Margin Loan Calculator

Margin lending can be a very effective way of boosting your investment portfolio if you have a limited amount of capital.  It allows you to boost your investment power, giving you the potential for higher gains. The flip side of that though is it can increase your losses as well as hitting you with interest and other fees.

In order to obtain a margin loan, you need to provide security, as you do when obtaining a home loan. This security can be in the form of cash, securities or some managed funds. A lender will apply a loan to value ratio (LVR) to each security, allowing you to only borrow as much as the market value of that share times the LVR.  E.g. if BHP had a LVR of 75%, and you had $10,000 worth of BHP shares, then you could borrow $7,500 against that.

The other main issue with margin loans is the danger of getting a margin call. If the price of your share goes down, bringing your LVR above the approved threshold, then the lender will insist that you either sell some shares or pay down part of the loan immediately to bring it back into line.

To assist with analysing the benefits of margin lending and how it could affect you, I have posted a spreadsheet on our site which will compare a portfolio with a loan with a portfolio without a loan, so feel free to check it out.

Note that this spreadsheet is a guide only, and there are various other things to consider when obtaining a margin loan, so if your keen on the idea of increasing your investment power, make sure you do your research first!


Tax Planning 2010

Dealing with some serious CGT for a client recently brought this topic to mind, and it's an important one. We've mentioned it before, but let's make it perfectly clear again now;

If you have sold an investment property, or if you run a business, you really do need to talk to us before the end of the financial year.

Tax is a cost of business, certainly, and making a profit generally means that you're going to need to share it with the tax office to some degree. However, there are always going to be ways of reducing that burden. And, of course, we'd love to help you with that.

The right tricks to use will vary from investor to investor. For some, prepaying interest will be helpful. For others, it won't, but buying a new car might be a better option. It's all circumstantial. Do you know what you need to be doing in the next three months...?

We can help, but only if you talk to us sooner rather than later. April is the best month to do this sort of tax planning; enough of the year has gone by to have a reasonable picture of things, and there is still time to implement whichever strategies are going to work best for you.

So! If you want to minimise your CGT or business taxes, get in touch with us now and we'll get things moving. Don't wait until July (or later!).


Property analysis #10 - OTP apartments

Woooo! Analysis number 10! I’ll try and make it a good one.

So this week, I’ll be sticking with the off-the-plan theme, but looking at an inner-city apartment. This one has a little twist though. Whilst we’re reaping the usual benefits of an OTP purchase, investigated in last fortnight’s post, we can also aim for significant cashflow benefits if we use this property as a holiday rental.

Turns out this OTP property in Adelaide is centrally located, with agent estimates of rental income looking quite attractive. I’ve worked on the following figures for rental income:

  • $450 a night for peak period (6 weeks), at 70% occupancy rate;
  • $250 a night for shoulder period (4 weeks), at 70% occupancy; and,
  • $180 a night for off-peak period (42 weeks), at 50% occupancy.

Had a chat to the agent about those estimates and they’ve been confirmed as realistic, based on their general holiday rental data for Adelaide, and taking into account the prime position of the real estate and the 3 night minimum stay (or 7 nights for peak period).

So, the combined benefits of the OTP purchase (almost no stamp duty, depreciation benefits) and the holiday rental setup (excessive rental income) neatly cover the rental expenses. When you also consider the additional depreciation for a furnished property, my figure shows that our investor might average an extra $85 in the pocket per week from positive cashflow; about $4,400 for the year.

It’s certainly a nice setup, but as usual, I should point out the risks.

Those agent estimates appear to be pretty reliable, but there are so many factors that could affect either the occupancy rate, or the nightly rent. One of these in particular, is how active you (or your agent) is with managing the property and getting tenants on board. In my opinion, you should make sure that you’re conservative with your estimates and factor in higher costs than you might expect. I've increased the cleaning, maintenance, body corporate payments and property management fees, as well as the interest rate we've found that many lenders won't offer the standard variable rates for higher-risk properties like this one.

Also, you’ll get a much broader range of tenants coming in and out of the property. This is unfortunately increasing your chances of, at some point or another, renting the property out to that tenant that we all dread; leaving the apartment an absolute mess, late rental payments, even skipping town without payment!

While there are things we can do to minimise the chances of this happening, such as requiring a deposit upon booking, there’s still an element of risk there. Make sure you’re comfortable with that before you jump into a deal like this. And while the average rental income is positive, you can expect long periods where you are behind the eight-ball due to the seasonal nature of the income.

So, have you had any holiday rental experiences, or known someone who has? I’m very curious about this one, so I’d love to hear from you if you’ve got anything to share.


ETFs & ETCs

In my last post I mentioned using diversification to manage risk in the share market. A simple way of broadening investments is by using ETFs & ETCs. These are Exchange Traded Funds and Exchange Traded Commodities. Both ETFs & ETCs trade on the ASX so are very simple to acquire. Using ETFs you can gain access to a portfolio of the top Australian shares,  different sectors, and international markets.

ETCs work in much the same way, but let you track the performance of the major commodities.

Like with any investment there are risks in investing in these funds, and if you want to get the feel of how they perform and how you can best use them to in your own investment strategies; why not join our share game, in which you can now trade both ETCs & ETFs as well as ordinary shares.

Good luck and happy trading!


Looking for tradies

We've noticed a sharp increase in renovation activity recently, as clients have looked to manufacture capital growth instead of simply waiting for the market to deliver it to them. Brilliant.

Some prefer the DIY approach, getting in there and doing it all themselves. Others still have paid what appears to be over the odds, to employ someone else to organise the whole thing from start to finish.

Most, though, seem to prefer taking more of a 'project manager' role, organising the various tradies and coordinating the reno without getting directly involved.

Often, this leads to clients asking us for recommended tradies and the like. We have the odd contact from our own experience but we're always keen to hear about your good experiences, as well.

So, do you have anyone who you can recommend to us...?


Contractors vs employees

Wazzup Guys,

The tax office has just updated their guide for contractors. There are a few key factors to find out whether you (or your workers) are a contractor or employee, such as the degree of control. If the worker’s payer has the right to instruct how, when, where and who is to carry out the work, then your worker is an employee. Another is see whether the worker is getting paid for the time they work or the result. Employees get paid by the hour whereas contractors get paid for the result of the work they conducted.

There's a few other things to look at, and while there isn't a lot different from before, it's worth knowing which side applies to your situation as this may have an impact on things like tax and paying super.

There are also links to information about PSI, or what many of you may know as the 80/20 rule. So, it might be worth having a read if this applies to you.


Property analysis #9 - off the plan

Ever considered buying off-the-plan? You know, buying the property before it’s even built, based on the existing plans for the property and your expectations of it. While there are potentially some great benefits to it, it’s certainly not a strategy without risk. Let’s have a look at what can be achieved though...

To demonstrate I’m going to look at this off-the-plan (OTP) listing at 2/4 Hillview Avenue in Rowville, Vic. Now this one in particular is already under contract, but I thought it’d still be a good one to analyse. Note already, that OTP doesn't have to mean inner city apartments - but we'll check out one of those next time.

So, I’ll look at what we could do after having it rented only after the first year of ownership; it might be faster, but for simplicity we'll assume that this will take a year to complete and be ready for lease. In this case, the only expense for the first year would be an approximate 10% deposit, in this case being about $46,000, and the interest on that amount. Don’t worry; our investor will be using equity in an already existing portfolio to foot the bill.

Alternatively, he could use a deposit bond, where an insurer will agree to pay the deposit on your behalf.

Another great benefit to purchasing OTP is the savings on stamp duty. In fact, you may have noticed whilst browsing realestate.com.au that almost all OTP listings proudly advertise the savings on the stamp duty you’ll pay on purchase. This is because stamp duty is effectively calculated on the value of the property at purchase. In the case of OTP purchases, this will be simply the land value, as the actual building hasn’t been constructed yet. For a unit like this one, it wouldn’t be unreasonable to expect only a few thousand in stamp duty, instead of over $20,000 for a completed townhouse at the same price.

After construction, we can also claim massive amounts in depreciation. Using our depreciation calculator, we can estimate about $17,000 total claimable for the first year after completion. This is due to the high quality fittings, and recent construction. You’ll find that with most new properties, and especially with OTP purchases, the tax benefits offered by depreciation can make a huge difference to your cashflow.

So, in the second year when the property is actually rented, our rough figures indicate that it might actually be just on the positive cashflow side; about $10pw after tax. Given the way that the Melbourne market is moving at the moment, with a little luck the completed property will already then be worth a fair bit more than what the investor has paid for it off-the-plan. This is one of the cool things about OTP strategies; you get to control a property and enjoy the capital growth, without actually owning it for some time.

While there are clearly many benefits to OTP properties, this kind of deal is certainly not without risk. It’s a bit of a wait before you can settle on the completed property, and during that time, things can go wrong. Property prices in the area might fall or become unstable. Also, the developer could fall short on promises or not meet deadlines. Worst case scenario, the developer could go bust and suddenly you’re left with nothing.

However, we do know that in most cases, the higher the risk, the higher the potential return. Purchasing off-the-plan could be something to consider as the next step in your investment strategy, so have a look into it. Never hurts to do some research. Let me know what you find.


New property investment forum

Hey! Another quick one from me this week.

We recently stumbled upon a new property investment forum. This place is actually brand new (opened this week!) and is still just finding its feet. So, we've jumped on board to offer our time, and our investment and accounting expertise for those who might be interested.

As a little background, the "B Invested" forum is run by Nathan Birch, an individual who recently retired from full-time work to become a full-time investor.

In his 20's.

Needless to say, we're big fans of both his style and his skill with making money from buying real estate. And, we're looking forward to seeing the forum grow and thrive and would love to see you there, too.

You can find the forum by clicking here. Get on board - we have.


Seminar discounts for our readers

Hey! We wanted to let you all know about a couple of seminars coming up that we're going to be involved in.

On the 17th March, Verix – March Property Investing Event - Tax Strategies. James will be speaking about tax strategies for investors with topics like capitalising interest, creative tax deductions, and different ownership structures. We've also negotiated a discount for our blog readers, so please email me directly if you’re interested.

Also, there is the Renovate & Profit Workshop on the 27th March, where you can learn about using renovation as a wealth creation tool, how you can get Real-Estate agents and tradies working for you and so much more. There will be a variety of speakers for different topics, and it certainly isn't all about us. Again, we've organised a 20% discount on this event for our readers and fans of our facebook page, so just shout if you'd like the promotion code for this one.


Managing risk in the sharemarket

Last post I talked about finding value in the share market, using indicators such as EPS & P/E ratio. This week I’d like to have a quick look at managing your risk.

If you are looking at investing for the longer term it’s important to do the research. It can be very tempting sometimes to be drawn in by a share with an extremely volatile graph that looks like it could make a big profit in a short time. However a graph is not enough for me to make a decision.  Generally when I am buying a share in a company I like to be able to write a written response to the question ‘Why am I buying this share?’

If I can’t come up with a response, with statements and evidence on why I think a share is a good buy then I won’t proceed with the transaction. Basic things I look for are:

  • Is the company actually turning over profits?
  • Is the share worth the price I’m paying?
  • Does it have consistent EPS & profit growth?
  • Does it have a decent amount of cash to support it?

Other things I keep in mind are diversifying within my portfolio and making sure I keep my profits and losses consistent, using a stop loss.

Once again, these principles are only a guide and are no guarantee, but they are principles that I myself find fairly reliable.