Here's a thought for you:

Get a house, and whack another house in the back yard.  Call them both units then if it makes you happy.

Here's another thought:

Get a large house, wall it off in the middle somewhere and add another external entry door.  One house has become two units.  Ta da!!!  Add in a cost-efficient kitchen and bathroom to the unit that appears to be all rooms and no facilities, and away you go. 

Either way, you are changing the property to increase its cash flow, but you still own the land and all the dwellings on it.  You've added value.

Think of it like this.  Let's say the loan is for $400k.  If you were on an interest only, you'd have to pay say, $554.61 in interest for week 1 (I've based it on an interest rate of approx 7.21% per annum (my rough calc is $400,000*0.0721/52 = $554.61).  Conversely, if you were on principal and interest, you would have to pay the interest plus extra.  Let's pretend you were asked to pay $700 in the first week if you were on a principal and interest loan.

So you could do this;

PRINCIPAL AND INTEREST = you must pay $700 in the first week.

or

INTEREST ONLY = $554.61 and OFFSET ACCOUNT = $700 – $554.61 = $145.39.

So with $1465.39 in the offset account, next week, interest will be calculated not on $400k, but on $400k – $145.39 = $399,854.61.  Thus the interest payable in week 2 would be $554.41 (instead of what it was last week which was $554.61).  So the interest payable reduces each week if you continue to add money into the offset. 

What we are trying to explain is that having a principal and interest loan will "pay your property off" at exactly the same rate as an interest only loan with offset, provided that you part with the same amount of cash each week that you would have if you were on a principal and interest.  So pay the interest you are asked, and put the rest in the offset.  etc.

The difference is, you can get the money out of the offset in the blink of an eye if you want to.  The same cannot be said for the principal and interest loan.  Sooner or later you are going to notice you've paid a bunch of money off the property, AND it's gone up in value, and you will want to leverage your position to acquire another property.  It will be easiest to do so if you have gone the interest only with offset account route.

Hi Joe

Here is how it works:

You can claim, as a deduction, costs of holding the property such as insurance, property management, gardening, etc etc.  You can also claim the INTEREST the bank charged you on your loan. 

So.  If you take out a loan for say, $400k, the bank will require about $554 per week in interest from you.  Now.  Let's say your property earns $300 per week in rent.  So over a year, that is $300 x 52 = $15,600.  But sadly some of that income gets eroded in costs such as insurance, paying the property manager, the gardener, the council rates, the water and sewer service charges from the local water company, bla bla bla.  So let's say that after that, your $15,600 is eroded down to $11,000.  Where does that leave you?

Income less costs: $11,000
Bank interest: $554 x 52 = $28,808

Loss = $11,000 – $28,808 = LOSS of $17,808

This does not mean that you get a tax refund of $17,808.  It simply means that your taxable income is reduced by $17,808.  So let's say from your day job you earn $60k a year.  Normally, the tax department would calculate tax owing on $60k.  But in this case they would calculate tax owing on $60,000 – $17,808 = $42,192.

So this will result in some kind of tax refund. 

You must remember that it is only the INTEREST PORTION of the loan that is deductible, not the portion that is chipping away at the principal amount owing.

Now.  coming back to the business of you wanting to speed up paying off this house.  Why bother? 

Having a "Principal and Interest" loan (which appears to be what you are looking at doing) is essentially the same as having an "Interest Only loan with an offset account".  In both cases you are charged, and will have to pay, interest.  With the interest only loan, you can churn all your surplus money into the offset account (instead of onto the principal).  This will reduce the amount of money you are charged interest on.  Eventually, you will have $400k in the offset account, which is the same amount as the loan you took out, and thus the bank would no longer charge you any interest at all.  And if you're that way inclined, you could then give your $400k to the bank to pay out the principal, say "yay me, I own one house" and that'd be the end of that.

What's the difference you ask.  Well.  You can withdraw money from an offset account whenever you want.  For instance, when there is a big wad of cash in there, you could just withdraw it and use it as a deposit on a second property.  Conversely, if you had handed the cash over to the bank in a regular principal and interest loan, you'd have to ASK for it back, and pay FEES.  Now why would you want to do that.

Aside from that, interest only loans are better for investors as they help with cashflow.  The bank requires you to stump up less cash every month.  And if you hold onto the property for ages you enjoy the growth in value of the property, without having bothered to pay it off.  Nice.

So.  Get an interest only loan with offset.  Pay the interest portion only.  All extra cash into the offset.  And when that offset account is looking super healthy, pull that money out and buy another property!!  Remember, property goes up in value each year – faster than you can save money.  So the more properties you acquire, the more wealth you will create for yourself.  Then one day when you are older and have a whole bunch of houses all with debt on them, perhaps you'd opt to sell a couple of them to completely pay out the debt on the others, and live off the rents for the rest of your life.

Does this help you?

Just on the uni topic…

Whether you like it or not, and whether the subject matter taught in courses at uni is relevant or not, quite often, having "a degree" is the required entry ticket to a lot of high-paying jobs.  High paying jobs means income which means servicability for lots of property loans.  It's kinda hard to get ahead in property without loans. 

1. Yes, provided you intend to, and do in fact build and income producing asset, on the land. 
http://www.ato.gov.au/individuals/content.aspx?doc=/content/00113233.htm
It would be best to call the ATO and check how long they will allow you to build on the land before the deductibility is no longer allowed.

2. You'll need to hire a Quantity Surveyor to tell you that. Try this mob: http://www.corpred.com.au

You will not get a loan with zero income.  It's that simple.  It's a great deal for them – free staff and no commitment.  It's a crap deal for you. 

Cheers to that.

Seriously I think people need to realise this:

Property goes up on average 10% a year.  So on a low-end property worth say, $300k, it goes up $30k in one year, while you sit wondering if the boom will come soon.  Get in the market, and stay in it for many years, and you will make money.  Hedging your bets on jumping in and out real quick and making a fast buck, you might just get your fingers burned.

Am I the only person that thinks chasing booms is not ideal?

Why not simply look at the history of an area, current factors (eg floods), and forthcoming infrastructure?

Great post kris07! 

Would you consider letting us know the reasons to steer clear of Radan and Sebastopol?  And of course the reasons why you'd recommend Soldiers Hill etc.  It's also be super handy to know what kind of demographic is attracted to each area?  (eg students tend to live in suburb X, nursing staff in suburb Y….)

Give this mob a call.  They'll soon tell you whether it is worth the bother;  http://www.corpred.com.au