The Rental Yield is a measure of the property's gross and net income compared to the
value of the property. Gross yield equals annual rent divided by the value and net yield
equals the annual rent less the cash expenses all divided by the value of the property.
You can use this percentage to compare properties with different prices and rental amounts.
Properties with higher rental yields will produce greater returns.
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The Potential Rental Growth is an estimate of the expected
rental growth over time and being an estimate is difficult to quantify. Your real estate
agent will be able to point you in the direction of good growth areas. It is vital that rental
growth exceeds inflation over the term of the investment.
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The Potential Capital Growth is an estimate of the expected change in the value
of your property from one year to the next. Good capital growth quickly increases
your equity allowing you to borrow again for further investments, and also reduces
your investment risk because your total debt is lower as a percentage of the
property's value.
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Property Age - Properties constructed after 18 July 1985 provide greater tax
deductions in the form of building allowance and may also have less costs involved
in repairs and maintenance. You would need to weigh up the price difference in pre
and post 1985 properties and measure the extra benefits from the newer property.
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The following example property will be used to demonstrate the process of
negative gearing. The example is deliberately simple and does not cater for complex
scenarios such as the property being used as a residential dwelling for some period of
ownership.
The loan is assumed to be a Principal & Interest loan (P&I) over a period of
20 years with a 7 percent interest rate.
Assets include such items as carpet, furniture and fittings and, since the property was constructed
after 18 July 1985, we are able to claim a percentage of the construction costs as a tax
deduction.
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The table shows a basic calculation of the property's Taxable Income or loss.
The rental income is reduced by normal cash expenses, by the interest portion of
your loan repayments and by the non cash expenses.
The non cash expenses include a percentage of the original asset value, a percentage
of the initial borrowing costs and a percentage of the construction costs.
The total loss in this example is $4,050 but this is not the amount of cash required to
fund the investment. In the next sections we will see the tax concessions applicable to this
loss and see how they impact on the cash flow.
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The amount of Tax Concessions for the property is calculated by comparing the tax payable
on your pre investment income to the tax payable on your post investment income.
Under the marginal tax system a lower income earner pays less tax on each extra dollar earned
than a high income earner. Equally, a lower income earner receives a lesser tax concession
for each dollar of investment losses.
You should see your accountant about estimating your total annual investment loss early
on in a financial year and applying for a variation to your tax so that less tax is taken
from your wages. The extra take home pay is best used for contributing to your
investment.
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In this section we can see how the taxable income relates to and differs from the actual
cash contributed to the investment. The table shows which items are included in
your taxable income and which items are included in your Cash Flow.
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Most borrowers use and are familiar with the standard Principal & Interest loan.
With this loan, the repayments meet the interest charge and also reduce the loan balance
so that it is paid out over time.
Another Type of Loan is the Interest Only loan whereby the repayments only meet the interest
charge and bank fees and the loan balance remains at a relatively steady balance.
One of the advantages of an Interest Only loan is that it greatly reduces the cost of investing
as you can see in the table example. The 'extra' funds can be used within your investment
to lower the balance of your loan or to invest in more property or a more expensive
property.
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Capital growth is the change in value of your investment from one year to the next.
If you sell a property the increased capital value will result in greater cash returns from the sale.
If your property is not sold, the increased capital value increases your ownership, lowers your
investment risk and increases your ability to meet the Loan to Value ratio test if you are looking
to add a further property to your investment.
Rental growth is the change in your rental income from one year to the next. Growth in
your rental income reduces your tax concessions but the overall effect is to reduce the
amount of funds required for your investment thereby freeing up more funds for use in
loan reduction or for adding new properties.
Wages growth is the growth in your wages from one year to the next and hence growth in the
amount of funds that you have available to contribute to your investment for loan reduction
or for adding a new property.
Growth in the capital value, rental income and in your wages allows you to add new properties to
your investment and to grow your overall equity more than could be achieved with a single
property.
The information presented on this website does not constitute financial advice and is for general
purpose use only. You should always consult your financial advisor before making investment
decisions.
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Property
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