Real Estate - rent vs. own - investment

[KnowItAll]

I thought the original post indicated that the property was for personal use .. not for renting out.

If you live in the flat, you can rule out IRD going after you. They have better things to do than collapse the market with one bad case. If you do not live in the flat .. that is another issue altogether.

cendrillon, you scare me ... there are atleast 10 profound tangents in your two posts which could be great topics to debate.

[cendrillon]

Thanks KnowItAll, from a KnowItAll that is a mighty complement indeed.

With the IRD, I'm wondering say if you have to leave HK in 3 years, but decide to hang on to the property (entry and exit costs being a good 5% of the principle, you'd want to avoid churn), what will be the situation regarding profit tax?

For example, does 3 years living in it, and 3 years renting it out count as an 'adventure in trade'?

I just don't trust the tax department to make an unbiased ruling when it's in their interest to tax people as much as possible. And reading the prior rulings, every single one of them was against the applicant (in most cases they fined them $5000 in court fees for having the audacity to question their judgement).

[cendrillon]

Here's an example:

In deciding whether a property is a capital asset or trading asset, it is necessary to
ascertain the intention of the taxpayer at the time of acquisition of the property. A
mere declaration of intention is of limited value. Subjective intention has to be tested
against objective facts and circumstances.

On the Board’s view of the totality of the evidence, the Board has come to the
conclusion that the taxpayer has not discharged this burden and the Board takes the
view that this appeal borders on being frivolous.

Appeal dismissed and a cost of $5,000 charged.

http://www.info.gov.hk/bor/eng/pdf/d...cond/d6103.pdf

You can find plenty more. I'm yet to find one where someone successfully appealed. Don't trust em, stick with stocks I say

[twlewis]

Hi Cinderella....

Answers to banter etc...below. I will try to post a sample model when I'm done - a few more days. It's not beautiful to look at, but hopefully it proves useful for others to start their own guess-timates when it comes to managing personal cashflow, figuring out how much one can afford to borrow and the fees surrounding a financing and subsequent exit for HKG property investments.

Rates
I've just arrived in Hong Kong but have lived in Asia for 10 years. Thanks for the guidance re: interest rates, I just hadn't bothered to check online yet and picked my estimates out of the sky.

Deduction
Yeah - the income tax deduction is one that I've now included in the model.

Cost estimates
Great to see the living cost estimates - gas, water, electricity....thanks. Wondering if everyone agrees or is similar ?

Maintanence - yeah agreed - I'm generally a conservative estimator at the onset... then later tightening up the assumptions. Maintenance will not factor greatly in my calcs going forward but will include a space for it in the model, in case we go with an older apt. Thankfully the model is not meant to go longer than 5 years at the most - which should keep a lid on major renovations/ repairs.

Mortgage Insurance
I looked at the mortgage insurance - good rates to use. The rates give a single payment rate and an annual rate. Can you explain the calc for each rate type - is it either / or ... or is it both, eg. an upfront and an annual ?

Like yourself, I'm big on gearing too. Borrowing at 4% is a great rate right now. I think I'll have a scenario that will gear it right up to 90% and weather the pain of big monthly payments for the short term and then exit upon departure from HKG in 3-4 years.

My model currently rewards the higher leverage - even with no appreciation realised in resale price upon exit. The problem is managing the monthly payments - which can be offset by different loan terms. I will explain more once it's complete.

Home vs. Mortgage
The home vs. mortgage is an easy debate for me... I can't afford to get a place in HKG that satisfies the quality requirement AND make another investment that is manageable, growable and headache free. The combo is a big plus for me right now.

Certainties in Life
Tax, tax...."Do you ever get the feeling that countries feel their citizens belong to them? " Well, for the sake of debate... let's kick it out to another thread. I'll get started on it shortly... but anyone else... feel free to start.

Investment property structures and taxation
Renting to your dad may be a tricky one in many jurisdictions because the rental agreement can often contribute to overall determination of residency ties which, in turn, are driving factors to taxation. For example in Canada, your situation would pose a problem for me because if I were renting to my father at a rate that wasn't at arm's length, the lease agreement would not qualify and I would be open to being deemed a resident of Canada because a property I owned was not occupied at market rates and open for my use. Residency / non-residency tax rules in Canada... another thread. The US system is different - they tax on citizenship - which makes it a very expensive passport to own if you're a US expat. And they've recently taken a hit on claiming limits for benefits too - another thread as well.

Hard to talk about the profits tax in general as rulings are made on case by case specifics. If you lived in the property, had a contract with an indefinite period in HKG - that would have to be pretty strong. But the intent to hold a residence after leaving HKG might be a subsequent intent to resell for profit. I would say you would have to demonstrate intent to return to HKG and the need to have a residence - eg. creation of more ties to HKG. Tough to argue if you rent it out while you're "away". One idea might be for you, as a resident, to structure a sale to your shell investment company to own, hold and manage the property for investment's sake BUT for a very high price, the very top of the market. Then a year or two later, after having collected some rent from tenants, you sell to third party at the low end of the market and compliantly take a tax hit but on a smaller profit spread. Fun to think about in theory - but in isolation, the structure and headache is probably not worth it for a regular apartment. Stamp duty would kick you as well. Needs more time and thought for a successful transfer/solution if trying to mitigate the challenge of intent by the IRD.

Love and War...
Re: shares & divorce...gotta ask - are you married ?

cheers-
TWL

[twlewis]

KIA-

You kindly noted the early repayment penalty rates for the first three years of the SC mortgage. What happens after year 3 ?

cheers-
TWL

[cendrillon]

Hi Twlewis,

So you speak French?

I too understand the pain of trying to build accurate real estate investment models in Excel. It's so much more complex than shares due to all the taxes, entry/exit costs, refinancing issues etc.

For mortgage insurance, my reading of it is that either you pay the upfront fee (3.98% or whatever), or you pay an annual fee. If you plan on holding it for more than 4 years then the upfront fee probably works out cheaper.

Where mortgage insurance really becomes a pain is if you want to refinance to extract equity, then you'll get hit for 4% of the (appreciated) principle all over again. It's like the old premium just gets tossed in the bin.

This is particularly annoying in HK as the banks wont cross-collateralize properties, so if you want to buy a second one you need to come up with the deposit all over again.

On using large deposit to reduce monthly payments, I know some people like to think in those terms, but in principle you could take the 30% deposit and use that to offset the larger monthly payments if that was your goal. Or put perhaps another way, you could put the 30% deposit into a savings account in Australia, get a 6% return, and then use 4% of that to cover your extra interest payments.

Tax is an issue isn't it? Another plus for investing in stocks rather than property in my view. I don't know why governments seem to penalize property investors so heavily, whilst stock investors go tax free. For example if I buy a property in Australia and sell it I have to pay capital gains tax, but if I buy stocks and sell them I don't pay capital gains tax because I'm not resident for tax purposes.

I guess the biggest negative in my view for stocks is the stock market, it allows you to check your stock price every day which may tempt you to do something stupid.

In property, I really wont know what it's worth until I try to sell it. In the mean-time I can look at what else if for sale, and it seems to be doing well, but I certainly wouldn't panic if my neighbour sold his appartment for 20% less than mine. On the other hand I am a little panicky that my stock has dropped 9%, irrational isn't it

And no, not married yet, but after seeing multiple ugly divorces I figure it's good to be prepared. People are extremely rational when they're in love, it's afterwards that the nasty side comes out

[twlewis]

Dear Cendrillon- or anyone who comes back to this thread.....

On Boxing Day, my entire notebook computer died. Took it to 3 places and nothing recoverable - nothing - and so I am starting all over again. Cendrillon wrote that she understood "...the pain of trying to build accurate real estate investment models in Excel" and I am wondering if she (or anyone else) has anything on the hard drive that might give me a head-start on a long and tenuous process. So I guess I need her to switch roles from Cendrillon (Cinderella) to Fairy Godmother Yes - an odd request, but my Google searches have been stuck on results that are either irrelevant or rudimentary. Ironically, my wife and I are now about to kickoff some mortgage hunting and I need to get a model up and running for budgetting. The email addresses and contact details as well as countless emails have made me a sorry but very big believer in "back-ups".

regards-
twlewis
findtrevor[at]gmail.com