Catchup from Tom On Tuesday

March 8, 2011

Hello readers! My blog title and tagline used to be “Tom On Tuesday and also on Thursday and Saturday during Dec10 and Jan11”. Well, I stuck to that promise, just! My last post was 14 Feb, some three weeks ago, not even on Tuesdays. So, I’ve changed the out of date tag line and I am undertaking to at least start posting again, weekly on Tuesdays!

What has happened in the meantime? We’ve had a cyclone but not too much damage in the immediate local area. Further down the Queensland coast a few smaller towns got done over at least as badly as Innisfail five years ago. While the experience and aftermath of a cyclone is traumatic, in the long run the communities will have better buildings and the businesses stand to come back stronger.

Also, the ICC World Cup Cricket is on!!! Yes, it is a bit of a bore fest because the organisers have only organised one or two games per day in order to maximise television coverage. That is 42 preliminary games in 30 days! Yesterday the sole game being played was Kenya vs Canada!!! OK, televise the game but even in the cricket mad sub-continent, methinks Kenya vs Canada is unlikely to stir much passion.

NZ lit up the competition a little tonight. They were comfortably beaten by Australia. At 5/175 after 42 overs against Pakistan, they were still looking a little ordinary. Somebody lit a firecracker under them. By 50 overs they were 7/302 or 127 from their last 8 overs! That is the fighting Kiwis od old. It will be interesting to see if they can hold out Pakistan with that score.

When the World Cup started I was convinced that Australia’s reign at the World Cup would come to an end this year. Yes, they had just beaten the Poms 6-1 but that was in Australia against one opponent, not on the sub-continent against potentially three or four other well credentialed opponents. While Australia’s bowling had been very good, there was almost certainly going to be an injury or two to that group. And for the whole summer, Tests, ODI’s or T20, Australia had barely had more than 2 or 3 batsmen out of the top seven fire in the same innings. And surely at this World Cup one of the sub-continent teams or South Africa perhaps would stand up and be dominant.

Now, I am not so sure. Australia still has its vulnerabilities. But England after spectacularly drawing with India was shot down by Ireland and won narrowly against the Netherlands. India took care of Bangladesh but could not prevent England scoring 338 to tie! India also suffers the greatest pressure due to home country expectations. South Africa was travelling comfortably until losing a low scoring game to England. On the other side of the draw Sri Lanka and Australia proved nothing with a game that was washed out before the end of the first innings. Pakistan is about to show whether they are man or mouse against an inconsistent NZ.

My tips for the SF’s – India, Sri Lanka, Australia, South Africa. Any one’s World Cup from there!

ICC World Cup Cricket 2011

February 14, 2011

I’ve just watched the highlights of the Australian’s first practice cricket match of the Cricket World Cup 2011. The first thing that struck me, apart from BOTH SIDES collapsing for not a lot of runs, was that the Australian team is back in a yellow uniform. That’s right folks, not the classier gold, not the green they have used since the Commonwealth Bank became a sponsor but yellow! Actually the majority green with gold trim one day uniform of recent seasons has been somewhat confusing. It looks more like South Africa turning out to play than Australia. However the majority gold uniform that Australia has more usually used is obviously not a good fit for the gold and black Commonwealth Bank logo.

The other odd thing about the Australian World Cup 2011 uniform is the LACK of a front sponsor. There is an Australian Coat of Arms above the heart, there is an ICC World Cup logo on the right breast and VACANT real estate on the rest of the front of the shirt. Did the Commonwealth Bank opt out of World Cup sponsorship or is there a conflict with another financial institution sponsoring the World Cup? I don’t know.

There ARE sleeve sponsors for the Australians however. The primary sleeve (ie front facing when the player is at bat – left sleeve for a right hander, right sleeve for a left hander) is VB of beer fame. The secondary sleeve sponsor is Adidas, presumably the providers of the uniforms. The relatively naked front of the uniform is still a puzzle. You have to go back to the 1980’s or early 1990’s to see uniforms as bare of a major sponsor as these.

For those who are keen to follow the World Cup Cricket 2011, be ware if you Google to find a site. I started by searching for “World Cup Cricket 2011” which resulted in an advertising heavy, poorly written, hard to navigate site ending in “.co.in”. In fact I think it is there solely for the advertising! Under this search the official ICC site comes up 6th and you need to scroll down. To get the official ICC World Cup Cricket 2011 site you need to search for “ICC World Cup Cricket 2011”, when the site comes up 5th, only one ahead of its dodgier cousin.

In between the official site and its dodgy competitor, a reasonable site that comes up 2nd on each of the two different searches is…Wikipedia…much scorned by some but as usual quite a good summary of the world cup cricket tournament.

Stay tuned for Cricket Wortld Cup updates!

Sex, Money and Paris Hilton ***

February 9, 2011

It has been a week since I posted. I’m from Cairns, so last Wednesday and Thursday we played host to Cyclone Yasi. Actually Cairns was somewhat of a bit player. The centre of the cyclone crossed the coast nearly 200km from here. The seaside towns of Cardwell and Mission Beach, and Tully, only a little inland, copped its share too. Port Hinchinbrook played a game of squash, where the squashee of choice was any boat or yacht currently anchored in said port. Here is a picture of the yacht squash.

Just as Cyclone Larry destroyed a lot of buildings in Innisfail in 2006, so it did to a number of these smaller coastal towns this time. It is little comfort that a lot of these house and businesses premises were built long before the current cuclone building standards (since the 80’s). Given that they have insurance coverage, people will re-build with stonger buildings. However there is heartache in the turmoil and less tangible things lost. There is also the despair of the uninsured. Perhaps everyone SHOULD be insured but there are always circumstances why this is not so. And those renting their homes are faced with more uncertainty as they need to find new homes in places where they are suddenly in short supply.

I have actually checked my home insurance policy. I’m covered for cyclone/storm damage but NOT flood or storm surge. Fortunately I’m not on the coast, so storm surge is out. And if the nearest creek floods me then the rest of Cairns would be in real trouble. Some of these homes that have been damaged down the coast would have been broken up by the cyclone but possibly inundated by the storm surge. I hope for them that insurance covers them for the cyclone and any storm surge is considered secondary.

Those that I feel most for are those that are losing their businesses, some for the second time in five years. For sugar cane and banana growers, the crops simply lie flat and useless on the ground with the wind of the cyclone. This year the ground was already primed with five months of continuous rain. Wind somewhat less than of category 5 cyclone could have done the same thing. The hardest part about coming back from the cyclone is the loss of substantial income. Farming requires cropping costs up front, while some months later the crop is harvested and income received. In this case there have been the initial costs, no income and more upfront costs for the next crop. I know most businesses can insure for business interruption but this would not normally extend to crops in the field. And I understand insuring the crops themselves can only be done in limited circumstances (if at all) and at exorbitent cost. The answer is to either sell up the farm or borrow more money and go deeper into debt.

The one blessing from this cyclone is there were no deaths directly from the cyclone. One unfortunate man did die from the fumes of s diesel generator in the power loss afterwards.

*** And the title of this blog post, “Sex, Money and Paris Hilton”, has absolutely nothing to do with the contents of the post. I’m just testing a blogging tip I read about constructing blog titles that people may be searching for. More searches = more traffic, the tip alleges! Waiting to see if it is true!

Investing: Rental Properties – The Financials Part 2

January 31, 2011

If this is the first of these articles that you are reading, you can still catch up. First there was an article on how to conduct research to find a suitable property. Next there was an article on purchasing and financing a rental property.

This article is about the everyday financials of a rental property. One topic needs special attention.

Gearing

When you are researching for a suitable rental property to purchase you may come across “advice” about the merits of gearing. Or more probably the worthiness of negative gearing. Less often you will hear about positive gearing.

Gearing simply means borrowed money. The amount of borrowed money can be any amount but with a rental property is typically around 80% of the purchase price. So if gearing is borrowed money, what are positive gearing and negative gearing?

Rental properties earn rent income. Rental properties also have various expenses such as rates, insurance, repairs etc. If money is borrowed to purchase the rental property there is also interest payable on the loan. Positive gearing means that after rent expenses and interest are deducted from rent income, there is money left over, a rental profit. Negative gearing means that after rent expenses and interest are deducted from rent income, there is a rental loss.

Where a property is negatively geared, the shortfall must be made up by other sources of money ie savings or income from business or employment.

Some people get excited by the prospect of a negatively geared property because they believe the shortfall will be made up through the taxation system. This is only partially true. It is true that a rental loss can be offset against other income (eg wages), so that less income tax is paid than there would be without the rental loss. However your income tax is only reduced by your marginal rate of tax. Let us use an example:

A has annual wages of $60,000. A’s rental loss on his investment property is $5,000. A’s taxable income is $55,000 and his marginal tax rate is 31.5%. The income tax that A “saves” by having a rental loss is $5,000 x 31.5% = $1,575. So, even after the saving in income tax, the net rental loss is $5,000 – $1,575 = $3,425.

So negative gearing is not the nirvana that some people would have you believe. You need to pay out a net $5,000 during the year to get a $1,575 reduction (or refund) in your income tax when you lodge a tax return to end up with an out of pocket cash loss of $3,425.

On the other hand, a positively geared property gives you net income from the outset. Sure, you will lose some in income tax but again the tax on the rental profit is only at your marginal rate of tax. In the example above, the marginal rate of tax is 31.5%.

So, WHY would you put up with a property that regularly makes a loss? First, the plan should be not to make a loss forever. Property is a long term investment,  NOT for just a year or two. Over time rent income should increase and as part of the loan is paid off interest paid reduces, so the rental loss should over time become a profit. Second over the long term, if you have bought a good property, the value of the property should go up. If you sell the property at a later date you plan on collecting a capital profit, which should ideally more than offset the earlier rental losses.

There will be one final article on the nitty gritty of the financials of rental properties.

 NOTE: Tom On Tuesday IS a CPA but is NOT a tax agent, a financial planner, a banker, a stock broker nor a real estate agent. Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their own personal circumstances before making any decisions.

Investing: Rental Properties – The Financials Part 1

January 26, 2011

So, you’ve found your ideal investment property after plenty of diligent research.

You should also consider the financial aspects of buying and owning a rental property.

Buying the Property

Buying a rental property is not just about the purchase price. There are additional purchase costs. These include:

Stamp Duty on property purchase price – this is an amount charged by state governments on property transactions, so it varies from state to state. It is usually calculated as a percentage of the purchase price. Stamp duty is lowest if the property is being purchased to live in by the owners and is the first property they have ever purchased. Sometimes, for a first home purchase, there is no stamp duty below certain thresholds. There are also some concessions on stamp duty if the property is being purchased by the owners to live in. There are no concessions for property purchased as an investment property.

Conveyancing Costs – this is the cost of a solicitor or conveyancer for their services in preparing all the documents so that the transfer of the property can take place.

Various searches – these are the out of pocket costs that your conveyancer will ask for reimbursement. Many of these searches are fees to search government data bases to determine if there are any planned activities on or near the property (eg new roads etc)

Adjustments on Settlement – the adjustments are for things like council rates and body corporate charges. These adjustments occur because while rates may have been levied up to 30 June or 31 December, the transfer of a property hardly ever happens on those dates. The adjustments are to account for expenses that have already been paid by the previous owner that need to be reimbursed to them.

For all of these purchase costs allow between 3% and 5% of the price of the property.

Financing the Property

Banks typically want a minimum 20% deposit of the price of the property. This deposit can be in cash or another property can contribute towards the 20%. What is so magical about 20% deposit? While some banks will lend on a 5% or 10% deposit, they require additional assurance that the mortgage will be repaid. That means the bank will require mortgage insurance. Mortgage insurance is paid by the borrower BUT protects the bank in the event that the mortgage cannot be fully repaid even after the property is sold. Mortgage insurance is expensive as it will require another 2% to 5% of the property purchase price up front.

Check the latest interest rate deals here.

NOTE: Tom On Tuesday IS a CPA but is NOT a tax agent, a financial planner, a banker, a stock broker nor a real estate agent. Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their own personal circumstances before making any decisions.

Investing: Rental Properties – Research

January 24, 2011

Of all the different types of investments available, one of the most common is the residential investment property. Being a common investment, it is also subject to many myths and half truths. The following outlines some of the basics and rescues the vulnerable from some of the myths.

Research

The first important step in making any investment is research. Understand what it is that you are committing yourself to and what effect your decision is likely to have on your financial future. Real estate people will readily tell you that the key to property is location, location, location. What does that mean?

People are attracted to live in homes that are located conveniently near shops, workplaces, schools, medical facilities, public transport and attractive natural features like beaches and mountains. Rarely though are ALL people looking for ALL these features in the one property. So, who are your potential tenants, what stage of life are they at, how big a property do they need and does the area have the facilities they are likely to value most highly?

The need for research is one reason why a first time investor would be well advised to check their local area first, including nearby suburbs and towns. Since you live there you are familiar with local facilities and have access to local resources like real estate liftouts in newspapers and open houses put on by local real estate agents.

One important thing to keep in mind while researching is that you are NOT buying a proeprty for yourself to live in. You are looking for a property that someone else would like to live in. The difference is that you can buy, say, a smaller property than you live in because it will suit someone else’s requirements. You could buy in a suburb that you would not live in but may have features that are attractive to other people. Try to put yourself in the shoes of a potential target tenant.

One more thing. BE CAREFUL if you are invited to a seminar or induced to take a trip where you will be asked to consider purchasing real estate that is a long way from where you live. For example if you live in a regional area and are asked to conbsider capital city real estate. Or you live is Western Australia and you are invited to look at property on the Gold Coast. It MAY be a good deal but it MAY NOT be. Being taken out of an area with which you are familiar simply makes it more difficult for you to adequately reseach a potential property and to judge whether the price is fair for that area.

You could start your online real estate research here.

Next Time: Investment Properties, the financials. 

 NOTE: Tom On Tuesday IS a CPA but is NOT a tax agent, a financial planner, a banker, a stock broker nor a real estate agent. Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their own personal circumstances before making any decisions.

Your Mortgage – To Fix or Not To Fix

January 21, 2011

Tom On Tuesday phoned his bank in December just before another anniversary arrived on the mortgage. So the question Shakespeare may have posed in this scenario is, “To fix or not to fix, that is the mortgage interest rate question.”

It seems that many people perceive that financial matters are full of difficult concepts. The difference between fixed and variable mortgage interest rates is one such topic.

A variable interest rate means that your financial institution can change your mortgage interest rate up or down at any time. However these changes are not entirely arbitrary.  The Cash Rate, set by the Reserve Bank of Australia, is the basis for changes in variable interest rates. The Reserve Bank changes the Cash Rate as a broad means of affecting the Australian economy. The Cash Rate is also the rate that banks lend to each other overnight.

YOUR variable mortgage interest rate is set by your bank at a margin above the Cash Rate. The Cash Rate since 3 November 2010 has been 4.75% pa. A typical variable interest rate at the moment is somewhere between 7.25% and 8.0%.

Fixed mortgage interest rates are a set rate for a period of between one and five years agreed between the borrower and the bank. Fixed rates are set by reference to banks’ borrowing costs. Fixed rates ARE NOT related to the Cash Rate.

So, which is better, variable rates or fixed rates? As with so many financial decisions, the answer is, it depends. In practice, most mortgages in Australia are on a variable rate. There are some exceptions, such as introductory or “honeymoon” rates where the bank may offer you a low rate for the first year to get your business.

Let me explain with some examples, relevant at January 2011.

Introductory/Honeymoon rate: 7.1% for first year

Standard Variable Rate: 7.7%

Fixed Rates: 1 Year 6.94%; 2 Years 7.19%; 3 Years 7.20%; 4 Years 7.69%; 5 Years 7.89%

So if you are some years into your loan, do you choose fixed or variable? The first thing to note is that the longer you fix, the more expensive is the rate. This is almost always true. Second, the one year fixed rate in this example is considerably cheaper than the variable rate. While that is true at this time of the cycle, it is not always the case. The one year fixed rate tends to be higher than the variable rate when interest rates are at the bottom of the cycle and tends to be lower than the variable rate as interest rates head towards the top of the cycle.

So where in the cycle are we now? No one knows for sure but here is a history of the Cash Rate as set by the Reserve Bank.

So how do I find the best rate for me now? Look here to check current home loan interest rates.

NOTE: Tom On Tuesday IS a CPA but is NOT a tax agent, a financial planner, a banker nor a stock broker. Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their own personal circumstances before making any decisions.

Money – Tom on Tuesday is taking requests

January 20, 2011

Since I started seriously blogging again in December, my posts have ranged across a diverse number of topics, some serious, some not so. I have noticed however that there is a spike of interest whenever the topics turn to money, whether business or personal. So, I have decided to take requests. I invite readers to send me their questions about managing money, personal budgeting or anything about financially setting up and running a business.

A little about my background. I am a CPA (Certified Practising Accountant). I have worked for many years as an accountant for various businesses running their day to day financial matters and preparing regular financial reports for business owners and managers. I have also has several stints working in public practice preparing financial statements and income tax returns for both businesses and individuals.

Here is what I am NOT. Although I have worked as an employee in accounting practices, I have never been a principal able to practise in my own name. I am also not a tax agent. This simply means that I have been qualified and experienced enough to be an accountant and tax return preparer for other business people but never for myself. Also, although I understand many things about investments in shares and property, I am not a financial planner.

That aside, I am prepared to answer financial questions as far as my experience allows. I intend to put the same qualification forward as you would hear for a radio talk back show or you would read in a newspaper column. My advice at all times is general in nature and not meant to be acted upon by any particular individual. Anyone reading my thoughts should get their own specific advice before making any financial decisions.

So what can I do. I can give the benefit of my experience in business and financial matters. I will also be making numerous links to relevant information on the internet. By doing this I hope to cut down on the time you take to wade through the mountains of information on the web.

So, fire away with your questions!

Personal Budgeting – Making the most of your Money

January 20, 2011

Saving for Special Occasions

Jingle Bells – on 31 January it will be a mere 47 weeks to Christmas Day! Depending on your shopping and budgeting habits, this information will bring a feeling of joy or an anticipation of dread. Some will have it all organised. Others will cross their fingers, and trust that the credit card will be paid off before next Christmas! How about using the time (and pay packets) between now & Christmas to put some money aside? That way, shopping for presents and Christmas Day meals will be a little financially easier this year.

From next pay day, put aside $20 a week (or $40 a fortnight) each pay until Christmas. That is $940 you will have to spend on Christmas! What does it mean to “put it away”? Deposit it to a second, card-less bank account until needed; put it safely in a piggy bank; put the money towards lay-buys; pay the money in advance onto your credit card, so that you have a “bank” for present buying.

How do you find the $20/week? Just a few ideas: forgo a weekly takeaway; buy fewer lunches/drinks/coffees at work; “donate” the cost of a pack of cigarettes to the cause.

Even if you plan to spend more than $940 on Christmas, at least you have made a start on paying for Christmas. If instead you put away $40/week ($80/fortnight), you will have $1880 for Christmas cheer!

The same plan works for any other special occasion or particular item – a holiday, new furniture, deposit for a car.

Getting Organised – for many the idea of budgeting is boring. For others setting up a budget is just too difficult. Still others have no idea where to start. This blog is here to help anyone learn more about personal budgeting.

There is an Australian produced product called Moneybags, details of which can be found here. Moneybags supplies a kit that enables anyone to setup, maintain and update a personal budget. You can run a budget for yourself or with a partner. You can run a budget whether you have few financial responsibilities or many. Moneybags not only helps you set up a budget but helps you keep track of how you are going. In addition to expenses, you can also set up savings goals and keep an eye on your progress. Moneybags comes in a compact A5 size folder with full instructions.

If an Excel spreadsheet is more your style, ASIC provides a budget planner here.

What Does a Habit Cost You? – Do you have a habit that you would like to give up? Does this habit cost you money? Could you use more motivation to help you give up? Sometimes putting a monetary value on a habit gives us a different perspective.

Say your habit is eating chocolate. You have decided to reduce the amount of chocolate you eat for your health. But chocolate is just so nice – perhaps you will give up tomorrow! Could the prospect of saving money help you reduce the amount of chocolate you eat?

Say you currently spend $3 a day on chocolate, just on weekdays. Let’s say you decided to only buy chocolate three days a week. What is it worth to you? Savings – 2 days x $3 = $6/week, $25/month, $300/year. What if your habit was buying CD’s? Say, average spend is $60/week. Change that to $30/week. Savings: $1,560/year. The most important thing is to decide ahead of time what you will do with the savings. What are your goals – new clothes, travel, car, a house? Bank the savings and enjoy putting them towards fulfilling your goals!

Ryanair – Rip off in the skies!

January 17, 2011

Ryanair is a low cost airline operator based in Ireland. Have you caught today’s newspaper report? Until now they have been charging 40 Euros (A$54) to print out a boarding pass if the passenger forgot to do it at home! A judge in Spain has now prohibited them from the practice because of a court case brought by a Spanish lawyer. To put this charge into perspective, Ryanair’s air fares start from as little as GBP 7 (7 British pounds)!

Low cost airlines such as Ryanair have been at the forefront of delivering low air fares by, at first, either getting rid of or asking passengers to pay extra for so called optional extras. The reasoning used by these low cost operators is that these optional extras are built into the cost of the more expensive air fares. The first thing to go was “free” food. Many people thought airline meals were not worth eating. So why pay for something that is built into the fare if you don’t want it? In Australia, Virgin Blue was the first mainstream airline to provide food as an extra you could pay for.

Next to go was “free” baggage. This one is also easy to understand. Not only does baggage have to be transported to and from the aircraft and loaded and unloaded, it is also of considerable weight. Extra weight on an aircraft means extra fuel burnt and thus extra expense. If no one brought any luggage at all, then the airline would save a heap on fuel and baggage handling. The low cost airlines often charge for any booked baggage, charging less if you tell them about it when you check in online. Their credo is customer choice. So if you are just nipping away for a couple of days and only have a small carry on, there is no payment at all for baggage.

As the years have gone by though the list of “optional extras” has lengthened considerably from meals and baggage. An interesting variation came due to a quirk of aircraft design. The space between rows on many aircraft is slightly larger adjacent to the emergency exits. Some smart passengers who were taller than average soon realised they could get access to seats in these rows for no extra if they simply asked for them. Smarter airlines quickly realised these seats are a valuable commodity  that people would pay for!

When laws changed in Australia a few years ago, all merchants were able to charge a fee for using a credit card. This is somewhat understandable as there is a cost to merchants for offering credit card facilities. Some people however think that this should simply be absorbed as an overhead of running a business. Not the airlines. Not only have airlines starting charging a credit card fee but it is often a flat fee per passenger, not a set percentage of the transaction. This can practice can produce a credit card fee that reaches far beyond mere cost recovery. It is also near impossible to book an airline seat WITHOUT using a credit card!

No area of the aircraft is safe from extracting additional fees from customers. Ryanair has considered charging a pound to spend a penny (use of the toilet). They are also looking at equipping their aircraft with “vertical seating” so that they can simply cram in more fare paying passengers!

Next the air travelling public should perhaps expect a fee for scuffing the carpet, wear and tear as they fasten their seatbelts and a per minute charge for gazing out the window!

Look here for a full list of Ryanair’s fees. Note that while the fees in Pounds or Euros are nominally the same, the exchange rate is around 1 Pound = 1.2 Euros. So a five pound fee converts to around six euros. Since the fees are nominally the same (5 pounds or 5 euros), those in the UK are being stiffed about 20% extra in fees!

Look here for a full list of Tiger Airways fees. Notice that they have trade marked their “boardmefirst” fee ($6) and cannot provide any detail on what you get for your “convenience fee” ($7.20)! Too inconvenient for them to explain it apparently!