Forum Replies Created
You have two factors to consider, purchasing another IP which you should use debt to do and the second is wanting to purchase another PPOR for which you should use as much of your own money as possible and minimise the borrowings for this.
To do that, set up an Offset for which surplus funds will be banked. This future balance will be the deposit for your PPOR. It also has the immediate effect of reducing the interest charged on that associated loan.
I would go further and suggest that if your existing loans are P&I, swap to IO if you can, 5 years only. In this way, it should free up principal that should go into your offset also.To fund the deposit for another IP, revalue and refinance one of your existing IP's, with a minimum of $120k LOC if you can and use part of that LOC to finance the deposit for the next IP. In this way, you are using 105% (depending on which state you are in) debt finance.
Good luck
GregEilatan,
I am not going to defend accountants either but her advice makes little sense, in not paying down debt because it reduces the tax deduction but then investing surplus funds in an interest bearing account? Why not run the numbers and see which gives a better return to you.Ultimately wealth is about assets less debts, so increase one while decreasing the other is what the end goal is about. The timing on which you do will depend on your end goals and your timetable. In concept I don't have a problem with reducing debt, however if you plan to build a multiple property portfolio, you need to concentrate on increasing your asset base and you need to have available cash flow and deposit to be able to borrow again. When you have built your portfolio and are comfortable, then concentrate on reducing debt.
You could use an offset account, even if it is against an investment loan, but if you have the borrowing capacity and wanted to purchase another IP, I would get the initial IP revalued and refinanced to set up a LOC and use that to fund the deposit for the second IP. Continue to channel surplus funds into your offset which is turn can be used effectively for purchases of a private nature.
In terms of CGT, as Terryw said, it has nothing to do with the loans associated to a property. It is simply the net selling costs less the costs to acquire. That is the profit. The surplus funds available is the net sales price less the loans outstanding. Two different concepts.
Good luck
GregS,
Yours is a different issue. My view is that the use of a unit trust will restrict you in lender choices. Your FP may have good reason for the MGS unit trust but it is not immediate apparent to me unless you have a need for unit type holdings with others.As you are on a property investing forum, I presume you are interested in a legal entity to hold property in and nearly all lenders are comfortable with discretionary trusts. Why restrict your ability to borrow if there is not a compelling reason to do so?
I am not sure as a general rule that FP's know much about trust structures (some will), I would get a second (or third opinion) from a good accountant.
GregG,
Depending on your state you live in, you may be able to transfer the assets into your name. Whether that makes sense from a tax perspective needs to be answered for the IP's but you certainly could for the PPOR.I agree with Terryw, if you are up for stamp duty and CGT, it may not be the wisest move. A company for a business is often a good vehicle and you could arrange ownership and directors according to your needs and that can include asset protection to an extent. If your husband is not a director, you obtain appropriate risk insurance you may be able to mitigate the risk.
Another option is to load up debt secured against the properties so that there is little benefit for great cost to take action against your husband personally. Obviously you use the equity released wisely.There are options to consider.
Good luck
GregIn simple terms – increasing deductible debt and reducing non deductible debt.
It is done indirectly, rental income and tax benefits go to reduce your non deductible interest expense (generally by way of an offset against a PPOR home loan) and all IP expenses are paid by use of an investment LOC.There are a number of threads explaining the use of this technique. It can be and is very effective used properly, especially if you have multiple IP's.Good luck
GregDazz,
The reason you use the LOC to fund the settlement costs is that you can no longer get a 105% LVR loan. The maximum LVR for an investment loan is around 90% (some lenders may got to 95% and it seems to be easing a bit in the current market, but the mortgage insurers make it difficult) so you need that 10% plus stamp duty etc and you use the LOC for this, so effectively borrowing 105% but from 2 lenders.If you use 1 lender and cross securitise, you can but then you are restricted in 'moving forward'! Not a preferred option for an investor. As I said earlier, if you only ever want to purchase 1 IP, then it may be a good way to go but you miss out on debt recycling ability to reduce non deductible debt. If you don't have any in the first place, then not a problem.
There are better rates around than Bankwest and be careful of mortgage managers, DEF can be an issue. I do use them but make sure they match your longer term needs.
Good luck
GregIt is a valid comment, it is about a life balance, to enjoy life now as well as being able to enjoy life in full after you retire.
As part of my work, I help older folk with finance and I am continually saddened to hear of their own circumstances. They took the advice of their parents and grandparents, buy a home, pay it off and never get into debt. They end up on a pension, superannuation was not available for many of these older folk and they live in a house paid off but nothing else.
They believe that this is their lot and they don't need anything else.It's a tough life, especially for single folk.
If you have an alternative, to use your equity to increase your asset base that grows over time without compromising your current lifestyle, would that not make sense to do?
Good luck with the travel around our great country.
GregTribulation,
The existence of a large PPOR mortgage should not be the game breaker.If you have equity you can access and are able to show servicing for increased debt, one very effective way to reduce non deductible debt quickly is to purchase an IP and debt recycle. You direct rental income and tax benefits (use an ITV form each year) into your offset against your PPOR to reduce the non deductible interest costs as soon as you can. Savings helps but many people do not want to greatly sacrifice lifestyle for this.
This presumes you can set up the facilities you need to be able to do this for at least 2 years, preferably longer.
I would say to you , what is the opportunity cost not to invest?
Good luck
GregJules,
The concept is a sound one and some of the responses raise good points.
To build a portfolio quickly with what you have said, you need to use as little of your own money as possible and borrow more for each property. LMI is just a cost of doing this. Based on your combined incomes, it should be possible to purchase 2 IP's if not more if you are smart about properties purchased.You are presuming that the H&L will come up to $350k, an assumption that doesn't always work out. Depending on stamp duty in your state (or not) it will add to the funds you need to pay to settle. There are not that many developers that I know of who leave that much on the table.
However, working on your assumptions and costs, as long as you can show servicing (pick your first lender carefully) than you could revalue to 90% after completion and pull our $350k * 90% = $315k, less LMI of say $7k = $308k, less the initial loan of $224k, you will have access to $84k. As an investor wanting to build a multiple property portfolio, you set up a LOC for this $84k and use it to fund the next IP.
You use $60k again and borrow 85% to 90% from another lender to settle the second IP. The choice of the second IP is critical as well, making sure you can show servicing for the new loan. Lenders use different criteria, different assessment rates, different living expenses allowances, different treatment of existing loans, different rental income assessments, some allow 100%, others 80% and others 75%.
You plan your third IP purchase before you obtain finance for the first IP and determine what the characteristics of each IP needs to be so you can borrow for the third IP.
As Linar said, it is harder to continually obtain finance so you need to think the three steps ahead, down to property type, price, deposit required, which lender to use in what order. Most mortgage brokers do not know how to do this or even know they need to. Find an experienced MB who is a multiple owner themselves and know how to do this for you. Unless you know what you want, I would not use a bank directly. You run the risk of them doing credit checks and that can come back and bite you in the backside big time down the track.
As to ownership and structure, on the basis that asset protection is not critical, marginal income tax rates are one aspect to consider, time in the workforce and future plans is another. I have a client, both on good incomes but were planning a family in 5 years and one will be staying home, the choice was to purchase a lower priced IP with a higher rent yield in the name of the person to stay home. The IP was negatively geared now but likely to be neutral if not positive in 5 years, so greater longer term benefit in one name rather than the other. The second IP was purchased in other partners name with lower rent yield but greater capital growth potential and higher value.
Another client, three IP's were purchased in one name due to high MTR before the 4th was purchased in spouse name. The first three IP's were new or near new to obtain better depreciation benefits yet still yield reasonable rental income in capital growth areas. The 4th IP was targeted towards more neutrally geared perhaps without the higher capital growth potential.Property investing has become more scientific than previously where the ability to borrow and refinance was ridiculously easy and people just went for capital growth. Now it is about maintaining the ability to borrow for the next IP and the one after that.
Good luck
GregGet an independent sworn valuation to give you a better idea.
At a cost of $300 to $400, it is worth spending the money on.
Alternatively buy one of the reports from the likes of Residex or RP Data.
Good luck
GregRedlegger,
I would be reluctant to go into that level of debt for an owner-occupier home. It is non deductible.I would do the numbers to decide whether it makes more sense to rent in your new location (you need to balance the emotional side of living in your own home to the financial benefit of renting) and use your funds to purchase another IP.
The use of an offset is an excellent idea and you build your offset up so you have sufficient own funds to make a large deposit and hence reduce your need to borrow non deductible debt. Once you are in that position, then consider purchasing your next PPOR.
However if your goal is to live in your own PPOR, you could use the same lender, cross securitise both properties and not need to put in much funds to settle the new property. A lender will add the 2 properties, $320 + $475k = $795k. They will then calculate 90% LVR (it could be higher depending on lender and your ability to service the loan) = $715k, you owe $240k already. $715 – $240k = $475k, which is the value of your new property. You will need to pay LMI which could be up to $15k or so and stamp duty, but a relatively painless exercise to be able to purchase an PPOR if you do not have much in way of saved funds.
It is not what I would suggest investors do, but it is an option for someone in your circumstances if there is a strong desire to live in your own PPOR and does not want to sell their existing PPOR. It will depend on what you can borrow and what your goals are.
Goo dluck
GregDaniel,
The type of property you can buy will be determined by what amount you can borrow and then be able to afford the rental shortfall (if any). I would also caution you to keep away from student accommodation, mainly because lenders don't like them and it is harder to get a higher loan to value ratio loan to purchase.I have a number of clients purchase their first property taking advantage of the FHOG, living in it for 6 months and then moving back with the folks or renting. They 'convert' it to an IP. The need is often because they only have a minimal deposit and need the FHOG to be able to settle. The type of properties this works well for are the new H&L packages or OFP developments. I would caution an OFP development as it has higher risk of valuation not stacking up on settlement and of delays. If you do, I would only suggest you look at small boutique developments, even the 2 or 3 town-house small developments in inner to mid suburbs rather than the multi story apartment complex.
You then need to consider loan structure, looking at a 5 year IO loan with 100% offset, even if you take the FHOG option. You have sufficient funds to be able to buy as an IP, it just depends on your longer term goals as to what emphasis you place on capital growth (presuming you have income to support further loans) or rent yield to support that income.
If you buy OTP where construction has commenced, you will still be eligible for some stamp duty relief but not as much as pre-build.
Good luck
GregThack,
Structure is an important component as is time frame, long term intentions, type of property, do you intend to build a multiple property portfolio, etc.
As Evolve outline very well, there are a number of different structures to use. It is costly if you think you need to change half way but that doesn't mean that you can't use multiple structures. Often for PAYG employees, buying the first 2 to 4 IP's in their own name can work very well, then you use a discretionary trust after that – essentially after you have reduced your personal income tax down to low levels. I agree with Evolve, do not use a company to hold property in.Unless you are 50 years plus, a SMSF is restrictive and it does not sound as if you have sufficient funds under super anyway to consider using it. There are other posts on the use of SMSF's to get a view of why and when to use.
For an employee with the level of salary you have, I would look at newer properties and also consider buying in the ACT for the one off benefit of claiming stamp duty on the lease purchased. As to whether it needs to be new or established will depend on the level of cash or equity you have available to settle the purchase. The choice of which state to purchase in needs to be factored in as well, each have different stamp duty rates and on different properties. The characteristics you need to consider for the first IP will be determined by your circumstances and your goals and time frame. You need to match the property type to benefit you to be able to purchase the second IP if that is your goal.
As to an accountants advice, more than likely you will get better advice here by experienced investors. I am an accountant by profession for over 30 years and the level of knowledge by most accountants in respect of property investing is sadly lacking and often bordering on incompetence.
Good luck
GregI would look at your longer term goals and what you want to achieve.
Once most people have two, three or four IP's in their own name and if they are typical median priced negative geared IP's, they may have used their income tax benefits like you have.Some of the issues with owning IP's in your own name include:
- land tax (if all in same state)
- eventual change to positive gearing and additional income tax payable
- capital gains tax
One way to overcome this is using a different legal entity. Most use a discretionary trust as opposed to a unit or hybrid. A large part of the choice is that lenders are comfortable with the discretionary but many lenders will not lend to the other two. If you have already used your tax benefits, then I would consider purchasing in a DT, they tend to be cheaper to set up and administer and you still have a full choice of lenders. The fact that you can't pass the tax losses down to beneficiaries and need to keep them in the DT to match against future profits assists you further down the track.
Asset protection is an added benefit if you are a PAYG employee or a critical protection mechanism if you are a business owner or in a profession where there may be a risk of being personally sued.
Good luck
Greg
I would ask why you would want to use borrowed funds to pay this?
If you don't need to then pay it from profits.
While I am not a tax agent, my view would be similar to the second accountant above, the debt arose due to an obligation relating to the sale of an IP, there is a connection between use of funds and purpose.I am not sure you can get a definitive ruling except from the ATO via a private ruling.
Good luck
GregIt is frustrating to me that mortgage brokers continue to recommend using the same lender for your first IP as your PPOR . Often using the old red herring of avoiding LMI. These are often old bankers who were brought up to do exactly that. The real reason is that lenders now have security over 2 properties with an end LVR of 50% or less instead of 80%.
I have a number of clients who have come to me with multiple IP's all with one lender, either on the banks 'advice' or a mortgage broker. Often mortgage brokers only use 1 or 2 lenders, they have come from that bank, know their policies and just put people into their products, sometimes because it is easier, sometimes because of commission.
For a person wanting to build a property portfolio, it is time consuming and often costly to extract from. I do it one IP at a time and go through the hassle of refinancing, multiple valuation issues, funds kept because of the cross guarantees etc.
Terry is spot on above in terms of financing strategy, do it smart, use the system, reduce non deductible costs as soon as possible, minimise cash outflow. You need to make sure you have the other risk minimisation strategies in place as well, a health safety net, income protection, trauma insurance etc.
At the end of the day, wealth is assets less liabilities. The timing to increase one or decrease the other depends on where you are at in your investing cycle. It is difficult to do both early in, far better to concentrate increasing assets than trying to reduce liabilities. At the later end of your investing cycle, then you focus on reducing debt.
Good luck
GregIt depends on your goals, the buying a property to get into the market, allow time for growth, sell and upgrade is a strategy many have used before. It is costly however, selling agents fees, moving, stamp duty on the new property etc may cost you $30k to $50k.
Alternatively if you need to move to a larger place, consider renting for a period. It is generally cheaper to rent than to buy. You 'convert' your existing PPOR into an IP, change the loan to an IO, set up an offset, save funds into that. You continue to build your property portfolio until it is time to sell one or more and use that equity to purchase your own place outright or close to.
I suggest you do the numbers to see which makes sense for you.
Good luck
GregSolomon,
If you just wanted to purchase 1 IP, go with what Richard has suggested.If you want to build a portfolio, I would consider going to an 80% LVR with a LOC of about $210k on your PPOR. The reason is so you have the funds available for the deposit for the 2nd IP and have a large safety net & also be able to debt recycle.
I would convert your existing P&I to an IO with a 100% offset. This frees up some of your cash flow and using the offset has a similar effect to a P&I anyway. My view is that you need about $120k funds (savings or equity) per each median priced IP purchased. This allows about $70k to $90k deposit and costs and $30k to $50k safety net and recycling ability.
I would use a IO loan from a second lender for your IP and may go to an 85% LVR or so, depending on how quick you want to build your portfolio. The selection of the IP needs careful analysis, what characteristics in the IP do you need to have to be able to then show you can service the 2nd IP? Do you need a better income, do you need lower initial costs, do you need capital growth, etc.In relation to your other questions, set up a separate transaction account on which you deposit part (or all) of your wage – this is your budget you establish for day to day living. The other portion of your salary, direct into your offset against your PPOR loan.
Rental income goes into your offset. Your LOC pays all the IP expenses including interest only loan on the IP from the 2nd lender.The ATO may not like it but it is a practice the ATO accepts and that savvy investors use. We are still allowed to manage our own affairs to our best interests as long as we are not intentionally doing it purely for tax avoidance purposes.
The LOC secured against your PPOR is with one lender (A) and the main loan to purchase the IP is with another lender (
. Lender A has security over your PPOR, lender B has security over your IP. They are totally separate.
Good luck in investing
GregTerryw is correct but that is only part of it. The more relevant questions is – what are your long term goals? Then you ask questions like – is rent yield more important, do you need capital growth for this property, whose name should it be in, will you use your existing lender and most likely cross collaterise or will you use another lender?
As a basic premise, for an investment property, I would borrow as much as I could keeping in mind your goals, your timeframe and the cost to do so. LMI is a progressive cost, so the higher LVR you go to, the higher the % charged. It is normally added to the loan or capitalised so it is not out of pocket and it is tax deductible over 5 years, so for an investor, it is simply a cost of doing business efficiently.
It does not suit all people so I would not recommend it necessarily but would consider it.
Good luck
GregThanks for your comment.
The lenders most likely are not aware that I refund or that I even charge a fee for service, nor would they care. Irrespective of what many lenders claim, brokers are a viable sales channel for them that if they want to grow their market share, they need to continue to cultivate. They took the opportunity of tighter credit under the GFC to substantially drop brokers commissions and under the guise of ASIC and the NCC may take the opportunity to eventually drop trail commissions as well.They have made many millions as a result and it shows very clearly in their profits announced, even with the big provisions for bad debts that did not eventuate. They were only ever a tactic to help reduce reported profits when they took their increases above the RBA increases back in 2008 and 2009.
Non branch lenders will continue to use broker channels as they do not have the sales presence otherwise and brokers are only paid on commission so they are a cheap and variable cost, only getting paid for work introduced. With easier credit now, lenders are starting to offer larger discounts to attract more business again. It will be an interesting next couple of years to see how this evolves.
I took a strategic position, what do I do well and what can I offer that distinguishes me from 99.9% of other brokers out there and that is to service the multiple property investors with clear strategies that are individually designed to achieve their goals. As the GFC has tightened credit policies, what worked prior to 2008 no longer works the same way and property investors need to place far more attention on being able to show they can service to obtain the next loan to continue to build their portfolio.
Good luck with your investing
Greg
. Lender A has security over your PPOR, lender B has security over your IP. They are totally separate. 
