I am currently renting a townhouse, pending a career change which may result in a move interstate. The proceeds from the sale of my owner occupied property have been invested in a managed fund until I’m ready to build/buy my next house, where and when ever that may be.
I have an investment property which needs to be re-financed due to the expiry of the (fixed rate, fixed term, interest only) loan. The house is negatively geared and costs me about $180 a week. The tenant is my 80 year old father, who is likely to move into an Aged Care Facility within the next 12 months. When that occurs, I will have to decide whether to sell the property, or renovate it and rent it out at market rate.
The property is currently valued at around $320K with $166K owing on it. A refurbishment could cost anywhere between $20K and $50K depending on whether it’s just a superficial facelift or whether a full renovation would justify its cost.
I also have a longer term goal to acquire more investment properties with positive cash flow to supplement my retirement income when that comes into play in about 12 years.
Essentially I think I need a loan structure with the greatest possible flexibility, at the least possible cost. I have been researching various structures and loan products and it seems that a line of credit secured by the investment property may be the way to go. I’m not sure I fully understand all the implications of this and would like to hear from people who have used this type of product, in particular where the catches might be, eg. hidden costs, taxation consequences. If anyone has had good or bad experiences with a particular lender, I would like to know that too.
I would also be interested in suggestions for other approaches regarding the re-finance issue, given my longer term goals.
Hi Allison,
Just a few random thoughts that may (or may not) help.
You will need to be careful to ensure that your father is paying market rent for the property as the ATO may otherwise consider the property to be a true ‘investment’. Obviously this throws other considerations into the melting pot but it is, nonetheless, food for thought.
Once your father moves out and you do the renovation you may well find that you can ratchet up the rent pretty quickly. This should make a significant difference to your cashflow. This, and the likely improved value of the property (if it is in a good locality), would make it desireable to hang onto as your property portfolio will require a mix of growth and income to do the job you want it to do in 12 years time.
You currently have useable equity of around $90K (80% of value less existign mortgage) and can use this to fnd the renovation and/or deposits for other properties.
A drawback with lines of credit/equity loans is that there can be a temptation to use the available funds to purchase personal ‘nick nacks’ which then creates all sorts of accounting nightmares. If you do use a line of credit/equity loan then ensure you do not mix the two types of spending.
Lines of credit also have a tendency to let you capitalise the interest – this too is a big ‘no no’ as you then create another accountant’s nightmare.
We use a 100% offset accountant for depositing all of our income which is set against our home. This helps to reduce our non-deductible debt quicker than would otherwise be the case.
Electronic transfers of interest only payments into the various accounts takes place as required and we have time to steer the ship without having to worry about such mundane matters.
We have leveraged off our PPOR and IPs interest only equity loans which provide the deposits for our investment purchases. When we find a suitable property our broker organises a 80% or 90% loan for the property from a bank that is favourable to our situation.
And so on and so on.
You may well be advised to sit down with a broker and accountant and set your structure up correctly from the beginning. This will save you costs in the long run and will also ensure that these professionals are conversant (and suportive) of your plan.
Derek
[email protected]Property investment advice and researched property in quality locations available.
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