Switching PPOR to IP

Discussion in 'Accounting & Tax' started by theorist, 25th Oct, 2017.

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  1. theorist

    theorist Member

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    Hi all,

    Bit a disclaimer, I am a newbie when it comes to property tax and terminology! Please go easy :)

    I am looking a potentially switching my current house to an IP for the first time. I am looking to rent somewhere closer to work and for lifestyle choice.
    My primary question relates to gearing - from my rough calcualtions the property will be negatively geared. I am wondering at what threshold it would have to be in order to be nuetral or cash flow positive.
    As I havn't done it before I was hoping you could all lend your expertise to costs that are involved in renting out a place.

    All figures below are per annum:
    Mortgage interest repayments: 21,600
    Rates: 1800
    Water: 900
    Insurance: 600
    Agent: 1000
    Body corp: 4000
    Maintenance: 500
    = 30,400 p/a

    For landlord insurance and agent fees I have done a rough estimate as these havn't been 100% finalised. Other figures are accurate. Any other costs to be aware of?

    Going through the tiers of rent I wanted to ensure at what level it changes from negative to positive. Bank val appraised rent @ 600 a week, however, I am far more skeptical and believe it lies between 500 - 550 (hence the calculations below).

    Rent @ 500 a week x 52 = 26,000. Gearing = 140 (salary) + 26 (rent income) = 166 - 30.4 (expense) = $-4400k loss p/a (Total inc. 135.6)
    Rent @ 550 a week x 52= 28,600. Gearing = 140 (salary) + 28.6 (rent income) = 168.6 - 30.4 (expense) = $-1800k loss p/a (Total inc. 138.2)
    Rent @ 600a week x 52 = 31,200. Gearing = 140 (salary) + 31.2 (income) = 171.2 - 30.4 = +$800 pcm profit p/a

    These calculations don't factor in depreciation schedules. Any advice from someone before who gone through a similiar situation would be apprecaited. Thanks again for your help!
     
  2. Trainee

    Trainee Well-Known Member

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    There are a number of mistakes in your calcs. With depreciation your about neutral or slightly negative.

    Unless you cant handle any negative cashflow, the calc isnt useful to you. You cant control the rent or a lot of the expenses anyway. Just rent it out and let your accountant figure it out.

    Focus instead on things like negotiating with a pm and getting a depreciation report.
     
  3. Tony

    Tony Well-Known Member

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    Did you notice that the gearing figure that you were coming up with was the difference between rent & expenses for the potential IP, and that your salary (being the same in all 3 cases) had no impact?
    Insurance seems a bit light. Allow $1000-$1500
    Management allow 7-8% of rent
    Maintenance all 1.5% property value
    Allow for rental vacancy, say 10%
    Others may have more input
     
  4. Trainee

    Trainee Well-Known Member

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    That gearing figure makes no sense anyway.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You may find our Rental property estimator tool useful. Normally its only for clients. I'm feeling generous today. It has a variety of options to assist you evaluate some issues
     

    Attached Files:

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  6. Mike A

    Mike A Well-Known Member

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    @Paul@PFI

    Now you will find it branded by a bunch of other people with no credit given.

    Cant tell you how many times ive seen our checklists appear elsewhere.

    It gives me comfort you have to be doing something right for people to use your stuff.

    Picked up a new client who said when i sent our checklist they said great its the same one my previous accountant used. Strange how the author was our firm
     
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  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I can lock it and do all those things but it can all be bypassed. I can only trust that based on past performance many people see the association with someone who knows what they are doing. I agree on the issue of comfort when someone steals your hard work - I dont think they steal your knowledge however.

    The spreadsheet does come with a very clear and very distinct warning about editing it or removing details. Any tax adviser who is too stupid to know what that means cant expect me not to give them a public slapping.

    I argue any firm that uses your info or mine knows sfa about property tax. And I also know that the spreadsheet for property decisions comes with loads of traps too.
     
  8. theorist

    theorist Member

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    Did you notice that the gearing figure that you were coming up with was the difference between rent & expenses for the potential IP, and that your salary (being the same in all 3 cases) had no impact? Insurance seems a bit light


    Thank you all for the feedback, really appreciate it. It helps to provide indications from people who have done it or been through it before. I've taken updated figures on board, does this look more accurate? I want to budget for worse-case and over estimate rather than under.

    Mortgage interest repayments: 21,600
    Rates: 1800
    Water: 900
    Insurance: 1100
    Agent: 2600 (10%)
    Body corp: 4000
    Maintenance: 500
    Depreciation Report: 1400
    Smoke Detectors: 200

    = 34,100 p/a

    As I am new, hoping you might be able to elaborate on this. I was taking my salary (140,000 a year) + 26,000 a year (500 a week) rental income then deducting expenses above (34,100 a year) to get the total gearing amount. Forgive me if I'm using the wrong term or formula, but is this the correct way to estimate the correct taxable amount? Is it 1:1? Is anyone able to elaborate? Are you able to define/articulate to how you refer to gearing?

    Thank you so much for this... kind of you to share it.

    Thanks again for all your help guys, really appreciate it.

    I am still weighing up the decision. It will be costing money to hold but by renting I save nearly 3 hours of my day commuting (almost 32 days a year) - I value time but at the same time want to balance up lifestyle vs. investment.