Forum Replies Created
- jate wrote:
I'm very glad you posted this example as this is exactly how I setup my loans when I started purchasing IP's recently.
However, I've got some follow up questions:
1) Currently my LOC (secured by the PPOR) interest is being capitalised, is this correct or should I instruct my bank to pay the interest for these capital expenses from one of my other Investment Transaction accounts?
I actually don't know for sure about this, so I would be interested in others answers. But I have read that the ATO doesn't like people claiming deductions for interest on interest, so if you're paying your IP interest from a LOC, and then claiming the interest on both the IP and the LOC then you're getting into murky areas. It's especially murky if you have a PPOR and you're making extra payments because of this setup. I'm interested to hear an accountants view of that though.
In my case I pay the interest on the LOC and IP loans from my own account and claim the IP and LOC interest at tax time.
jate wrote:2) Debt Recycling
(a) When my IP's gain equity and I go back to my Lender to pull out additional funds will I simply retain the same loan account but the amount increases or will I have to keep creating new loan accounts everytime I take out i pull out more equity?
(b) Once I have access to these additional funds, should I be dumping the lump-sum and 'reimburse' back the LOC account which I used to pay the initial deposit/acquisition costs, thus lowering the balance and the debit interest charges?
For a. It's situation dependent, my bank can create a new LOC and pay out the old with the new, therefore transferring the balance. This is ok I guess, but you'd need to keep it for investment purposes only. If you wanted to draw on equity to go on a holiday, then you'd want a new account.
For b. Are you talking about additional funds from equity or from cash? If it's from equity then you're not really reimbursing, if it's cash then it depends on your situation – if you have a PPOR that you're paying down then I would leave your money there or use it for some other reason.
Thanks Richard, that's an option I hadn't considered. You might have to explain it to me in a bit more detail though, but is it something like:
Assume I have saved the 10% deposit of a $350000 house. ~ $35000.
The $35000 sits in an offset account against my PPOR.
The bank then puts a freeze on the offset account so I can't reduce the balance below $35000.
The bank creates a loan account for the $35000 that is tax deductible.
The $35000 in the offset still reduces the interest on my PPOR.
Eventually, as the IP goes up in value I can release the $35000 from the offset.
If that's possible, then I'm definitely doing that.
Maybe I misunderstood your comment, but I wouldn't look where you can afford (ie. $220k property) then figure out if it's worth it. You should look where you can get a good investment, then see if you can afford it.
That way you're only looking at good investments. I was originally looking at Brisbane, but not on the south side. In the end I decided not to, and one of the main reasons was all the advertising and attention that Brisbane was getting. There are a number of posts on this forum about it, but also there are a bunch of web pages, agents are advertising it and I even saw it on the latest episode of Selling Houses Australia…. all that made me think that the best opportunity to buy was 6 months ago, not now!
Hi Liz,
I'm was in your situation a few years ago (I'm 33 now), and had similar questions. I can tell you what I did, and why-
– I bought a new PPOR, and rented my existing place. I did this because I was married, and wanted to have kids. So I bought a bigger, nicer family home that we could live in for 10+ years. The existing property was also cash flow positive straight away since it had a fair bit of equity already. There are downsides with this, but I couldn't stay in my current place for much longer. So while there were tax advantages with other options, being that I wanted a family etc I decided on this one.
– I now have a 1.5 children, with private schooling, and holidays etc it takes a bit of extra $$$. But I'm about to buy another IP. I also put a few $$$ into super to take me as close to the $25k limit as I can get.
In general, I would consider myself to be relatively risk adverse, but letting your cash save you interest isn't the same as having your cash make you money. So I would definitely be looking at other options than just paying off your PPOR. Plus, if it's on your offset account you're more likely to spend it!
Out of curiosity, can you answer the following:
– Your current loan amount
– The value of your property
– The likely rent for your current property
When you say $150k net income, are you talking about after tax and after maintenance and running costs of the investments?
Are you talking about $150k on todays value, or the value when you retire at 55? On 3% CPI, in 15 years you'll need ~ $230k
Some extremely basic numbers in my head.
To earn $150k net, you need to earn ~ $100k each, or $200k in rental income. ie. $200k split across 2 people, less tax ~ $75k
To earn that much a year on a 7% rental return, you need about $2.8mil in investment property paid off. You'd still need to pay 'running / maintenance' costs.
In this scenario any capital increase will need to be offset against CPI to keep the $150k salary in today's value.
In order to pay off $2.8mil, you'll need to average principle repayments of $185000 a year…
Anyone know how to do this? I'm keen to know as well
As an FYI, I'm in a similar position, but younger and less equity (similar salary). I'm hoping to achieve $100k GROSS income, and I'm happy to wait 25-30 years.
Nice post Benny, you put in way more effort than I could have!
A downside to IO and offset accounts that I found, particularly when I was younger, is having access to your money can burn a whole in your pocket pretty quickly. When I bought my first place I called the bank and made them increase my repayments and deliberately made it I&P so I was forced to pay it. If it was in an offset account, or even a redraw I might not have had the self control to 'save'. At a later stage I then remortgaged and got the money back with a small fee…
Now I'm apparently wiser, or at least older, I have the IO & Offset setup for my IP(s), but still have P&I on my PPOR as a bit of a safety net.
No, you won't pay more. Have a read up on the many articles about how offset accounts work and it might be explained in a way you understand.
FMS explained it pretty well.
$500000 loan. Interest Only.
$500000 in offset account.
Interest is usually calculated on (loan – offset account) x daily interest rate. 500000 – 500000 x interest = $0 interest charged. If you take that theory, then you put your additional 'principle' payment and put it in the offset account then you will be charged less interest due to the (loan – offset account) x daily interest rate rule. Assuming you have a true 100% offset account, then you will be in the exact same situation:
I&P loan
$500000.
Payment : $3500. $3000 Interest. $500 principle.
IO loan.
$500000
Payment $3000. $3000 Interest.
Additional $500 in offset. Means interest will be charged on $499500, just like the I&P loan.
Hi,
I started a post in here asking about financial advisors, and didn't get much response. I got a few leads on buyers agents though (https://www.propertyinvesting.com/forums/help-needed/4349478). I don't have a dedicated accountant, I have so many friends that are accountants in different fields it's crazy, so I just ask them.
You're in a similar position to me, see my previous thread that's along the same lines: https://www.propertyinvesting.com/forums/help-needed/4349433
Basically, I would consider going IO on the IP. Get an offset account against the PPOR (if you don't already) and just pay everything into that. Then when you're ready to buy, use this cash and any extra equity you have to buy the next one.
As you can see, I'm really new here. So I'm hoping someone else will jump in with their opinions as well, since we're in the same spot I'm keen to see what they say as well!
You can get deductions on a property regardless of it being positive or negatively geared. My IP is positively geared in the sense that rent is more than the mortgage, but after depreciation claims it becomes negatively geared. I absolutely still claim it!
Why do you keep moving into the property first? I hate moving and like to stay in the one place to make it 'my home', plus I'm married with kids and they definitely don't want to move. Someone else can answer how this works with acquisition costs for CGT at sale and deductions in the following years, but it would seem easier to just buy an IP as an IP, rather than a mix of PPOR and IP.
I would be considering making the IP interest only and just paying the additional payments into an offset account against my PPOR. Then when I'm ready to buy again I can draw from that. Some of the more experienced people here will provide other ideas.
— Added.
I just noticed you replied above. Were your loans cross-securitised / cross collateralised? ie. Do you have a loan that is secured by both properties? This might have happened when you drew on the equity of your IP to purchase your current PPOR. If you don't know, what is your loan structure at the moment?
Jamie is correct, if you're going to pay of any loan it should be your PPOR, which will improve your overall tax position. Is there a reason you want to pay off the IP first?
It sounds like you can buy another IP when ever you like by drawing on the equity of your first IP, but we don't know any numbers or whether you want to consider this. Since the first is +ve geared, you could use that income to cover any potential negative gearing of your next IP.
Hi Paul. Good luck, and let us know how you go. I'm definitely interested to know what happens, particularly if you stay with the NAB.
Also, the $395 fee is per annum, so if you do stay make sure you get it put on a tax deductible account.
Hi Paul,
I'm still very new, so definitely take my advice with less weight than others, but to answer:
1. Yes, that sounds exactly right. It's what I thought was the case in the first place. I was quoted (for QLD) for $6800 for 90% LVR on $350k, so to go to 100% would be much higher than that.
2. I would ask what interest you're paying on the 'equity', unless they're doing a brand new mortgage with a 100% loan then I don't get it. Are you getting 5.08% with the choice package? That's what I got. How are you pulling out the 'equity' to know that it's tax deductible – I'm pretty sure that it is? If it's on the same loan, how do you calculate it? Being in it's own loan is way easier for this. Make sure the $395 for the package is taken out of the investment loan, so it's deductible.
3. I had this conversation with NAB only 8 days ago, and I was told I could only get 95% LVR and the LMI was ridiculous for a $600k loan. I was never told that 100% was possible. I would be really concerned about this lady at this point. Maybe consider a phone consult, I haven't had trouble with them.
4. I would just push for the 3 loans, check my thread I posted a few posts back in here for the link. There is no extra cost with the Choice package in having additional loans.
I'm pretty well embedded with NAB, but if you're not, maybe you should consider moving banks…. there are probably some brokers here keen to have a chat.
Jamie M wrote:TheNewGuy wrote:In my mind I'm happy to do a buy and hold (I'm in my early 30s), with a combination of yield and growth across the portfolio with the eventual idea of paying them off for a passive income around retirement…Sounds like me
just with the odd reno thrown in.Cheers
Jamie
Smart people think alike! I would be interested in knowing how you're going, where you are on your 'journey' and ideally, what you would do differently if you could!
Hi DK,
I was looking at developing as well, but decided against it. I used this website as a rough guide http://www.bmtqs.com.au/construction-cost-table
It doesn't take into account any haggling that can be done for building multiple dwellings, but it's not a bad start.
Hi Paul,
I have gone through a similar situation as you, it was a few years ago now but it was also with the NAB. I ended up in the 3 loan situation that Jamie is talking about. So, it definitely can be done if you ask.
In regards to the LMI, I have also discussed this with the NAB. I think that they might be billing you an extra $6000 to take the loan to 100%. Because $6800 is quite low for LMI for a 95%+ LVR on $350k. It could also be that they're giving you this equity via a Line of Credit (higher interest rate), and then probably not cross securitising your loans. But I would be paying particular attention to this!! Like has been said above, I'd do what I did, and end up with 3 separate loans set up how you stated in regards to IO loans etc.
The only other thing I would mention is to be careful what / how you buy, as you'll need the bank's house valuation to be as good as, or higher than the purchase price. Being pre-approved, and only having 10% deposit could be painful if you find the valuation comes in lower than your purchase price!
I'd be interested to know how you go, because I was only chatting to my NAB bank manager the other day. Check out my thread here: https://www.propertyinvesting.com/forums/help-needed/4349433 this was all with the NAB.
Hi Jamie, yes I am going to email Richard as he is obviously an active member here and has answered some of my previous posts. I hadn't heard of Andrew though, so I'll chase him down as well. Thanks for the heads up.
Shanin, in regards to strategy that was the main thing I wanted to chat with the planner about. In my mind I'm happy to do a buy and hold (I'm in my early 30s), with a combination of yield and growth across the portfolio with the eventual idea of paying them off for a passive income around retirement.. at whatever age I decide that to be. Due to work commitments and locality, I'm not sure if development is on the cards. But, like I alluded to in my original post, I'm not sure if I know enough to make the right decision.
In regards to budget, the main reason I want to commit to something is to force me to use my income for something a bit smarter. I have 80% LVR on $1.05mil in property, and about $75k in cash. I am saving about $50k a year in my current situation, which I plan to redirect to the property portfolio (if I knuckled down I could save $65k+). My goal would be to use this money plus ideally some capital growth in the portfolio to fund the next purchase, and so on until I can't service it anymore or I've had enough.
At least, that's my plan based on my own research.
Hi TerryW,
That's a good idea, we have child number 2 on the way and I haven't renewed my will since before child number 1 was born. At the moment everything goes to my wife, the whole I die, it goes it her, she remarries, then dies so it all goes to him does have me a bit worried about the future of my 2 children.
Thanks for the heads up.
PS. I'll check out all the links in your sig as well!
I just renewed all of my insurances. I have Income Protection for 3 months to death, at 80% of my salary. 3 months to 24 months is in my super, and 24 months+ is via Macquarie Insurance.
For permanent injury / death, I have $750k lump sum, and a pension paid to my wife ~ $15k p.a + CPI for the rest of her life.
I have ~ $800k in loans, including one IP and our PPOR. So this should leave her in a relatively 'ok' state, by providing no mortgage and a yearly income (including rent) of about $35k. I don't want to be worth more dead than alive!
Hi Benny,
That's actually a good idea. Depending on how long it takes to find the next IP, I might be getting pretty close to paying it off. So I'll keep it in mind.
Thanks.
Hi Benny,
Yes, that is what I said and you interpreted it correctly. That $100k is against the IP and unfortunately is not tax deductible. However, I left out some of the detail in my posts. That $100k is actually in a separate account, so I have an account of $274k and one of $100k that are both secured against the IP. So when it comes to tax purposes I just use the $274k account and it saves plenty of complications at tax time.
What I've actually decided to do (in more detail), unless someone has a better idea is:
$100k account. Interest Only. Variable @ 5.18%. 100% Offset account. IP secured, but not tax deductible.
$274k account. Interest Only. Fixed 2 years @ 4.99%. IP secured. Tax deductible.
$458k account. Interest & Principle. Fixed 2 years @ 4.89%. PPOR. Was contemplating IO, but I feel like I should pay some principle down, even in acquisition phase.
Offset account – linked to the $100k account. This is the superman type account that Sharin referred to, which I currently use in this regard anyway.
Line of credit – 5.73%. No set up fee, no monthly fee, etc.
This is with NAB's Choice Package (billed to the $274k account), so there are no fees for pretty much everything.
The expectation for me is when I nearly pay down that $100k by using the offset account, I can then start looking at acquiring another property.
Happy for opinions.
