Hi guys, first time poster hoping to get some help.
I am new to the whole investment property thing, still trying to get my head around this.
This is my current situation:
We have a PPOR worth around 300K, which we still owe the bank 240K.. so it means we have equity around 60K right?
Currently we are doing principal & interest loan, standard variable rate.
Since this is a unit, we are trying to move to a bigger and better place.
Hoping to buy a property around 500K and use this as the new PPOR. We have some cash around 150K to put into deposit into this property.. while the rest we will borrow from bank of course. And we want to rent out our existing PPOR , so that will be our IP.We are a bit confused on how to start this properly:
1. We have equity around 60K. How do we utilise this exactly to help us purchase our new PPOR (without selling the property).
2. The strategy is then to try to pay the debt back PPOR first as much as possible? Because their interest is not deductible is that correct?
3. Is it better then to change our existing PPOR (future IP) loan from principal & interest to interest only, so they are fully deductible?
4. Other recommendation?
Will appreciate any input to these, thank you so much.
Honam
Hey Honam
Firstly, welcome to the world of property investing!!
Ok, let's go through this step by step….
60K equity – right! Ok, good start so far!
However, it must be noted here that if in fact your current PPR would be valued at 300K is this market by a conservative bank, that you effectively have an 80% LVR (If I say anything that doesn't make sense, tell me!).
Depending on what sort of loan you have, the max LVR and the mood of the bank valuer on the day of valuation, you may not be able to pull much out of that property at all.Aside from that, you are going to have some complex tax-deductability issues here, which I will try and address from my personal experience, but I am not an accountant so you can't sue me!
If you have 150K and you want to buy a property worth 500K, then you are going to have to borrow another 350K (+legals, transfer duty, etc). While you MAY be able to borrow some of that against your current property at 80% LVR already, why would you, when you'll only be at 70% LVR for the new house?
The simple strategy here is to change your IP payments to interest only, and pump as much money into your new PPR as possible. So you've basically got that right – again speak to an accountant AND a good mortgage broker before you do all this.
Now, if property investing is going to be something that you see yourself doing a bit more of, then you have another more complex strategy that is your best bet (in the long term). Ok, big breath…..here it is!
Basically, you set up asset protection structures (trusts and stuff), and then you sell your current PPR into the trust. You borrow as much as you possibly can for that "purchase" by the trust. You then use as much equity as you possibly can for the new PPR so that your non-tax deductable debt is minimised.
Option B is only something you'd look into if you were planning on being a serious property investor. If you just plan on having two or three properties for your whole life, then by all means go with option A. Option B raises a whole lot of questions about tax deductability, extra expenses for tax returns, and basically having to run your whole property investing thing like a business.
If you go for option B, find a GREAT accountant. If you're paying less than $500 per hour, they're just not going to know what they're doing with this stuff. You could try Chan and Naylor, The Intelligence Group and maybe even Active Financial Answers.
Have fun!
Andrew
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Hi, you need to work on the viability of what you propose to do first. The trust structure is costly unless you can do much of the accounting. Legal fees etc add to the cost. Probably not worth unless you're looking at a million dollar investment.
Current PPOR – no need to do much except change over to IO loan. Your LVR of 80% is about standard for any loan. As an IP, what kind of yield will you be getting? On costs of around 7%, you need to recover $21000 p.a. rent i.e. $400+ p.w.
Your proposed new PPOR around $550000 less $150000 = $400000 loan. You will need to pay $500-$550 p.w.
The numbers are approximate. But you can get an idea of where you'll be at say in 5 years time.
If you're happy, then easy to go ahead.
Good luck,
KYHi, new to all this.
I've got a small question to throw out there.
I'm looking to get into the property market and have 50K for a deposit. I was looking at buying a 5-20ac block with a house to get started, as we have a few horses and dogs.
Later down the track I'd like to start buying some investment properties.
What I was wondering is, what should I look at spending on the first property and then how long would I have to wait to buy the second. The second property we would rent out, with the rent covering all exspenses.
Thats the plan. Am I on the right track?I'm open to suggestions,
Thanks
Steve
Hi Steve
That's not a bad track… although next time you ask a question you should start a new topic!
The problem with buying a rural property is capital growth. The idea is you buy your first place, wait until it increase in value, then refinance to unlock the equity and use that a deposit on the next place. I hope that makes sense for you??
However, it's impossible to tell you how much you should spend on your first place without knowing your income details and whether you'd need a full doc loan or low doc loan.
Start a new post, give some more details, and I'm sure you'll get some answers
Thank you for your comments everyone!
Ok so at the moment I have equity around 60K which I still owe bank about 240K, which like you mention essentially my LVR is around 80% .. so at this stage virtually there is no equity I can pull out.
However, by next year (which is when I am planning to buy a second property), I should be able to add about 30K to my equity.
So by that time I should refinance my loan to 80% LVR, which means I have extra cash of around 30K. On top of that I will change my loan from P&I to IO for the investment property…
Is that how it works? So in addition to my 150K cash I will have further 30K cash towards buying second property.. sounds right?Andrew, I dont really understand your comment here: (like i said im very new at this so bear with me
)
"While you MAY be able to borrow some of that against your current property at 80% LVR already, why would you, when you'll only be at 70% LVR for the new house?"And regarding your option B .. although it sounds good, thats definitely not something that I want to do at this stage.. maybe further down the road yes.
Hi Honam
To correct a couple of misunderstandings:
1) You could access 90% of the current property value fairly easily subject to the payment of mortgage insurance.
2) If you intend to purchase a new PPOR next year then you do not want to pay down the current loan and I woul dbe switching it to an interest only loan with 100% offset account linked to it now.
Now to answer Steve's post question.
Subject to the post code of the property you may stil get 90-95% LVR as long as the land has a habitable dwelling upon it. You wont however get a 90% lodoc loan upon the property so will need to have satisfactory income evidence.
Richard Taylor | Australia's leading private lender
AndrewBuysHouses wrote:Now, if property investing is going to be something that you see yourself doing a bit more of, then you have another more complex strategy that is your best bet (in the long term). Ok, big breath…..here it is!Basically, you set up asset protection structures (trusts and stuff), and then you sell your current PPR into the trust. You borrow as much as you possibly can for that "purchase" by the trust. You then use as much equity as you possibly can for the new PPR so that your non-tax deductable debt is minimised.
Hi there,
Just wondering about this. I know we set up trust/etc for protection, but if you sell your house to the trust doesn't that remove the protection on our PPoR? Its still non-tax deductable debt right? Just a little confused, could you give more info please?
Thanks
– BenHi Ben
Regretfully not. If an when you sell the PPOR and it is held in a Trust entity it becomes a Taxable asset for CGT purposes.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Hi BenRegretfully not. If an when you sell the PPOR and it is held in a Trust entity it becomes a Taxable asset for CGT purposes.
Oh, thats ok. I dont plan to ever sell or move out of this home (I guess things could change but plan is this is it). I'm just trying to work out what the advantages of selling to the trust are?
Ahh ok. I think I get it. I spoke to my Uncle over the weekend who has done a fair bit of investing (passively) about Trusts/etc. Apparantly the way to get money into the trust is to 'gift' it. Therefore if I refinanced my PPOR to release equity, I need to gift that to the trust, and therefore since its a gift and not an investment I cant claim the interest as a deduction? Not only that, but I'm assuming if I make a good return and want to repay the money, I need to distribute it and actually pay tax on that distribution.
Is that the basic thinking? So I need to weigh up the benefit of 'selling' my PPOR to the trust and paying new stamp duty on it, v's the extra repayments on my PPOR which are non-tax deductible if I keep the PPoR in my name?
I'm currently with St George, looked at their new Portfolio loan product. It mentions being able to have each sub-account in a different entity name. Does that mean I could create a sub-account under the name of my trust and when I draw down on it (its a line of credit) that interest becomes tax deductible for the trust?
I'll obviously talk this stuff over with an accountant, just trying to understand the issues a bit.
Qlds007 wrote:2) If you intend to purchase a new PPOR next year then you do not want to pay down the current loan and I woul dbe switching it to an interest only loan with 100% offset account linked to it now.
Just a quick question regarding the above, why is it recommended to have a 100% offset account against the IP when you are paying IO. If your salary is going straight to the offset account does this not minimise your tax deductions?
Sorry if this is a sily question, I just can't get my head around why the offset is required for the IP. Is there another purpose for the offset account?
Ediot
Yes it would certainly limit your Tax deductions but it will also limit your loss.
If the interest is greater than than the rent being received you are only negatively gearing the asset at your highest marginal rate.
Someone still has to cover the other shortfall.
If you can reduce this why wouldnt you.
This is of course subject to not having any non deductible debt.
Richard Taylor | Australia's leading private lender
However, it must be noted here that if in fact your current PPR would be valued at 300K is this market by a conservative bank, that you effectively have an 80% LVR (If I say anything that doesn't make sense, tell me!).
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