Hi
My husband and I are slowly moving towards buying our first investment properties and are after some advice on how to financially set up our venture. We have a St George Residential Loan (6.37%) for our PPOR (valued at around $500K) and owe $50 000. We are planning to buy 2 investment properties valued at approx. $250,000 each in the next 6-12 months. And then more investment properties as our savings/equity permit.Our investment plan is based on Lomas’ positive cash flow approach and we are interested in a LOC as suggested by her. I have spoken to St George and they have recommended their Portfolio Loan (LOC) (7.14% or 6.34% when combined with Advantage Package). I am also aware than NAB has a portfolio loan (6.25%).
What attracts us to a LOC is that each investment property only needs a small increase in its value to make the total values enough to buy more (whereas if separate loans this would be harder/more costly??). From my understanding, so long as the LOC can be split then keeping personal and investment $ separate for tax purposes is achievable.
I suppose I am still unsure about a LOC being the best financial structure for investment properties. What other options could I consider or is the LOC the way to go? If so what other LOC products should I consider??
Thanks, Liz
Hi Liz
Welcome aboard.
I like the Lomas approach to property investing and I have enjoyed her books – but I'm not a huge fan of the approach taken in structuring finances.
The STG portfolio loan is fine – but you need to set-it up correctly.
You just need to set it up as a second, stand-alone loan against your PPOR which will be used as the deposits/costs on your IPs.
For instance, if you're looking to purchase a couple of IPs worth $250k each, then you'd set-up a $120k portfolio loan against your PPOR which would be used to cover two 20% deposits and costs on each $250k IP (about $60k each).
You'd then set-up separate, stand-alone interest only loans for the remaining 80% for each property (two loans at $200k each).
This way, you've avoiding crossing up your properties, which is in your best interest and not the banks.
If you look longer term – and think you might purchase more than a couple of IPs, then I'd look to access more equity now. You won't pay interest on it until you use it.
It probably all sounds a bit confusing but hopefully it helps.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
i would only use a LOC secured on your current house and then use this as deposits with the main loans for each new property being IO loans.
With that approach all the securities would be cross collateralised which is not good.
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 Liz,
I am not a broker so take what I say with a grain of salt.
It sounds like you are a little fixated by interest rates – interest rates are only part of the finance equation as you also need to consider serviceability, or, in other words, how much you can borrow.
Thanks banks have different servicing calculators and you may find that another bank, not currently on your radar, may be a better option for you. If this is the case then switching banks now, when debt levels are low, may be a viable option.
For these reasons alone I would grab hold of a broker (two have already replied to your original question/comments) and see what they think.
Pays to get your financing foundations right as early as you possibly can – and that is now.
My thoughts.
Derek wrote:It sounds like you are a little fixated by interest rates – interest rates are only part of the finance equation as you also need to consider serviceability, or, in other words, how much you can borrow.Amen – it happens all the time. Trying to save $20 per month on a 0.1% lower rate but wrong lender can end up costing a lot more in the long run. Not saying that's the case here but the "lowest rate" shouldn't be the number one concern when looking to purchase multiple properties.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks everyone for your feedback.
Jamie with the loan strucutre you have suggested I am still a little confused about how I access the equity in the IPs. do i access the equity by increasing the existing line of credit by securing it against the IPs (and isn’t this then cross collaterisation) or do i get a new line of credit for secured against a single IP?Liz
Liz, you must use one security per loan or you will be cross collateralising.
This may be a pain if you have 10 properties with $10,000 available equity each, but it is worth it I think,
To see the dangers of crossing look at this thread where someone has sold a house but the bank won't release it because the other house remaining has reduced in value:
http://somersoft.com/forums/showthread.php?t=79661
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:i would only use a LOC secured on your current house and then use this as deposits with the main loans for each new property being IO loans.With that approach all the securities would be cross collateralised which is not good.
Terry, any comment on using loans instead of the loc for the deposits. A mortgage broker that we saw recommended 2 x $60,000 loans with st george for deposits that we can then use for loans at another bank
Liz
Yes i agree with that but cant see why you would use a LOC when an equity loan us cheaper.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
lizpaul wrote:Terryw wrote:i would only use a LOC secured on your current house and then use this as deposits with the main loans for each new property being IO loans.With that approach all the securities would be cross collateralised which is not good.
Terry, any comment on using loans instead of the loc for the deposits. A mortgage broker that we saw recommended 2 x $60,000 loans with st george for deposits that we can then use for loans at another bank
A standard loan would be ok. But make sure you don't borrow money and park it in a savings account to write a checque. Draw it down with a bank cheque made out to the person you are paying – such as real estate trust account etc. Using a LOC makes this part easier.
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
Liz,
To buiild a multiple property portfolio, you need to make sure you have the finances structured in order for you to be able to borrow the funds needed. As Terry suggested, a start would be to establish a separate loan facilty against your existing PPOR and it is kept separate and only used for investment purposes. Whether it is a LOC (for flexibilty) or a term loan depends a little on how soon you are going to require the settlement (of the IP) amount and whether you use a debt recycling strategy.More important is the cross security issue and whether you are looking at future revaluation and refinance strategies. If you are, then use a different lender each time (as much as practical). After all, they are simple IO investment loans until you have paid off your own PPOR. You use each lender is a structured way, using the lowest servicing lenders first, then work your way up depending on the number of properties your goal is.
You use that settlement amount from your existing PPOR new facilty, whether it is 10% or 20%, then for the majority of the funds required to pay, obtain a term loan IO from a new lender. The security is separate, the interest rate for a term loan is generally 0.1% (or more) lower and you have the flexibility of locking the rate ir it suits your needs.
The Lomas positive cash flow approach can suit some investors some of the time but like anything else, it will not suit all investors all of the time. Make sure you get ownership sorted out first to benefit from lower margnal tax rates if it is a positively geared purchase.
Good luck with our portfolio.
Greg
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