Hi Claudio,
Good on you for asking the questions first – smart move !! You have already received some invaluable knowledge from several qualified members, each offering good reason to question this loan and where it may lead.

This is a very important decision for me and my family and I am a bit scared to take the wrong choice, I hope someone can help me to find the best (if there is one) solution./

Absolutely right. I’d suggest you check the other answers you have already received, and contact one of the repsonders (maybe the one whos response seemed to “click” with you. But really, any and every one of them would be able to explain what loan type would be best for you, and (maybe) WHY this loan could become a problem into the future.

Pick up the phone and call one of them. :)

Even as a non-adviser, I could see several holes in the advice you have already received fro. Never ask a barber if you need a hair-cut – you know what the answer will be, right?) :p Get the answers from one of our residents – I’m sure you will be much more confident and knowledgeable after spending time with one.

We are buying our first home

Well done – your needs might be different to those of investors right now, but remaining flexible is the key. Who knows – you might want to become an investor a few years into the future. Thinking of your loan structuring NOW is a really good move. Well done.

Now, where’s that phone!!! :p

Benny

PS Just to help you get up to speed on a number of basics, try this :-
https://www.propertyinvesting.com/forums/general-property/4349450

Benny

Hi Wiwin,

Exit strategy for every purchased ip is kind of hard.

I think the real reason for the seminar to mention this is because we don’t automatically think of this when buying things – at least, not to any depth. e.g. when you buy a new handbag, do you naturally think “This will do me for just one year, then I will pass it on to St Vinnies” or, if we buy a new car, we might have in the back of our minds “Ah, this will do me for 5 years, and then I’ll buy another one”. We don’t really think about HOW to get rid of the old one, how much it might be worth then, where would we sell it, etc.

With a purchase as expensive (and immobile) as a house, it is worth thinking this through before buying. Even if your plan is Buy and Hold, events may happen that might change this intent, and it would be good to have already considered what to do before it happens. Like, you might leave the country suddenly, and want to take all of your assets with you – unplanned, but that’s life. Take the time to think through “What would I do if I had to sell it quickly?” before you buy it, and maybe watch the markets for peaks and troughs, in case it suddenly becomes useful to take a profit to get into something completely different.’

I think the process of thinking about the exit is just so that your subconscious mind can be “doing its thing” as you live your life. Having previously thought through the process, your mind will be triggered when you hear of someone selling their place in your area, and you might want to revisit whether Buy and Hold is still the right thing to be doing.

See, over time, Councils change their bylaws, and Govts change laws – any of which can affect your investing. You don’t know today what may change tomorrow, but if your subconscious is aware “You might need to sell one day” then you can go about your life, knowing that you have it covered if you did need to sell.

What if you lost your job right after buying an IP? It probably won’t happen, but it could – so be sure to consider just what you would do BEFORE buying it. Would you take a loss to move it quickly? Do you have an alternative job in your mind? Do you have sufficient savings to “ride the storm” for six months? Can you alter the use of the place to make it MORE attractive to buyers so it will move quickly?

It is probably also a part of getting Finance – when you take on finance, you must have a way of paying it back !!

Benny

Hi Pati,
Welcome aboard, and a great suite of questions. I’ll have a go, then see what others can add (or to pick me up if I get it wrong… eeek! :p )

1) How can this scenario be positively geared.

Except for the Tax deductions, you would be losing ~$85/week in the first year, then $65 in year 2. They assume a rental increase of ~$25/week each year (is this viable? Could be…. but no guarantee).

After Tax deductions, you are positive by $36 a week in year 1, 40 in year 2, etc. You can get this weekly by filling out a Withholding Variation Form, allowing your employer to take LESS Tax out of your weekly Income. Or have it arrive as a cheque from the ATO at year end.

2) I am not sure the stuff listed under Non-cash deductions.

They have calculated the building cost at $215k, so just $135k remaining to cover land cost – small block? Their Profit will be in there somewhere too. Where is this IP being built? Is it a House, Townhouse, or a Unit?

Fittings are $24k (could be about right, depending on just what you are buying). You also are allowed to write off some of the costs associated with the purchase (borrowing costs) as well as Interest on the Mortgage. I see nothing untoward in most of that.

3) Does the assumptions and rates make sense.

I was pleased to see them allowing 7% Interest after 3 years – this could show an expectation that the low rates of today won’t remain at those levels (good thinking). Note that, in Year 5, you are only just breaking even – this is because your non-cash deductions have all but disappeared, and rental increases haven’t yet gained enough to cover the losses of deductions.

DEPENDING on what is being bought, and where, the numbers look sensible enough to me. Do try to ascertain whether a $25/week rental increase each year is viable, as well as their projected equity growth of 7% pa. These are the real “unknowns” that need a bit more digging.

Let’s see what other points pop up from other members,

Benny
PS Just my opinion – I’m not an adviser of any kind !! ;)

Hi Knox,

Am I right in saying that using this method I’m basically freeing up more cash to purchase more IP’s?

Correct – the bank only asks that you pay Interest – nothing needs to be paid off the Principal – so you “pocket” the extra, putting it to work in your Offset account (which helps to REDUCE the Interest owing each month).

And you keep your spare dollars “freed up” too, as you may remove the total contents of the Offset at any time, at which point the original loan and Interest/month reverts to its original settings – which leads on to your next point:-

How does maximizing my tax deductible debt benefit me?

The ATO allows you to claim any IP losses against your personal Income (wages), thus reducing your “Taxable Income”. Now, we have two common scenarios with this:-
1. If an IP is negative geared, you are losing money each month in hopes of a later equity gain. The loss after all expenses, less rental income, is applied to your personal Income for the year. This loss reduces your Taxable Income, but your employer would have been paying Tax for you as though your wage was your only income. With your Taxable Income reduced (by the negative geared loss), the ATO will write you a cheque as a Tax Refund.

2. If an IP is positive geared, you are making money each month. Your accountant adds the Income, less all expenses, to arrive at your total gain for the year from the IP – this is then added to your Taxable Income, and YOU write a cheque to the ATO for the extra. By paying Interest only, you are not spending after-Tax $$ paying down the Principal, but you ARE reducing the Interest paid, so your deductions do get less, and you make more of a Profit each year (and write a bigger cheque to the ATO). Same as if you worked an extra job – you make money from it, you pay extra Tax.

BUT, when you find another use for the $$ in Offset, like buying another IP, and you take those $$ out of the Offset, your original loan and Interest remain at their original amounts, thus you are making LESS money (paying more Interest), so you pay less Tax.

Instead of using your after-tax $$ to reduce the Principal (thus the Interest owing) on an IP, you keep the Principal at its highest, and use the Offset to lower the Interest. THEN, when opportunity knocks, you use those after-Tax $$ you have saved in your Offset to generate another Income by buying an extra IP, or you might use it as a deposit on a PPOR. You don’t have to “ask the Bank” to get some more Equity out of your house to buy another one. No need to – you are your own bank !!

So yeah – HUGE gains and flexibility by utilising Offset accounts (as per that LONG example I linked you to – read it a few times and see if it starts making sense to you),

Benny

Hi Aque,

My goal is to buy a PPOR and aim at a strategy I can have all my saving in PPOR

I’d suggest you add the extra bit at the end that keeps your options open :-

My goal is to buy a PPOR and aim at a strategy I can have all my saving in an Offset Account against my PPOR loan….

See, though you might buy a PPOR now, you MIGHT, in later years, want to turn it into another IP. By using an Offset account, your savings offset the mortgage payments as you save. But, when you withdraw YOUR cash from the Offset account, the original loan is still in place (allowing you to claim the Interest on the full mortgage as a Tax deduction on what might be your new IP – your old PPOR).

Talk about this in depth with the right adviser, or read on here all about it. Be sure to know of this choice before buying your PPOR. One link that helps to answer a lot of early investing questions, including re Offset accounts, is this one :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/

Thanks for adding that extra information re your circumstances,

Benny

Check out some on here – a Mortgage Broker will be able to identify your lending limits, and an experienced one will have all kinds of useful knowledge that may not be advice per se, but will no doubt be useful.

Some on here are certified to give advice too – pick someone who posts here regularly, whose posts appeal to you, and have a chat with them. The effort will pay you dividends.

An accountant might not be useful right now, but for sure, you will need to find a good one at some stage.

Financial Advisers come in Heinz 57 varieties – so be sure to go for one who IS into Property Investing. Otherwise, if you use Yellow Pages, you might be talking to someone who will steer you into other areas which may or may not be what you are wanting.
Or go with a Mortgage Broker who is also a Fin Adviser – problem solved.

Benny

Hi Aque,

Any equity loan I draw from these IPs for my PPOR will be tax deductable.

As I understand it, such a withdrawal would not be deductable. The purpose of the loan determines deductability, not the asset which the loan is drawn against.

Your following comments indicate that you KNOW that, so I think your first (quoted) statement was simply missing the word “NOT”. I agree that having higher leverage against an IP makes sense in most cases.

Re your second paragraph, I’m not sure that debt recycling is the only way – but I agree it might have worked better by paying LMI when borrowing for an IP. As always your “numbers” need to be considered – each situation is different, based on your pay, any savings, your working situation, age, risk profile, goals, etc.

Is buying a PPOR your next priority, or are you talking of paying down the debt on an existing PPOR? Depending on the situation, perhaps a drawdown on the two existing IPs can provide deposit/costs on your third, thus increasing your income for “debt recycling” on your PPOR loan.

Lots of ways to cut it, and I’m sure some of our resident finance gurus will be able to add more, especially in a one-on-one with you where you share a lot more detail.

Benny

PS Tell us more about the title – “Contaminated deposit” – how is this so? I hope you are not cross-colled with your PPOR…..

• This reply was modified 10 years, 1 month ago by  Benny.

Hi Wiwin,
A quick primer on average and median – average is derived from all sold prices added up and divided by number of properties. Averages can be skewed if sales are heavy (say) at the top end. e.g. imagine a suburb that has 5 houses sell last month – 2 at $250k, 1 at 300k, 1 at $400k, and 1 at $600k. Total is $1,800k – divide that by 5 (number sold) and the average is $360k.

The median price for that group is simply the middle property price in the group. Thus, the median is $300k. Of course, most suburbs will have a larger number of sales than just 5 – but it shows you HOW it happens.

Some investors say “Buy below Meidan price”. This gives you the best chance of adding value – whether by reno, good bargaining, or whatever. Lower priced properties are affordable to more renters, thus increasing your market.

Benny