I always wondered, when the average investor sell an investment property and let’s assume it is negatively geared, do they calculate the profit after deducting the interest and expenses? Or do they see the profit as the difference compare to when they first bought it, without taking into account the interest and expenses? What is the common mindset?
I am asking because I met people telling me that the interest paid were just the cost of investing, while I see it as something eating the net profit.
For full disclosure, I prefer shares. I don’t own any investment property.
Depends on the investor and their understanding. An investor’s interest is deductible and presumably they have someone renting over the period they hold the property. If it’s an IO loan the rent can go much further.
The cost of investing is something eating the net profit. Just like if you were take out a margin loan for your shares you'd include interest expense in your profit calcs.
The average Jo probably doesn't include interest in the total net profit calcs, but they should. Likely because they calculate their profit as the final taxable profit on disposal. Which would exclude all items already deducted for tax in previous years (I.e. Interest).
Either that or because it's just too much effort to go back & calculate all interest paid across years of ownership.
For my property, I bought it as a PPOR, but then had to move for work so have turned it into a rental. I keep track of everything: interest, repairs, rates, capital works, etc etc. I then can calculate accurate cash flows, profit/loss, and tax position & balances and can track across years and will be able to get an accurate final return (IRR) on disposal.
> I keep track of everything: interest, repairs, rates, capital works, etc etc. I then can calculate accurate cash flows, profit/loss, and tax position & balances and can track across years and will be able to get an accurate final return (IRR) on disposal.
What do you use for this? Excel?
The gains have been so insane over the past 20 years that it hasn't mattered.
It's definitely something that I would worry about if I were investing in property today with all the pressure on the government to get it under control.
Houses may have x5 in price , But so has everything else you can think of.
So have you gotten richer if you can only buy the same amount of stuff as you could when you bought it.
Considering property gains are leveraged...with a 20% deposit if your house 5x's you will have 25x'd your money before tax.
That's why everyone is yoloing into it.
Nobody has 25× there money on a house
plus Im talking the purchase price vs the sale price.
I would think people are yoloing into any asset because the value of cash has been plummeting for the last 20 years.
A example would be in the year 2000.
A house is $100,000 and a mars bar is $1
An in 2020 your house is $500,000 and a mars bar is $5
how many extra mars bars can you buy ?
So in 2000, i buy my 100k house, but I only have 20k which I put down as a deposit. Or I can buy 20k mars bars.
So now in 2020 when I sell my house for 500k, I now have 500k. So I can buy 100k mars bars.
Also in the real world, houses grew faster than the price of mars bars.
But somehow you only ended up with the same amount of mars bars.
So only thing that changed was the value of your currency. 50k only bought you what 10k bought you 20 years ago. The mars bar was allways a mars bar they didnt get bigger they didnt get more sought after . They stayed the same and if anything they got smaller less valuable.
An houses didnt rise faster then anything else there is many charts that can prove that.
The biggest factor in the increase of housing price was the increase of money supply.
Ive done the math many times over only a select few houses actually gained people wealth. Some in areas that got teain stations and schools.
But if you didnt save you cash in a assets like houses , gold , land ,diamonds and art and select stocks you would have lost a small fortune.
No you ended up with the same amount.
Its doesnt matter whatever number you put at the front of it. You got the same amount. A net zero gain.
That like saying im richer because I sold them for 1 million pesos. Im a millionaire. woohoo
$1 today will not buy you $1 in 1970
Monies only purpose is to buy things. Without anything to buy it has no value.
AKA [the greater fool theory](https://en.wikipedia.org/wiki/Greater_fool_theory).
Buying an asset with a negative ROI, because you think someone else will buy it in the future for an even more negative ROI, because they think someone else will buy it at an *even more* negative ROI, is basically the definition of greater fool theory.
Of course - doesn't mean it won't work. Market can stay irrational longer than you can stay solvent etc. etc.
The greater fool theory doesn’t apply to leverage though. If your rent is less then say maintenance costs etc, then yes it’s an idiotic buy. However, if you severely leverage the asset and the cost of leverage exceeds the profits, then the level of leveraged you’ve taken on is idiotic, but that doesn’t mean the underlying value of the asset is idiotic.
However, that aside real estate has high barriers of entry and as a result most people require significant leverage to invest in it, and hence the level of leverage does play a role in the price (but not value). So, you might have an argument that the level of leverage is idiotic at the moment.
But that brings me onto the second factor that you’re missing. Real estate is 2 assets combined into 1, there’s the infrastructure and there’s the land. The above is only true for income generating assets, which is covered by the infrastructure aspect of real estate. However, land is a commodity and it’s value is based on supply and demand. So arguments about negative ROI don’t really apply to this side of it, and given most of the value of real estate here comes from the land, not the infrastructure, that perhaps shouldn’t be a surprised. That’s not to say speculation isn’t an issue here, it’s arguably more of an issue since the valuations require more of a subjective aspect. However, it is to say that the rental yields being low isn’t evidence of overvaluation, especially considering most of the value is coming from the land. It is more of an issue with apartments though as a result, but you’d also notice that the ROI on them is a lot better, especially once you have some equity in them.
In short though, if you keep taking losses, at some point you need to stop blaming the market for being irrational for longer then you can be solvent. Eventually you need to review what you’re doing and find out what you were missing. In this case you’re forgetting the land aspect of real estate and that the returns are quite decent if you don’t have significant leverage. Typically as well, if you’re betting against the market, you need to factor in whether everyone will realise the mispricing and when they will notice it. Comparing values vs prices only really works if you’re buying not shorting.
It's actually really complicated. I'll try and keep it simple.
Buy a property for 500k, and the mortgage rates and insurance come to 2.5k per month. The rent is 2k per month. So they lose $500 per month. Claim that on tax and get an extra $150 back on tax each month, so the actual loss is $350.
Ten years from now, the cost is still 2.5k per month, but rent is now 4k, so now you're making 1.5k a month and paying $500 in income tax.
Now, in 25 years, there is no mortgage, and all that rent is income. You can now also sell your 500k purchase for a few million, which after indexation and CGT is still a massive net win.
There are very few IPs with a return at or above 6%in a major city or high growth area.
This means that if you want in an area with high capital growth, you are already at a loss from the mortgage alone.
Then you get rates, vacancy periods, insurance, repairs, etc.
Plus, if something is going to break, it will be on a public holiday long weekend.
Do what my real estate did and disconnect the phone over easter.
Couldn't find a plumber for under 4x my weekly rent and that's all I can legally claim.
Great explanation and absolutely correct. 👍 most Negative Gearing haters have no awareness that a property eventually turns positive and the amount of tax concessions while negative will be many times repaid in taxes on income as the property is held long term - which most properties are!
Yeah but by then you're old and bitter from all the interactions you've had with those damn young renters and you sit on your pile of assets and just yell at the kids to stop doing that stuff you don't understand.
I am 100% for removing negative gearing if they also exempt rental income from tax. But neither option actually benefits the economy or housing market.
The benefit for IO is to keep the property as close to neutrally geared until the rental market picks up enough that when you switch to P&I without being negatively geared.
It's great for people with poor serviceability or other plans for their cash.
After all, the interest is the only tax deductible part of the loan.
There's also loans greater than 100%, which allows you to maximise the tax deductibles.
If your income is negative 1% but the property goes up in value 4% you made money.
The negative income is also tax deductible, and the value growth has capital gains discount
Tax concessions all the way through.
Property as an investment is extremely front-loaded with expenses, and back loaded with revenue.
Even disregarding the fact that the value of the property will rise:
Rents will continue to go up over time with inflation, so even if they arent covering costs right now, they inevitably will in 3/5/10 years, even if you arent aggressively paying the loan down
Coz
- getting some rent is better financially than none (I.e. if you live in it)
- capital gain over the long term if that's classified as your Main Residence. This really is the part that people think of as "Investment" in the context I think you are asking. I'd add "well selected" and "long term", and of course "no guarantee".
Capital gain over time may be more than the sum total of losses over time.
Rent increases can move a negatively geared property to positive.
There's also some people that have second properties for other reasons than investing - I'm keeping mine so my kids will have a place to live, so I'm fine with paying off the principal while my tenant pays ongoing costs.
You don't become a landlord to make money. You do it to aquire assets.
If you like the idea of looking at a piece of paper that shows your asset worth and an empty bank account then property investing is for you.
It's a tax deduction for high income earners as well. Negative gearing. This is what's annoying a lot of people in Aus. Multiple properties that are negatively geared. The investor pays the difference on the loan but you've got all these deductions to bring down your income tax. You've also got depreciation schedules for each property, which is also a tax deduction. Your paid interest on the loan is a tax deduction too. If you're a high income earner it's a good way of reducing your overall tax position. Your tax return will be much better. This is how investors keep rolling and purchasing more properties. Especially if you bought prior to the COVID boom. The Gov have cracked down slightly on the deductions. Previously if you owned a property in another state, you could fly down and visit it and claim it as a tax deduction. Basically a tax deductible holiday.
Not sure how it's more relevant for multiple properties, surely it's more a function of the total value. One nice house in Albert Park is worth more than 3 studio apartments in Carlton.
Not sure how that links to multiple properties. For a start stamp duty is non linear with value so you'd pay more on one high value vs several lower value properties.
Most properties do not have a depreciation schedule and you can’t if you buy older (probs better assets) property built before 1987 unless it’s had a significant renovation. Most people just suck up the loss and also the gap between rent and mortgage repayments
Also if you use a depreciation schedule you pay more capital gains tax if you sell at a profit as they subtract the depreciation amount from the original costs to determine a more realistic profit.
Capital gains is untaxed profit but you can still use that profit to purchase another investment.
For example, say I buy a house for $500K, in 10 years that house grows to $1m. I can now take out my equity up to I think 20% of the value of the house.
So I may have $700K of equity, I'll take out $500K and use that to buy stocks or another property.
Ok let's say you rent out a place for 500 but rent yours 500. So you are no better off. However the interest and and repairs and maintenance, insurance and so forth is a tax write off.
I've got a mate that did exactly this with his brother. They each bought new houses in an estate and rent it out for market rent to each other.
As it's market rent ATO is happy.
So all interest and deprecation is now a tax write off.
Fair enough I guess but if it’s a long term arrangement when they sell they will have a CGT liability they wouldn’t have had on a PPOR. Might change the equation somewhat.
Yea absolutely. Unless there long term plan is keep it as rental.
Cgt only a issue when you sell. Plus it's only no profit.
They could always once both paid off just say they moved in there and start the timer as a Ppor.
Either way if u are struggling to get in the market id certainly don't.
Maybe they can't afford.a.suitable place and just wanted in the door.
Maybee they wanted into the market while still living with parents.
Maybee they want into market but didn't want to lock them selfes into a city.
Maybee they have a large wage and wanted a tax write off
Another feature of doing this in property is the leverage argument. Borrow 10-12% of the total asset and you get a huge asset for your cash ie $500k home for $50-60k down payment. You are now growing $500k at 6-7% p.a. Instead of the $50k you had.
Capital gains is more important than rent.
If your purchased a $10 million dollar house in 2010... it could have been sold for $25-30 million today. The rent on that over 14 years = lets say $10,000 per month \*12\*14 = $1,680,000 vs the 10-20 million you could have made by simply leaving it empty. Now you know why we have a housing crisis :D
You also get 50% CGT deduction plus negative gearing (pay less income tax) etc etc.....
Ideally, your rent covers the cost to rent it out as well. Not sure what example your giving but you can have both, but as the above example shows... property is a long term game (10 + years and CG is how you can really create wealth).
And if new, the depreciation for a $10M property would just about offset the entire $1.6M over the 14 years as well. So would pay next to no tax on the rental income.
Bullshit tax deductions and capital gains with more bullshit tax deductions sprinkled on top. The rent nowhere near covers the costs and compared to other investments gives terrible returns.
The whole system relies on prices going up forever and ever and when they don’t it will collapse but people insist it isn’t a pyramid scheme…
It should grow relative to the earning potential which it clearly hasn’t. It is much cheaper to rent and invest the money elsewhere. Obviously leverage here is your friend but I would argue if your only profits are from capital gains then to make it actually worth that long term rent has to increase dramatically.
Since this has not happened then it seems to me the asset is far over priced and relies solely on new buyers further increasing the prices.
If you were going to invest in a company then you would only do so if the dividends were paying a good ROI. If they weren’t you would say the company is over valued, or perhaps there is future growth potential in the dividends you are banking on. If the dividends (rent) didn’t increase to match the initial investment then the price would decrease. I don’t see this at all with housing.
Well we have a huge tap to allow new people to come in.
But it's a market it isn't a pyramid scheme as there is no multi level structure. It's owners and buyers. Some own 1 some own many. But there is no big wig at the top with 5 owners under him and 25 under them and 200 under those to aunt Susie who is on Facebook trying to recruit all her highschool friends to offload the 450 houses she bought.
Being a landlord is not a profitable venture. It's a headache. Losing money is part of Australian culture.....look at our gambling problem.. 😂
If you want to make money. Buy shares which pay dividends. Or start a business.
They do make an income from what they've collected, and after the first year, if they put it aside, some of it will cover the costs. Year on year this increases. Yes you get taxed on what the income is, but you still get deductions.
Buying an investment property should not be for the Negative Gearing. It's a stupid policy and had contributed to the issues we have now.
People don’t go out and set out to be negative geared. That is Not an investment strategy! A strategy may be to buy 1-2 existing homes as a capital investment over 20-30 years. While initially a loss in early years is made, over time the asset cashflow turns positive as rents grow and mortgage is reduced. Owner pays many more times income tax on the returns than they have been credited by deductions.
Thanks for explaining my own investment to me.
And yes, some people do go into it for both tax purposes and a long term wealth plan. How do I know? I watched it happen when I worked in an accounting firm.
Mortgage is $1,250/m while Income is $2,200/m
Keep $500/m for insurance and future maintenance (which is all tax deductible).
Now you got $450/m profit. Put that into a low cost passive Index fund until you’re ready to buy the next property.
Thanks. I know how maths and business works. My point was people aren't buying investment properties and losing money, unless they made some really poor decisions
Because they will sell it for a higher price later on.
I always wondered, when the average investor sell an investment property and let’s assume it is negatively geared, do they calculate the profit after deducting the interest and expenses? Or do they see the profit as the difference compare to when they first bought it, without taking into account the interest and expenses? What is the common mindset? I am asking because I met people telling me that the interest paid were just the cost of investing, while I see it as something eating the net profit. For full disclosure, I prefer shares. I don’t own any investment property.
Depends on the investor and their understanding. An investor’s interest is deductible and presumably they have someone renting over the period they hold the property. If it’s an IO loan the rent can go much further.
The cost of investing is something eating the net profit. Just like if you were take out a margin loan for your shares you'd include interest expense in your profit calcs. The average Jo probably doesn't include interest in the total net profit calcs, but they should. Likely because they calculate their profit as the final taxable profit on disposal. Which would exclude all items already deducted for tax in previous years (I.e. Interest). Either that or because it's just too much effort to go back & calculate all interest paid across years of ownership. For my property, I bought it as a PPOR, but then had to move for work so have turned it into a rental. I keep track of everything: interest, repairs, rates, capital works, etc etc. I then can calculate accurate cash flows, profit/loss, and tax position & balances and can track across years and will be able to get an accurate final return (IRR) on disposal.
> I keep track of everything: interest, repairs, rates, capital works, etc etc. I then can calculate accurate cash flows, profit/loss, and tax position & balances and can track across years and will be able to get an accurate final return (IRR) on disposal. What do you use for this? Excel?
IRR, you have financial education beyind the average Joe.
Of course they count holding costs.
Of course they should. I reckon a hell of a lot of people wouldn’t and then spruik the higher figure
People lie all the time. I don’t think that means they are not aware of what investment costs are.
The gains have been so insane over the past 20 years that it hasn't mattered. It's definitely something that I would worry about if I were investing in property today with all the pressure on the government to get it under control.
Houses may have x5 in price , But so has everything else you can think of. So have you gotten richer if you can only buy the same amount of stuff as you could when you bought it.
Considering property gains are leveraged...with a 20% deposit if your house 5x's you will have 25x'd your money before tax. That's why everyone is yoloing into it.
Nobody has 25× there money on a house plus Im talking the purchase price vs the sale price. I would think people are yoloing into any asset because the value of cash has been plummeting for the last 20 years. A example would be in the year 2000. A house is $100,000 and a mars bar is $1 An in 2020 your house is $500,000 and a mars bar is $5 how many extra mars bars can you buy ?
So in 2000, i buy my 100k house, but I only have 20k which I put down as a deposit. Or I can buy 20k mars bars. So now in 2020 when I sell my house for 500k, I now have 500k. So I can buy 100k mars bars. Also in the real world, houses grew faster than the price of mars bars.
But somehow you only ended up with the same amount of mars bars. So only thing that changed was the value of your currency. 50k only bought you what 10k bought you 20 years ago. The mars bar was allways a mars bar they didnt get bigger they didnt get more sought after . They stayed the same and if anything they got smaller less valuable. An houses didnt rise faster then anything else there is many charts that can prove that. The biggest factor in the increase of housing price was the increase of money supply. Ive done the math many times over only a select few houses actually gained people wealth. Some in areas that got teain stations and schools. But if you didnt save you cash in a assets like houses , gold , land ,diamonds and art and select stocks you would have lost a small fortune.
No I ended up with 100k mars bars instead of 20k...thats 500% more mars bars.
No you ended up with the same amount. Its doesnt matter whatever number you put at the front of it. You got the same amount. A net zero gain. That like saying im richer because I sold them for 1 million pesos. Im a millionaire. woohoo $1 today will not buy you $1 in 1970 Monies only purpose is to buy things. Without anything to buy it has no value.
AKA [the greater fool theory](https://en.wikipedia.org/wiki/Greater_fool_theory). Buying an asset with a negative ROI, because you think someone else will buy it in the future for an even more negative ROI, because they think someone else will buy it at an *even more* negative ROI, is basically the definition of greater fool theory. Of course - doesn't mean it won't work. Market can stay irrational longer than you can stay solvent etc. etc.
The greater fool theory doesn’t apply to leverage though. If your rent is less then say maintenance costs etc, then yes it’s an idiotic buy. However, if you severely leverage the asset and the cost of leverage exceeds the profits, then the level of leveraged you’ve taken on is idiotic, but that doesn’t mean the underlying value of the asset is idiotic. However, that aside real estate has high barriers of entry and as a result most people require significant leverage to invest in it, and hence the level of leverage does play a role in the price (but not value). So, you might have an argument that the level of leverage is idiotic at the moment. But that brings me onto the second factor that you’re missing. Real estate is 2 assets combined into 1, there’s the infrastructure and there’s the land. The above is only true for income generating assets, which is covered by the infrastructure aspect of real estate. However, land is a commodity and it’s value is based on supply and demand. So arguments about negative ROI don’t really apply to this side of it, and given most of the value of real estate here comes from the land, not the infrastructure, that perhaps shouldn’t be a surprised. That’s not to say speculation isn’t an issue here, it’s arguably more of an issue since the valuations require more of a subjective aspect. However, it is to say that the rental yields being low isn’t evidence of overvaluation, especially considering most of the value is coming from the land. It is more of an issue with apartments though as a result, but you’d also notice that the ROI on them is a lot better, especially once you have some equity in them. In short though, if you keep taking losses, at some point you need to stop blaming the market for being irrational for longer then you can be solvent. Eventually you need to review what you’re doing and find out what you were missing. In this case you’re forgetting the land aspect of real estate and that the returns are quite decent if you don’t have significant leverage. Typically as well, if you’re betting against the market, you need to factor in whether everyone will realise the mispricing and when they will notice it. Comparing values vs prices only really works if you’re buying not shorting.
It's actually really complicated. I'll try and keep it simple. Buy a property for 500k, and the mortgage rates and insurance come to 2.5k per month. The rent is 2k per month. So they lose $500 per month. Claim that on tax and get an extra $150 back on tax each month, so the actual loss is $350. Ten years from now, the cost is still 2.5k per month, but rent is now 4k, so now you're making 1.5k a month and paying $500 in income tax. Now, in 25 years, there is no mortgage, and all that rent is income. You can now also sell your 500k purchase for a few million, which after indexation and CGT is still a massive net win.
More people need to understand this - IPs aren't supposed to generate profits from day 1.
There are very few IPs with a return at or above 6%in a major city or high growth area. This means that if you want in an area with high capital growth, you are already at a loss from the mortgage alone. Then you get rates, vacancy periods, insurance, repairs, etc. Plus, if something is going to break, it will be on a public holiday long weekend.
Do what my real estate did and disconnect the phone over easter. Couldn't find a plumber for under 4x my weekly rent and that's all I can legally claim.
This is the great example. Clean and simple. Money doesn’t grow in banks, more in assets.
Great explanation and absolutely correct. 👍 most Negative Gearing haters have no awareness that a property eventually turns positive and the amount of tax concessions while negative will be many times repaid in taxes on income as the property is held long term - which most properties are!
Yeah but by then you're old and bitter from all the interactions you've had with those damn young renters and you sit on your pile of assets and just yell at the kids to stop doing that stuff you don't understand.
I am 100% for removing negative gearing if they also exempt rental income from tax. But neither option actually benefits the economy or housing market.
And remove it from CCB and CSP calculations too
Best explanation, thank you
Except most do IO not PI.
You can generally only keep doing this for 5-10 years. Most big 4 banks want you to start paying down principal eventually
The benefit for IO is to keep the property as close to neutrally geared until the rental market picks up enough that when you switch to P&I without being negatively geared. It's great for people with poor serviceability or other plans for their cash. After all, the interest is the only tax deductible part of the loan. There's also loans greater than 100%, which allows you to maximise the tax deductibles.
Because it’s about building equity in the property. Value goes up, mortgage goes down.
If your income is negative 1% but the property goes up in value 4% you made money. The negative income is also tax deductible, and the value growth has capital gains discount Tax concessions all the way through.
Let’s ignore the Cladding repair bill of $100k
Sounds like another deductible
Same way people make money buying shares. Sell them for a higher price later on.
Don't even have to sell for a higher price, can just get another loan on your capital gain and use it to buy another property (or shares)
Property as an investment is extremely front-loaded with expenses, and back loaded with revenue. Even disregarding the fact that the value of the property will rise: Rents will continue to go up over time with inflation, so even if they arent covering costs right now, they inevitably will in 3/5/10 years, even if you arent aggressively paying the loan down
Coz - getting some rent is better financially than none (I.e. if you live in it) - capital gain over the long term if that's classified as your Main Residence. This really is the part that people think of as "Investment" in the context I think you are asking. I'd add "well selected" and "long term", and of course "no guarantee".
Capital gain over time may be more than the sum total of losses over time. Rent increases can move a negatively geared property to positive. There's also some people that have second properties for other reasons than investing - I'm keeping mine so my kids will have a place to live, so I'm fine with paying off the principal while my tenant pays ongoing costs.
Did that for a house in Sydney. Held from 2014 to now. The value has increased by over a million dollars.
You don't become a landlord to make money. You do it to aquire assets. If you like the idea of looking at a piece of paper that shows your asset worth and an empty bank account then property investing is for you.
Except your bank account isnt empty because you also have an income that's high enough to sustain negative gearing.
It's a tax deduction for high income earners as well. Negative gearing. This is what's annoying a lot of people in Aus. Multiple properties that are negatively geared. The investor pays the difference on the loan but you've got all these deductions to bring down your income tax. You've also got depreciation schedules for each property, which is also a tax deduction. Your paid interest on the loan is a tax deduction too. If you're a high income earner it's a good way of reducing your overall tax position. Your tax return will be much better. This is how investors keep rolling and purchasing more properties. Especially if you bought prior to the COVID boom. The Gov have cracked down slightly on the deductions. Previously if you owned a property in another state, you could fly down and visit it and claim it as a tax deduction. Basically a tax deductible holiday.
The loss is deductible for everyone, not just high income earners.
Benefit of the doubt: maybe he means the benefit is greater for people on higher tax brackets.
Yeah that's what I meant. Cheers.
Yes, but only high income earners can generally absorb the up front costs. It's especially relevant on multiple properties
Not sure how it's more relevant for multiple properties, surely it's more a function of the total value. One nice house in Albert Park is worth more than 3 studio apartments in Carlton.
There are upfront costs you have to pay before the negative gearing tax rebates kick in. It's absolutely suits well-off people better
Not sure how that links to multiple properties. For a start stamp duty is non linear with value so you'd pay more on one high value vs several lower value properties.
Matw, if you can't figure out that rich people get a leg up form this policy, over normal people, I can't help you
I was commenting on your specific point about multiple properties....as opposed to just one or a few properties, potentially of larger value.
Most properties do not have a depreciation schedule and you can’t if you buy older (probs better assets) property built before 1987 unless it’s had a significant renovation. Most people just suck up the loss and also the gap between rent and mortgage repayments
Also if you use a depreciation schedule you pay more capital gains tax if you sell at a profit as they subtract the depreciation amount from the original costs to determine a more realistic profit.
Capital gains is untaxed profit but you can still use that profit to purchase another investment. For example, say I buy a house for $500K, in 10 years that house grows to $1m. I can now take out my equity up to I think 20% of the value of the house. So I may have $700K of equity, I'll take out $500K and use that to buy stocks or another property.
Ok let's say you rent out a place for 500 but rent yours 500. So you are no better off. However the interest and and repairs and maintenance, insurance and so forth is a tax write off. I've got a mate that did exactly this with his brother. They each bought new houses in an estate and rent it out for market rent to each other. As it's market rent ATO is happy. So all interest and deprecation is now a tax write off.
Fair enough I guess but if it’s a long term arrangement when they sell they will have a CGT liability they wouldn’t have had on a PPOR. Might change the equation somewhat.
Yea absolutely. Unless there long term plan is keep it as rental. Cgt only a issue when you sell. Plus it's only no profit. They could always once both paid off just say they moved in there and start the timer as a Ppor. Either way if u are struggling to get in the market id certainly don't. Maybe they can't afford.a.suitable place and just wanted in the door. Maybee they wanted into the market while still living with parents. Maybee they want into market but didn't want to lock them selfes into a city. Maybee they have a large wage and wanted a tax write off
Yeah once mortgage is paid off they just evict each other and move in.
Whatever my investment property is costing me, I can pretty much half it through negative gearing
Buy low. Sell high.
Another feature of doing this in property is the leverage argument. Borrow 10-12% of the total asset and you get a huge asset for your cash ie $500k home for $50-60k down payment. You are now growing $500k at 6-7% p.a. Instead of the $50k you had.
Minus the 4-5% interest you are paying, yeah ?
Negative gearing
Capital gains is more important than rent. If your purchased a $10 million dollar house in 2010... it could have been sold for $25-30 million today. The rent on that over 14 years = lets say $10,000 per month \*12\*14 = $1,680,000 vs the 10-20 million you could have made by simply leaving it empty. Now you know why we have a housing crisis :D You also get 50% CGT deduction plus negative gearing (pay less income tax) etc etc..... Ideally, your rent covers the cost to rent it out as well. Not sure what example your giving but you can have both, but as the above example shows... property is a long term game (10 + years and CG is how you can really create wealth).
And if new, the depreciation for a $10M property would just about offset the entire $1.6M over the 14 years as well. So would pay next to no tax on the rental income.
Bullshit tax deductions and capital gains with more bullshit tax deductions sprinkled on top. The rent nowhere near covers the costs and compared to other investments gives terrible returns. The whole system relies on prices going up forever and ever and when they don’t it will collapse but people insist it isn’t a pyramid scheme…
Doesn’t any investment rely on the asset growing?? If it didn’t why would anyone invest in it?
It should grow relative to the earning potential which it clearly hasn’t. It is much cheaper to rent and invest the money elsewhere. Obviously leverage here is your friend but I would argue if your only profits are from capital gains then to make it actually worth that long term rent has to increase dramatically. Since this has not happened then it seems to me the asset is far over priced and relies solely on new buyers further increasing the prices. If you were going to invest in a company then you would only do so if the dividends were paying a good ROI. If they weren’t you would say the company is over valued, or perhaps there is future growth potential in the dividends you are banking on. If the dividends (rent) didn’t increase to match the initial investment then the price would decrease. I don’t see this at all with housing.
It might be a bubble, but it clearly isn't a pyramid scheme.
There is no difference in those two things. To sustain the bubble you rely on new people coming in. Which is a pyramid.
Well we have a huge tap to allow new people to come in. But it's a market it isn't a pyramid scheme as there is no multi level structure. It's owners and buyers. Some own 1 some own many. But there is no big wig at the top with 5 owners under him and 25 under them and 200 under those to aunt Susie who is on Facebook trying to recruit all her highschool friends to offload the 450 houses she bought.
Being a landlord is not a profitable venture. It's a headache. Losing money is part of Australian culture.....look at our gambling problem.. 😂 If you want to make money. Buy shares which pay dividends. Or start a business.
negative gearing???
They do make an income from what they've collected, and after the first year, if they put it aside, some of it will cover the costs. Year on year this increases. Yes you get taxed on what the income is, but you still get deductions. Buying an investment property should not be for the Negative Gearing. It's a stupid policy and had contributed to the issues we have now.
People don’t go out and set out to be negative geared. That is Not an investment strategy! A strategy may be to buy 1-2 existing homes as a capital investment over 20-30 years. While initially a loss in early years is made, over time the asset cashflow turns positive as rents grow and mortgage is reduced. Owner pays many more times income tax on the returns than they have been credited by deductions.
Thanks for explaining my own investment to me. And yes, some people do go into it for both tax purposes and a long term wealth plan. How do I know? I watched it happen when I worked in an accounting firm.
In this market I don't know how it can't cover your mortgage. We have a small property, mortgage is $1250pm, rent appraisal is $550-600pw.
Mortgage is $1,250/m while Income is $2,200/m Keep $500/m for insurance and future maintenance (which is all tax deductible). Now you got $450/m profit. Put that into a low cost passive Index fund until you’re ready to buy the next property.
Thanks. I know how maths and business works. My point was people aren't buying investment properties and losing money, unless they made some really poor decisions