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Help Me Answers

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Help Me Rhonda

The "Help Me Rhonda" section assist you by providing answers to your questions in relation to property Investing.

Below are recently asked Questions and their Answers.

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What does the term Capitalisation Rate mean?

A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.

Capitalization Rate = Yearly Income/Total Value

Also known as "cap rate".

What does Annual loan Constant mean?

"This value is calculated as a percentage by taking the actual value of debt repayment (interest and principal) and dividing by the remaining principal. Generally, the constant is larger than the actual quoted loan rate and increases with duration"

What are the tax implications between negative and positive gearing?

If you invest $200,000 at 6.5% flat interest for three years, it will bring in a positive return of $13,000 in twelve months, which is taxable in the hands of the investor. This is positive gearing, and the interest is regarded as passive income.

A Negatively Geared example:
If for example you take the same $200,000 and borrow a further $300,000 (at a fixed rate of 8.2% over ten years from Big Bank) and purchase a real estate investment with a view to renting out the property, the interest cost on the borrowed money will be $24,600 in the first 12 months. After deducting rental income your costs will be higher than your income, and provided you have set this investment up properly you will make a tax deductable loss. This is what is referred to as negative gearing, and rental property income is also regarded as passive income.

Although negative gearing is commonly perceived as being associated with an investment property, the term also equally applies to investments in other income producing investments such as shares and managed funds. The gearing in the later cases is through "margin loans".

In Australia the investor hopes that capital growth will be greater than the costs involved in the investment. While this works well in a rising market, as many investors discovered in 2007, when the market corrects itself you can be badly 'burnt'. However, for many investors The attraction of borrowing or gearing to invest is that it enables you to invest in shares or property that might otherwise have been unaffordable. For individuals, the loss can also be offset against other assessable income and the tax benefit will depend on your marginal tax rate."

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