Hi everybody,
I've just joined recently and learned a bit from reading the post.I have a question which I cant seem to get my head around.We want to start investing in property but dont know how to start exactly even after reading a lot of stuff.
We have a house we bought 2 yrs.ago now worth about 270-280,000.We've taken out a basic loan with redraw facility and have all our savings of the last two years, about 111,000 there at the moment offsetting our mortgage.So we have a mortgage of about $68,500.Would it be better to redraw our money for the deposit or refinance our mortgage, and what would be the tax implications if we use our money for the deposit?Thanks,
mimHi everyone,
Hi Mim,
Probably best to just redraw the money you've got as it's much easier. You would still have to pay interest on the money you take out of your redraw so it doesn't make much difference if you do that or refinance. Except that refinancing you'll have to pay anything up to $700 for the privilege! I recently inquired into refinancing for some basic repairs but it's not worth it when you have to shell out for those fees, particularly when you are starting out and trying to put all your savings into acquiring properties.
Re a problem I have:
I've just found what I think is a really good deal in a strongly growing regional town in NSW, however after taking all costs into account I would only get about a 5 or 6% cash on cash return on my initial cash down, using the method in Steve's book (0-130 properties in 3.5 years). My cashflow would equate to about $16 per week which is cashflow positive but if interest rates go up as I'm sure they will (especially with all of our Commonwealth debt), this will wipe out my cashflow and put me back into negative gearing territory.
I have already gone down that road with a couple of properties (both of which I plan to sell) and I don't want to go there again!Anyone have any suggestions?
Thanks
AaronMim
Hate to disagree with Aaron but be very very careful in just redrawing the funds in advance on your home loan as the interest will not be deductible.
It is imperative that you establish the structure correctly to maximise the deductability of the interest and ensure both interest savings and flexibility.
The cleanest easiest way is to look at refinancing the existing loan to either an interest only loan or P & I loan with 100% offset account attached to it and then behind the initial home loan attach an investment line of credit.
This can then be used to draw down funds to cover the 20% deposit and acqusition costs of the individual investment properties.
Then take out a separate Interest Only loan to a level of 80% of the purchase price on each new IP loan.
Repeat for each new property.
This way the interest is clearly identifyable and you are not running the ATO gauntlet.
A good mortgage broker can set up on the way with both the structure and product choice.
Richard Taylor | Australia's leading private lender
Yep, thanks for that. I was a bit unsure if the interest on the redrawn money would be tax deductible and you've cleared that up.Now all i've got to do is make sure I understand all part of it
Thats fine mimi anything you dont understand just ask.
This is what the forum is for.
Richard Taylor | Australia's leading private lender
Richard, would this help Mimi or not?
PPOR loan would be P/I with offset and 1 split
20% deposit placed in split, this money to come from PPOR loan account not offset.
Borrow 80% for IP at I/O
All 100% of IP purchase is identified, no problem with ATO and interest for all 100% of purchase tax deductible.
Rent from IP deposited straight into offset to help reduce non-deductible debt and of course interest is paid out when due.
Have I got this right or not?
Appreciate your input
Hydramax
,Hi Hydra
The way around it is to take out a totally new loan for the investment rather than increase or redraw the existing PPOR loan.
By splitting the PPOR and Line of credit then the loans are the interest is easily identifyable.In essence you have it correct with a little massaging.
Richard Taylor | Australia's leading private lender
Hi Richard,
Is this what you mean?
Refinance the PPOR, establish a line of credit, take 20% deposit from PPOR loc, borrow 80% of IP so it is a standalone loan?
By the way, how much money do you reckon we might be left with after refinancing?Thanks,
MimiRichard,
If separate 100% IP loan would that mean security for PPOR would need to be involved as well? ie IP loan would need to be taken out with same lender.
Regards
HydraHi Mimi
Yes if we do the figures.
PPOR valued at say $275,000 x 80% = $220,000
Existing mortgage of $68,500 linked to offset account
Investment line of credit of $151,500New Invt property of say – $300,000
Standalone loan of $300K x 80% = $240,000Balance of $60,000 plus acqusition costs funded from Investment Line of credit.
IP 2 – Repeat as above.
Hope this makes sense.
Richard Taylor | Australia's leading private lender
Hydra
Whilst in mimi's case and in most case investors borrow 100% of the purchase price + costs it is how it is funded that is important.
Personally I wouldnt use my own PPOR as cross security for my investment property and that is why it is important to split the loans.
What you would do once the IP has increased in value is shift the debt solely onto the IP security.
With the above example i haveed to mimi let assume after a few years the IP valued had increased to $400,000 then 80% of this would be $320,000 and the investment loan would be increased from the original $240,000 to $320,000 with the $80,000 raised being used to discharge the portion of the IP loan secured against the PPOR.
Eventually as time goes on you might have a dozen or so properties all with loans secured against them and your PPOR totally unencumbered.
Hope that makes sense.
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks for that. That makes it very clear but just another question, let's say we would like to buy another property sooner rather than a few years down the track, how does one do it ? Is it wise to borrow 90% or try to look for cheaper properties which in Melbourne is a bit discouraging at the moment.( looked only on the net, though)
Thanks,
MimiHi Mimi
With the equity you have you can purchase multiple properties subject to serviceability and do this immediately.
Depending on how many you buy they would all be under an 80% lend.
All you would do is use the line of credit to fund the deposit and costs again and take out a separate standalone loan on the investment property you are buying.
If you are thinking that way probably not a bad idea to get the structure set up soon rather than later so you can jump when the time comes.
Richard Taylor | Australia's leading private lender
Hi Richard,
Thankyou also from me.
As always your advice is very informative and professional. I appreciate your great support to this forum.
I have not been a member for long and I along with others really look forward to the help you provide
HydraThanks Hydra for the kinds words.
We try to assist where possible
Richard Taylor | Australia's leading private lender
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