Wealth Creation
positive
PROPERTY
bricks & Mortar There are dozens of rules for successfully buying property. These are some of the key points Margaret Lomas suggests we keep in mind: • Do not buy property on a gut instinct or a tip from a mate. • Do not take advice from the people selling the property. • Be sure to ask the right questions and realise these questions have nothing to do with the physical appeal of the property. • The property next door or down the road may not be right for your investment goals. • Never buy property just to cut your tax bill – you may be careless and your net position may be worse than it was before you bought the property.
February/March 2009
I
n previous issues of emPOWER, we have carefully considered what is required to prepare for building wealth. So far, we have considered spending plans, your attitude to risk management and had a look at different ways you can invest for the future. Those of you who are familiar with my work will know that, while I am a financial advisor, I have a particular affinity for property. I own 35 properties and have been buying them for the past 10 years. However, just because I like property, doesn’t mean I buy it with any less care and attention than I would any other kind of investment. Buying property successfully and commencing a portfolio that caters for your retirement is a huge process that deserves not only your time and care, but commitment to education. In all the years I have been involved in this area, I have never seen a property fail an investor – it is usually the investor who fails as a result of poor choices. There are dozens of lessons to learn and an abundance of information to discover. To start, it’s important to learn more about how cash flows on a property investment, and the possible outcomes you will see if you buy a property.
Negative Gearing Most people have a basic understanding of ‘negative gearing’ or have heard the term before. When you borrow money to buy a property, this is known as gearing. When the costs of the property, including the interest on the loan, are greater than the income you receive from it, this is then known as negative gearing. When you make a loss, you are allowed to claim a tax refund. The refund is equal to your marginal rate of tax. For example, if expenses exceeded income by $100 a week, and your marginal rate of tax is
72
30 percent, you would receive a refund of $30. This helps you to keep the property, as this tax refund essentially covers some of your expenses.
Positive Cash Flow Property Sometimes you may be lucky enough to buy a property where the rent return is more than the expenses. This could be because the rents are high or because the expenses are low, possibly because you had a large deposit and your loan interest is small. Either way, this is called a positive cash flow property. For example, your expenses may be $220 a week, but the property may fetch $240 a week in rent. The difference of $20 is then taxed at your marginal rate of tax (30 percent for this example), which would be $6. You get to keep the $14 left over. The greater the difference, the better, and you can then use this extra money to repay the debt faster. Of course we would all buy property like this if we could, but with interest rates a little volatile, they are very hard to find. However, rents are also increasing and there is constant talk of lowering interest rates, so it’s worth watching this space. Another thing to think about is that if you buy a property that was built after 1987, as well as claiming the actual costs of keeping it you can depreciate the loss in value of the building, fixtures, fittings and furniture. If the property you buy has a building valued at $150,000, for example, you can make an additional claim of 2.5 percent ($2,250) of this value every year for 40 years. You may also claim the fixtures and fittings, such as lights, blinds and carpets, at varying rates, but usually at about 15 to 20 percent of their value each year. A property with good depreciation claims can give you an extra $50 to $100 a week back in your tax. In some cases, this
iStockphoto
Wealth creation expert Margaret Lomas explains one of the fundamentals of property investment – cash flow.