Goodbye Renting
Page 16
payment of your rent, keeps the premises tidy and makes sure
any maintenance issues are reported and/or addressed.
All these qualities will assist you into your own home because you
are conscientious about your surroundings. By paying your rent on time
and the correct amount, you are demonstrating that you are reliable with
bills. If you don’t think it will count that much when it comes to buying
your own house, you need to think again. Your reliability can be
reflected by a good reference from someone who is a regular payee.
Who better than your own landlord/lady?
I recently heard of a story where an elderly landlord left his
investment property duplex to his tenants in his will. The
tenants had never caused any undue stress, always paid their
rent on time and looked after the property as though it was
their own… so the deceased owner left it to them so that it
would be their own.
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2. If you do decide to buy an investment property you’ll discover
that a good tenant is one you want to hang onto.
Most owners would rather have a good long-term tenant paying less
rent than a difficult one paying more. I know this because as a good
tenant I have been rewarded for my efforts. Now as a landlord, I cherish
a great tenant.
In addition, good tenants deserve to get a quick response to
maintenance issues that may arise to ensure they remain happy and
hopefully will extend their lease.
The dream tenant
One such case of finding a dream tenant was just after I had
completely, and I mean completely refurbished a townhouse. Everything
had been replaced, from the internal walls to the kitchen, to the
bathroom. New air-conditioning, curtains, carpet, paving and doors -
there were all brand new.
I placed an advertisement and received a number of good potential
applicants, but there was one that I just could not ignore. It came from a
single mum with a little girl. She included a long handwritten letter with
her application declaring her difficulties in getting a place to live
following a disastrous share arrangement with a friend. The problem
involved a default in rent which resulted in a notification to TICA ( For
those people who are not familiar with TICA it is a national default data
base that notifies real estate agents of problematic tenants), thus making
it very difficult for her to get a real estate agent to take her on as a
tenant.
Her letter was sincere but at the same time desperate and I knew
exactly what it was like to be without a home, with a child, and feeling
as though the whole world was working against you.
So against all advice from associates in the real estate business, I
decided to let the property (on which my husband and I had worked
tirelessly for over six months), to someone who was potentially a risk.
Her gratitude was immense, but I really didn’t want her to feel so
grateful. At the end of the day she was still going to be paying me to live
in what was essentially my property. If anything, she was doing me a
favour… and she really did do me a favour by being one of the best,
most reliable tenants I have ever hand. She stayed with me for nearly
five years, got a good job, settled her daughter in the local school and
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found love. This was the ideal tenant who paid her rent without question,
kept the place in exceptional condition and caused absolutely no trouble
whatsoever.
Incidentally, the only reason this wonderful tenant decided to leave
boiled down to the fact that the adjoining townhouse had been sold to a
lady with two dogs and the dogs barked incessantly. The noise became
too much and she decided to relocate for some peace. I didn’t blame her!
For several months both my tenant and I had sent complaints to the
Bodies Corporate, the local council and the owner of the dogs, to no
avail. The owner of the dogs was also an owner of the unit and for some
reason or other believed she had the right to keep two dogs regardless of
the body corporate by-laws. While the drama played out my poor tenant
was the one who had to endure the constant noise of two barking dogs,
until eventually she could stand it no more and gave notice to leave.
This wonderful tenant moved out of the townhouse and left it in
pristine condition after five years of living there. I was able to let it
immediately (if I could just find a tenant who could put up with yapping
dogs!).
This is the best a tenant could be and as such deserve to be rewarded
with great references.
Problematic tenant
On the downside, I have also taken on a woman who was so desperate
for a place to rent that she rang me at 7 am in the morning, was the first
to be waiting on the front porch and she wanted to sign up before I had
unlocked the door!
She told me she had just come out of a
relationship, had two small children and worked
part-time. She also told me that she had applied to
several real estate agents over the course of three
weeks and not received any calls back. At the time
she was living in her car with her kids.
My heart went out to her. She looked absolutely
desperate and browbeaten. How could I say no?
Again, the townhouse had just been painted with the
installation of new carpet, dishwasher and
accessories. In the first few months she was a good
tenant who regularly paid her rent and seemed to look after the place (on
the surface). Then we started to get complaints by other tenants and
owners about noise, uninvited guests and concerns about the children’s
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welfare. During an inspection I was alerted to a large gash in one of the
doors which required major surgery. After several breaches, complaints
by neighbours (who were also my tenants) and numerous visits by police
about rowdy guests (not on the lease) who were living on the premises, I
was eventually forced to give her a ‘notice to leave’.
When I arrived on the day of the hand-over I was gobsmacked by
what awaited me.
A bear can had been deliberately cut to create a serrated edge. The
edge of the can was then scraped across the entire lounge room wall with
obscene words. The newly painted walls and doors were heavily gouged
and marked. The kitchen was not only filthy but the brand new oven was
badly damaged. The new carpets were stained and rubbish was left
inside and out. And to make matters worse, the tenant was still on the
premises in a state of inebriation with no sign of making a move to get
out.
After a great deal of negotiation and some helping hands by my other
tenants in the adjoining townhouse, we managed to get the place back
into a livable abode.
The problematic tenant on the other hand had now put herself in a
more difficult situation as the full bond was used for repairs and she
needed a good reference from me in order to get somewhere else to live.
So why am I telling you all this when you don’t have any i
ntention of
being a landlord?
Well, firstly, because of the ways of getting into your own home is by
becoming a landlord and there is a great deal to think about. Secondly,
because being a good tenant yourself can have a positive effect on
securing your own house if you are lucky enough to get into some very
innovative projects currently being considered within governments.
I guess the upshot of all this is that you can never really pick people
and it doesn’t matter whether you’re a Good Samaritan or not, you can
still get burnt so you need to take it as a matter of course, deal with it
and move on. But - as you will read in the ensuing chapters, you can’t
become so despondent with this behaviour that it causes you to SELL!
The cosmetics can always be repaired and improved on but once you
sell you stand to lose more than just some inconvenience.
Today, the demand for housing is so high that statistics
indicate the national average is 20 applicants for every
rental property, and this is higher in some cities.
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Capital gains tax
Why you need to know about it
If you consider the option of buying an investment property first, you
need to be aware of the associated expenditure you may incur which is
not usually related to an owner-occupier. The costs involved can be a
good thing or a bad thing depending on which way you want to look at
it. With investment property, you have the ability to recover most of
your out-of-pocket expenses as well as claim a majority of the costs as a
tax deduction. In essence, you are using before tax dollars to keep the
property afloat.
Think of it in these terms, every cent that goes into your own home is
with after tax dollars, it is money that has gone into your home after
your tax was taken out by the Tax Office. It is money that ‘won’t be
coming back’. Of course, on the flipside, when you do go to sell your
own home you generally get to keep the entire proceeds of the capital
gain. This is not the case with the sale of an investment property. This is
a time when the Tax Office calls for a visit while rubbing hands
together, because the sale of an investment attracts a capital gains tax.
Australia has a capital gains tax but New Zealand does
not. This is very important for you to know if you are
considering investing in either one.
If you live in Australia you’re liable for Capital Gains Tax on assets
worldwide.
If you’re a non-resident you’re liable for Capital Gains Tax only if the
asset has a connection with Australia.
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What is capital gains tax
Firstly let’s consider what a capital gain is.
A capital gain is the increase in capital value of an asset that has
occurred from the time of purchase until the time of sale if that asset was
acquired after the 30th September 1985 in Australia.
A good example might be a house that your parents may have bought
as an investment in 1999, for which they paid $85,000. That property
has grown in capital value and is now valued at around $230,000 in the
current market. The capital value that has accrued on that property is
$145,000.
Tax is payable to the government (up to 28% in some countries) on
the profits from the sale of that investment property. The amount of tax
paid is dependent on how long you have owned the asset and the other
income you may have. Long-tern gains are those that have been owned
longer than 12 months and are consequently taxed at a lower rate than
ordinary income. This is an incentive to hang on to your assets.
Conversely, the short-term gains are taxed at a regular rate.
Capital gains tax is paid on other assets as well, including stocks,
bonds, businesses and other real estate, but the tax is only levied when
the asset is disposed of.
However, as mentioned previously (and generally speaking), if the
property is the principal place of residence i.e. your own home, you will
not pay any capital gains tax. The principal place of residence is usually
exempt from tax.
One thing that must be mentioned here is that different rules and
regulations apply in different countries and they may differ in other
states within the same country. With this in mind, it is in your best
interests to find out, research and seek professional advice about what
regulations are applicable to you.
It is imperative that you become familiar with the particular fees,
taxes and expenses you need to be aware of now and in the future. It will
help you plan, take into consideration, and more importantly understand,
the costs involved.
If you were considering buying an investment property first, you need
to be mindful that you will incur a capital gains tax if the investment
property is in the United States, Australia, or the United Kingdom… but
is effective only when you sell.
However, not all countries, counties or states are subjected to real
estate capital gains tax. An example of this is Singapore.
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Story time
One story I would like to revisit which was used in my last
book is the one about Trevor and Barry, the two trolley boys.
This is the one story which seemed to bring the most hope to
many of the readers. As much as you may not be seeking a
large property portfolio or plan on having untold wealth, this
basic strategy of planning to get somewhere still holds the
same key component to success now as it did eons ago. This
story illustrates the same philosophy of plain, save, invest
and stay focused.
The two trolley boys
Barry (Bazza)
Bazza was a 15-year-old boy with big ideas and a gung-ho (zealous)
approach to life.
He didn’t apply himself at school and always seemed to be in trouble, so his
parents eventually conceded that school was a waste of time and that Bazza
needed to find another vocation in life.
Bazza wasn’t old enough to get unemployment benefits and was still living at
home, but his parents had an expectation that Barry would work to support
himself. They gave him the option of leaving school only if and when he got a
job.
Barry was determined to get out of school and consequently asked around
the shopping centres for a job. With no qualifications and no experience, the
jobs were limited but he was eventually employed in a casual position as a
trolley boy. The pay was $157.35 per week, which was a pot of gold for Bazza
who had never had any more than $20 per week pocket money.
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Bazza worked hard and played hard. He had aspirations of climbing the
company ladder and becoming a CEO or someone of that magnitude. He
often bragged about the new telecommunication device that he’d just
bought such as the latest mobile phone, web-cam or computer. He was
good at saving for the items but he was also good at spending. He would
buy his lunch every day and only bought name-brand clothing.
Consequently, he didn’t have much in the way of savings.
By the time Bazza was 17 years old he wanted to buy a car. After two years
working Bazza had saved $500 in an access account (an account that accrues
minimal interest), which he could use as a deposit. As he had been employed for
some considerable time and his hours and wage had now gone up, he could
access a loan with his father as guarantor. His father dutifully accepted the role
as guarantor and Bazza bought himself a brand
new 6-cylinder Holden Commodore for $30,000
with an interest rate of 10 percent over 4 years.
This equates to around $760.00 per month in
repayments. After the first year $2,711.00 is paid in interest alone.
Bazza was now earning $11.70 per hour for a 30-hour week. His pay was
$351 per week less tax or approximately $1,320 per month (after tax). He was
also still living at home and paying $240 per month week board.
What Bazza hadn’t seriously taken into account was the ongoing expenses of
a motor vehicle on top of the car repayments. These include the cost of petrol,
insurance, registration, servicing and parts. Petrol alone was costing in excess
of $60 per week.
This equates to:
MONTHLY CREDIT
MONTHLY DEBT
Take home pay $1,320.00
Car payment $675.98
Board $240.00
Ongoing car costs $300.00
TOTALS: $1,320.00
TOTALS: $1,215.98
In the very first part of the year Bazza ensured the repayments were made
every month, but it sometimes placed a stress on his social life because it meant
he no longer had the freedom to spend up on anything he wanted.
A few months later, Bazza won $1,000 on a radio game show and
immediately went out and bought some mag wheels for his car. He also decided
not to re-insure the vehicle to save some expense. He was confident his good
driving would prevent any possibility of an accident happening. How wrong could
he be?
Less than a week after let ing his insurance lapse (just after twelve months
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from purchasing the vehicle) Bazza was involved in a car accident. He became
distracted when his mobile phone went of and he couldn’t see where it was. He
rummaged around the seat next to him and tried reaching underneath to see if it
had fallen on the floor, but his concentration was broken causing him to slam