Understanding the cash flow of a property is the key to building a significant property portfolio, writes inSynergy director, Richard Sheppard.
If you tell people they can buy a good $600,000 investment property and it pays you money from year one, most look at you in disbelief.
However when you learn how investment property cash flow and tax benefits work, it is actually quite typical on new properties in areas with good rates of rent such as well selected areas of Brisbane, Newcastle and Canberra.
Despite recent government moves to tighten depreciation deductions for items such as fixtures and fittings, the rules have not changed for new property.
If you have about 30 per cent equity or more in a $1.5 million-plus home and enough income, you can usually borrow enough to purchase the investment property and pay all the costs, so you don’t need to use any cash.
This means you are borrowing $600,000 to buy the property, plus stamp duty of $22,500, plus legal and other costs of about $2,500, giving a total minimum of $625,000 to settle the property.
The total weekly ongoing costs are roughly:
| Interest | (at 4.5 per cent): | $540 |
| Rates | ($1,300 per annum): | $25 |
| Insurance | ($1,000 per annum): | $19 |
| Agent Management Fee: | $35 | |
| Maintenance: | $20 | |
| Allowance for vacancy: | $20 | |
| Total Cost = | $659 per week | |
| Less: Rent of = | $500 per week | |
| Leaves: Gross cost of | $159 per week |
This is the first tax deduction and is claimed at your marginal tax rate, assuming 38 per cent, so $159 x 38 per cent = $60 tax refund per week.
Therefore, the net cost is $159 – $60 = $99 per week.
If the property is new, there are also depreciation tax benefits.
Depreciation tax benefits:
The total depreciation estimate for a new property of this value is approximately $15,000 per annum.
This depreciation is a full tax deduction, so again with a tax rate of 38 per cent, the tax refund is $15,000 x 38 per cent = $5,700 pa, or $109 per week. Therefore, the final net holding cost = -$99 + $109 = $10 per week positive!
To take advantage of current market conditions safely, it is important to seek the assistance of a qualified property investment advisor. You’ll be surprised just how affordable a new investment property can be.
Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory. 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 425 595.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.
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