Hi all,
I'm still trying to learn about property investment and this forum has been really helpful. Recently, I've been reading some books by Tony Melvin & Ed Chan, and I'm stuck trying to understand some of the concepts. So, some help is really appreciated.
1) In the How to Achieve Wealth for Life book, there's a topic on not paying off your home loan asap. If I understood the book correctly, it gave an example of paying of a PPOR through a P&I loan for 30 years, versus having the PPOR on an Interest only loan and putting the difference into an IP. The total equity in latter is better. However, this seems to be different to some of the advice I've been given where I was told it's better to payoff PPOR asap and using its equity to get loans for IP. I'm a bit confused, so would appreciate to hear what others think.
2) In the same book, there's a section on self-funding investment property, which suggests capitalising interest. I can't claim to understand the whole idea completely, but am I correct in assuming that the writers are suggesting to use LOC against the investment property's equity to pay off the interest & other cost? As long as the equity rises faster than the interest rate on the LOC, then it's OK?
3) In a different book (How to Legally Redue Your Tax), there were examples of unit trusts being setup. It seems like a good idea, especially since income units can be owned by highest income owner if the properties in the trust are negatively geared, while capital units can be owned by the lower income earner. I'm just wondering if this sort of structure is widely used and if there are any downsides to it?
Thanks.
XYA
1. Think about it – the fastest way to wealth creation is to pay off your PPOR ASAP, therefore always P & I. There are no 2 ways to it. Why pay interest only on PPOR when there is absolutely no tax benefit. You are only making your bank richer. The only time I would do that is to get a family member to buy the property and you rent it from the family member who is paying interest only which is tax deductible for that member – both parties win. Your family member will have no issues of tenant not paying rent or you throwing wild parties and thrashing the place
2. Using LOC is fine provided it is put to good use, ie absolutely required. If not you are opening another debt opportunity and this puts you further away from asset / wealth accumulation.
3. Unit trusts can be volatile depending on who is managing the trusts. You also have to pay management fees regardless of whether the trust is making money. I would rather invest in property shares some of which offer a guaranteed return eg Myers shares were offering 15% guarantee returns. This is a lot higher than most investment properties and you dont have the hassles of paying strata fees, property management issues etc. Only thing is you can’t live in the shares.
Thanks for the response, awsydney.
1) Yes, I was under the same impression that paying off PPOR asap is good until I read the book, and since it was written by accountants, I thought I might have missed something.
3) Just to clarify that the unit trust mentioned in the book is basically setting up a unit trust to own the investment properties. Not sure if I'm using the right terms, but I'll then be the trustee & beneficiary of the trust. According to the book, I could structure the unit trust such that the capital units go to the lowest income earner, so that in the event any of the properties in the trust is sold, the CCGT is taxed according to the lowest income earner tax bracket. Similarly, if the properties in the trust is negatively geared, then the highest income earner would receive the income (which will be negative) units.
Look sorry AW i dont want to appear arguementative but have to totally disagree with some of your comments.
1) The fastest way to wealth creation is to pay off your PPOR ASAP, therefore always P & I.
Have to disagree Interest only with a 100% offset account is the way to go as this gives you flexibility and this is the key.
2) I would rather invest in property shares some of which offer a guaranteed return eg Myers shares were offering 15% guarantee returns
Sorry but again this is clearly incorrect. Coles Ordinary Shares do not have form of guaranteed return. You are refering to Preference shares which carry a coupon note and whilst the return maybe guaranteed the value of the asset will rise and fall according to the fixed interest rate market. It sounds like you do not fully understand fixed interest markets so would careful offering such advice on a forum.
Richard Taylor | Australia's leading private lender
LOL!
1. I also happen to be an accountant and I can surely say that accountants may not be the best business people contrary to popular belief. I have known many accountants who are very good at keeping score but are very myopic in their views about the world.
2. OK, I misunderstood and thought you meant buying unit trusts in a financial institution. In this case, it is like a family trust. There are some technicalities to this and I would suggest you consult a solicitor / accountant who is experienced in setting up a family trust to advise you.
xya wrote:Hi all,I'm still trying to learn about property investment and this forum has been really helpful. Recently, I've been reading some books by Tony Melvin & Ed Chan, and I'm stuck trying to understand some of the concepts. So, some help is really appreciated.
1) In the How to Achieve Wealth for Life book, there's a topic on not paying off your home loan asap. If I understood the book correctly, it gave an example of paying of a PPOR through a P&I loan for 30 years, versus having the PPOR on an Interest only loan and putting the difference into an IP. The total equity in latter is better. However, this seems to be different to some of the advice I've been given where I was told it's better to payoff PPOR asap and using its equity to get loans for IP. I'm a bit confused, so would appreciate to hear what others think.
2) In the same book, there's a section on self-funding investment property, which suggests capitalising interest. I can't claim to understand the whole idea completely, but am I correct in assuming that the writers are suggesting to use LOC against the investment property's equity to pay off the interest & other cost? As long as the equity rises faster than the interest rate on the LOC, then it's OK?
3) In a different book (How to Legally Redue Your Tax), there were examples of unit trusts being setup. It seems like a good idea, especially since income units can be owned by highest income owner if the properties in the trust are negatively geared, while capital units can be owned by the lower income earner. I'm just wondering if this sort of structure is widely used and if there are any downsides to it?
Thanks.
Hi
I haven't read those books, but I think the some points:
1) paying IO on your main residence reduces your monthly repayments which enables you to hold more investments. If the investments are growing faster than the interest being outlayed than this can help your overall position.
I agree it is best to pay off non-deductible debt first is a good principle. But paying less means owning more.
2) THis needs careful planning – see another recent thread on this topice. THe theory is you borrow to pay for investment expenses and free up more cash to pay into your non-deductibe debt (but see 1) – or into your 100% offset account. Overall the interest should be the same, but you are increasing your tax deductible interest.
3). This would not work now in a way that would benefit you. To be able to claim the interest the unit holder would need to get all of the rent and the capital gain. See ATO TD 2009/17. A lot of people have deeds set up which are not commerically viable and the ATO will deny the interest deductions. Lots of anguish in years to come. You would also have problems borrowing for this these days.
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
awsydney wrote:XYA 1. Think about it – the fastest way to wealth creation is to pay off your PPOR ASAP, therefore always P & I. There are no 2 ways to it. Why pay interest only on PPOR when there is absolutely no tax benefit. You are only making your bank richer. The only time I would do that is to get a family member to buy the property and you rent it from the family member who is paying interest only which is tax deductible for that member – both parties win. Your family member will have no issues of tenant not paying rent or you throwing wild parties and thrashing the place 2. Using LOC is fine provided it is put to good use, ie absolutely required. If not you are opening another debt opportunity and this puts you further away from asset / wealth accumulation. 3. Unit trusts can be volatile depending on who is managing the trusts. You also have to pay management fees regardless of whether the trust is making money. I would rather invest in property shares some of which offer a guaranteed return eg Myers shares were offering 15% guarantee returns. This is a lot higher than most investment properties and you dont have the hassles of paying strata fees, property management issues etc. Only thing is you can't live in the shares.I think aw has totally miss read the question on trusts.
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
Terryw wrote:1) paying IO on your main residence reduces your monthly repayments which enables you to hold more investments. If the investments are growing faster than the interest being outlayed than this can help your overall position.I agree it is best to pay off non-deductible debt first is a good principle. But paying less means owning more.
If I have plans to upgrade my PPOR in a few years time from my current apartment to a house, and turning the apartment to an IP, would that then make more sense to have the PPOR loan as a IO?
Terryw wrote:2) THis needs careful planning – see another recent thread on this topice. THe theory is you borrow to pay for investment expenses and free up more cash to pay into your non-deductibe debt (but see 1) – or into your 100% offset account. Overall the interest should be the same, but you are increasing your tax deductible interest.Thanks, yes, I saw the other thread. Just wondering if LOC is a common approach for property investors?
Terryw wrote:3). This would not work now in a way that would benefit you. To be able to claim the interest the unit holder would need to get all of the rent and the capital gain. See ATO TD 2009/17. A lot of people have deeds set up which are not commerically viable and the ATO will deny the interest deductions. Lots of anguish in years to come. You would also have problems borrowing for this these days.Thanks for the update. I think that book was published a few years back.
It’s fine if you need flexibility and want to own more at the same time.
From my own experience, I didnt need the flexibility and found the fastest way to pay off PPOR is with P & I whilst buying other IPs.
Hi xya,
I agree with Richard and Terry. (and I have rarely seen them offering anything but useful contributions)
While awsydney’s comments may work on an individual basis, it may not work for everyone.
Accountants are typically not authorised to offer any financial planning advice unless they are registered and comply with RG146. This will apply to awsydney and the author of the book you mentioned. Their recommendations should be treated as experience based and not expert opinions.1, PPOR using P&I vs IO
Mortgage Interest paid on holding a PPOR is not tax deductible against your income. Tax accountants will probably recommend that you pay it down as quickly as possible to reduce level of debt as a Tax professional. However, this is not always the best option for everyone in terms of investment strategy. Having to pay the P in addition to I, as Terry said will mean you have less disposable income and less opportunity to hold more investments at the same time. It depends on your circumstance and your risk appetite.
I have not read the book you mentioned, however if the author offers a comparison between the two options and the method of comparison is logical, then it may work.2, If I have plans to upgrade my PPOR in a few years time from my current apartment to a house, and turning the apartment to an IP, would that then make more sense to have the PPOR loan as a IO?
Richard’s recommendation may work best for you in this case. IO with 100% offset.
Because any interest paid in order to generate income is tax deductible. This option (IO + offset a/c) should allow you to deduct the whole amount when you are ready to upgrade.
However, if you initially paid the loan down for your PPOR, and later covert it to an investment property, and take a second mortgage to purchase a different PPOR – interest paid on this additional loan amount will not be tax deductible.
You should be aware of CGT implications in order to make the best decision.Best of luck
KennyThanks for all the comments. You guys are great.
I'll digest all the advice and will likely to be back with a few more questions….
The above discussion about the topics was new for me. My concept about those matters was not so clear. But I am a bit confused because of the two types of discussion.
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