Hey guys I am a beginner and I have this question going through my head. I am buying an apartment for $600,000. I have 20% deposit ready. My plan is to live in the apartment for about 5 years and than turn it into a Investment property, rent it out and purchase a home to settle in. I do plan on having a 100% offset account which I can store all my savings and principle repayments in, so later I can withdraw from my offset account and deposit into my future PPOR and be able to claim a higher tax deduction for my apartment when it becomes an IP. My question is whether to deposit a 10% or 20% on the apartment, I am thinking if I deposit 10% which will be a $540,000 remaining principle and than I can store the remaining 10% (I have) into the offset account so in future I have a higher tax deduction when it becomes an IP or should I just pay the 20% deposit and have $480,000 remaining so the loan repayments will be cheaper? Sorry if it doesn’t make sense, I’m new to the whole property investment thing.
My first thought is buying with a 20% deposit reduces your risk and that is the most important thing to set out to do when investing above all else you need to preserve your investment capital and reducing your default risk with a 20% deposit does just that.
If you would like to reduce your risk further you could rent it out instead of living in it. Why you ask? Because the bank looks at part of the rent (80%<>) as though it is your income (almost yours) as a result you will increase your borrowing capacity for your next purchase. But thats not all, generally speaking renting is cheaper then then owning, so you will have more surplus income to keep on saving for your next investment property or PPoR.
I would also expect that at todays interest rates the apartment should be positively geared after tax, or you are pay to much.
I hope this helps.
Modernity Investing
Email MeYou’re on the right path wanting to maximise your tax deductions should it become and IP down the track.
It does depend on your risk profile whether you would be more comfortable with a 10% or 20% deposit. If your deposit is <20% then you will need to add LMI into that equation too.
Another thing to consider too is principal and interest vs interest only as once again, to maximise your tax deductions you don’t want to be reducing the principal.
Other than the apartment and the next PPOR you plan to get in around 5 years time are you planning on any other property purchases in the meantime?
Kinnon Bell | Kinetic Funding
http://www.kineticfunding.com.au
Email Me | Phone MeMortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.
One option is to put down 10% instead of 20, cop the LMI and then offset the balance of funds. Put the loan as interest only with an offset account and make the equivalent extra principle portion payments into the offset. Once you are ready to buy another house to live in and make the current property an investment, draw the offset funds out as your deposit for your next PPOR.
This will maximise your deductibility, whilst reducing your PPOR loan significantly when you upgrade.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Speak to your tax advisor about related party loans. Could you borrow from a parent, say 20% and a bank 80%. Properly done you could borrow 100% or 104% and have more interest deductible when you move out.
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
As stated by the brokers and Terry above, there are a few options but if the long term goal is max tax deductible then you want a larger loan amount, keep your cash separate, set the loan to interest only and let the offset grow so your next purchase is with the cash reducing that eventual ppor (non deductible) loan.
BuyersAgent | Precium
http://www.precium.com.au
Email Me | Phone MeSouth Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au
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