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Buying an investment property in a boom can be risky

investment property

I am a 45-year-old nurse earning about $120,000 a year, with living expenses of $27,000 and superannuation of about $213,000. I used to salary sacrifice to the maximum but stopped in the past three years, since I filed for bankruptcy in February 2019, due to a disastrous property investment in the mining town of Newman, Western Australia. I will be discharged from bankruptcy in February 2022. After discharge at age 46, I plan to buy a house for about $650,000 with a $140,000 cash deposit. I wonder if I should continue to salary sacrifice to the maximum of $27,500 a year, or should I focus on fully paying off my mortgage? I plan to pay it off in 6.5 years, earning about $150,000 from July 2022 onwards. I am single and have no children. After I pay off my mortgage at age 53, I can finally stop working night shifts and my income will come down to $95,000 a year. I plan to retire at age 60 – when I’m still healthy. L.L.

I always set two main goals for retirement: to stop working with a fully paid-off house and enough money in super to produce the tax-free income you need for living expenses. It is hard when starting from scratch – and not always possible.

At the end of the day, if both goals cannot be achieved, there is always the safety net of the age pension. So, that’s why I suggest giving priority to paying off your mortgage before salary sacrificing to top up your employer’s 10 per cent super contributions.

That’s sad news about your bankruptcy.

I am aware that house prices in mining towns peaked in 2011-12 during the mining boom. An ABC news report indicates Pilbara median house prices later fell more than 80 per cent when the boom soured.

It is a good lesson that buying an investment property in a boom can be risky, even though prices in Newman have since turned up.

I am aged 46, earning $190,000 a year and my wife, 47, is working four days a week and earning $120,000. We are both relatively healthy and have two children aged 11 and 9, due to go to private high schools at a cost of $40,000 a year each in 2023 and 2025, respectively. We own our home valued at $2.4 million and have $955,000 in joint investments, plus $556,000 in my super and $358,000 in my wife’s super. We also have an investment unit valued at $450,000 with a mortgage of $400,000. Our combined monthly income is $17,000. Our monthly expenses are $10,000 (excluding private school fees). We would like to maintain this lifestyle, or close to it, for the rest of our lives, adjusted for future inflation. We have both earned relatively high incomes for most of our working lives and have a relatively modest but comfortable lifestyle, prioritising the needs of our children. We both would like to retire at age 50. Are we on track? P. L.

If you retire at 50, your wife would have a statistical life expectancy of some 37 years and, as always, I add five years to that, assuming she is healthy and will live longer than the average.

If you then plan to spend $120,000 a year, indexed to 3 per cent for inflation, you could expect to go through savings of about $2.7 million. On top of that, you would spend about $500,000 on school fees, plus significantly more on sports plus any private tuition and then tertiary education.

I suspect you should plan on working until your children finish their education – possibly longer – while maximising your super contributions.

I purchased a unit in 2001 for $432,000 and moved out in 2007. It has been fully renovated with a new kitchen, bathroom, flooring, laundry and garage door. The total cost was $33,105 and other costs include stamp duty is $29,191. Over the years, I have claimed all council rates etc. I would like to sell the unit this year. The agent estimates it will fetch as much as $1.2 million. What is the best way to calculate the Capital Gains Tax (CGT)? M.W.

Step 1: Hire a good accountant.

Step 2: Give them the original sale contract for the property, as well as receipts for all your renovations, plus tax returns to show what you have claimed. This allows the accountant to determine your “cost base” and also how much, if any, could have been claimed, but wasn’t.

Let’s say you have spent $500,000 up to now and that your selling costs come to, say, $30,000, including agent’s commission.

If you sell for $1.2 million, your capital gain would be $670,000, half of which, or $335,000, would be added to your assessable income.

It doesn’t sound as though the property is held in joint names, so assuming no other income in 2021-22, the CGT would be about $128,000. Ouch!

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions. 


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Lending restrictions could hit property investors

property investors

Property investors are likely to find it harder to obtain the big mortgages often required to buy free-standing homes after regulators signalled they would likely act to tighten lending rules.

The Council of Financial Regulators says that with credit growth materially outpacing growth in household income, there is increasing medium-term risks facing the economy, even though lending standards remain sound.

The Australian Prudential Regulation Authority (APRA), which is a member of the council, is weighing up what measures it could take to curb riskier borrowing.

One of the tools APRA could use is to make lenders subject to a cap on mortgage lending to borrowers with a ratio of more than six times debt to annual gross income – the point at which it considers the lending to be risky.

CoreLogic data released on Friday show Sydney house prices are now up 25.8 per cent since the year began, with Melbourne prices up 16.2 per cent.

In September, Sydney’s median house price soared by $18,000 to $1,311,641 – a stunning gain of about $600 a day. In Melbourne, the median jumped by $7750 to $962,250 – up about $260 a day.

Nationally, the monthly growth rate in prices slowed to 1.5 per cent, compared to its peak rate of 2.8 per cent in March.

The CoreLogic figures show house values are generally rising faster than unit values, a trend that has been evident throughout most of the COVID-19 period, especially in capital cities.

“There has been a shift by investors from units to free-standing houses,” says Doron Peleg, founder of RiskWise Property Research.

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Super a great way to invest as you near retirement


A relation aged 25 is earning $150,000 a year in a construction job. He and his partner will be paying for a new house-and-land package next year. He asked me if he should be salary sacrificing to save tax. I told him I did not think that was wise in light of his proposed house purchase and all the costs associated with that. Your often mention salary sacrificing to superannuation rather than paying off a home loan, but am I correct in thinking this would only be applicable to somebody approaching retirement?

You are spot on. It would be crazy to be piling money into super at such a young age when they are planning to buy a house in the foreseeable future.

In any event, salary sacrifice into super is not a massive tax saver in his situation. His employer should already be paying $15,000 a year into super, which leaves only $12,500 available to be salary sacrificed.

The sum of $12,500 in his pay packet would lose tax of $4937, whereas money contributed to super would lose $1875. The tax saving of $3062 is relatively small.

It is a different matter entirely for someone aged 50 or more who wants to pour money into super, to make sure they retire with no mortgage.

My partner and I live in Melbourne and bought a house on the south coast of NSW for my daughter to live in, and for us to use for holidays. She owns 40 per cent of the house and we own 30 per cent each. I plan to leave my 30 per cent to my daughter in my will and my partner plans to leave his 30 per cent to his daughter. Will my daughter need to pay Capital Gains Tax (CGT) when I die? Would it be better to transfer my share to her before I die?

If you give it to her now, you would be liable for CGT.

However, if you leave your share to her in your will, no CGT would be payable and until she disposes of the property. This could be many years in the future.

Furthermore, provided the property continues to be her principal place of residence, the impact of CGT should reduce over time.

Your daughter should be thinking about ways to buy out your husband’s share, because the situation could be unsatisfactory if he dies and 30 per cent of the property is then owned by somebody else.

I am aged 60 and work full-time. I am trying to plan my finances for retirement in six years. I have recently come into an inheritance of $170,000 and am in a quandary as to where to invest it. I would like to be able to grow the funds but also to be able to access the money relatively easily after my retirement. The money is for travel and possible small renovations, as my husband’s defined-benefit super scheme generates payments of $2415 per fortnight, which covers our living expenses. We own our home and have a $300,000 mortgage on an investment property, valued at $850,000. I am thinking about either buying and renting another property – although would need to get a large loan – or perhaps buying shares or putting the money into my super, which is now just $60,000. I am also not sure about the tax implications of shares vs super. I welcome your comments on how best to invest the money.

I do not think taking out a large loan at your age is wise.

Super is the perfect place for you to invest the money, as accessibility would not not be an issue.

You have turned 60, which means you can withdraw money from your fund as soon as you retire from your job, or at age 65 – whichever is earliest.

The money could be contributed as a non-concessional contribution and there would be no tax on it or on any withdrawals.

Keep in mind that shares are a type of asset, whereas super is a vehicle that lets you hold assets in a low-tax area.

You could have each way bet by having your money in super, with a large part of the selected fund asset mix in shares.

I have been reading with interest your comments on what happens if a couple are on the age pension and one of them dies, leaving the surviving spouse over the single asset cut-off means test of just $593,000. Does replacing worn carpets and blinds come under allowable ways of spending money on renovations?

Yes, there are a number of allowable ways for a pensioner to spend money. These include renovations, replacing household items and travel.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions. 


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House price growth to slow, one way or another

House price growth

The madness of rising house prices cannot be allowed go on. Apart from higher prices making it harder for our kids to get into the property market, there is the broader impact on the economy.

Ever bigger mortgages simply mean less of our wealth is used for productive pursuits, such as capital going into new start-ups that employ people, or invested in companies working on cures for diseases.

Houses are, after all, just shelter, but in Australia they have a privileged position in our tax and social security system – and anyone suggesting there should be any changes to that had better watch out.

Just ask federal Labor, who took some sensible housing policies to the last election and the one before that. Policies which have since been dropped.

The party’s platform had included restricting the use of negative gearing and a reduction on the discount on tax on capital gains on investment properties. Had those policies come into force, it is likely the latest prolonged surge in prices would not have been as steep.

While first time buyers have been attracted by record-low mortgage interest rates and government assistance, it is investors in search of easy capital gains who have been driving the most recent phase of the upswing.

Sydney home prices are up 23.9 per cent for the year ended September 26, CoreLogic figures show. Melbourne prices are up 14.8 per cent over the same period.

One sure-fire way to slow price rises is for interest rates to start rising, just as the cutting of the cash rate to help stimulate the economy during COVID-19 has helped prices on their way up.

However, that is unlikely to happen until at least the end of 2023, as the Reserve Bank of Australia says it will not be increasing official interest rates until wages growth has pushed inflation back to the upper end of its 2 to 3 per cent target band.

Regulators could tighten restrictions on mortgage lending, or the lenders could tighten the rules themselves.

“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market.”

CBA chief Matt Comyn

The International Monetary Fund last week warned that a house price correction is a risk to the economy and recommended tightening lending restrictions to help cool a runaway property market.

The IMF says that more should also be done to increase the supply of housing. That is something on which the federal government and state and territory governments agree.

However, changes to increase supply, such as better planning and zoning and more land release, takes time.

Last week, CBA boss Matt Comyn said he is increasingly concerned with rising house prices and household debt levels.

Speaking during a hearing of the federal economics committee, he said: “We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market.

“I want to be clear, I’m not concerned about the point we are at today. But, based on the acceleration, I think it would be prudent to act sooner rather than later.”

Comyn said it is preferable for the banks to take action themselves, referring to raising the “stress test” benchmark interest rate, which includes a buffer on top of prevailing interest rates, against which loan serviceability is measured.

CBA increased its benchmark floor rate to 5.25 per cent, from 5.1 per cent in June.


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