The Reality About Rental Investments

"There are landlords who were reported to have lost over $43 billion within the last decade from rental investments"

The wealthiest investors have one thing in common, they are always eager to learn new strategies. We have the strategy for the mum and dad investors:

In a recent Australian newspaper article, there are landlords who were reported to have lost over $43 billion within the last decade from rental investments. Most of the properties they purchased are residential properties. This problem may seem like it’s not supposed to happen to them, surely they were able to achieve financial freedom when they invested in real estate. However, purchasing properties is not as simple as it looks. 

Before a home owner can make money from the real estate they invested in, they need to earn the amount used to cover the cost of the property. In a negative gearing market, the most profitable properties are commercial instead of residential. This is due to how commercial tenants can ensure a positive cash flow in comparison to residential tenants.

From the first day they occupy the space, you can already determine if they are able to generate enough income to cover the rent. Now, Investing in real estate requires proper planning if you want to create a positive cash flow it. As mentioned above, you cannot just purchase any property and expect it to make money right away. There are certain things to consider when looking for a commercial property.

Below are some of the things to consider when choosing a commercial property:

1. Determine the amount you are going to spend. Keep in mind of the 30 to 40% for deposit or equity of the commercial property.

2. Determine the type of property you are going to invest in. These can be a retail, industrial, or medical property.

3. Determine the right location for the property. Consider the cost of the space and the surroundings. When looking for a location for your property, you can also check other similar commercial establishment in the area. This can help you determine if your investment can generate a positive cash flow or not.

4. Determine the total cost of the property as well as the taxes when you are able to choose the three things mentioned above. Try to ask other commercial establishments how much the rent they are paying is. This will help you know the right amount to charge your tenants with.

5. The last thing to consider is to learn more strategies in investing in commercial properties. The wealthiest investors have one thing in common, they are always eager to learn new strategies. One strategy to consider is to utilise the tax deduction you will receive when you purchase any property.

This is only a short-term plan which should give you enough time to find the right tenants. For a long-term strategy, look for a commercial property which seems likely to generate a positive cash flow. If you have one which is able to generate at least a net of 8.5% in profit and the mortgage interest rate 6%, you are now earning money.

To clarify the sample mentioned above:

Your property might cost about $200,000 and the rent paid to you is about $20,000 per year. Your net return here is 10%. Now, if you purchase the property with a loan which has an interest rate of 7% per year, you can still earn $6000 per year which is 3%.

By following everything mentioned above, you should be able to break away from a negative gearing market and start creating a positive cash flow from your properties.

So why not contact Beyond Granny Flats today to find out how you can profit from rental investments

Source by created property mag: property investor. 

Property Investing & SMSF

Property investment & Self Managed Super Funds

"There are strict rules and regulations about renovating properties purchased with borrowed funds in an SMSF"

By now, most people in the “property world” know that you can purchase an investment property in a self-managed superannuation fund (SMSF) with borrowed funds. What most people don’t know is that there are strict rules and regulations about renovating properties purchased with borrowed funds in an SMSF. If you break these rules, your SMSF could be deemed “non-compliant” which results in a tax bill of 45% of the SMSFs assets coming your way.

I have written articles in the past that expound the tax benefits of this strategy and it is an area of our firm that continues to grow at a rapid rate. The current legislation makes it very clear that the property cannot be changed, which means that extensive renovations are out of the question.

If you have sufficient cash in the SMSF, you can do almost anything you like with the property. SMSFs are also prohibited from maintaining or running a business, which puts renovators in a precarious situation. According to the Tax Office, a SMSF cannot be in the business of property development. Furthermore, it cannot buy a property, improve it and sell it because that would most likely be considered as carrying on a business. Undertaking too many renovations and selling too many properties will attract the attention of the Tax Office. Unfortunately the law does not give a specific number of properties that a SMSF can buy or sell in any given period, and the judgement of a “business” is determined on a case-by-case basis.

Whilst you can’t renovate a property using borrowed funds, you can use those funds to undertake any necessary repairs, but not to “improve” the property. The Tax Office insist that money under a limited recourse borrowing arrangement (LRBA) applied for the acquisition of an asset can be used for expenses incurred in maintaining or repairing the asset, but not to improve the asset, as this would fundamentally change the nature of the asset used as security by the lender.

Below are some examples the Tax Office has provided to help determine what is a repair and what is an improvement. Interior A fire damages part of the Exterior The guttering on the house Repair Example Improvement Example kitchen. Replacement of the damaged part of the kitchen with modern equivalent materials or appliances would constitute repair is replaced with the modern equivalent and house is repainted

Structural Damage A cyclone damages the roof A fence is replaced using modern equivalent materials. If part of replacing the fence also included the addition of a gate to provide another access point, this would not be regarded as an improvement of the house. Replacement of the roof in its entirety with the modern equivalent is a repair, as it is restoring the asset to what it was Complete Destruction A fire destroys a three-bedroom residential house. Rebuilding a broadly comparable house is not an improvement, as it restores the asset to what it was before the fire

As a Landlord A residential house is acquired under a LRBA and is rented out for a number of years. As the area is now a real estate hotspot, a decision is taken to renew the kitchen, which although functional, is significantly out of date and showing wear and tear. The design of a kitchen is improved and modern equivalent (rather than superior) materials and appliances used

If you do have sufficient funds to go down the path of renovating, you need to make sure all that all materials are purchased in the name of the SMSF.

The SMSF can only pay you for your time if you are appropriately qualified, have the necessary licences and you perform the same services to the general public as a business. If you don’t meet this criteria, you need to undertake the work for free, or engage the services of a suitably qualified person.

Also, you can never live in the house, even whilst you are undertaking the renovations.

Source: Ellingsen Partners.