Home' API Magazine : December 2014 Contents 30 n APIMAGAZINE.COM.AU n DECEMBER 2014
Cate Bakos Property
It’s interesting, Rose, that you feel you’ve
made a mistake. Technically you have,
but when I look at the calibre of the
properties you’ve bought and the growth
you’ve experienced since purchasing
your Cammeray property in 2008, it
hasn’t all been bad.
The issue you’ve been focusing on
is the lack of deductibility in your
Cammeray property. However what you
haven’t considered with that positive
cash flow ‘issue’ is the fact that you’ll
need your property portfolio to balance
in terms of cash flow, and this property
will be able to aid that. If every property
is negatively geared, your borrowing
capacity will hit a brick wall and your
journey will come to a sudden stop.
So rather than advise you to sell
your Cammeray property, I’m actually
advising you to enjoy the positive
cash flow and the counterbalance it
enables alongside the negative cash
flow properties, which you’ll later add
to your portfolio, including the already
purchased Rushcutters Bay property.
In your ‘fork in the road’, I believe you
have the option to own five investment
properties. I’ve formulated this strategy
based on four main goals:
ffTo keep building your portfolio as you
said you would like to.
ffTo avoid further cross-securitisation,
in order keep your options open in
terms of where you live and if/when
you choose to sell.
ffTo keep your overall cash flow as close
to neutrally geared as possible.
ffTo diversify your purchases so that
you have exposure to all eastern states.
To give you good options now while
you’re a busy professional, and later in
relation to where you decide to live once
you get closer to retirement.
The (proposed and hypothetical)
breakdown of properties in your
portfolio will be:
Cammeray, NSW ....................... $600,000
Rushcutters Bay, NSW .............. $656,000
Kensington, Vic ......................... $750,000
Ascot, Qld ................................... $350,000
Geelong West, Vic .................... $350,000
Your overall debt would be $2,155,000
and at five per cent interest rates, would
cost $107,750 per annum. Your rental
return, based on the typical yields in
each nominated area, would be $121,160
per annum. Your own rental costs per
year would likely be in the vicinity of
$30,000 to $35,000 while you’re renting.
I’ve also apportioned 1.2 per cent of the
total portfolio value to cover the other
Despite the raw interest and rents
showing that you’re positively geared,
your calculated holding costs based on
the above 1.2 per cent equate to $32,472
per annum. This then makes the total
portfolio negative cash flow before tax.
Obviously while you’re working you
can enjoy the benefit of the negative
gearing and any associated depreciation.
When you do eventually face retirement
you can then make some decisions
about letting go of your principal place
of residence in Rushcutters Bay and
pursuing the western Sydney property,
or whatever your wish is then.
You would be seriously advised to
consider the benefits of fixing some
of your loans – certainly the ‘buy and
hold’ properties such as the interstate
ones. Your exposure to debt in this low
interest rate environment is attractive
now but could change for the worse if
interest rates increased. You’d also be
advised to use the $350,000 in equity but
to have each loan secured only against
each property and not cross-secured.
Your mention of using other lenders is
interesting but not necessarily crucial.
Any lender could offer standalone
loans. A line of credit for the $350,000
would be a good idea. That way you
only pay interest on the amounts that
are drawn down. You’ll need to carefully
note which portions are used for each
property, so that your tax position is
clear for every asset. In addition, you
would be advised to utilise an offset
account, so that your earnings and
savings offset your daily interest, and
your quest to reduce the debt is aided
optimally. While these properties are
investment properties, you shouldn’t be
making any early repayments. Instead,
channel all of your savings into your
I’d recommend you keep Cammeray
and Rushcutters Bay – and hold both
as investment properties for now.
While your Cammeray property would
be positively geared, this gearing will
enable you to balance your cash flow
across the portfolio and it will enable
you to comfortably hold your more
aggressively negatively geared future
purchase, including Rushcutters Bay.
To manage your cash flow sensibly, at
least while you’re working, you’ll need
to rent. Given you love Rushcutters Bay,
a nice one-bedroom property there will
cost you about $550 to $650 per week.
Your cash flow and tax related benefits
will outstrip that of living in your
Rushcutters Bay apartment.
I would apportion the $350,000
equity into three deposits for property
purchases as follows:
First of all a growth property in
Melbourne’s inner northwest/west,
where the yields are stronger compared
to other parts of Melbourne. Your next
move to diversify and invest in a slightly
stronger yielding city asset could be an
apartment in Brisbane’s inner north.
For example, the blue-chip suburb of
Ascot on a five per cent rental yield;
$350,000 with $330 per week rental
income. My reason for selecting Ascot
is that this suburb is close to the CBD
and has strong tenant demand. Finally,
to diversify into a smaller secondary
city in another state again, I’d consider
a sensible townhouse purchase in an
area where your returns are likely to be
closer to neutrally geared.
THE NUMBERS | ROSE DENNING
Loan on the
$1,051,000 $45,000 $683,000 $656,000 $580
Principal place of residence (PPOR).
The Cammeray lounge
FORK IN THE ROAD n Rose Denning
Links Archive November 2014 January 2015 Navigation Previous Page Next Page