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CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Can I Afford it? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Property Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Whose Name Should I Buy it in? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Tax Differences between Different Ownership Structures . . . . . 6

What Type of Loan is Best? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

How Do I Protect my Assets? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Selecting a Suitable Investment Property . . . . . . . . . . . . . . . . . . . . . . . 10

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This e-book aims to help you make an informed decision about purchasing an investment property. We do this by helping you answer 4 critical questions:

Can I afford it? Whose name should I buy it in? What type of loan is best for my circumstances? How do I protect my asset?

Only after answering these critical questions should you then make your investment. Often people jump straight into buying a property without the proper research. It is only later that they discover that the investment decisions made were not the right ones. Mistakes made in purchasing an investment property are extremely difficult and costly to undo. Due to this, generally the decisions that you make at the start are the ones that you are stuck with. You should NOT make an investment without expert investment property advice as the wrong decisions can cost you hundreds of thousands of dollars.

Introduction

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Can I afford it?

Firstly, you need to work out what you can afford. This is done by analysing the cashflow and the tax impact of the investment. Many people work on the amount the bank says it will lend them to determine what they can afford and this is dangerous. You must do the numbers properly to work out what you can actually afford. Typically, a bank will lend up to 80% of the value of a property, provided that you have the income to support this debt. However, just because the bank approves the loan, doesn’t mean you can actually afford it in reality. You can often get a loan at greater than 80% of the value of the property with the use of mortgage guarantee insurance or by using equity in another property. Mortgage guarantee insurance is a one off cost and should be avoided.

It’s surprising how many people enter into debt without actually reviewing their current cashflow position. The best way to know that you have the cashflow surplus to service additional debt is to complete a budget that shows all your income and expenses. You can this handy spreadsheet which is a good start in assessing your current cashflow position. Once you know your current cashflow position, you need to analyse the impact of the proposed borowing and investment. Having a detailed analysis of the cashflow and tax benefits of the property (with the debt) will enable you to determine how this fits into your existing budget and cashflow.

It is extremely dangerous to just look at the weekly cost and say “I can afford that”. Remember this figure is an

after tax figure, you may be waiting until you lodge your tax return to get your tax refund. There are strategies

available that will allow you to get your tax benefit throughout the year without having to wait.

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Property Investment Analysis

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The correct ownership has a massive impact on the after tax returns of your investment. This is not just in terms of

the benefits you may receive from negative gearing or depreciation. Many people do not consider the capital gains

impact on the eventual sale of the property and this can result in paying hundreds of thousands of dollars in tax.

Too many people make a simple decision to purchase a rental property in their own name/s without fully considering,

or fully understanding all of the options. You must consider the capital gains tax position on disposal of the property

in your decision making. A small tax benefit in the early years is often well and truly outweighed by a massive capital

gains tax bill upon disposal.

When looking at the ownership structure for your needs take into account taxation and asset protection, and

consider all options including self ownership, joint ownership, tenants in common, use of a company or trust and

also using your super to buy property via a Self Managed Super Fund.

The ownership structure also determines the amount of asset protection you have, after all what’s the point in

creating wealth if you end up losing it? We discuss the asset protection aspect of your investment ownership

decision further below.

Who’s name should I buy it in?

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This table shows the significant tax differences between the different ownership structures.

It is not just tax considerations that come into play when making your investment ownership decision.

Entity Individual Individual Super Fund Super Fund

(in pension phase)

Tax Rates 39% 47% 15% 0%

Loan Value $343,200

Purchase Costs

Purchase Price $429,000

Purchase Costs $2,797

Stamp Duty $0

Total Purchase Costs $431,797

Selling Costs

Agent $19,621

Legal Fees $600

Total Selling Costs $20,221

Selling Price In 15 Years $891,860

Building Allowance

15 Years At $7,250 $108,750

Capital Gain $548,592 $548,592 $548,592 $0

Discounted Capital Gain $274,296 $274,296 $365,724 $0

Tax Payable $106,975 $128,919 $54,859 $0

Net Cash Position After Sale $421,464 $399,520 $473,580 $528,439

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It is not always simply ‘the lowest interest rate is best’. You should have in place a debt management strategy. The

best type of loan will be the one that fits your debt management strategy.

Debt management is critical to your long term wealth creation. The amount of interest you pay over the life of a

loan can be hundreds of thousands of dollars. The length of time it takes you to pay off a loan is the critical factor

to how much interest you end up paying, not the interest rate you are paying.

You need to make sure that you have a strategy in place for ALL of your debts. Often people will be juggling a

number of debts and you need to not only keep them all under control, you must have a strategy in place to

ultimately repay them.

You need to have considered deductible versus non deductible debt, interest only versus principal and interest,

flexibility to allow additional repayments, re-draws and offsets, as well as flexibility to allow for any changes in your

circumstances.

Your debt management strategy and ultimately the correct loan structure for you will be determined by cash flow,

tax considerations, ownership structure and your long term financial strategy.

It is critical to have the correct loan structure, as well as the correct loan type and strategy to ensure that your debt

is actually helping you to create wealth.

The table below shows what a loan will actually cost you in interest. Compare this to being able to reduce the loan

term to 15 years by having an adequate debt management strategy. You can see the difference adds up to over

$240,000 between a 15 year loan and a 30 year loan. You can see why the banks love you taking out a 25 or 30

year loan.

Loan Value $343,200

Interest Rate 6.50%

Loan Type Principal and Interest

Term 15 years 20 years 25 years 30 years

Monthly Repayment $2,990 $2,559 $2,317 $2,169

Total Interest Paid $194,935 $270,914 $351,993 $437,733

What type of loan is best?

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Protection of your investments is another critical factor that is often overlooked. There is no point in putting in the effort to create wealth if you do not protect it and end up losing it. This starts with making sure your ownership structure is correct. Certain structures provide protection if you are sued, go bankrupt or your business fails. You don’t necessarily have to lose your investment if things go wrong.

Being unable to work for a period of time or permanently, due to illness or injury could mean you cannot make you loan repayments and ultimately lose your property. As part of protecting your assets you need to have adequate personal and general insurance policies in place. This is not just insurance over the property itself, but also your personal insurances.

You need to make sure you have the correct insurance and that they are for the correct levels of cover, ownership and premium structure.

The personal insurances you need to have in place include:

Income protection Life insurance Total and Permanent Disability Trauma

Wills and enduring powers of attorney are critical aspects of your asset protection. Not all assets automatically form part of your estate when you die. The ownership structure of your assets will determine their treatment upon your death. You want to ensure that your assets end up with who you want to have them.

Not all assets fall within the jurisdiction of a Will. The table below explains how various types of assets are dealt with upon a person’s death.

Asset Structure Can be included in Upon death

Individually owned assets

Will

Tenants in common

Will

Jointly owned assets

Assets automatically pass to surviving owner

Superannuation

Trustee discretion or a Binding Death Nomination

Life Insurance (non-super)

Policy owner, unless the policy owner is the life insured

Interests in Trusts

Trustee discretion

How do I protect my assets?

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Asset protection is the foundation for your wealth creation, without it you are building a house of cards which can easily collapse. Build your wealth on a solid foundation that is protected in the event of unforeseen circumstances. What if you couldn’t work for a period of time, or you passed away – what happens to your investment, and your family?

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Only after addressing these four questions should you move on to actually selecting and purchasing a property. It is important that you remove the emotion from your decision. Look at the property purely from an investment sense and focus on the numbers. Firstly, work through the type of property that you would like to invest in. There is actually a fair degree of property types within the direct property investment space. Your options include: Residential House Inner city apartment Town House Unit Commercial Industrial Office Retail As you have addressed the cashflow of the property as part of answering ‘Can I Afford It’, you can now assess: Rental yield (pre and post tax) Property condition (will minor or major repairs be required) Ability to attract quality tenants Location with a long term history of capital growth Ease of re-sale

The condition and age of a property are important factors. Older properties may have significant, ongoing repairs which can impact both cashflow and investment returns. Newer properties will have greater tax benefits through depreciation and tend to have less maintenance expenses. All too often we see people who go out on their own and simply purchase a property without seeking advice first. Once a purchase has been made it is usually too late to correct the mistakes. Making a property investment is a serious commitment and a big decision - you need to make sure you do it correctly.

Selecting a suitable investment property

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Based in Melbourne Australia, Business Concepts Group Pty Ltd (BCG) is passionate about helping people reach their

financial goals and live the lifestyle that they want to live. BCG aims to develop long-term, on-going relationships

with clients by working together as a fantastic team with complimentary expertise to help them achieve their goals.

BCG provides expertise on services such as Business Development, Financial Planning, Property Investment, Property

Development, Self-Managed Super Funds (SMSF) and Lending Services. Furthermore, BCG publishes a Financial News

and Views and SMSF News and Strategies podcast every month, delivering the latest news on Taxation, SMSF and

different Accounting issues.

Suite 1, Level 1, 333 Whitehorse Road BALWYN, Victoria,3103

03 9861 4200

admin@buscgroup.com.au

www.buscgroup.com.au

Speak to us to ensure you have those 4 critical questions answered: Can I afford it? Whose name should I buy it in? What type of loan is best for my circumstances? How do I protect my asset? Let us help you with the selection of a property investment.

Contact us today!

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