When does an investment property actually earn anything?

Just something I've wondered for a while...

We own a two bedroom apartment (no mortgage) which would get $340 p/w rent.

After property management fees, landlord insurance, body corporate ($88 p/w), council rates, water rates and electricity costs, how exactly would we actually make any money?

Especially while we'd also be paying body corporate, contents insurance, council rates, water rates and electricity at our place of residence (which also would have no mortgage).

AND when we eventually sold the investment property, we'd be slugged with capital gains tax?

HOW is this ever a good idea!?

Note - we do not earn enough each week to accommodate a negative cashflow for tax offset purposes.

Capital gains is the only reason why you would invest in housing in Australia.

Think of rent as a bonus to help you pay the loan repayments (if you have a mortgage).

The tax you pay on capital gains will be at most 25% of the gain.

To be honest, I've never liked apartments as investments. 99% of times houses in the same street/suburb will do better.
Plus no body corporate.

Why are you paying for electricity?

Ahh, I see now. That makes a bit more sense.

I thought many landlords thesw days had to pay for electricity.

Never heard of landlords paying electricity (unless they are only renting a room).

I've heard of some landlords paying for gas/water usage when the apartments/units don't have separate meters.

Stevie_Sloth, I think you are also looking at things incorrectly. The fact that you have no mortgage should not be forgotten. You should apply a rate of interest that you would have earned on that amount and put that as a cost. The way I look at it you are making around 11.5K before rates and taxes and then take interest off. Not sure how much the property is worth but lets assume its 350K then you would have 7K in forgone interest. Take the council rates off, and lets assume its 2K that leaves 2.5K. The tax excluding depreciation would be on 9.5K, lets say you are in the 47% bracket that would translate to 4.5K in tax which puts the investment at real terms loss of 2K and a cash surplus of 5K. Depending on your capital growth projections you may have less risk and better returns leaving money in the bank.

The issue with a lot of Aussie real estate is the rental yields do not make it viable in many cases. All the agents that say its good for self managed super, well that would be true if you want your super to lose money. Not applying a cost of capital leads to incorrect net present value calcs.

Also pay for as little as possible....... definitely not electricity

You also need to hold the property as long as possible and sell when your personal situation deems it best tax wise. When you sell, you should also contribute the maximum amount possible from your wages in that tax year to super to decrease your tax liability.

Always plan ahead.

Re apartments...the golden adage is land appreciates, buildings depreciate. Apartments have little land value. You are however in a good equity position to buy many more properties.

Ugh, that all confuses me! Lol

Say I currently get an interest rate of 4% from the bank (the highest I can get without risk).

Say the property would expect to get around $300k if it sold right now, and a rental of $340 p/w.

And say I earn $24k p/a plus my bank interest, so hardly pay any tax?

Does any of that change anything?

Stevie, go and see an accountant. This isn't a good place to seek financial advice.

Althom is correct however you can do some comparative analysis. I am not sure if you read what I wrote above but if you can get 4% then you get 12K from interest before tax and 9.5K if you kept the rental property. You would have additional deductions for non cash deductibles and repairs however repairs would impact your profit by the cost of the repair multiplied by 1-marginal tax rate.

Would it change anything, erm yes. You would pay tax on your interest, so if you earn 24K and have no deductions then your tax bill would be 1,121. The interest earnings or net return from rental properties would be taxed at 19% (assumes you do not earn more than total combined taxable income of 37k which puts you in the next bracket).

One thing you have not considered is that property will more that likely have a better chance of keeping pace with inflation, although there are many variables. Your cash at bank is eroded by inflation.

You do not provide any details of your age but I would definitely see an accountant and see how super planning can be used to reduce future tax burdens and map things out a little better.

I agree with SaveH2O that you have good equity however the banking environment in Australia presently is becoming more difficult to to use the equity as lenders are looking at ability to repay rather than collateral cover. This is supposedly under the prudent lending guidelines, I think it is BS but hey they have the money.

Hope this helps a little. See an accountant.

Investment in residential property generally depends on a combination of capital gain and rental returns.

In this example, the rental returns are around 340*52-88*52-4000 = $9100 per year
For an annual return of around 9.1/300 = 3%

This is less than bank interest, but bear in mind that on average you're getting around another 3%, or more, of capital gain in owning the property. So the return is more like a minimum of 6%, when comparing it to bank interest. When comparing to cash type investments, The capital gain is a real profit, which has returns before selling. That return comes from the rent increasing as the value goes up. When you sell, you pay capital gains tax, but generally you'd be paying tax on any of the alternative investment too.

So rental properties can get reasonable returns, but you need to look at the details of your particular situation.

That's only possible if your income from employment sources is less than 10% if your overall assessable income. Unless the net assessable gain and other investment I come dwarfs employment income, you won't be able to claim any tax deduction for super contributions to reduce your tax.

I understand what he means, either self employed contributions, or if you're working for someone, just salary sacrifice it. It will result in the same tax deduction.

stevie_sloth, do you actually own an investment property and your own home or are you just asking hypothetical questions as a matter of interest?

If you are thinking of investing in property, you obviously have a lot to learn and you need to do a lot of research. As is, you don't even know the basics of capital gains tax.

Stevie, see an accountant mate and do a few calcs and a little bit of planning. Then either way you want to go you are a little more prepared.

Exactly. At least you have done some basic sums. Now when the rest of the lazy blinkered investors in Australia wake up and realise the great Ponzi scheme they have signed up to is about to burst, we may see a return to normality, where house prices should return to a level where it could be a viable business.

To be a good investor you have to understand Council Planning Schemes and Rates charges, the Tax system, the property market, and building costs at a minimum Its no mean feat, but you know them Aussie Mums and Dads ...