You appear to have assumed that I'm promoting IO over P&I. Not actually so. I'm suggesting that people explore the various impacts of how they allocate their capital.

BTW For clarity, my position is that IO is higher risk, because the IO investor is betting that they can get those significantly-better-than-8.5% returns. This would typically inolve further gearing, which increases the risk.

The question of paying off non-deductible debt is an interesting one. Haven't done analysis, but since property investment (from my perspective) is largely about reaping the benefits of compounding, time is required. The longer you leave it, the less time you have, so the less compounding etc. The hare and the tortoise come to mind.

Ironically enough, I had paid off all non-deductible debt before swinging into property investment. I wish I had started sooner. The real secret to success is time.

Daedalus.

Nice graphs F,

Only a couple of points to add:

You can still pay off the principal if you have an IO loan. Your reasons not to do so may include:
1) your desire to deploy that cash into other investments, perhaps leveraged. If these investments are successful then the money will have worked harder for you. Also, there's a lot of accumulated cash flow between those two curves – at least $50/week. If you compound that quarterly at 4% over the 25 years you end up with $111,921 in cash. This should not be ignored.
2) affordability. i.e. you can afford the IO repayments but not the P&I repayments.

It comes down to your risk profile and your investment strategy. Note that the x-axis is in years, not months.

Daedalus

Welcome VI!

I would highly recommend reading some books on property investing over the next month or so. Things in the property market tend to get a bit quiet over xmas, so it won't set you back much time-wise or money-wise. The knowledge you gain will be more than worth it.

There's a good choice of books by Australian authors around. Read a few. This way, the opinions that you base your investment strategy on will be yours. Knowledge is power!

Daedalus

Hi p_mac,

You should definitely buy the book now.

WRT starting. Your first investment will be determined by:
1) Your level of income (assuming you need to borrow)
2) What funds you have to invest
3) Your level of knowledge.

Maybe the starting point is to ensure you have adequate capacity in those 3 areas? Maybe the starting point is to refine your strategy down to exactly what you will do in the next 3 months to progress yourself along your strategy.

Note that this might not actually require buying property in that timeframe – the first year of my plan involved research and reorganising income and finances so that I could begin to execute my plan.

Daedalus

Hi JL,

I'm pretty new to the forum too, and it takes a bit of reading between the lines to pick up some of the terminology. However, here's a link to a glossary with a lot of property stuff in it: http://www.somersoft.com/forums/showthread.php?t=9382.

Some abbreviations are Internety ones, such as WRT (with respect to), IMHO (in my humble opinion) etc. More can be found here: http://www.gaarde.org/acronyms/

You sound like you're doing pretty well, congratulations!

Daedalus.

Hi all,

It seems that this approach is well suited to IP's where the yield is high and CG is high, but the expenses are minimal. While you only pay 15% on the upside, you can only claim 15% on the expenses too. Since many CF+ IP's at personal tax rates are only CF+ because of the depreciation, many of these will no longer be CF+ on a tax rate of 15%. It's pretty tough to find such an IP unless you don't have to borrow, which negates the whole discussion.

I think that the main point of using a strategy such as this is to leverage your super funds, not as a form of tax minimisation. Accessing super might be a quicker way to kick start a property investment portfolio than saving up a deposit or paying down personal debt to get some equity.

The other advantage might be to get your super funds out of the hands of some bozo funds manager. [My personal quest is to reduce the number of idiots between myself and my investments to just one idiot – me!]

Daedalus

Hi,

I'm really interested in the answer to this question, and put together my investment plan a year ago hoping it would be the case. I did expect that the growth rate would be limited by the amount of equity though. All the banks I've ever used always needed me to kick in something, eg a 10%-20% deposit. So I could only expect to add new properties as my deposit equity grew.
So I figured that (since I have a fair bit of starting equity) I could go on a CF+ shopping spree, buy a number of properties to consume the equity I have, then wait. After a year, I would get the properties revalued, which should create some more equity. This new equity could then be used as deposits on new property etc and on it goes. So, I expected that I would be limited by the rate at which the underlying equity grew.

We are now several properties into this plan, and I'm starting to get noises from my lenders that serviceability is becoming problem. To me this is ridiculous, as our properties are CF+ (or neutral), we have no other debt (not on PPoR, not on cars, not on CC's), and have surplus income each month to reduce the IP loans by a few grand. It looks like I've got capacity to make maybe 1-2 more investments, but that's it. (My plan was for about another 6 at this point).

When the lenders look at what you can afford to borrow, they don't allow for ALL the rental income (maybe 70-80% only). This means that as far as they are concerned, you have a collection of negatively geared properties, and you can only afford so many of them.

So these are 2 of the limiting factors on your (and my) world domination plans . When I find a way around the servicability limitation, I'll get back to working on the equity limitation….

Rgds,
Daedalus.