Call us on 1300 794 893

Your Money

Your property investment questions answered

I am trying to convince my 24-year old daughter who lives at home (and we are happy) to invest in property. She has finished university and has started a good job with good pay, and so I want to encourage her to buy a property to rent out that maybe she would like to live in one day. I don’t want her to waste her money. How should I convince her?

You are a good dad and I commend you for talking to your daughter about starting early in wealth building. I think I would talk to her about being financially independent, which is important for women, and also the value of getting in early, especially when she currently lives at home. Once you convince her of the value of investing in property as a long-term source of wealth, I would then argue the tax-effectiveness of borrowing to invest in a rental property. Show her that the interest on an interest only loan, which most professional investors use, plus any other related expense for running the property, are added together and deducted from her income from work. This will reduce her taxable income and result in a bigger tax refund. Better still, she can work out this potential refund and fill in a form her paymaster can access, which will mean her fortnightly tax can be adjusted so she can receive her annual tax refund in smaller doses in each pay packet. This in turn improves her cash flow, which helps her meet her monthly repayments. You should take her along to a mortgage broker or a bank and see what she can borrow and work out the repayments to see how it will affect her material life. You could also take her to an accountant so she can see how tax-effective the proposition is. In fact, introducing your youngsters to professionals can open up their eyes to the world of money information that can give you a life advantage for the rest of your life. There are also websites such as Residex which can give you the average rise in house prices per annum in various areas, and this can be used to show your daughter what can happen to its value over time. You can use this equation, but simply put in the figures that apply to where she is looking. Say she buys an apartment for $400,000 and she borrows at 6% fixed for five years. She would be up for $24,000 a year in interest or $2,000 a month or $500 per week. If the area rises by 6% per annum, then the value of the place could double in value every 12 years — that’s 72 divided by 6. If it rose by 8% per annum. then 72 divided by 8 is 9 and so the value of the place doubles every 9 years. This is called the rule of 72 and is used to work out doubling rates. Let’s take the latter example. The property would be worth $800,000 after nine years and $1.6 million after 18, and $3.2 million after 27 years, etc. This could be a powerful way to get your daughter interested in property and investment. Obviously you need to pick the right areas, but some homework will show you the way.

 

Peter Switzer

Published on: Wednesday, July 24, 2013

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300