Archive for the ‘top posts of 2009’ Category

Property analysis #3 – student accommodation

Wednesday, December 16th, 2009

I’ve gotta admit, this one was a little fun…

I’m looking at a 12 bedroom house at 44 Arthur Street, in Bundoora VIC. Who could possibly need 12 bedrooms, you ask? Students, of course! What I love is that we can expect fairly constant demand for student accommodation, particularly in this area, which is home to 2 large universities.

Like many properties going to auction lately, this one has no price attached. But after a bit of research, I’ve found out that the agent’s expected range for the auction is $670k – $720k, and if Melbourne’s recent auctions are any indication, the property will probably go for a little higher than that.

So with this one, we’re going to work out the max price where the deal still makes sense from a cashflow perspective. Using the same assumptions for our hypothetical investor that we always do (with one or two twists that we’ll get to in a moment), how high can we bid before it’s no longer positively geared?

With impressive rental income of $4441 pcm (gross yield of 7.4% on $720k purchase), and after all your average deductions (depreciation, council rates, etc.), the property is likely to return a decent amount before interest.  Do note I’ve assumed a higher amount than usual for maintenance, and a higher vacancy rate for empty rooms over the summer. Leaves a little bit of room for error.

Also, in my workings, I haven’t included property management fees. This is because, in my opinion, self-management is probably a better strategy when it comes to student accommodation. This DIY approach also seems to be favoured amongst our clients who rent to students, as property managers can get quite expensive in these scenarios and tenants are easily found with the universities just around the corner. Being a little more hands on does require more effort, of course, but also offers more control, which is helpful when dealing with your average bunch of rowdy students… Like me!

There are many risks with student accommodation, but that’s not to say that the risk necessarily outweighs the potential for profit in this situation. I’ve seen quite a few of our clients using variations of the ‘student accommodation’ strategy, and the one thing they all have in common is a fairly healthy profit.

So anyway, what I’ve done here is analysed the likely expenses and current rental income, and if our hypothetical investor was looking for positive cashflow from day one, I wouldn’t recommend going over $790,000 on auction day. This price will have him sitting at a relatively cashflow neutral position, so the further below that figure he is, the better off he’ll be. The cashflow analysis shouldn’t ever be the only factor in nominating a bidding limit, but still, that $790,000 benchmark is not so unrealistic.

So what do you reckon? A viable deal? Click that comment button just below and let me know your thoughts.

Posted in property investment, top posts of 2009 | 9 Comments »

Sleep at night factor

Monday, December 7th, 2009

Often, friends and clients will ask us about strategies and ideas around their investing. That’s great, because that’s what we’re here for. But, of course, there’s rarely a one-size-fits-all answer. Everyone has their own different goals, and their own different style.

And, their own SANF.

It’s a term that I first came across on the Somersoft Property Investment forum, about six or seven years ago. It stands for Sleep At Night Factor; a concept that measures in a practical sense the level of risk that you’re comfortable with. Ie, how well you can sleep at night with a given set of circumstances.

Those circumstances, for you, may come in the form of high LVR’s; or being negatively geared; or holding interstate properties; or renting to students; or buying five properties in a year; or any other scenario that has the potential to make you (or your partner!) just a little too nervous. With shares, for example, it may refer to using margin loans or CFD’s.

To me, this is perhaps the single most important concept to be aware of, especially when starting out. There is a lot to be said about pushing your boundaries and expanding your comfort zone, certainly, but not to the point where it becomes hard to sleep at night. Getting stressed about creating wealth just seems kinda counter-productive, y’know?

Posted in miscellaneous musings, top posts of 2009 | No Comments »

Conquered a fear of heights!

Friday, December 4th, 2009

Two weeks of the share trading game to go! Dave is just killing it now, sitting on $24,735 with most competitors sitting back around the $21,000 mark. But I’m now in the top three!

On another note,

I finally ventured on the tallest building in the Southern Hemisphere the Eureka Skydeck despite my fear of heights I did it, and gosh was I terrified when I went on The Edge, but it was an extraordinary experience that I won’t forget. Being on the 88th level was a very nerve ranking experience but the sky deck was very relaxing and the views were absolutely amazing, looking above the city, seeing all the city night lights was just gorgeous.

But then came the Edge, this was when the nerves really kicked in, being in a small glass box, that projects 3 metres out of the building, 300 metres above the ground and the glass I was standing on was only 4cm thick really made me nervous. The glass was all fogged up you couldn’t see through then all of a sudden you could hear a cracking noise and the glass begins to go clear.

The couple of minutes in the box felt like hours I was too scared to move from the spot I was standing my hands sweating from holding on to the rail so tightly, and I didn’t want to look down but I couldn’t help myself I had to which just terrified me more. Cars looked like ants and people well you just couldn’t see them. When the Edge experience had finished and I was back on the ground I wanted to kiss it, but it’s definitely an experience that I’ll do again.

Posted in house news, top posts of 2009 | 1 Comment »

Trading vs Investing (part two)

Wednesday, November 4th, 2009

I wrote recently about how the tax office decide whether someone is an investor or a trader, and promised to write about the advantages of each. If we look at this from a tax perspective, there are many benefits to being a trader:

  • The first is something called the entrepreneurs tax offset. This is claimable if you have a gross revenue of under $50,000 and record a profit. If you have a gross revenue of over $50,000 then your offset decreases until you have revenue of over $75,000 when it is no longer claimable. This basically means you can offset 25% of the tax payable on the profit that your business made.
  • The second is the 50% tax break for small businesses purchasing assets (over $1000) before the 01/01/2010. For example if you as a trader were to buy a laptop worth $1500 for trading purposes, then you could potentially claim $750 of it immediately, as well as the depreciation for the first year. This means you could claim $975 of the laptop in the first year alone!
  • In regards to depreciation of assets, you can claim more outright as a trader than you can as an investor. As an investor any assets purchased valued between $300 and $1000 must go into what is called the low value pool. This means that 18.75% of it is claimable in the first year and 37.5% is claimable in subsequent years. With a business assets up to $1000 in value can be claimed outright as a low cost asset!
  • With capital gain events, if you make a loss then you have to wait until you have another CGT event to offset those losses. If you are running a business with a gross revenue of over $20,000 (which you would probably want to be able to justify running your trading as a business) then you can offset your losses against other income to reduce tax. Of course you don’t want to be making losses but this is a handy advantage to have up your sleeve if the market tanks on you.
  • Lastly, sometimes it is easier to claim more as a share trader than as a share investor. An investor can hardly justify claiming large portions of internet costs, computer and costs, magazines etc if they are only making 2 purchases a year!

As an investor, however, there are still some advantages to consider:

  • Any shares held for over twelve months can become eligible for a 50% discount, meaning that you only need to pay tax on half of the gain made.
  • If you already have capital losses from previous events, these can only be used up against other capital gains. So this would be a time where being an investor could have a tax advantage over being a trader.
  • Record-keeping is often a lot easier, and you don’t need to account for stock-on-hand each year until it’s actually sold.

In many cases, as you can see, there is often an advantage in both sides and this is where it’s good to plan with your accountant which case you want to build.

Posted in shares and forex, tax and accounting, top posts of 2009 | No Comments »

Nothing to be scared of, here.

Monday, July 20th, 2009

Avid readers of the tax office legal database may have spied the release of a new Determination dealing with what we commonly refer to as hybrid trusts.

This is a follow-up to the draft released late last year, which we commented on as part of the House Rules newsletter at the time.

As per our explanation in that article, this final determination looks to be good news. We spoke with our legal advisors this morning to be sure, and they were as rosy as ever in confirming that the trust deeds and resolutions that we like to use still comply with what the tax office are looking for.

The determination in question deals with a few scenarios, none of which apply directly to how we usually do things. In each example presented, the trust has the ability to distribute income to a beneficiary in a discretionary manner, despite the units on issue; or, the borrowings were not used in full for the unitholder in question. In those cases, the unitholder is only required to receive a disproportionate amount of income, and thus their borrowings are not of a direct commercial nature and they incur an expense for the (potential or actual) benefit of others.

It’s also important to note that in the first example, we would suggest that (all else being equal) Paul’s wife would likely be eligible to claim the interest on her share of the loan to acquire her units.

Looking at that first example a little closer, we can draw a fairly clear line from that point. You see, the tax office were happy in that example to allow Paul to claim 50% of the interest incurred based on holding 50% of the units. It is not a far stretch to conclude that should he hold 100% of the units in that example, he would be able to claim 100% of the interest.

So; what we need to show is that the unitholders who borrow funds for the purpose of buying units in the hybrid trust with the expectation and entitlement of income, will indeed receive that income. The trust deed needs to be very clear in that requirement (as ours are), and of course, the distributions need to reflect that as well (as ours do).

This means that for investors who use their deeds properly, the hybrid trust can still be an excellent choice of structure in the right circumstances and this determination is nothing to be scared of. As always, they’re not a one-size-fits-all type of thing, so it’s always a good idea to speak with your accountant before choosing the structure for each investment that you plan to make. Or, if you are after further clarification on your particular situation as it currently stands.

~J.

Posted in tax and accounting, top posts of 2009 | 3 Comments »