I struggled for so long trying to get a good investment system down, that would be stable and have sustainable growth.
After purchasing my 17th property , heres what im doing now….
Loans:
Before:
I used to cross two or three properties in one loan not understanding how i could pay for deposits on new purchases. All my rents would go into one single bank account, servicing would all come out then try to juggle the expenses from the rest. (half yearly rates would suck some months income dry)
Now:
I locate a property with at least 40k usable equity and do a cash out equity draw up to 80% LVR. So what happens ill draw 40k from one property and place the cash into an offset account until used, that reduces the loan somewhat until used. This cash can be then used to pay cash 20% deposits on new purchases or buy unencumbered property.
The rental income would have to support the equity cash out as well, a quick option is to locate a property do a reno, increase the value AND rent to cover the equity draw.
This option was more stable as it gives me a huge chunk of liquid assets WITHOUT selling them off to get the same result. This also separates all your loan/properties without cross collateralizing.
I made this diagram primarily to show my bank manager how to set up my loans, so here it is for everyone
Pretty standard approach.
Problems occur with always loan redrawing after completing renos on properties are the lowering of serviceability unless it is covered by a increase in rent. But also it becomes harder to move to the next level of investing. Lets say you bought and renoed and revalued a property. Drew down the equity made and went and purchased another property and renoed and then drew down. Each time if your buying standard bread and butter properties under 400k and making lets use your example of 40k. Then what is your maximum earning potential.. Its only 40k at a time.
Sometimes letting go of a one or two or 10 properties can release the cash required to take your investing to the next level. Ie a Bigger development where in 1 year you could leverage and make 300-400k etc. It beats renovating 10 individual properties in the same year.
westnblue wrote:I locate a property with at least 40k usable equity and do a cash out equity draw up to 80% LVR. So what happens ill draw 40k from one property and place the cash into an offset account until used, that reduces the loan somewhat until used. This cash can be then used to pay cash 20% deposits on new purchases or buy unencumbered property.
You are doing well. But borrowing money and parking it in a savings account is potentially dangerous. You are breaking the direct nexus between borrowing and investing. The longer the money is unused the weaker this nexus becomes.
If there is other cash in the offset account then you will be mixing money and non borrowed money and that will mean you won't be able to fully deduct the interest in any case.
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
Im only parking it until i find a new property usually under 4 weeks, for every 100k im only paying $420 for a months interest (even less with offset).
With 100k cash i can pay deposits on 5 regional properties, which in turn will make more equity if bought right
westnblue wrote:Im only parking it until i find a new property usually under 4 weeks, for every 100k im only paying $420 for a months interest (even less with offset).With 100k cash i can pay deposits on 5 regional properties, which in turn will make more equity if bought right
I stand by my comments!
Doesn't matter if it was one hour.
You should seek tax advice.
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
Already have, accountant said theres no problem, just a but more work for him. The properties are in a company/trust and as long as the cashout is used for other company properties theres no harm.
As a tax lawyer i disagree.
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
I cant see your angle…. Im drawing equity to pay for more property for the SAME company.
And if you say thats wrong, well cross collateralizing is the same thing just more risky. How many people have drawn equity to go and buy more property – Nearly everyone I know.
What Terry is trying to say is that, the purpose of the funds determines whether or not the interest will be deductible. By depositing the funds into your offset account, the initial purpose is not to pay the deposit. Ideally, the deposit should be paid directly from the loan draw down, not via your offset account.
westnblue wrote:I cant see your angle…. Im drawing equity to pay for more property for the SAME company.And if you say thats wrong, well cross collateralizing is the same thing just more risky. How many people have drawn equity to go and buy more property – Nearly everyone I know.
The same laws apply no matter who the borrower is.
Interest is only deductible if the funds used are borrowed to invest.
You are borrowing and parking in a savings account before the investing. The direct nexus is thereby broken. Once the funds are in the savings account they are no longer borrowed.
However all is not lost, you may still be able to trace the money and there is a PBR which allowed interest to be deductible on something similar.
But, if there is any other money in the savings account then the full interest cannot be deductible and must be apportioned. The authority for this is the case of Domjan from 2004. Mrs Domjan borrowed money and put it in a cheque account for about 1 day just to write a cheque. She had other cash in the cheque account and this caused her to lose the full deductibility of the interest on that borrowed money.
eg.
Joe borrows $40,000 and gets an IO loan because the LOC rate was slighly higher. His accountant tells him there will be no tax problems and to just stick it in his offset account.
The offset account has $20,000 in it already. Now it will have $60,000
The percentage balances are 33% private and 66% investment.
So Joe will, at best, only be able to claim interest on 66% of the interest incurred on the $40,000.
At worse it will be much less if Joe has put money in and taken it out several times – and it will be much harder to calculate.
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
spearsy wrote:What Terry is trying to say is that, the purpose of the funds determines whether or not the interest will be deductible. By depositing the funds into your offset account, the initial purpose is not to pay the deposit. Ideally, the deposit should be paid directly from the loan draw down, not via your offset account.Thanks Spearsy! That is it in a nutshell.
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
OK i understand now.
What if i had an unencumbered property and the value was 100k and drew out 80k against it. Would it still be in the same position – aka the entire loan interest not being tax deductible?
westnblue wrote:OK i understand now.What if i had an unencumbered property and the value was 100k and drew out 80k against it. Would it still be in the same position – aka the entire loan interest not being tax deductible?
From your question I don't think you do understand the concept.
Same principals apply no matter what the security is. So if you drew down $80k (ie borrowed) and parked this in a savings or offset account and then later used it for investment you will run into the same problems as outlined above.
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
Is this the same if the company owns all the money and properties, wouldn't you then go on company tax for the lot anyway?
Jezelle wrote:Is this the same if the company owns all the money and properties, wouldn't you then go on company tax for the lot anyway?Yes, the same principals apply. A company can only claim expenses related to the production of income or business under s8-1 ITAA97. Not all expenses would be deductible, just like a person.
In this case the company is acting as trustee too – not this this changes anything.
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
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