Taxing questions…

I have had my own business for over 20 years. I also have three investment properties.

My question is: if I payed $3000 from my income to the ATO and I have a loss which was bigger than this amount, should I receive more money than the amount I had payed to the ATO?

In the same period of time, one of the properties, after the tenants left, was practically destroyed and after 4 months of hard work the house was left as new again. What will happen with the $30,000 I spent to repair the house and put it in the market again?

Many thanks.
Alfredo Garcia

The answer to this question is "yes". Whenever a property is transferred it is deemed a sale. You would be up for CGT and your son would have to pay stamp duty. The way they calculate CGT and stamp duty is based on the current market price

Regards
Edward Chan
Chairman - Chan & Naylor Australia www.chan-naylor.com.au

---

Send your question to editor@PropertyUpdate.com.au and we'll get one of our experts to answer it.

---

Investment concerns…

Hello,

I own an investment property in Dandenong North a few kilometers from the EastLink arterial under construction. Will the opening of the EastLink in late 2008 have an effect on the value of properties in the vicinity and in which direction?

Could you please advise?

Kind regards
Jamal Alsamarrai

Jamal

Thanks for the question. A lot of property owners are wondering the same thing – "how will Eastlink affect them?"

In general infrastructure upgrades improve property values in an area and obviously Eastlink will make access to certain southern easternMelbourne suburbs easier.

I think the effects of Eastlink have already been anticipated and built into the price of many of the suburbs affected by this freeway, especially the Frankston area.

You see infrastructure changes affect property values in 3 waves:

1. When they are first announced speculators anticipate an increase in property values and buy up properties in the hope of rising prices.

2. When construction commences – which could be a couple of years after the first announcement, the proposed infrastructure change now becomes a reality. Again speculators buy up in the anticipation of further price rises

3. On completion of the infrastructure changes the improved amenity to an area is obvious and theoretically people will pay more to move into the region. Often this hs been already anticipated and built into property values in the area.

With the speculation that has occurred in anticipation of the early completion of Eastlink, I don't think there will be much change in Dandenong North property values.

In fact this suburb, plus other surrounding suburbs are likely to be affected negatively by the next interest rate rises that are likely to occur due to its demographics.

Regards
Michael Yardney
Director – Metropole Property Investment Strategists www.metropole.com.au

Send your question to editor@PropertyUpdate.com.au and we'll get one of our experts to answer it.

---

Managed property funds…

Hi, my question is regarding managed property funds as in Westfields, what are your views on these type of investments.

They appear to be easier to get into with less fees, but how do the returns stack up?.

I understand that due to an oversupply of inner-city apartments especially in Perth has left huge demand for office space, do you know much in this area.

Any advice is greatly appreciated.

Kind regards
John Alietti

John

For investors who are considering getting involved in commercial property, managed property funds are a great way of taking advantage of this sector of the property market.

They are not true property investments – they are really a hybrid. They are share investments – listed companies, whose income comes from owing commercial properties.

I am an Australian resident living in the United Kingdom and will be returning home in March. My wife and I have a house in Australia which we owe a $150,000 mortgage and two years ago used the equity to purchase an investment unit.

There are some investment opportunities in Europe I have been offered by a friend of mine who is a developer. I would like to finance through Australia as I will be going home.
Would you have any advice on what type of loan I should use to borrow to invest and/or any better advice on how we are investing due to our inexperience in this field.

Regards,
Jason Ewer.

A basic interest only investment loan with a redraw facility should be sufficient. This will have to be secured solely by your properties located in Australia as lenders will not accept property located outside of Australia as security for a loan.

The only issue with borrowing in Australia is the foreign exchange currency risk. That is, it is often important to match the currency of the assets income and expenses. Your rental income will be received in a foreign currency. However, your major expense (i.e. interest) will be in Australian dollars. Therefore, should the foreign currency devaluate (for example), your loss from this asset will increase. However, assuming that the bulk of your total income is derived from employment (and hence being paid in Australian dollars), this risk is significantly minimised.

Regards
Stuart Wemyss
Director - ProSolution www.prosolution.com.au

It is more relevant to look at your personal circumstances rather than the banks "generosity". The banks are in the business of lending money so they will always be keen to lend you more (as long as you can afford it). However, you should consider your circumstances and any potential changes as this may affect your ability to borrow later on. For example, if you are currently an employee (PAYG) but plan to start your own business within the next 12 months then borrowing the maximum now would be a good idea as it might be more difficult or more expensive to borrow later on when you are self employed but have less than 2 years of history. However, if you don't envisage any changes in your circumstances, then there's probably no need to borrow more now.

Regards
Stuart Wemyss
Director - ProSolution www.prosolution.com.au

Send your question to editor@PropertyUpdate.com.au and we'll get one of our experts to answer it.

---

I would like to ask about using equity (L.O.C) to cover shortfalls in rental property repayments, is it true that this technique can only be used short term as eventually the extra accrued interest will overtake the growth in your portfolio?

Regards,
Duane

In my opinion, capitalising interest (i.e. borrowing the interest) is a potentially good solution for people that choose to use this structure, not have to use it. That is, if the only way you can afford to own property is to capitalise interest then you have clearly borrowed too much in my opinion. However, if you choose to capitalise interest on your investment to allow you to repay your home loan quicker (for example), then that's a perfect strategy. The reason I say this is this structure/strategy does come at a risk. Interest rates could continue to increase or property values might be stagnant for a few years. Worse still, both might occur at the same time. These events might put you in a situation where you'll be forced to sell property – sometimes quickly which may not maximise your value. However, if you capitalise by choice then you can always revert back to paying the interest bill each month (and avoid any forced sales).

The capitalising interest strategy does need the property growth rate to be higher than the debt growth and can really only work if your overall loan to value is reasonably low (i.e. less than 80%). If you don't have enough equity in your property then this strategy will not be a long term solution.

Regards
Stuart Wemyss
Director - ProSolution www.prosolution.com.au

I have 1 PPOR and 2 investment properties. I would like to draw equity from my investment properties.

Currently I have 1 LOC against my PPOR split into 2 (1 for my personal use and 2^nd for investments only).

To draw equity from my IPs should I setup LOC for each IP property or have only one LOC against all IPs?

Thank you
Halina Nockiewicz

I suggest that you should separate loans by purpose. Firstly, you must keep tax deductible and non-deductible lending separate which you have done. Secondly, I would also recommend separating the investment by purpose. For example, if you had total investment lending of $300k, you might split that loan into two. $100k might relate to IP 1 and $200k might relate to IP 2. This is important for record keeping. If you wanted to access equity to say invest in the share market then I would suggest establishing a third loan account as this is a different purpose.

Regards
Stuart Wemyss
Director - ProSolution www.prosolution.com.au

Teamwork…

Hi

I live in Queensland, Bargara I have a PPOR and investment property and some land. I want to get into more creative options as I only have a few years left in the workforce. So I am looking for genuine advice on the subject. I have a mortgage broker at the moment but I have some concerns about some of his methods and work practices and don't know who to go to. Do you have any suggestions? I have closely followed your web pages and news letters and I am impressed with its range of content and advice.

Judith

Hi Judith,

Thanks for the question.

To move forward with your investment program you need to get the right team of advisors around you. Advisors who aren't giving you theoretic knowledge – but people who have achieved what you want to achieve.

And don't be scared to pay for good advisors – its one of the best investments you could make (after your own education.) As I often say – "If you're the smartest person in your team, you're in trouble."

So if you are not sure about the quality of advice form your mortgage broker then maybe you should find an investment savvy mortgage broker.

Out of fairness to your current mortgage broker, maybe you are expecting too much from him. He is not meant to be giving you property investment strategy advice – his specialty should be finding the most appropriate way of financing your investment choices.

The others you should have on your team are:

1. A property tax accountant – one who will set you up with the correct structures for asset protection and tax minimisation.

2. A smart solicitor who can help with asset protection contracts etc.

3. A property investment strategist – someone to help you devise a strategy that suits your specific needs and risk profile. The team at Metropole- www.metropole.com.au specialise in this field.

Regards
Michael Yardney
Director – Metropole Property Investment Strategists www.metropole.com.au

---

Send your question to editor@PropertyUpdate.com.au and we'll get one of our experts to answer it.

---

Development dilemmas…

Hello
We are about to embark on our first development of 4 townhouses on a 809 square metre block in the Bayside district of Brisbane (Victoria Point).
Our dilemma is whether to:
a) Build a 2 storey townhouse with an loft area built within the roof space which can be multi-purpose room ie. media/rumpus; (these will have partial bay views) or
b)  Build a 2 storey townhouse with a rooftop terrace/entertainment (partially enclosed) which will have unspoilt bay views.
We know personally that we would go for b), however we are not the ones who will be buying the townhouse, investors and/or retirees will.
We are aware that adding a "Third Storey" to the build does significantly increase the cost.
Any advice regarding whether extra outlay is likely to increase the saleability and/or increase our profit margin or are we just overcapitalising.
Thanks.
Alison & Jeff

Thanks for this query. Of course, any comments are of a very general nature as we don't know the area, the particular council and state planning requirements and the overriding neighbourhood rules and regulations. It cannot be regarded as specific advice.

However, initially, I would ask about town planning issues such as over looking (into the neighbours' back yards) and overshadowing (similarly, the neighbours).

I would also be looking at the possibility of neighbourly objections about blocking their views. We don't normally like to get into battles that may substantially add to costs with delays and planning changes, unless we know we're going to win and that's never sure with planning issues.

As to the desirability of an attic v a rooftop terrace for the future resident, I would have to look at the general demographic of the area.
 
Is it generally a young and up coming "yuppie" demographic or largely an older more established demographic. From their comments the development is aimed at investors or retirees. That seems a very broad target, each with very specific and differing requirements. Tenants (the investor's target) will probably be a very different group of residents than retirees, with dramatically different wants and needs and the investors will need to be convinced about the project's attractiveness to any possible tenants. Will retirees make use of the terrace (in these days of "sunsafe" practices) or would they prefer extra storage space ?

I would look at what is more common in the surrounding new developments and try to understand why other people have done what they have done. We're probably not trying to make an architectural statement here, nor build a monument. I assume we're just into making money with a good sustainable project and what the enquirer prefers may have no relation to good planning and a viable project.

Of course end values are the key to a successful project, whether the enquirer is building to hold or on-sell (and it sounds like the latter here).  Important research would include data on the recent end values attained in the area for either style of property. Speaking to many local agents about their recent results (and their opinions) will assist as well as the enquirer's personal empirical research.

I understand form the enquirers notes that they feel the costs of either to be about the same but I would suggest that a detailed feasibility study would be necessary (even critical) to understand the implications of their decision with relation to all costs, end values and the effect of time on their project dollars. We use a very helpful piece of software called Feasstudy. It is available at the online bookshop at www.PropertyUpdate.com.au .

Building four townhouses sounds very good.

Building four dwellings that will fit the requirements of the target market perfectly, with control of costs and full knowledge of end values and demographic requirements sounds even better.

Trust this assists.

Best wishes
Jack Henderson
Director Metropole Property Investment Strategists - Melbourne www.metropole.com.au

...click here.

---

How and Where to Invest in 2008
Seminars around Australia
Featuring Michael Yardney and Ed Chan

The fall out from the stock market crash is going to affect all of us in many different ways. It will also create the type of property opportunities we haven’t seen for over a decade.

Are you ready to take advantage of the property markets in 2008?
There will be some great opportunities out there, but the rules are different now and not every location will experience strong property price growth in the short term.

Come along to our seminars in March and April in Melbourne, Sydney, Brisbane, Perth, Adelaide and Canberra to find out how you can get started in property investment and experienced investors can discover how to grow a substantial property portfolio…featuring Michael Yardney of Metropole Property Investment Strategists and Ed Chan, accountant and best selling author of Chan & Naylor, who will discuss tax, trusts and wealth preservation.

Both presenters have built their own substantial property portfolios through a number of economic cycles and understand how the markets work after a crash.

Please click here to find out further details and to see exactly what they will be discussing.

>>> Reserve your place now and receive 3 free bonuses worth over $100. Please click here for full details <<<

---

Click here to check out our great range of property books, CD's, DVD's and software

Click here