Showing posts with label rental income. Show all posts
Showing posts with label rental income. Show all posts

Tuesday 30 August 2011

Are you a landlord?


“Landlording and long-term investing go hand-in hand. Being a landlord isn’t for everyone, but if you have the right personality and decision making skills then it’s a snap.”

Tuesday 16 November 2010

Q&A: What can be deducted from rental income?

Oct 21, 2010
Q&A: What can be deducted from rental income?

Answering a reader's question about deductions for rental income is PricewaterhouseCoopers Taxation Services Sdn Bhd (PwC) senior executive director Margaret Lee.

Lee holds a portfolio of clients from diversified industries. She has been with PwC for 20 years, and has been involved in the undertaking of corporate restructuring of companies, cross-border deal structuring, due diligence reviews and negotiations with the regulatory authorities on tax matters. Additionally, she advises clients on the income tax, real property gains tax and stamp duty implications of merger of multinationals, conglomerates, trading and manufacturing companies.



Dear Editor,

I've rented my condo and would like to know if these are deductible:
- Real Estate Agent's commission
- Sinking fund (imposed by condo management)
- Service charges for repairs (in addition to costs of repairs)
- Installation costs of air-cond and water heater requested by tenant

Thank you.

Regards,
Sharon

--------------


Dear Sharon,

My answers are as below:

- Real Estate Agent's commission
Answer: This is deductible, provided that this is not the first time the condo is rented out to generate rental income.

- Sinking fund (imposed by condo management)
Answer: Deductible, since this is an expense in connection with the production of rental income.

- Service charges for repairs (in addition to costs of repairs)
Answer: Deductible, as long as these are not capital expenditure but are revenue deduction incurred for the wear and tear of the premises.

- Installation costs of air-cond and water heater requested by tenant
Answer: Not deductible and not qualified for capital allowance (tax depreciation) since there is capital expenditure incurred by the landlord and the landlord is not carrying a rental business.

http://www.starproperty.my/PropertyGuide/Finance/7699/0/0

Friday 12 November 2010

Overseas Property Investments: Do your homework

Do your homework — Png Poh Soon
November 12, 2010

NOV 12 — Signs of a slowdown in Singapore home sales showed in both the number of primary and secondary transactions following the government’s announcement of property market cooling measures on August 30.

The number of developers’ sales, subsales and resales fell by about 28 per cent, 52 per cent and 42 per cent, respectively, in September from the previous month.

While there has been a decrease in property transactions within Singapore, there has been a pickup in marketing efforts for overseas properties from as near as Malaysia to as far as the United Kingdom. There has been an increase in the number of advertisements in recent weeks inviting Singapore investors to exhibitions and road shows for overseas properties.

Investors here are increasingly attracted by potential opportunities overseas as the local market takes a breather. With the current low savings rates, they are looking for better yielding assets to park their money. Potential price appreciation, income guarantees, low mortgage rates and favourable exchange rates are some of the main factors attracting investors to foreign markets.

Based on recent Knight Frank research, Singapore investors formed the third-largest group of buyers from Asia, after those from China and Hong Kong, of prime London properties from July last year to June this year.

Before jumping on the bandwagon, potential buyers should not assume that the same institutional and legal framework that is applicable in Singapore will apply in other countries.

What should buyers look out for when investing in overseas properties? What are the risks and who should they consult?

Many often buy properties in countries that they are familiar with. Some might have studied in a particular country and have developed a fondness for it. Others feel safer if their investment is closer to home and, therefore, prefer to buy a property in neighbouring countries.

From experience, up to 20 per cent of buyers who purchased foreign properties during exhibitions had not visited the city and up to 70 per cent of buyers had not inspected the project site. As environments change and cities evolve, it is prudent to re-visit the site and not to rely solely on memories or gut feel.

For completed overseas properties, it is also advisable to seek an independent professional valuation. One may want to reconsider the purchase if there is a big difference between the asking price and the valuation. In any case, if bank financing is required, a valuation will be carried out by the bank. It may also be worthwhile to get a structural survey done, too. If significant problems are highlighted, one can either forgo the purchase or negotiate a lower price to account for the rectification cost.

Some projects offer purchasers rental guarantees, some as high as 8 per cent. A rental guarantee is a contract between the granter, usually the developer or the vendor and the buyer, where the latter is paid a fixed income based on a guaranteed rate on the purchase price.

For example, a guaranteed rental of 6 per cent on an apartment bought for £250,000 (RM1.25 million) in London amounts to £15,000 per year.

Most rental guarantees are on a gross basis where the buyer is still required to pay all outgoings, such as maintenance costs and property taxes. Because of this, the net return will be lower.

Properties with rental guarantees often also come at a higher price to compensate the granter for bearing the risk of not earning an income when tenants cannot be secured in time or higher vacancies during off-peak holiday periods. Buyers should note that the rent collected may drop significantly after the guarantee period.

It is important to engage reliable managing agents to look for tenants, to collect rent and to look after general repairs. Usually they charge a fee of 5 to 10 per cent of the monthly rent. An agent’s commission for securing a tenant is usually the equivalent of one month’s rent for a two-year lease, similar to the practice in Singapore. Total outgoings average between about 10 and 20 per cent of gross rental income per year.

There are other miscellaneous costs such as legal fees, stamp duties, valuation fees and bank processing fees. The amounts vary across countries and the prospective buyer should seek professional advice.

Potential buyers should also be aware of tax regulations, especially for mature markets such as the United States and Australia. In many instances, rental income is taxed at the progressive personal income tax scale in the country where the income is sourced. While capital gains tax does not apply in Singapore, it may be applicable in other countries. Buyers should consult tax advisers to ensure they understand all tax issues.

To guard against poor workmanship, the sale and purchase agreement should provide for a two- to six-month liability period for the developer to rectify the faults. In instances where there are delays in the completion, purchasers should be compensated or can opt to rescind the purchase with the money refunded.

The types of legal recourse available are subject to the terms and conditions in the sale and purchase agreement. Buyers are advised to read the document carefully before signing and paying the initial reservation fee, which is often non-refundable. They can engage lawyers to advise them on their rights if things go awry.

If a developer goes bankrupt during the construction stage, any monies paid directly to the developer rather than to a trust fund are usually not recoverable. Hence when buying properties off-the-plan or under construction, one should look at the developer’s reputation, track record and financial standing to reduce the risk of potential losses.

There are also other legal considerations to note. Some countries have laws that restrict resale property ownership. For example, in Australia, residential properties can be resold only to Australian citizens, permanent residents and foreign students or foreign companies that have obtained the Foreign Investment Review Board’s approval to buy for owner occupation.

In Malaysia, the government’s consent is required for the sale of freehold landed properties to non-citizens. In some instances, the property can only be sold to Bumiputeras.

In a nutshell, while there are many success stories, buying that overseas property is not as simple as some may think. One needs to look beyond the glossy brochures and the glitzy displays. Engaging competent and experienced advisers will help the process but at the end of the day, it is still caveat emptor (buyer beware). — Today

* The writer is senior manager, Consultancy and Research, at Knight Frank.

* This is the personal opinion of the writer or the publication. The Malaysian Insider does not endorse the view unless specified.

http://www.themalaysianinsider.com/breakingviews/article/do-your-homework-png-poh-soon/

Monday 12 April 2010

The Math of House Buying


3. Math of House Buying

by M. Bourne

Disclaimer

This discussion is simplified so we don't get lost in complications. Also, interest rates are changing all the time - check your local banks for latest rates.
There is no need to really use the formulas in this section. You can easily use Excel to calculate the values or you can use the many on-line calculators to find the values.
This site does not contain investment advice.
Don't miss Flash mortgage calculator on this page.
Tom (see the chapter intro) wants to buy a house sometime soon. He knows that real estate is a reasonably safe way to build wealth. It is slow, but generally low risk.
house
He will come across a bewildering choice of mortgages. A mortgage is just a fancy word for the process of borrowing money for a house.
The bank actually buys the house and keeps the title deed. You agree to pay off the borrowed amount each month, usually over a period of 20 to 30 years. When you have finally paid it off, you get the title deed, meaning you now fully own the house.
If you stop paying for any reason, the bank has the right to sell the house. After all, they own most of it.

Mortgage Example

Tom's house will cost $300,000. He needs to pay a deposit of 10% and will pay the remaining 90% over 30 years at 8% per annum.
So he will need to pay a deposit of 10% of 300,000 = $30,000.
The remaining amount he owes is $270,000.

Monthly Payments

The formula for the amount Tom has to pay each month is
monthly mortgage
where
A = amount to pay each month
L = loan amount (or principal)
r = interest rate (per year as a decimal - or divide by 12 to get the rate per month)
n = number of payments
(This formula is based on the Sum of a Geometric Progression.)
So for our case, we have:
L = 270,000
r = 8% ÷ 12 = 0.0066667
n = 30 × 12 = 360
So the amount is
mortgage
So Tom needs to find just under $2000 per month to buy his house. Of course, he won't be paying rent so the extra amount is not too bad, he figures.

Back of the Envelope Calculation

A reader asked if there is a reasonable approximation that we can use for this formula when we want to do "back of the envelope" calculations. It turns out there is.
("Back of the envelope" is an expression meaning we can work it out quickly and easily on a scrap of paper.)
Most mortgages are for less than 30 years. The following chart illustrates the value of the denominator for the above expression, for interest rates of 6% to 14% up to 30 years.
For example, the graph for lowest curve, 6%, is of the following form, where n is the number of years:
1 − (1 + 0.06/12)12n
approximation
We can use this graph as follows.
If the mortgage is 25 years and the interest rate is 10%, the graph tells us the denominator value is close to 0.91.
So a $100,000 loan would have a monthly payment of about
value
A check in the actual formula yields a value of $908.70. So the approximation is not bad.


Flash Interactive - Mortgage Payments Calculator

You can calculate any repayment here. Change any of the values for principal, interest or period and then click "Calculate". You can also see a graph of the equity (the amount you own) that has been built up in the property over time.

Note: These calculations do not take into account the bank fees and we are assuming a fixed rate of interest for the whole period of the loan. Actual amounts charged by lenders are sure to be higher than this.

Mortgage Calculator

You can use this calculator to get a rough idea of how much you can borrow, how long you will need to pay it off, what interest rate or the amount per month.
Loan Calculator
Gadgets powered by Google

Six Months Later

Tom has been paying off his pride and joy for 6 months. He has paid a total of $1981.16 x 6 = $11886.96.
He gets the first statement from the bank and expects to see a reasonable dent in the amount he owes. He is shocked to find that he still owes $268,894.74. How is this possible? He has paid $12000 but only $1000 has come off the balance.
The formula for the balance is:
balance
where
L = the loan amount
r = interest rate per month as a decimal
p = number of payments already made
n = total number of payments to be made
In our example, the balance will be:
balance
With mortgages, the amount you are paying early in the loan period is mostly interest, and very little is coming off the principal. Towards the end of the loan, the interest amount is less and the principal starts to disappear more quickly.
balance graph
Amount ($) still owing after p months.


The mistake a lot of people make is to sell the house quickly. The average mortgage is only 7 years. They own very little of the house by then because they have mostly been paying interest to the bank. If house prices have gone up a lot, they are ahead. But if house prices level off, or decline, then you lose a lot of money.

Money Maths Lesson Plan Suggestion - House Buying

Simulate a house buying scenario in your district. Use actual advertisements for houses and for housing loans. Get students to find the best loan deals. Which is best - fixed or variable interest? What will they pay in total for the house? What will it be worth at the end of the loan period? How much will they have paid after 10 years and how much will they own by then?

Footnote

It may not always be best to buy a house compared to renting. In Japan, house prices have still not recovered to where they were 16 years ago. Sure, interest rates are low there, but negative equity has been a huge problem for years. (This is when the amount that you owe on a house is more than what the house is worth.)
japan
House prices, Japan. Index = 100 in 1975.
This means that house prices more than doubled at the peak in 1991 and have dropped back to 1975 levels since. In 2005/2006 there has been a modest increase.
Interestingly, house prices in US, Australia, UK, and most industrialised economies have shot up in recent years due to low interest rates. One wonders what the future holds for house prices in these countries...
If rents are low in your area, it may be better to rent a place and invest (not spend) the difference.

http://www.intmath.com/Money-Math/3_Math-of-House-Buying.php

Friday 26 March 2010

Make sure you have a steady cash flow when you retire

19 Mar 2010, 0139 hrs IST, Lovaii Navlakhi,


Retirement is the time when you hang up your boots from the hustle-bustle of daily life, relax, do your own thing. As we say, it’s time to say: "Goodbye tension, hello pension!” Suddenly, from the risk of dying too young, you have transformed yourself to the category where the risk of living too long exists.

The last thing you want to do is to have your money run out before you do. Risks have to be taken in a controlled manner, and post-retirement returns are thus assumed at 1% or maximum 2% p.a. over inflation. During one’s retirement days, the key requirement is safety, liquidity and tax-free returns. It is important to analyse the pros and cons of some of the avenues available to generate cash flow.

Rental Income 

Apart from a self-occupied property, all other real estate investments are made with the objective of either capital appreciation — like the purchase of land — or to generate return on investment, as in the case of rental property. 2008 has been a rude awakening, and we must prepare for the time when rentals may drop, and the property may remain vacant for a few months. Depending on rental income for 100% of one’s needs may be a risk that needs to be mitigated before heading into the retirement days.

Dividend Income 

A few weeks ago, a client approached me to plan some additional investments for his mother who was a retired senior citizen. He did not want to take risks with the investment and during the course of our conversation, we realised that nearly a third of her income was being received by way of dividends. So, while she was averse to risk investing, she was equally reluctant to reduce her shareholding because she was thrilled with the quantum of dividend that she would receive year on year. In this case, there is a need to reduce the risks that this client carries in her portfolio.

Annuities 

In all our retirement planning calculations, we assume a life expectancy of 85 years for males and 90 years for females. However, no one can say today whether that is an under-estimation or an overkill. To do away with this risk, one can consider purchasing of annuities which are paid for your lifetime, and on your expiry, to your spouse. Obviously, if one was to use this as the only source of retirement income, the quantum required to be invested would be large, so it’s best that about a third of one’s retirement requirement is met through this route.

Fixed Income Investments 

Returns on fixed income investments are normally taxable. For the purpose of planning, it may be best to consider these — like senior citizen bonds, post office schemes, fixed deposits — first so that the income is within tax exempt limit for senior citizens — Rs 2.40 lakh per year as per the latest Budget proposals. Practical examples abound which ensure income that is tax-free and carries minimalistic risk for the senior citizen.

(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt Ltd)



http://economictimes.indiatimes.com/Personal-Finance/Savings-Centre/Analysis/Make-sure-you-have-a-steady-cash-flow-when-you-retire/articleshow/5699880.cms