Hi All,
I am hoping to get some assistance with the setup of my investment and loan structure as I understand it is important to get this correct at the very beginning to avoid any costly fees down the track if anything needs to be changed.
My situation is:
26 years old, $75k income, bought my first property (PPOR) in Sydney in January this year for $525k and currently have a loan with NAB (Choice Package) for $350k (67% LVR) with 100% offset. I originally had the loan as Principal and Interest but recently thought it a waste of money paying down the principal when I have a 100% offset account, so I changed to an interest only loan with 100% offset. My loan is now $346k as I have paid of $4k in principal. I have $70k in the offset account (effectively making my interest payments based on 276k). I have a further 60k in the sharemarket.Therefore my current debt is 346k (mortgage debt only, no other debts).
My net equity is 179k in PPOR, 70k cash and roughly 45k shares (after deducting tax on capital gains) totalling 294k equity.Plans for investment
I am starting to look around for an investment property and I am looking at properties in Sydney worth $450k-550k, with rental returns of approximately $450-$500 per week. I plan on using my cash and liquidating my shares to use as a 20%deposit for the property. This would mean I have a debt on PPOR totalling $346k + debt on new investment property of roughly $400k totalling $746k. My biggest issue is cashflow as they are both negatively geared and I'm on single income as stated above. The investment property would also be interest only.If I assume a 5% capital gains per year over 3 years this would mean I would have $150k additional equity to use as a deposit for my 3rd property ($1m property value x 1.05^3), which again would be interest only.
Concerns/Questions/Help??
– Potentially there is a better way to work this for cashflow or future opportunities?? Cashflow is the hardest out of all of this as everything I earn will be going to interest payments other than daily essentials. Obviously choosing a cheaper property can help but I would prefer to invest in quality apartments with stronger capital gain prospects??
– Is it better to use the equity in my PPOR to use as deposit for investment property or use the cash/shares?? Not exactly sure how this works.
– Is choosing interest only loans the best way to go for all of this and future opportunities, including on PPOR?Obviously I am going for a buy and hold strategy. Will I run into any problems with the above approach down the track, or immediately?
I'm doing my ground work and before I make any decisions I want to know I've got my strategy correct from the start, so hoping those more experienced can lend a helping hand or provide any guidance/suggestions!!
Thanks,
Brendan
Hi Brendan
Firstly welcome to the forum and I hope you enjoy your time with us.
Couple of things you can do about the cash flow issue and that is look at a fixed rate of interest and also if you are buying in your personal name look to undertake a QS report on the property so you can lodge a PAYG Tax variation stright up.
Now on how you structure the loan remember you can look at an investment loan upto 95% lvr + LMI which means subject to your income and the likely rental income you can spread out your equity amongst a couple of properties.
You wouldn't cash in your shares on use your own money especially when you have equity in your PPOR. Set up a separate LOC or Equity loan sitting in behind your IO PPOR loan and use the borrowed funds for the deposit and acqusition costs. Then look to take out a separate IP loan against the security itself.
Interest on the 2 loans will be Tax deductible as the purpose of the funds is investment.
NAB probably wont give you the full 0.7% rate discount on the equity loan unless you push them.
Your mortgage broker should be able to suggest alternative lenders for the separate IP Loan.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Why use your cash?
If you take money from your offset your nondeductible loan will increase.
Or
Pay the cash into your loan and then reborrow it as a separate loan and then you will be able to claim extra interest. Also look at selling your shares and then putting the money onto your home loan and then reborrow it to buy back the shares again. This should save you a few thousand each year.
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
Thanks Richard/Terry, great advice.. its things like this (tax benefits) which I am yet to fully understand so I appreciate the responses.
In saying that, I should be able to use the equity in my PPOR (approximately $180k) to take out a LOC and use it for the deposit and acquisition costs of my first IP, and the interest paid on this LOC is tax deductable. I can then take out another 'normal' loan against the IP to cover the remainder of the property. So I would have 3 loans in total (PPOR 350k, LOC 180k, IP 320k… assuming a 500k IP purchase).
I am yet to fully understand LOC loans, do these have options of interest only or principal and interest and would the intention be to pay this off? If so with what funds? As I am currently paying IO on my PPOR and the new IP would be negatively geared. Hence why I was assuming it is better to use my cash as a deposit rather than increasing my loan amounts when cash flow is tight?
Terry, interesting advice, it's new to me. I always thought it better to NOT pay off the loan on the PPOR but build up funds in my 100% offset account so I would have access to my 'equity'/cash immediately to use for future purchases. What I understand you saying is that it IS better to put the money into the PPOR and then access these funds through the LOC which gives the benefit of tax deductions for future interest payments? It's effectively transfering funds from a non-deductable loan to a deductable loan.
Exactly, pay of all non deductible debt first, then borrow to invent because the interest on borrowed funds to invest is tax deductible.
I see.. so putting away all my funds in my 100% offset is not ideal. With the 70k I have in the offset account this should all go straight into the loan on my PPOR, paying it off (leaving some $ for emergency/living funds ofcourse). Then when I need access to this, for eg share investments or deposit for IP, I apply for the LOC.
Understand.
It is generally good to keep your cash in the offset and not pay down the PPOR loan. But this may not be the case if you don't have equity and need to use cash to start. If you take the offset cash your PPOR loan interest will increase and you won't be able to claim this so it would be better to pay down the loan and then reborrow it as a LOC. Then invest and thereby claim the interest
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
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