I'M 36, have $60,000 in savings and own a $400,000 apartment. I earn $50,000 a year from contract work. Without job stability, I'm reluctant to take on a mortgage. How can I build wealth?
You've done well to date for a person whose income is irregular. Job instability may well make it a challenge to commit to a mortgage but you could still make regular deposits to an investment plan without any sort of commitment. Another option is to invest in a geared share fund, which would provide the benefits of leverage without the necessity for you to make loan repayments. The internal gearing means these share funds can be volatile so take advice and make sure you understand the product before you invest.
We owe $140,000 on our home worth $300,000. We'd like to buy land and build a home to live in within the next few years. If we buy this land as an investment property now for the purpose of claiming interest, buying costs and maintenance fees, do we have to pay capital gains tax when we start building?
You don't pay CGT until you dispose of a property, so building on it won't create a CGT liability. However, if you move to the new place when it's built and retain the original home, you will be liable for CGT on any increase in the value of the existing home from the date you make it available for rent. You cannot claim interest, rates, etc, on the vacant block as it's not income-producing. But if you decided not to build on it and eventually sold it, they would be included in the base cost and reduce any CGT liability.
My grandmother recently passed away and left her home to my mother and her sister. My partner and I have offered to buy it. My mother wants to give/lend us her share of the property and we will borrow the rest. What would be your advice?
Take advice before you act because your mother's aged pension entitlements could be adversely affected if she is of pensionable age or within five years of it. Also, keep in mind that to be successful in real estate investing you should try to find a well-located property at a bargain price. By buying the deceased's property, just because it is available, you are restricting yourself. I suggest you look at what other properties are available before you decide to buy this one.
My wife and I earn $180,000 gross combined. We own a $500,000 investment property and also own our home worth $900,000. Our home has the full amount in an offset account, while the investment property has $150,000. I also have $150,000 in managed funds/cash. Our home needs major renovations costing $400,000. How should I finance the renovations?
If you have $900,000 in your offset account and you intend to remain in that home, simply withdraw the money in the offset account. This is a much better option than taking out a non-deductible loan for a private purpose. On the other hand, if you intend to rent out the house in the foreseeable future, borrow for the renovations as the interest would be tax deductible once the house is rented out.
Noel Whittaker AM is a co-founder of Whittaker Macnaught. Advice is
general and readers should seek their own professional advice.Contact noel.whittaker@whittaker macnaught.com.au.
In recent years I have come to believe that we "normal" investors have little or no influence on the price of shares. Do you think this is correct?
You have highlighted one of the basic differences between property and shares. If you buy a property you can improve it by adding value or ruin it by neglecting it. The sharemarket is a different animal entirely it will be influenced by a multitude of factors that are outside the investor's control. This is why a savvy investor will have a diversified portfolio and understand the way each investment type works.
Questions to: Ask Noel, Money, GPO Box 2571, Qld, 4000, or see moneymanager.com.au/ask-an-expert.
Frequently Asked Questions about this Article…
How can I build wealth with irregular income if I’m reluctant to take on a mortgage?
If your income is irregular and you don’t want mortgage repayments, you can still build wealth by making regular deposits into an investment plan without a long-term loan commitment. Another option mentioned is a geared share fund, which offers leverage benefits without you having to make loan repayments – but these internally geared funds can be volatile, so get advice and make sure you understand the product before investing.
What is a geared share fund and what are the risks for everyday investors?
A geared share fund uses internal leverage to enhance returns without requiring you to service a separate loan. That leverage can increase volatility and risk, so everyday investors should seek professional advice and fully understand how the fund works before investing.
If I buy vacant land as an investment and later build a home to live in, will I have to pay capital gains tax (CGT)?
You don’t pay CGT simply because you build on land. CGT is triggered when you dispose of a property. However, if you move into the new home and keep your original home and make that original home available for rent, you may be liable for CGT on any increase in the original home’s value from the date it becomes income-producing.
Can I claim interest, rates or maintenance on a vacant block of land I buy as an investment?
No. You generally cannot claim interest, rates or maintenance on a vacant block because it isn’t income-producing. If you later sell the block without building on it, purchase costs and upkeep would be included in the base cost and could reduce any eventual CGT liability.
My mother wants to give or lend us her share of an inherited property so we can buy it. What should we consider?
Seek professional advice first. If your mother is of pensionable age or within five years of it, gifting or lending her share could affect her aged pension entitlements. Also consider whether buying the deceased’s property is the best investment — successful real estate investing usually involves finding well-located properties at bargain prices, so compare other options before deciding.
Is buying a deceased relative’s house always a good investment for family members?
Not necessarily. Buying a deceased person’s property simply because it’s available can limit your options. It’s better to consider the investment merits — location, price and potential — and compare it with other properties available before committing.
How should I finance major home renovations: use my offset account or take out a loan?
If you plan to continue living in the home, withdrawing from an offset account is usually better than taking a non-deductible loan for private purposes. If you intend to rent the house out in the foreseeable future, borrowing for renovations can make sense because the interest would be tax deductible once the property is rented.
Do regular retail investors influence share prices, and how should that affect my investment strategy?
For the most part, individual 'normal' investors have little influence on share prices; the sharemarket is driven by many external factors beyond one investor’s control. That’s different from property, where owners can add or lose value through improvements or neglect. Because of these differences, a savvy investor should diversify and understand how each asset type works.
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