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Home ownership – an easy way?

I have been trying to save the deposit to buy a house but I am finding it too hard because price rises seem to knock out the progress I have made in my bank account. I am 25 years of age and live at home but my family has taught me the value of home ownership.

Unfortunately, I can’t see myself buying the kind of place I would want to live in. My dad says I should become a landlord and live at home because he believes the tax deductions could make it easier for me to afford a home in the area I am looking to eventually live in. What’s your view?

I think being a property investor, which is also called being a landlord, is a good option provided you go in with your eyes open and you do your homework. Your dad is right that the taxman can help you by making the interest charges on your loan and other costs in being a landlord, minus the rent collected, a nice tax deduction.

Basically, you calculate your ‘loss’ on the transaction of being a landlord in debt to the bank (where the rent is less than the interest and other costs), and you deduct this loss from your working income.

This could mean you have paid too much tax. This ends up delivering you a tax refund and you can actually inform your paymaster plus you have to fill in a form, and you can reduce your weekly or fortnightly tax bill. This can help you cope with the negative cash flow from the rented property.

Now if you do this for less than six years and you don’t have another property you live in, you could avoid capital gains tax.

So, as you can see, being a landlord living with mum and dad is not a bad strategy as long as you know about the tricks and traps of having a tenant.

By the way you can sometimes find properties that are quite cheap but the rents are also pretty good. In these cases the rent could be higher than the interest charges and other costs. This is called a positively-geared property.

Geared means that the property has debt and when the rent is less than all the costs, it’s said to be a negatively-geared property. Why do people give themselves a ‘loss’ with a property? Well, they’re looking for capital gain.

Go to websites such as Residex and RP Data to find out what are the average price rises over a five- to 10-year period for the suburbs you like. This could help you make up your mind about where you should buy. Ask lots of questions and find lots of answers before you jump into the landlord role and good luck.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today. 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

 

Published on: Wednesday, June 16, 2010

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