Hi All,
I currently have 1 investement property with equity of around 180K. I am ready to buy one, possibly 2 more properties to maxamise negative gearing but I just don’t know what structure to form. Do I use this equity out of property 1 or do I finance the next deal seperatley? Any help/suggestions would be appreciated.
CheersHi showbags,
Some say it’s best not to cross-collateralise. I agree. That is to say: don’t use the equity in your existing IP to borrow more from the same lender.Instead you can set up a Line Of Credit (see your broker to do this) using the equity in your IP and draw down on it as you need money for a deposit to purchase more IP’s.
Then you have the luxury of deciding on a lender of your choice, and the property will stand alone. (Not be tied in to the same loan as your existing IP)
That way you wont have any dramas from your lender if you decide to sell either of the properties in the future. They will be independent of each other.[biggrin]
Regards,
Sharon
Thanks Sharon,
that makes perfect sense. I really like the idea of keeping these IP’s seperate.
Thanks again for your advice.Cheers
Hi Showbags,
I would suggest you utilize the equity as deposits on separate loans, 80/20 finance will avoid cross colaterisation and the need for mortgage insurance.I would also suggest the benefits of a 100% offset account rather than a LOC, especially where non-deductible debt is involved, Cheers.
Regards
Steven
Mortgage BrokerPhone: 0402483216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
I have a similar situation to this in Perth and have structured it as follows:
– PPOR has $270k equity and $80K PI mortgage
– IP has $380k IO finance
– IP interest payments are being made by a LOC (which I am not paying off)
– All rental income from the IP is channelled to pay down the PI mortgage on my PPOR.
– I also make voluntary payments to the tune of the difference between the net incoming and outgoing on my PI (it’s -ve geared) to my PPOR IO mortgageMy justfication for this is that the LOC interest rate is only marginally higher than the PPOR mortgage, the PPOR mortgage interest is not tax deductible and the IP mortgage interest is. At our current rate I will have paid down our PPOR mrtgage in 12 months. We will then work at paying off the LOC and setting up an offset account in addition of course to looking to extend our IP potfolio.
I would be interested in other peoples thoughts to this structure..
Andrew
Hi Andrew,
If I read your post correctly it looks like you are capitalizing interest on investment via your LOC, You may want to seek professional advice regarding this structure as you may come unstuck with the ATO, cheers.Regards
Steven
Mortgage BrokerPhone: 0402483216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
I am ready to buy one, possibly 2 more properties to maxamise negative gearingMaybe it was the way you worded it, but negative gearing or minimising tax shouldn’t be the sole reason to invest, whether property or anything else.
Thanks Steven,
My IP has an interest only mortgage. I am claiming the interst on the IP mortgage and the interest accrued on the LOC (which is only paying interest off the IP mortgage) as deductions against income.
This does increase the loss but it’s all tax deductible and allows me to pay down my non-tax deductible PPOR IO mortgage much faster.
I ran this past my accountant (who is ex-ATO) and he said that it is fine as long as you don’t use the LOC for anything other than expenses against the IP that are truly tax deductible (e.g. maintenance and IP interest payments).
Do you think I need a second opinion?
Hi Andrew,
As Steven said it does like you are allowing interest to capitalise (interest on interest) on/in your second LOC and as such there may be issues with the ATO.
So – in a nutshell it would pay to get a second opinion.
Derek
[email protected]Property investment advice and researched property in quality locations available.
Hi Andrew
Yes i would definitely get a second opinion. From what you have indicated you are capitalizing interest. You are not paying (the interest only) on the LOC account.
To my undertanding the rent can go to your PPOR account and sit there till the interest is due in your IP LOC. This reduces the amount of interest on the PPOR for the month due to the lesser balance.
When you work it out it amy save you a few hundred dollars over the financial year.
If you have the rent paid into your LOC (IP) and there is a shortfall then the LOC can pay the shortfall.
With tax deductions etc this shortfall is generally covered at some stage.
cheers
stargazerThanks for your feedback Derek and Stargazer.
I set this up about 6 months ago thinking this was a great idea. I guess I should have know better – if it seems too good to be true it probably is! I will pursue a second opinion.
Beforee I do and to make sure I understand this ……..
If I used the LOC to pay the IP’s IO monthly payment and then paid the LOC’s monthly interest from the IP’s rental income (hence my LOC would not accumulate interest) then this would be OK?The problem here I guess is that the LOC IR is higher than my PPOR IR and hence I am worse off not better off. Is this all correct???cheers
AndrewHi Andrew,
The advice from your accountant regarding the use of the LOC may be in relation to keeping
deductible and non-deductible separate for accounting purposes.
I would assume if he was aware that you were capitalizing the interest on the LOC and more importantly intend to claim the capitalized interest as a deduction he would advise otherwise, especially if he is ex ATO,I suggest you run this past your accountant again, if he says its fine then definitely get a second or third opinion.
Please let us know how you get on, as I’m sure a lot of the forum readers would like to know the outcome, Cheers.
Regards
Steven
Mortgage BrokerPhone: 0402483216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hi Andrew,
Just read your last post,Making repayments on the IP loan from the LOC should be fine as long as you don’t intend to claim the interest on the LOC, (please seek professional advice regarding this)
If your aim is to pay down non deductible debt (PPR Loan) at a faster rate, then I would suggest you look at the benefits of a 100% offset linked to the PPR loan, any spare income rent etc could be parked into the offset until required,
What security are you using for the LOC, if it’s the PPR then a split loan with an offset may be cheaper than a LOC.
Regards
Steven
Mortgage BrokerPhone: 0402483216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
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