New lower interest rates could mean owning your own investment property for as little as $33 per week. Richard Sheppard tells us how.
With many of the big banks making the decision to lower interest rates on some of their fixed rate products, it’s now become more affordable than ever to own an investment property. Most people are surprised when they learn just how little an investment property can cost them after they claim their negative gearing and depreciation tax benefits, especially now that some banks have cut their fixed interest rates by up to 0.6 percent.
Understanding negative gearing is one of the most powerful pieces of knowledge you can have as a property investor. It will reduce your fear of the unknown and provide you with a greater understanding of how you can use the concept to guide you on the path to wealth while planning for risks such as interest rate movements or tenant vacancy. Essentially, negative gearing means that if the total property costs – such as interest, rates and depreciation – are more than the rent received, the difference can be claimed on tax so that the tax returned helps to pay the costs.
To demonstrate this concept, let’s look at a real life scenario:
For a $500,000 property with a $50,000 deposit, $35,000 costs and a $485,000 loan, total weekly costs are:
| Interest | (at 6.59 per cent): | $565 |
| Rates | ($1100 per annum): | $21 |
| Body Corporate | ($2400 per annum): | $46 |
| Agent Management Fee: | $35 | |
| Maintenance: | $20 | |
| Allowance for vacancy: | (2 weeks per annum) | $20 |
| Total Cost = | $707 per week | |
| Less: Rent of = | $500 per week | |
| Leaves: Gross cost of | $207 per week |
This is the first tax deduction and is claimed at your marginal tax rate, assuming 38 per cent, $207 x 38 per cent = $78 tax refund per week (which can be refunded each pay day). Therefore, the net cost = $207 – $78 = $129 (this is essentially how much it would cost if the property was quite old with no depreciation benefits).
Depreciation tax benefit
The depreciation estimate for a fairly new property of this value is approximately:
$230,000 for the building claimed at 2.5 per cent per annum = $6250 per annum $35,000 for fixtures and fittings at 20 per cent reducing per annum = $7000 Yr 1, $5,600 Yr 2… This gives a total depreciation of $13,250 for the first full year = $254 per week.
This depreciation is a full tax deduction, so again with a tax rate of 38 percent, the tax refund is $254 x 38 per cent = $96 per week. Therefore the final net holding cost = $129 – $96 = $33 per week – a relatively small commitment that will go a very long way towards securing your future financial security.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.
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