All Topics / Heads Up! / Repaying equity drawn from home loan for IP

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  • Profile photo of PegasusPegasus
    Member
    @pegasus
    Join Date: 2003
    Post Count: 8
    November 21, 2003 - 2:57 am

    Hi Steve. I have a query regarding the use of the equity in one’s home as a deposit etc for an IP. I notice that on your examples in “0-130” you do not include repaying the interest (or P&I) on the deposit you have used. Presumably this was savings in these examples, and hence no interest charges apply, but how does this affect the viability overall equation? ie it would decrease the cashflow for each property significantly.

    Would you advise repaying the interest (or P&I) from the positve cash flow, in which case one would have to pay tax according to the investment structure (entity) or quite probably at one’s marginal tax rate if the home loan from which the equity was drawn is in an individual’s name. I see also the possible danger of investors paying his portion of the loan off with their salary which is in after tax dollars and so would also impact significantly on the overall profitibility of the transaction.

    Any ideas on this issue please?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    November 21, 2003 - 7:01 am

    If you used your equity in your own home to buy an IP in a trust by using a LOC, you would be acutally lending the money to the trust. the trust would pay you the same interest rate that you were paying the bank. So you net position would be Nil as incomming interest would equal outgoing interest. All profit would be retains by the trust.

    Is this what you meant?

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of PegasusPegasus
    Member
    @pegasus
    Join Date: 2003
    Post Count: 8
    November 23, 2003 - 12:40 am

    Thanks Terry. So the trust can pay this interest as an expense in pre-tax dollars?

    I was also concerned about this extra cost and how it would reduce the positive cash flow each week or even turn the deal into a negative cash flow one, and the fact that Steve didn’t seem to have mentioned this or taken the into account at all. Not in any of the calculations I could find in 0-130, anyway. It of course translates that you would need a higher percentage of return on the properties (which are in the minority in the market, anyway) to make buying them viable (as a buy and hold strategy).

    Cheers,
    Pegasus

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