew it for your personal use, then you've decreased the amount of your loan that is tax-deductible by $100K... ouch!

 

[chara79]

i have heard that before, but silly me asked the bank and they said that was incorrect.

I have just paid 70k off the loan from a sale of our other ip, i knew i should have put it in a term deposit...

I finally booked into a finacial advisor for wed so hopefully he can shed some light on our situation, i did not really want to see one, as i hate the thought of paying someone a lot of money when i am sure he will just try selling us different packages (that i dont want)... you have been very helpful thank you...

i will take one of our pays off the morg, that way it makes the repayments smaller.....

Thanks

 

[s_t]

I imagine an accountant would be the more appropriate person to see regarding this sort of stuff?

i have heard that before, but silly me asked the bank and they said that was incorrect.

I have just paid 70k off the loan from a sale of our other ip, i knew i should have put it in a term deposit...

I finally booked into a finacial advisor for wed so hopefully he can shed some light on our situation, i did not really want to see one, as i hate the thought of paying someone a lot of money when i am sure he will just try selling us different packages (that i dont want)... you have been very helpful thank you...

i will take one of our pays off the morg, that way it makes the repayments smaller.....

Thanks

 

[yo yo ma]

I have just paid 70k off the loan from a sale of our other ip, i knew i should have put it in a term deposit...

Ouch; expensive lesson... Would have been much better in an offset. I think best to speak to an accountant before a financial advisor.

 

[chara79]

Thanks i think i will see an accountant. I have so much to learn i think.

 

[Alex P Keaton]

Ouch; expensive lesson... Would have been much better in an offset. I think best to speak to an accountant before a financial advisor.

I am so grateful I have found this forum and have been doing my homework before venturing into the property market. I get to hear from the experiences of others and also mistakes that have been made.

I have learnt heaps in the past month.

I now understand alittle bit more about the principles behind having an IO loan with a linked offset account. It took a while to sink in.


I will buy an IP unit for around $250,000


1. The rental income will cover most of my repayments, I'll pay the remainder (IO LOAN) each month.

How much would that likely to be for example?


2. The rest of my income (work income) will go directly from my employer and tenant into my offset account. This money can help to reduce the interest? I think. Is that right?


3. I can claim tax benefits from my IO loan, maintenance, repairs etc.


4. So nstead of paying down my IP loan like i thought I had to do, I will pay the minimum and save the rest of my income in my offset account. I can use this money in a few years time (as a deposit) to buy my first PPOR.


4. For the first 5 years of owning my ppor I will probably go for IO loan too, so that I will be able to service both IP loan and PPOR loan.


Can I please have confirmation if am on the right track


thanks

 

[Viewburn]

1. $250k * 10% = $25K pa (Of course this figure would change on laon amount and reduce with the amount of money in offset account)
Rent $250pw = $13k pa
Remainder ($25k -$13k) $12k or $1000 short fall a month.

2. Correct

3. Due to the fact that the laon account is only used for investment purpose all interest should be tax claimable.

4. Yes this is the idea. What you coauld do is have a loan for $250k and save as much as possible into the offset account up to $250k then when you use the funds for private use you still have the loan setup correctly for tax benifits.

 

[Alex P Keaton]

1. $250k * 10% = $25K pa (Of course this figure would change on loan amount and reduce with the amount of money in offset account)
Rent $250pw = $13k pa
Remainder ($25k -$13k) $12k or $1000 short fall a month.

thanks

So lets see if I have this right



25 K pa consists of:

15 K pa rental income
12 K pa shortfall


I was hoping the shortfall would be a bit lower, hmmm in this case I would be struggling to buy my ppor in a few years time.

Perhaps I could do it though if I were to buy a $200,000 IP in a decent area, that is still within 10 K's of the city. Mum and dad are going to gift me $50 K and I'll put in 30 K then I'll only have to get a 120 K mortgage.


I may just be able to afford it then.


thanks for you help, its clearer to me now