Home Owners Equity and Taxation refunds, the key to investing, not hard earned after Tax dollars November 2005 RETURN
Our investors entrust over $200 million worth of property to our Management Department. Their individual circumstances are as varied as the types of property they own. One thing most investors have in common is that the capital gains created are the source of the majority of their increase in wealth, regardless of how it was purchased or how much finance was required in the purchase. This being the case it stands to reason that the less personal funding $’s used to create this increase in value, the higher return to the investor. Many of our clients actually hold quality city edge property investments for less than $50pw after tax and after a few years of rental increases, at no cost at all. They have also structured their finance to repay their personal home loan many years earlier and only be left with a tax efficient investment loan. These are normally the people who get the maximum benefits from their investments. While still having a home mortgage, the investors have used the net equity in their home, not cash, to borrow the maximum amount for the investment purchase. They then channel the rent, their taxation refunds and their income into reducing the existing home mortgage. This allows them to invest years earlier, using the rent & taxation refunds to assist the purchase and then eliminate their home loan. It all sounds too easy to some and being conservative by nature, they will only invest when their loan is fully paid off and a deposit is saved for the investment. This is a slow road to wealth creation and overly cautious for most people.
A tremendous comparative example of this was experienced this month by our clients. Both approached our office in June 2000 and investigations showed both had average incomes and a similar amount owing on their family home. One party, Investor A, refinanced and bought an apartment we recommended for $275,000. He borrowed the entire amount including purchase expenses and has retained the property as a rental investment at the cost of about $9500 of his own money so far. His loan structure has also enabled the pay out of his home mortgage of $48,000 over that time. The other party elected to pay out his mortgage first and save a stand alone deposit. With a normal income he took over 5 years and $82,000 of his own money to achieve this. He has now just purchased for $421,000 a similar property to what investor A already owns for $275,000. Over this time Investor A has used under $10,000 of his own and $38,000 of the tax mans to increase his equity by nearly $200,000 and over the same 5 year period the 2nd party has spent over $80,000 to increase his equity by about $70,000. There is no comparison in who is better off. Both Investors are now being advised to purchase again as they have the capacity to invest again in the currently attractive conditions. Investor A is obviously more keen to go and his example is a glaring reason for the other to alter his conservative approach.
This scenario is seen in our office time and time again and with the high cost of living it is vital to provide our own independent nest egg for later years, not just our retirement. You don't have to have a high income or a wealth of assets already to do this. What is vital is that the structure and property selection are carefully considered and allow for maximum benefits to occur. With this a new investment property every 4-7 years is very achievable and later every 2-4 years. If the average person knew that for well under $50pw you could easily maintain a quality city edge investment for 10 years they would probably do so more often. Saving with after tax dollars is just too hard compared with the massive gains created by good property. A sizable portfolio with multiple properties is achievable for so many people that just need a plan and an effective Estate Agent.
Our investors entrust over $200 million worth of property to our Management Department. Their individual circumstances are as varied as the types of property they own. One thing most investors have in common is that the capital gains created are the source of the majority of their increase in wealth, regardless of how it was purchased or how much finance was required in the purchase. This being the case it stands to reason that the less personal funding $’s used to create this increase in value, the higher return to the investor. Many of our clients actually hold quality city edge property investments for less than $50pw after tax and after a few years of rental increases, at no cost at all. They have also structured their finance to repay their personal home loan many years earlier and only be left with a tax efficient investment loan. These are normally the people who get the maximum benefits from their investments. While still having a home mortgage, the investors have used the net equity in their home, not cash, to borrow the maximum amount for the investment purchase. They then channel the rent, their taxation refunds and their income into reducing the existing home mortgage. This allows them to invest years earlier, using the rent & taxation refunds to assist the purchase and then eliminate their home loan. It all sounds too easy to some and being conservative by nature, they will only invest when their loan is fully paid off and a deposit is saved for the investment. This is a slow road to wealth creation and overly cautious for most people.
A tremendous comparative example of this was experienced this month by our clients. Both approached our office in June 2000 and investigations showed both had average incomes and a similar amount owing on their family home. One party, Investor A, refinanced and bought an apartment we recommended for $275,000. He borrowed the entire amount including purchase expenses and has retained the property as a rental investment at the cost of about $9500 of his own money so far. His loan structure has also enabled the pay out of his home mortgage of $48,000 over that time. The other party elected to pay out his mortgage first and save a stand alone deposit. With a normal income he took over 5 years and $82,000 of his own money to achieve this. He has now just purchased for $421,000 a similar property to what investor A already owns for $275,000. Over this time Investor A has used under $10,000 of his own and $38,000 of the tax mans to increase his equity by nearly $200,000 and over the same 5 year period the 2nd party has spent over $80,000 to increase his equity by about $70,000. There is no comparison in who is better off. Both Investors are now being advised to purchase again as they have the capacity to invest again in the currently attractive conditions. Investor A is obviously more keen to go and his example is a glaring reason for the other to alter his conservative approach.
This scenario is seen in our office time and time again and with the high cost of living it is vital to provide our own independent nest egg for later years, not just our retirement. You don't have to have a high income or a wealth of assets already to do this. What is vital is that the structure and property selection are carefully considered and allow for maximum benefits to occur. With this a new investment property every 4-7 years is very achievable and later every 2-4 years. If the average person knew that for well under $50pw you could easily maintain a quality city edge investment for 10 years they would probably do so more often. Saving with after tax dollars is just too hard compared with the massive gains created by good property. A sizable portfolio with multiple properties is achievable for so many people that just need a plan and an effective Estate Agent.