Financial Advice For Dinks
Are you part of a double income no kids (DINK) household
? If so, your wealth and financial considerations are different. Consider this case study for determining if an investment property may be the best option to grow your portfolio and avoid facing excessive taxes.
Case Study: the Joneses
A typical DINK couple, Mr. and Mrs. Jones are both employed in professional fields. They earn $250,000 per year and own their own home, which is valued at $750,000. Their debt is currently $200,000 and the Joneses wish to expand their financial portfolio by investing in rental property.
They are encountering two particular issues in relation to property investments: what type of real estate to purchase and how to structure the ownership to result in the least amount of taxes owed on the investment.
The Best Property for the Joneses to Purchase
First, Mr. and Mrs. Jones should be very confident about their income earning potential for the future. If either of them feels their job is not secure, then this would not be a good time to allocate funds to investment.
With a reasonable expectation that their incomes will remain stable or increase, they could certainly afford to buy a property worth $500,000 that allows for high capital growth and moderate yield. The property could easily rent for $625 weekly and give them a 6.5% yield.
This does not take into account, however, the interest rate of the loan. At 6%, the rental amount will cover the loan payment but after additional expenses, such as insurance, improvements, etc., the Joneses will experience a loss of $5,000, or $100 per week.
This may not seem to be the best investment - until you take into account the tax considerations. Depreciation on the property would be approximately $9,000 yearly, giving the Joneses a total loss of $14,000 that could be deducted from their tax liability. Since their earnings put them in the 38% tax bracket, this allows a tax refund of $5,300, making it a reasonable investment; the real estate enjoys high capital growth potential whilst allowing for a substantial tax refund.
Ownership Structure
How should the Joneses structure the ownership of their investment property? They should establish an LAQC structure with equal shares in the company (assuming their incomes are comparable). A family trust including their residence will protect their assets. The loan on the investment real estate should be spread across two lenders so that their home is not at risk for the entire amount; $100,000 secured by their residence and the additional $400,000 secured by the rental property itself.
The above scenario allows the Joneses to purchase a high capital growth investment that does not negatively impact their cash flow - basically buying real estate at no cost. In the end, this is a very sound investment and perfect for DINKs.
by: Paul Easton
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