Expert Advice by Todd Hunter
Click here for Part 1 of Todd's The old myth - Property Forever post
In the first release of my two-part Blog, I mentioned some valid reasons for selling property. I’m not even sure if “Blog etiquette” allows for sequences so we could be breaking some Blog code of ethics here…
I am a believer of lifestyle for now, rather than being wealthy only when I retire. So if that means buying and selling a few properties now so that I can achieve this, then that’s exactly what I will do.
Sure we all need to put some aside for our retirement, along with leaving our children with something in their inheritance, but you only live once and we need to enjoy our lives now… another reason I am not a fan of large home loans.
To achieve my lifestyle I use property as my tool… and that means selling some property along the way.
There is another property myth though, that you have to pay half of your profit in capital gains tax. What a load of bollocks… completely untrue. If you have owned the property for more than 12 months, the maximum capital gains payable is 23.25% if the property is owned in your personal name. But the word “profit” needs to be defined. Sale price minus purchase price is not profit. Included in that subtraction we must also include things like:
- Stamp duty
- Buyer’s Agents fees
- Renovations that were improvements
- Real estate sales commissions
- And more…
It’s this final number that the capital gains tax is then calculated on.
I think this myth was invented by the same people who think that when you are a high-income earner that you half your income as tax. Someone who earns $200,000 per annum pays $66,548 tax and this equates to 33% of his or her income.
A far cry from 50%…
So you own your home, had your holiday to celebrate, now what?
The next step is to build a passive income. This is an income that you do not have to work for. In this instance, rent received, would be a passive income. This is where the rent far out ways your outgoings and starts to bring you in a tidy income each month.
In our previous example in Part 1, you would still have 2 investment properties and therefore have some investment debt on your home which would be tax deductible. Your home still has a large portion of usable equity available to use for investing.
I prefer my loan structures to be Stand Alone and not Cross Collaterised. For more info read my earlier blog post. To do this you borrow 20% of the value of the investment property plus set up costs held against my home and have a separate loan for the remainder 80% held against the investment property itself. Like this:
Home value $600,000
Investment Deposit Loan $240,000
The $240,000 allows for three deposits of $80,000. You already own two investment properties and the extra is for your next purchase.
Investment property value $300,000
Investment Loan $240,000
The extra $20,000 is for stamp duty, Buyer’s Agents fees, legals, building inspections and of course a depreciation schedule.
This structure means that you do not have to pay mortgage insurance on either home or your investment property.
It does however chew into your home equity by $80,000 chunks per property. For myself I use smaller deposits of $40,000 on my home and pay the mortgage insurance on the investment property. This way I minimise the use of my home equity thus, I can purchase more properties.
At this stage a well-structured Game Plan that calculates serviceability with lenders, available equity and time-frames in which to achieve this is essential…
So, in over a 5-year period you have now purchased a property every 6 months and have a portfolio of 13 properties (including home plus the 2 investment properties you already had). Well done… to achieve this you would have to use smaller $40,000 deposits like I do.
Please do not think that this is not achievable. This can be done on dual incomes of around $75,000 each. It takes time and of course buying the right properties in the right locations.
Now it’s time to sit back and let the properties mature. Your earlier purchases would have increased considerably in value, plus be cash flow positive by a reasonable amount each week. This helps keep the whole portfolio cash flow neutral and then positive.
And do not stop paying down the debt. As your whole portfolio would be cash flow neutral or positive, your incomes can go towards paying down the principle. Focus on the loan held against your home. Over a ten-year period of $500 per week, your loan would reduce by $260,000, which is almost the cost of one of your properties.
Remember: you have no home loan, a neutral investment portfolio and dual incomes of $75,000 each so $500 per week is easily achievable.
But what happens at the end of all this… you have 12 investment properties which cost you $320,000 each = $3,840,000 and sure in ten years you have paid down $260,000 but how do you pay the remainder off?
Answer; You sell some properties…
The last thing you want to do is relax and work part time or retire with $3.5 million or so in debt…
As your portfolio has increased, maybe even doubled over a long period of time, you can selectively choose which properties are right to sell and how many it would take to pay off your investment debt in full.
You may only need to sell 4 to 5 properties (remembering you have almost paid one off yourself) to pay off the debt of all of them. And sure you have some capital gains tax to pay but at that stage there are some tactics to minimising that.
The end result being you own 7 – 8 investment properties and have a very substantial passive income. By this time the rents should be $600+ each per week.
And Bam!!! You have over $4,000 income per week, every week… and this will continue to keep increasing as the rents do.
Now sure you probably have paid some $600,000 plus in stamp duty and capital gains tax but so what, the end goal was to achieve a passive income and it has been achieved.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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