We are a young family and looking to buy an investment property and would like some feedback on our strategy.
We live in Perth and are currently paying our reidential mortgage off (house value = $280k, mortage = $190k). We have an additional $50k cash to invest and think the best thing to do is to put this money into long term rental properties.
However at the same time realise we need to put as much money into our residential mortagge as popssible.
We plan to buy a property (unit or house) for < $200k which we can hopefully positively gear (on a P&I loan) and hold for the long term using our savings. What is this the best thing to do? Should we buy and rent privately, or consider property funds, or put all our spare cash into our residential mortgage to minimise long term interet?
Thanks in advance for the advice!
I would put you cash into your home loan and have a redraw facility available on it.
Then use you equity to invest into an investment property.
Reduce debt that gives you no benefits. You can cliam the interest on an IP but not the interest on your home.
Don’t rely on what you learn in here but use it to ask questions of proffesional people who can help you. Ask your accountant about property investment. If he dismisses it straight away then go and ask another accountant who can tell you about it. A good accountant can help you with your finance structure as well.
Don’t be afraid to pay for good advice as it will save you thousands in teh long run.
Petters
Thanks for the advice. We do have an accountant which I intend to run all scenarios past. As you suggest I am looking for all possible strategies so we can weigh the pros and cons.
Are there any other strategies we should consider – that is ther than depositing the $50k into our home mortgage and then redrawing it?
Hey Andrew,
The thing with owning your own IP is leverage. This game is all about leverage. You want to own as much as you can with as little down as possible. So for example.you buy $50K worth of property funds, you now own $50k worth of property funds.
you buy $250K worth of property (80% lend with deposit of $50K) OR
you buy $500K worth of property (90% lend with deposit of $50Kyou have control of a lot of property that can grow in capital and possibly provide you with some income in the future or even now. $50K in funds will maybe do 10-15% on a good day. so in 1 year you earn $5-7500K. If your property only grows 5% then at 250K you have made $12500. At 10% – $25K. Do you think it is possible if you buy well to see your property grow at least 5-10% per year ??
To me it is a no brainer. I do not trust fund managers as they do not have my best interest at heart. Also if I do these deals then I learn a whole lot of things about property that will continue to make me more money over time. If you hang around forums like this not only can you leverage your money through property but leverage your knowledge off others who have been there.
I know it may seem daunting buying propety but keep on asking questions and reading info and hunting property. Also remember your first deal may not be an earth stopper but it will teach you a lot that if you are clever you can continue to apply.
Hope this helps.
Enjoy
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(Andrew)“”Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”
Albert EinsteinHi Andrew.
While doing your research put your cash into an offset account against your home loan. This has the same effect as putting the money into the loan itself, but avoids redraw fees and limits. It means you have instant access to the funds for investment, and also your investment monies are kept separate from your home loan (simpler book-keeping).Terry
Terence McMahon
HomeWin
FinanceHi
I thought I already replied to this a couple of days ago, but my post is missing??
You could put the money in the offset account and pull it out to use for further investments. But when the money is withdrawn the interest payable on the home loan would just increase again. This portion would not be deductible.
However if you actually paid it off your home loan and then reborrowed the money again for investment purposes, then the interest on this extra portion would be tax deductible as it is for investment purposes. The net interest would be the same both ways, but the tax deductions would be increased by using the redraw strategy. It could get a bit messy attributing and keeping track of the portions-but worth it. It would be good if a second sub account or split could be set up. Check with your bank.
On $50,000, this could work out to be a bit. eg 6% interest is $3000 extra in tax deductions.
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry, in my last post I meant to write what Terryw wrote, having used exactly that method – before finally paying off the home loan!
I was thinking of an immediate strategy whilst you do your research (assuming you don’t have your savings in an offset a/c); e.g. can you redraw on your home loan? If so, how much, how often, what charges (if any)?
TerryTerence McMahon
HomeWin
FinanceThe most tax effective strategy would be as follows
1.Establish a line of credit on your home and put in all surplus money and savings you have.
2.Make sure the LOC has sub accounts so that you can keep your personal mortgage seperate from you surplus funds that would be used for investing.
3.find a suitable investment property (hopefully cash flow positive) and take the deposit and costs from your LOC
4 Borrow the rest of the money needed against your investment property (do not let the bank take cross security over both properties)
5 Use the form 1515 form to get deductions back on a weekly basis and put this money and all your rental and salary into your personal mortgage. This will help you pay off your personal debt quicker.
6 Pays interest only on the investment property until you are happy with the level of debt reduction on you personal mortgage.
If you need further assistance please email me at [email protected]
M Mays
Financial Consultant
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