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It is not an issue. It is the ‘purpose’ of the funds that determines deductibility. It doesn’t matter which property is used to secure the money against.
It is strongly recommended that you do not mix up deductible and non-deductible expenditure as it will cause difficulty at tax time.
Also, on your PPOR, I would recommend using an offset account and paying interest only on the loan and placing all additional funds (at least the extra you would have paid if the loan was P&I) into the offset. You will be able to deduct the whole loan amount later if you move out of the PPOR and make it an IP.
Good luck with it all and use a mortgage adviser / broker!!!
Robert Bou-Hamdan
Mortgage AdviserI thought all of Melbourne had a bad reputation. Bloody Mexicans!!!
))Robert Bou-Hamdan
Mortgage AdviserMichael, nothing personal, but I was asked why I was not so critical of your comments pertaining to living off equity. To be honest, I did not read the earlier pages of this thread.
As a result, I have written an extensive response to a few of your comments on this subject to be fair to poor Terry!
Nothing personal guys… I just think this ‘strategy’ is ridiculous and should not even be called a ‘strategy’.
Sorry for the length.
Enjoy!
Originally posted by MichaelYardney:Theer is no stamp duty on mortages any more and my bank (NAB) does not usually charge me establishment fees, and even if they did, it would be irrelevant.
I am just wondering, when was stamp duty on mortgages abolished?
If you mean once you initially borrow, are you forgetting upstamping to tap into more equity?
Imagine I went and got a real job and earned $100,000 After tax and medicare levy I would have $50,000 and even less after super.Let’s make this a little more realistic. You do NOT pay tax on super so take it off before tax. That would mean you earn a taxable income of approximately $91,000 based on minimum super. In the highest bracket (and neglecting the fact that you have a stack of deductions from your properties you want to use to tap into equity), this would leave you, at worst, at least $46,865. You also still have the $9,000 super which should be growing for you.
If I have a property portfolio worth say $2million in good capital growth areas my properties go up by say $200,000 per annum (on average).It is a BIG IF assuming consistent 10% per annum growth in any area over a long period but I will leave it for another discussion.
The bank will lend me against this extra equity and I borrow $100k at 7%. (I could borrow more)This would cost me $7,000 interest and I would be left with $93,000 to live off or invest, or pay off other loans.
If I worked for the $100k and paid tax I would only have half that.
A true breakdown of this ‘strategy’ using your example and assuming all money is used to fund lifestyle will see the following happen…
Year 1
$100,000 Borrowed – $7,000 CostYear 2
$100,000 Borrowed – $14,000 Cost…..
Year 14
$100,000 Borrowed – $98,000 CostYear 15
$100,000 Borrowed – $105,000 CostOH NO!!!!! I cannot afford to live any more!!! Oh well, I lived well for 15 years – BANKRUPTCY!!!
The above figures assumes at least 5% NET growth (Highly unlikely) per annum for 15 years and that you could borrow at 100% (Won’t happen). It also assumes that you could service the ever increasing level of debt with a decreasing income and that maximum loan exposure limits will not kick in.
When you own enough equity; cashflow is not important.Equity = cashflow.
This is correct. If you have enough equity, you will have a huge cash flow and not need this ‘strategy’ of tapping into equity!
Banks will lend against the equity of your properties,and you don’t need income (lo or no doc)Low Doc requires an income figure to be stated in most cases and LVRs are restricted. Mortgage insurance usually applies over 60% LVR. Stating an untrue income figure will see an audit and possible charges of fraud. Also, the money you are borrowing from equity is not deductible and cannot be called income as it is a DEBT.
No Doc is easier to get but the LVRs and maximum exposure limits are even lower. At least you don’t have to lie on the application to get the loan but you will run out of borrowing capacity much sooner.
Having debt is not risky, not being able to have it isDebt in the wrong hands is the riskiest thing ever! This blanket statement cannot apply.
Now at the end of the year you would need to find more money to pay the interest again for another year, but your properties should have gone up in value once more.This will be clearly explained as the seminar.
The big secret answer!
The crust of it is that you will either need to borrow more exponentially each year to cover previous years interest, live on less money each year or BANKRUPTCY!
Here are the figures if you borrowed additional funds each year to keep the same amount for personal expenditure using the same assumptions above…
Year 1
$100,000 Borrowed – $7,000 CostYear 2
$107,000 Borrowed – $14,490 Cost…..
Year 10
$100,000 Borrowed – $96,715.12 CostYear 11
$100,000 Borrowed – $110,485.18 CostAt least you will live ok for 11 years (notice the sarcasm).
Add in inflation and the strong possibility of interest rate increases during the term of this ‘strategy’, you won’t be able to sustain this for very long!
Wouldn’t it be nice to get a tax deduction for the personal items also. That is live and enjoy your life on before tax dollars.Well you can.[biggrin]
Rich people earn money, live and spend and pay tax on what’s left.
The majority of people earn money, pay tax and live on what’s left and have little left over for investment.
The first group have twice as much money to live on.
How do you do this?
You can, but I really can’t describe it here in this public forum, but it will be the subject of Dale Gatherum-Goss’s presentation at our “Real World” real estate workshop in June
I am disappointed Michael. Great sucker marketing though! Just tell them it is done through structuring your entities and holding assets in a particular way which any good accountant can help them with. There is no need to pay fees to attend a seminar which will tell them to go and see their accountant where they will pay more fees. A clever marketer would offer accounting services as well at such a seminar. Do you offer accounting services?
That is – this process only works when you have large amounts of equity and it should probably not have been discussed in this context without lots of explanation.This is why this sort of information should not be posted with the many qualifications to its use that apply. The only time you can use this is when you don’t need it.
Michael, please explain to all of us why someone with a lot of equity would need to supplement their income when considering the return off that equity and how reducing that return when you borrow to fund lifestyle for a few years will not lead to bankruptcy?
There tend to be 3 stages of investors.Income Stage – We work for our money
*Here we finance investment with our personal contribution.
*We are concerned with the efficiency of our physical body (we need it to earn income)
* We are concerned about cashflowSome investors progress to the next stage (most never do) …
Your last point is correct. Everyone still needs to fund their current lifestyle and most will never achieve the NET equity position required to live off equity!
Capital Stage – Money works for us
*We finance investment without our personal contribution because we use our equity to finance new aquisitions
*We are more concerned with the efficiency of our capital rather than with our physical excertionVery, very few invetsors move to the last stage…
As a result of getting through this stage, you have clearly funded your lifestyle and DO NOT NEED to live off equity!
Active Stage – Everything works for us
*We finance our investment the way we choose to
*We are more concerned with the efficiency of everything that we can influence
(Do you think Kerry Packer worries about his cashflow or even his equity. He sees the banks money or the money market’s money as his money. He does deals without putting in money or equity or cashflow)Not everyone is Kerry Packer who CERTAINLY DOES NOT NEED to live off equity!!!
By the way, Kerry Packer uses alternate funding sources to fund investment which returns a positive income which attracts additional taxes. Living off equity is going backwards and very different to funding further investment.
OK so back to living off equity….You’can’t do this until you reach stage 2 – the capital stage of your investment career.
…and you no longer need to live off equity.
Imagine you have $3million dollars in properties and $2million in loans.That leaves you with $1million in net equity.
It actually leaves you with far less USEABLE equity when considering LVRs.
You borrow $100,000 against this equity to live off. You allocate $7,000 of this to pay interest, leaving you $93,000 to live off. (better than paying 50% tax on earned income).At the end of the year you have eaten up your money and have to go and borrow more.
But on average your properties have gone up $300,000 over that year (10% per annum)
Lets say it was a bad year. They only went up $200K. At the end of the year you are still $100,000 ahead – in other words $100,000 more equity than you started the year with to invets again or do whatever you want.
This involves a lot of imagination, assumption and hope. Don’t forget, the interest on the $2 million also has to be paid and a few little economic changes can destroy you. Look at the current market… correction in property prices downwards, a few interest rate increases, rental returns dropping and lenders tightening their lending policies further. What do you do now Michael???
So Michael, this strategy is definately not for beginning investors. You need at least $1 million nett equity or more for it to work.I don’t believe any half decent investor with $1,000,000 in NET equity would need to tap into equity to live better. This is a ‘strategy’ in difficult times ONLY!
Robert Bou-Hamdan
Mortgage Adviser
