Will my investment make a loss or a profit?

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samchester
Posts: 35
Joined: Thu Jun 27, 2013 3:49 pm

Will my investment make a loss or a profit?

Post by samchester »

Hi brokers, I am about to buy my first ever investment property very soon and I am having trouble figuring out if the property will be profitable or not. Is there any way I can calculate this?

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Otto Dargan
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Location: Sydney, Australia
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Re: Will my investment make a loss or a profit?

Post by Otto Dargan »

Hi and welcome to the forums samchester,
You can use our Negative Gearing Calculator to find out whether your investment will make a profit or a loss. Negative gearing is basically when your investment properties have higher ongoing costs than your rent income. This calculator will also work out your tax refund from negative gearing.

The following costs are included in the calculation:
  • Property management
  • Repairs and maintenance
  • Interest on your mortgage
  • Council and water rates
  • Strata fees
The costs for the property are simply deducted from the rent income you receive which results in your weekly cashflow. In addition to this non-cash expenses such as the depreciation of the building may also be deducted from your taxable income.

The effect on your taxable income and the amount of tax refund (if any) is then calculated depending on the tax rate.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

samchester
Posts: 35
Joined: Thu Jun 27, 2013 3:49 pm

Re: Will my investment make a loss or a profit?

Post by samchester »

Okay, so I tried out your calculator and it showed a negative cash flow. I spoke to one of my friends about this and he mentioned that it is a good thing to have a negative cash flow at the starting period. When I asked why I did not really understand what he was trying to say. Is what he said true? Is it really good to have a negative gearing? If so, can you help me understand more about this?

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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Will my investment make a loss or a profit?

Post by Otto Dargan »

Hi samchester,

Most people do not mind having a negative gearing at the start of the investment because it allows them to save money on tax.

To make this clearer, let’s suppose you are earning $80,000 a year at your full time job and you own a rental property. This property is rented at $20,000 a year and you spend about $30,000 in interest and running costs such as maintenance, repairs, etc. Therefore there is a loss of $10,000 from your property. You can normally claim the net loss as a tax deduction against your other income.

This loss on your investment property means that your taxable income can be reduced by offsetting it with the loss amount and so your final taxable income will be $70,000 ($80,000 - $10,000).

You may also claim depreciation benefits on the property allowing you to reduce your taxable income further. Suppose you claim $5,000 in depreciation then your taxable income can be reduced by $15,000 (including your rental income of $20,000 and running costs of $30,000).

However please keep in mind that although you are saving on tax you are still losing money. This kind of gearing is mostly used by investors who are trying to achieve more in growth than the cost to hold onto the property as well as to own more investment properties without having to pay too much for them. Your ultimate goal should be to earn money off your investment.

If you would like to know whether or not you can qualify for a loan then please fill in our free assessment form and one of our brokers will get in touch with you. You can also call us on 1300 889 743 to speak to us directly.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

samchester
Posts: 35
Joined: Thu Jun 27, 2013 3:49 pm

Re: Will my investment make a loss or a profit?

Post by samchester »

Okay thanks Otto. I will ring you up in a few days to discuss more about investment properties.

SamuraiJack
Posts: 25
Joined: Sat Aug 03, 2013 9:32 pm

Re: Will my investment make a loss or a profit?

Post by SamuraiJack »

Hey, I am also planning to buy an investment property and I need to borrow $500,000 to complete the purchase. Can you tell me what the criteria are to get approved for a loan?

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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: Will my investment make a loss or a profit?

Post by Otto Dargan »

Hi SamuraiJack,

You would need to apply for an investment loan to purchase such kind of property. This type of loan are considered riskier than standard home loans and to get approved you would need to have a strong financial position. The approval criteria for investment loans are quite complicated especially if negative gearing benefits are required to prove that you can afford the loan.

The criteria to qualify for an investment loan are:
  • You need to have saved up at least 5% of the property value in genuine savings.
  • You should have a good credit history without any black marks on your credit file.
  • You should have an above average credit score.
  • You should have stable employment.
Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

SamuraiJack
Posts: 25
Joined: Sat Aug 03, 2013 9:32 pm

Re: Will my investment make a loss or a profit?

Post by SamuraiJack »

Thanks so much Otto for your answers. Catch you later!

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