Alanz Eyes

Property investment Part 1

September 11th, 2007 - Posted by Alan Howard

As some of my long term readers would know, I’ve been very interested in property investment for quite a few years now, but have never been in the position to actually go out and get started. I’ve learnt a lot about it, and what I’ve learnt has helped me understand that my future lies in property investment. It’s the only way to become financially independent.

A few weeks ago Deidre and I went to my friend Peter’s place, where some property investment guy was talking about the tax benefits of investing. What we learnt was so exciting that we decided to get involved in it immediately. We’re going to Wollongong this weekend to learn more about our options and move forward with it.

Here’s a quick summary of what I’ve learned, and why I’m so excited about it.

Getting a mortgage for a property investment incurs a cost, which is made up of the mortgage payments plus depreciation. The property receives a rental income, which is offset against the cost, giving a net cost. This net cost is then deducted from your income in such a way that it only affects your tax. As an example, let’s say the net cost is $20,000 per year. The tax office deducts this net cost from your yearly income of $70,000 which results in your taxable income being only $50,000. They notify your employer to charge you tax on your 70k as if you were earning 50k, thus getting a free 20k of not paying tax. This is a considerable gain, as you can imagine.

So you’re paying tax on 50k instead of 70k. This means your income actually increases. This increase is important, and here’s some figures I’ve made up to show you how it works.

Mortgage payment each week - $600
Rental income each week - $400
Balance - $200

Tax savings of $150 each week means the real cost of the mortgage is only $50 a week. As I’ve mentioned, I’ve pulled these figures out of my butt in order to show how it works.

This is not ‘too good to be true’. This is the Australian tax office’s negative gearing system to encourage people to become property investors. Most people think that negative gearing can only be applied at the end of the financial year, but the exciting thing I found out is that negative gearing can be applied to your weekly income from the very beginning.

This makes a $600 a week property investment much more affordable at $50 a week (as per the example). Who wouldn’t do that!

Which is why we’re going to do that ourselves. By negative gearing property in this way, as long as you have a high enough tax rate to support it, you can invest in as many properties as your tax can afford. Eg. if one property reduces your tax by $9,000 and you’re paying $45,000 in tax, then you can have up to 5 properties of the same value…. It’s only when you can’t get a tax deduction that a property starts to cost ‘real money’ instead of tax money, and it suddenly becomes more expensive to do so, because you can’t get any refunds.

So 5 properties that would equal about 1.75 million in assets is costing you only $250 a week…

Can you see why I’m excited?

Entry Filed under: Create Your Reality