Ok, so it seems the general consensus is to never own an investment property outright but rather just pay the interest.
I assume then the only money is made when you sell the property down the track???
i had this crazy idea that i could own outright two 250k IP's rent them out for 250 a week each and then use that 500 a week to help pay off my ideal approx 500k PPOR which would mean i wouldn't have to work as much.
It has become apparent through this site that i should put the money into offset account/s over the next 5 years and then using it to pay the PPOR almost outright or keep it in the PPOR offset because inevitably every one moves on.
My first silly question/s is what is the problem with the first scenario? how much tax would you be paying ? why is it bad to own an investment property – are the taxes huge? What are we avoiding?
My second silly question is if i go with the second scenario where is my income coming from if the entire rent is paying the IP's interest? when do i see the money? I mean how does one become financially independent if the money they generate from rent only goes back to the bank? Put it this way does anyone live of rent they receive?
THANKS EVERYONE sorry for being silly.
Carl,
Definately not a silly question in my mind. A very crucial one.
It depends on your strategy, if you pay off your IP's you can't deduct your interest from your tax so your are missing the opportunity to borrow money cheaply and increase the size of your portfolio. In principle the other way to get money out of your investment properties is by refinancing and living off the equity (bear in mind the money you take out for living will not be tax deductible). In the current financial environment living off equity has become quite difficult unless you still maintain a reliable income stream.
I would say that the sensible strategy is to first grow your portfolio (i.e. accumulate) and during this phase you do not pay off the loans but use spare equity to reinvest and increase the portfolio. Once you have the required portfolio size (in $ terms not property numbers) you then need to decide what your strategy will be to get the money out i.e. live off equity or sell some of the IPs and pay off (most of) the outstanding loan balances or a combination of this.
Many angles and things to think through on this one so I could write on and on …
Erik
PS Michael Carmen wrote a series of articles on this in API Magazine worth reading. You can read his articles on his on website http://www.wealth-enhance.com.au or at http://www.propertyupdate.com.au/authors/40/Michael-Carman or start at my site http://www.retireonproperty.com/whyproperty/how-to-retire-on-property.html
Its not a bad idea to pay off debt, but better to pay off non-deductible debt first.
Imagine if you still had a home loan and had 2 properties paid off. You would be paying high interest on the home loan – which you could not claim a tax deduction for. And you would be getting $500 rent with not much to offset this (deductions). So you will earn an additional $25,000 pa which goes on top of your other income so you are likely to have to pay a high rate of tax on this money.
If you did it the other way around, you would have a low home loan (or nil) and would have interest here. Then you would have high loans on the investments so your profit there would be low and therefore little or no extra tax would be payable.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Thanks heaps for your input!!
I really appreciate the comments!
So i guess i have plan now,
i am going to always keep my money in an offset account which is linked to my PPOR mortgage
and if i move ill take that money with me.
You guys are all ace!
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