Frequently Asked Questions

Investing

 

• Good Debt vs. Bad Debt
• Negative Gearing
• Positive Gearing
• How do I minimise Taxation and maximise simplicity?
• Can I reduce mortgage broking Insurance Costs?
• Lowering Deferred Establishment Fees
• Calculation of Rental Income

If you can't find what you are looking for, contact us and we will be delighted to assist you in any way that we can.

Good Debt vs. Bad Debt

As investment properties are generally considered to be tax effective and assist in generating wealth, they are often considered to be 'Good Debt'. In simple terms, good debt is considered to be tax-deductable and can be used to generate an income by investing in property or shares. Bad debt on the other hand, is not tax effective and does not generate income, things such as credit cards and personal loans fall into this category.

Negative Gearing

Negative gearing involves using a loan to purchase a property and then renting that property out to make an income. The property is considered negatively geared when the income generated from the rental does not cover the costs associated with running the property and the interest on the loan used to buy it. Any losses incurred during this process are tax deductible and can then be offset against other assessable income and boost returns. The profit occurs when the value of the property goes up over time, resulting in capital gains outweighing the losses incurred during the negative renting period.

Positive Gearing

Positive gearing is where the rental income received is greater than the total amount of the expenses, including interest rate repayments and maintenance expenses, taking into account your rental yield and tax breaks. Also, the property was built after 19 July 1985 you may be entitled to depreciation allowances that will enable you to claim “paper losses” to reduce your taxable income.

Property experts suggest that positive gearing could be tricky because it relies on the rents being high in comparison to the purchase price of the property. The benefit of a property that generates cash flow is realized when you sell the investment property sometime in the future. This is because you won’t have to subtract the losses incurred over the life of the investment, as is the case with negatively geared properties. For more information on this issue you should seek the advice of a financial planner or qualified accountant with experience in property investment.

How do I minimise Taxation and maximise simplicity?

Find a property investment loan that allows splits. This is where each property has an its own account and makes it simple to keep track of each properties performance. It also significantly reduces ongoing fees and simplifies paper work

Each split can have its own repayment structure such as principle and interest payments or interest only payments. Also, you can choose a variable or fixed rate loan for each split.

Taxation calculations are made easier as you can gauge the negative or positive cash flow for each investment property. It also makes you accountant life a lot easier when it comes to calculating your tax

Obviously in all cases you should seek advice from your accountant or financial planner before making any investment decision.

Can I reduce mortgage broking Insurance Costs?

If your total lending is greater than the 80% of your total property value then lenders mortgage broking insurance (LMI) will need to be paid. The higher the percentage the greater the mortgage broking insurance cost. It is important to structure the property portfolio correctly to save on lenders mortgage broking insurance. A poor structure could cost you thousands in extra costs.

Lowering Deferred Establishment Fees

If you are an active property investor and turn over properties in less than 5 years then there may be fees for paying out the loan early. Some lenders can charge up to one to two percent for discharging your mortgage broking early so this is a cost worth considering when choosing a lender.

Calculation of Rental Income

When it comes to servicing a loan (your ability to pay your loan), the percentage of the rental income a lender will accept may determine the amount you can borrow for you next investment property.

Some lenders only account for 70% of rental income while others account for 100% of rental income. Depending on your investment strategy, choosing the right lender is important for increasing your borrowing costs.