Tax trick to get a $1 million real estate for $8000 a year

Buying a $1 million investment property may seem daunting, but there is a perfectly legal way to pay just $8,000 a year for it.

In Australia, real estate isn’t just the best-performing asset class of recent decades – it’s something that can give you serious tax deductions and help you lower your tax bill as you build wealth.

Many people are afraid of buying a investment properties, and they are right to be careful. Buying real estate involves risks that are important to manage, but they can be.

The result can be a investment that accelerates your wealth building and accelerates your path to financial freedom.

owning a investment properties is not nearly as expensive as most people think, especially when you factor in the tax benefits available, with statistics showing the average cost of a $1 million real estate investment is $8,114 per year.

While owning an investment property generally comes at a cost, on the other hand, you benefit from owning an asset that grows in value over time.

Over the past 150+ years, the average growth rate of Australian real estate has been 6.3 percent, meaning that on the same $1 million property, the increase in value should average $63,000 per year.

The implication is that owning this $1 million real estate will cost you $8,114 per year, but will generate annual growth of $63,000, meaning the net benefit to you (benefit minus expenses) is $54,886 each year.

In this piece, I wanted to unpack what drives these numbers so you can see how this could work for you.

Initial cost of buying a home

When buying a property in Australia there are some costs to get things going. You have to pay stamp duty, which varies depending on the state you buy your property in, then there are building and pest inspections and legal fees to manage the registration of your purchase.

These costs, on average, equate to about 5 percent of the property’s value, which for a $1 million property means $50,000 in initial purchase costs. (This will be higher for states where stamp duty is higher.)

Ongoing costs of buying a home

When you own an investment property, you are on the hook for some ongoing charges. You have tiers for apartments and townhouses, or municipal rates for houses, water rates, insurance costs, property management costs, repairs and maintenance.

These costs average about 1 percent of the property’s value, so for a $1 million property, this equates to $10,000 per year in ongoing charges.

then you have you mortgage interest costsand depending on how your loan is structured, you may also be making principal payments, reducing your debt over time.

According to current data from at the time of writing, the average variable mortgage rate in Australia is 3.23 percent. Using an online calculator, we can calculate based on a $1,050,000 30-year mortgage that should cover your $33,915 annual mortgage interest.

Note that this assumes you borrow the full amount of your property purchase plus the 5 percent initial purchase cost to make a total loan of $1,050,000, and is based on interest-only mortgage payments to determine the actual show costs.

Depending on your situation, you can choose to take out a principal and interest loan where you pay off the debt over time. Taking this approach will increase the ‘cash flow’ costs of running an investment property.

But you should keep in mind that paying off debt is essentially the same as saving money, as each principal payment reduces the debt and thereby increases your net worth – meaning it’s a bit unfair to list them as actual expenses. to take.

But if you’re playing along at home, the average principal payment on a mortgage is about 2 percent of the property’s value — so for a $1,050,000 loan, that’s a principal payment of about $21,000 a year.

I also wanted to point out that borrowing the full purchase price of the property, as well as your expenses, is only possible if you are either using equity from another property, or following the path of the family guarantee or guarantor.

The reason the full amount is included in this example is to show you the full cost of the entire purchase. Buying a home with a cash down means your loan will be smaller and mortgage payments will be less than the figures above.

Financial benefits of an investment property

When you own an investment property, the benefits are twofold. You get a return on income through the rent paid by your tenants and receive a benefit from the growth in value of your property over time.

According to CoreLogic, the average gross rental income on real estate in Australian capitals as of June 2022 was 3 percent. On a $1 million property, that would be about $30,000 per year.

Looking at real estate growth over time, Westpac Data shows that Australian real estate growth returns have averaged 6.3 percent per year since 1870. Noting that this data is from 2019, and with real estate prices rising since then, the numbers would likely be significantly higher.

Real estate costs are tax deductible

When we look at the cost of running an investment property, there is a kick. If the costs of your investment property are higher than the income you receive, you can use this amount as tax deduction at your marginal tax rate.

Based on Australian marginal tax rates, if your annual taxable income exceeds $45,000, your marginal tax rate + Medicare levy is 34.5 percent. This means that for every dollar your investment property costs you, you will receive a $0.345 tax refund. If your income and tax rate are higher, you will get even more back at the time of tax.

This helps to reduce the after-tax costs of running your property as it essentially gives you back at least a third of what you pay.

So how much does an investment property cost?

Putting the above numbers together, I’ve outlined the expected average costs and benefits of owning an investment property.

Purchase costs:

Property Value: $1,000,000

Purchase Cost at 5 Percent: $50,000

Total Funds Needed: $1,050,000

Current income:

Gross rental income of 3 percent: $30,000 per year

Ongoing charges:

Ongoing property charges of 1 percent: – $10,000

Mortgage Rate: -$33,915

Total Cost: -$43,915

Cash Flow Cost / Net Income: – $13,915

Tax refund at 34.5 percent: +$4800

Net Holding Fee After Tax: $8114

real estate growth

Average annual growth of 6.3 percent: $63,000 per year

Net result

Based on these numbers, we see annual cost of owning a property of $8,114 per year and growth of $63,000, meaning the average net annual benefit is $54,886 per year.

Shout out that these numbers are based on a number of assumptions and that the past does not necessarily predict the future. But that said, you can tell from the significant annual gain that there’s plenty of room for you to still be ahead, even if some of the numbers aren’t quite as strong as described above.

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Buying an investment property is something that can significantly accelerate the speed at which you move forward. But it does carry risks that are important to manage.

You should be prepared for higher interest rates (the RBA is tipped) raise interest rates every month for the rest of 2022), keep in mind that real estate prices may have peaks and valleys from year to year, and make sure you are never forced to sell a home at a time when it isn’t right. This means that solid planning is critical so that you get the results you want when investing with real estate.

But done right, it can speed up your money success and go a long way in building the future you want.

Ben Nash is a financial expert commentator, podcaster, financial advisor and founder of Turning wealthand author of the Amazon bestselling book ‘Get Unstuck: Your Guide to Creating a Life Unlimited by Money

Ben has just launched a series of free online money education events to help you get on the first financial foot. You can view all details here and reserve your place

Disclaimer: The information in this article is of a general nature and does not take into account your personal goals, financial situation or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it, and seek professional advice from a financial professional if necessary.

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