One of the benefits of property is that the investor may not have to significantly reduce their current lifestyle to fund the investment. Based on how the property is financed or ‘geared’, the investor may input little or no personal cash week-to-week, as there are multiple sources of income at play. Unlike all other forms of investment, your tenants and the taxman will be paying a large portion of costs involved in servicing the property.
INCOME AND EXPENSES
Like any business, there are income and expenses associated with owning an investment property. There’s quite a few to take into consideration, and they all combine to work out the property’s ‘bottom line’ each year.
INCOME (made up of cash and non-cash)
- rental income
- investor’s personal cash
- tax savings (from deductions generated from actual cash expenses)
- tax savings (from deductions generated from non-cash expenses such as building and fittings depreciation)
EXPENSES (made up of cash and non-cash)
- mortgage loan repayments (interest component only)
- council and water rates
- land tax
- insurances (eg: building and landlord)
- Owner’s Corporation fees
- property management fees (including advertising and letting fees)
- maintenance and repairs
- loan costs (eg: bank application)
- conveyancing
- bookkeeping
- building and fittings depreciation
HOW IT WORKS FOR YOU
The table below depicts a typical gearing structure that incorporates the income and expenses associated with a $400,000 example property.
| ANNUAL EXPENSES | Interest repayments | $22,790 |
| Rates (Council + water) | $1,400 | |
| Owners Corporation + Landlord Insurance | $1,350 | |
| Management fees (6.6%) | $1,235 | |
| Maintenance and repairs | $500 | |
| Land tax | $350 | |
| Bookkeeping | $300 | |
| TOTAL CASH EXPENSES | $27,925 | |
| ANNUAL INCOME | Rental income (50 weeks @$375p.w.) | $18,750 |
| = initial cash shortfall (investor contributions) | -$9,175 | |
| ANNUAL TAX DEPRECIATION | 2.5% building depreciation + 20% fittings depreciation | $12,125 |
| add in annual tax savings (based on $70,000 salary) | $6,922 | |
| = investor’s annual shortfall contribution | $2,253 | |
| = weekly ‘out of pocket’ expense | $43.30 |
* Assumptions: Loan 1: $367,300 (5.5%p.a. 30year 90% LVR interest-only including $7,300 LMI capitalise). Loan 2: $47,070 (5.5%p.a. 30year equity re-draw interest-only for $10% deposit and $7,070 stamp duty). Estimate of depreciation claimable based on typical 3 bedroom + 2 bathroom + single garage, double storey dwelling
SO WHO ACTUALLY PAYS?
The tenant pays most of the expenses, and the rest is divided up between the taxman and you. This enables the investor to reap all the benefits of an asset steadily growing in value each year, without putting in much personal cash. Assuming 7%p.a. average annual growth, the property investment will grow $386,860 in equity in 10 years’ time, averaging the investor over $38,000 uplift in value per year. Not a bad return for the price of a few coffees and take-away lunches each week?
SOME CONSIDERATIONS...
It’s important to remember that different income and expense variables will have positive or negative effects on the component the investor must contribute.
Cheaper interest rates, greater rental income and greater salary will reduce the shortfall required by the investor. Conversely, lower tenancy rates, higher purchase price and reduced tax depreciation will need the investor to chip-in more. Therefore it’s vital that you work with property professionals prior to deciding which investment is suited to your personal situation.