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Selling A Property To Fund Australian Real Estate Investment Trusts (A-REITs)

Discussion in 'Business, Investment and Economics' started by vyaw2003, May 30, 2016.

  1. vyaw2003

    vyaw2003

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    Hi,
    I asked this exact question on a property investing forum and got zero responses. Hopefully this time I will have more luck.

    In last months Money magazine, I really enjoyed reading about Australian Real Estate Investment Trusts (A-REIT’s). This type of investment interests me but the article lacked enough information for me to make the jump. This type of investment is hard for a mum and dad type investor because a bank doesn’t give you a loan for $100k for a liquid type investment.

    Let’s visit my specific circumstances. I have a small unit that cost $60k. The loan is now fully paid off, suppose I sell it because it is under performing. After outgoings it currently returns $2,905 (1.66%). The costs that went into the property total $20k for the time I had it. I sell it for $175k, Real Estate commission and other charges equate to $15k. The profit is $80k, I will have to pay CGT on 50% which is $40k. I have a taxable income of $135k so my tax rate is 39%. So from the profit of the sale I will have to pay $15.6k in tax. So the cash after the sale is $144.4. I now take all of this money into 2 different low risk A-REIT’s with the average annual return of 10-15% ($14.4k- $21.66k). So based on these approximate figures, I would be crazy not to sell and invest in A-REIT’s?? This is a cheaper way to buy a slither of a Sydney property which I simply cannot afford.

    I would appreciate your thoughts of experiences investing in this.
     
  2. trainspotter

    trainspotter

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    Why sell it? Why not leverage against it and borrow 100% on another investment property in an area that is returning 8-10% (first mortgage) and not necessarily in Sydney? I see no reason as to why you would want to pay 15.6k CGT to the guvmint for what. You have capacity to service the loan @135k per annum ??

    Based on giving 50% of your profit away through CGT based on your income ... have you calculated as to how long it would take to return this through an REIT??? Let's say it is 10% @ 144k. You do the maths !! 1 whole year before you claw back what you had to start with. Let alone the tax deductions you could claim if you BUILT a home (depreciation, interest component during the course of construction etc through a quantity surveyor)

    Let's say you buy a block for 150k and put a 350k house on it and the builder wants to rent it back as a Display Home for 40k per annum?? Where is the downside in that equation? 8% all day long on RoR let alone Cpi increase or profit margin on the build.

    I think you need to talk to your accountant as your reasoning is not making sense to me. :confused:

    P.S. Adding another 14.4 to 21.66k to your income is going to do what exactly? MORE TAX !
     
  3. qldfrog

    qldfrog

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    "Based on giving 50% of your profit away through CGT based on your income"???
    of course not, you would be taxed on 50% of your profit.
    so 25% at the most, and as you know, the returns on RE are pathetic on average, and not talking about the hassle;

    A right point is that you could try to mitigate the tax effect by offsetting with CG tax losses if any, or time it with lower income in a way or another.
    On a side point, I am not sure you will get the quoted returns on REITs 8/9 % at most I would say.
    DYOR
     
  4. Toyota Lexcen

    Toyota Lexcen

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    most agents charge about 3% sales commission and a lot do advertising inclusive in that,

    doubt if any of the REIT's return 10-15%

    is your rent too low for property?
     
  5. trainspotter

    trainspotter

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    qldfrog ... read it again :banghead: 50% of his profit of 80k is 40k and based on his income of 135k =39% CGT = $15,600

    Also let alone the 15k you are sacrificing in RE comms and bits and pieces. There is another year before you see any RoR :eek:

    SO you are now 2 years down the track and back exactly where you started :eek:
     
  6. skc

    skc Goldmember

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    I don't know if you should anchor your decision on this.

    Past return is no guarantee of future return. The REIT's dividend flows are pretty stable in stable times, but they are now 3.5-5% unfranked. To make up your desired 10-15%, you will need 5-10% capital gains. You may get that in some years, or you may lose 10-15% in any given year.

    REIT's dividend will always be higher than the net rental income from physical properties.... but that shouldn't be the main criteria...
     
  7. qldfrog

    qldfrog

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    indeed read again your post, error is humane but you wrote what you did => 15.6k of tax is NOT 50% of an $80k profit.
    :banghead: indeed
    in any case, the issue for the poster is:
    is 15.6k too much to loose vs hypothetic higher returns on REIT.
    At no time did we consider RE move and I believe we all assume that the REIT would follow that IP for computation purpose;
    One advantage I see with REIT is risk spread but it does not come cheap and REITs are often leveraged which can play both way
     
  8. trainspotter

    trainspotter

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    Oh dear :banghead:

    Did you read after the dots?

    ERGO 10% @ 144k = 14.4k and then I wrote ... "You do the maths !! 1 whole year before you claw back what you had to start with" as in the 15.6k on CGT based on his/her/inanimate object income !! SHEEESH !!

    If this is too hard for you to comprehend I suggest I reword it for you to understand ...

    Based on your income of 135k and on a tax rate of 39 cents in the dollar you will incur a CGT liability of $15,600 as you will be taxed on 50% of your profit. Better now??:rolleyes:

    Not just 15.6k in CGT old mate PLUS the 15k in RE fees so he/her/inanimate object is now 2 years behind the J curve bellend wassa me dingy !!
     
  9. Junior

    Junior

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    Take an interest-only loan against the property to invest into a diversified portfolio of shares and/or managed funds (can include REITs in the portfolio). Direct surplus cashflow into the portfolio to reduce risk and build equity in the portfolio using dollar-cost averaging.

    This is tax-effective and will give you a diversified portfolio over time. Interest rates are at record lows, not a bad time to use debt as long as you have safeguards in place to avoid any negative-equity situation.

    Don't sell the property or portfolio until you are on a lower tax-rate, or until you need the money.

    If implemented you should intend to hold for a minimum 7-10 years IMO, and should be able to pay off the loan using surplus cash flow from your salary....not rely on rental income or dividends/distributions from the portfolio, these should be reinvested.

    DYOR, this is not advice, just a suggestion.
     
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