RENT MONEY IS NOT DEAD MONEY IF YOU OWN A RENTAL PROPERTY!?!
This might sound like a backward statement but the fact is if you want to create wealth more quickly you should rent the place you live in and rent out the place you own.
But how do you do it effectively?
Because of the way negative gearing tax laws work, if you own a house and rent it to tenants then all of the expenses associated with that property become tax deductible whereas we all know that virtually nothing is tax deductible for the home you live in.
A rental property is basically a business because it makes money and like any business it can claim any legitimate expense against its taxable income. These expenses can include the interest component of a loan to buy the property, interest paid during its construction period, stamp duty paid on the purchase price, mortgage insurance, ongoing expenses such as council rates, water rates, building insurance, Emergency Services Levy, repairs, property manager’s fees, building insurance, landlord insurance (in case the tenant does not pay) and more.
It can also include the depreciation on buildings, fixtures and fittings. And there is also the potential for claiming the cost of major works provided these works will result in generating income; i.e. they will enable you to increase rent. This is probably more commonly an issue with older homes but could include the cost of building improvements such as adding on rooms or air conditioners. Commonly claims for older homes could include the cost of renovating kitchens and bathrooms.
None of this can be claimed on the house you own and live in.
If you buy wisely in a rising market as prices for homes increase you can borrow money to buy more property. This happens because the increased value of the property, created in this rising market, is yours, not the banks, and you can use it as asset to borrow against to buy the next house.
But the best way to get this first property is if you buy it as a rental, not to live in. This means you may have to stay living at home with mum and dad or continue renting. If you can knuckle down for a few short years you will be able to get into a home of your own sooner than you think, or you can buy more investment properties.
Many wealthy people rent and use their money to build wealth in a normal business or by investing in rental properties. Many businesses will even sell the building they operate from to an investor who then rents back to them. This enables their business to use the cash from the sale to expand their operations even further or maybe just use it to get out of financial trouble. In this situation they believe their business can use the sale proceeds to make more money than the rent they now have to pay to the new landlord.
It is the claiming of all your expenses from your investment property that will enable you to do build up your assets much faster.
As an example; if you earn $80,000 per year in the 2014/2015 tax year, as a single person with no dependents, you will pay $19,188 tax but if you owned a newly built rental property and were to claim a typical tax deduction of $20,000 in the year then you would only be taxed on the difference of $80,000 less $20,000 = $60,000 which is only $12,272.
This puts an extra $6,916 onto your pocket each year. And you can elect to have this tax refund either paid as a lump sum after 30 June each year or as $133 extra in your pay packet each week by lodging ATO income tax variation form NAT 2036.
So have a look at what it would cost you each week if you took out a loan to buy a newly built property for $420,000 which would typically get about $400 rent per week. The rent will pay for a lot of these expenses but you would still have a shortfall of about $146 per week.
This means you are $146 in the red each week and if there was no such thing as claiming negative gearing then owning a rental property would be senseless. You would either have to increase the rent by $146 per week or sell the place. And since no tenant is going to pay $546 for this house, selling will be the only option. Even if the tenant was mad enough to pay the full increase that would mean you still only come out even. And investing this sort of money just to come out even is insane!
But you will get about $133 per week from negative gearing so the property ends up costing you only about $13 per week!
Maintenance on a new property should be virtually nothing for at least 2 years and absolutely minimal for at least 5 years considering your warranties and remember that you can insure against loss of rent and other unforseen problems with the tenant.
With your costs now so low you should be able to use all your spare cash to pay off the principle and if/when the value of the property increases you may soon have enough equity to borrow more to buy another property.
It may be your ultimate goal to buy a home to live in but in the short term it ties up all your cash in a non-money making asset, just like the business owner who owns the building he operates from.
The trick is to put your money into a venture that will make you the most money.
And if you want to invest in property then you need to search out the right property in the right place that will do it for you.
If you are interested in finding the right property that will achieve these sorts of returns in an upcoming area or if you would simply like to check out the figures we have used then we would encourage you to attend one of our free Property Workshops
The next free Property Workshop will be on Wednesday 10th December 2014
At this workshop everyone will be given access to the following list of Providers:
- NAB preferred products
- An Accountant
- A Financial Planner
- A full range of Builders
- Real Estate Agent & Property Manager
- Surveyors & Building Inspector
- Wills, Tax & Property Lawyer
- Personal, Property & Assets Insurances
- Business & Budgeting Coaches
You will be given the opportunity to receive a complimentary personal in-home assessment where you will be provided with education and motivation to access this huge range of services. This can vary from simply a cross check of your current home loan to a full service putting together a risk free growing Investment Property Portfolio.
Where: West Adelaide Football Club in the Sturt Pea Room
When: Wednesday the 10th December 2014@ 6.00 pm, Workshop start.
Speakers: Andrew Lloyd, Guest Speaker, NAB Bank. Coach Tony Sawlwin.
Cost: Workshop complimentary.
Afterwards: 7.30 pm meal at the club. Private in-home assessment.
If you would like to register your interest it is important for you to first contact the writer, Mark Nielsen on (08) 8186 2777 or reply to this post.