Structure
- If you are serious to be a long-term investor get a structure in place to protect yourself and your assets.
- If you are going to use any statistics for housing growth ensure you use 10 year growth figures. 1-year figures are deceptive and do not indicate possible future growth. During a boom even the poorer suburbs can experience growth that looks good. 10 year figures will most likely include a complete cycle boom through to slump. Shorter terms will miss part of the cycle and not be accurate.
- I heard an interesting stat that out of all the banks long term interest rate predictions they have had poor odds at getting it right. This would be similar to economist’s long term property value predictions I guess. Past history is no guarantee of future growth and long term factors are very hard to predict as something usually happens to alter the forecasts. (Wars, terrorism, floods, earthquakes, Asian crisis). However saying that we can usually see into the short term and be semi reliable. Using historical growth and buying in the right location at the right price can put us ahead of those blindly purchasing to follow a boom.
- A good way to protect yourself is to use the “What if’s” . Decide if you are going to protect yourself from anything that concerns you with regards investing. Most things that concern people and prevent them from investing can be covered by a well thought out plan. Do this from day one.
Finance
- Avoid using the one bank trap. This is simply where an investor gets comfortable with their current bank giving the bank complete control over their entire portfolio. Banks will like to cross-collaterise if given the chance. Using several banks spreads your loans around and reduces the risk of your portfolio being called up if the economy turns bad.
- Banks use Loan to Value Ratio (LVR/ Equity) and Debt Service Ratio (DSR/ Cash flow) to determine your ability to acquire a loan. It is safer to drop back and keep your serviceability low at the end of a boom. This will enable you to have a buffer if things get tough and let you ride out any pending downturn in the market (Slump). Historically rents and house prices usually drop back from their peak.
- Ramp up your serviceability leading into next boom. This is when you need to use your servicing to catch the wave and build some serious equity.
- Just as it is sometimes safer to diversify your property locations, you should do similar with your borrowings. Interest rate diversification. Spread any fixed rate terms over a range of dates so all your loans are not expiring at same time. Interest rates move around regularly and you do not want to be caught out needing to have your entire portfolio expire at a time when rates may be high.
- There is a large amount of opinion on Principle and Interest (P&I) loans versus Interest Only (IO). The general consensus is if you have non-tax deductible debt e.g. personal house mortgage, then use Interest Only on your IP and pay down the non-tax deductible debt with the money you will be saving in lower loan payments. Otherwise if you have no bad debt the choice is up to you P&I or IO. IO can allow you to accumulate more property but P&I can be good during a slump too as the debt is being paid off slowly.
Hi Anthony
Great advice. If I was asked to add one more
I'd suggest you be very wary of making an investment decision based on the tax benefit you'll receive.Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Great Post Anthony!
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Thanks Anthony! Always love to read your posts!
Have you thought about writing a book?
PaulDobson wrote:Hi AnthonyGreat advice. If I was asked to add one more
I'd suggest you be very wary of making an investment decision based on the tax benefit you'll receive.Cheers, Paul
Totally agree. We hear it so often – but the fact is, no investment strategy should be based primarily on receiving taxation benefits.
Good point Paul and great post Anthony.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Great topics ,I have just been tracing information myself for possible restructuring .
I have found the same a few property groups I went to see , have been full on into tax benefits not interested at all about any positive gearing as it will attract tax .Although we do need to be tax effective in our property portfolios.
But as I think Steve and others have mentioned before , If we make money we pay tax and the reverse is also true if we are paying tax we are making money , which is good .Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
Any comments Thanks .slowachiever wrote:Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
Any comments Thanks .Potentially very bad idea. A LOC should only be used to extract equity for investment purposes.
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
slowachiever wrote:Great topics ,I have just been tracing information myself for possible restructuring .
I have found the same a few property groups I went to see , have been full on into tax benefits not interested at all about any positive gearing as it will attract tax .Although we do need to be tax effective in our property portfolios.
But as I think Steve and others have mentioned before , If we make money we pay tax and the reverse is also true if we are paying tax we are making money , which is good .Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
Any comments Thanks .LOC is easier to get approval and less hassle…but it’s def not the best structure in the long term + less flexabililty and costly.
I would suggest a standard equity release with a standard split loan…Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Thanks guys , I have a bit more research to do .This broker has suggested I get a LOC setup as then will have theoretically
a higher amount of loans with Combank which then I would qualify for wealth package loan rates .
I have aleady got a business line of credit from a previous time $50,000 . Which were to use for deposits where needed .
So it has been suggested to get another against my other property ,so I will have 2 . 1 is for deposits the other for expenses related to property . Put the majority of all monies into the larger one I think to keep interest down .It were something like that
arrangement .Shape: Can you please discuss a standard equity release with a standard split loan in more detail for those of us with equity who want to use it for the next IP?
I will use round figures.
Home worth $500,000
Current loan is $300,000 — LVR 60% — lets call this Loan 1 ( can be PPOR or Invest)In the above question by slowachiever she/he mentioned a LOC to obtain the deposit ; the another option is a standard basic equity release.
1. Refinacne with a cash out or top up the loan to a 80% LVR ( higher or lower based on your requirement)
2. Make sure the bank sets up a “split loan” or in another word another mortgage for this “top up/cash out” – this way the loans are clearly separated for tax reasons and simplicityEnd result
Home worth $500,000
Current loan $400,000 @80% LVRLoan 1 ( as above) is still $300,000
New loan called Loan 2 is $100,000
Total : $400,000So in affect you have 2 mortgage secured by one property with the same bank-
Most loan product theses days allow up to 2-5 splits.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Shape,
In this example is the interest on Loan 2 tax deductible?
If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?
Regards,
Dave
siraitken wrote:Shape,In this example is the interest on Loan 2 tax deductible?
If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?
Regards,
Dave
It is.
There are many ways to achieve a similar outcome- it all depends on your overall LONG term goal and objectives ie planning a construction? wanting to buy it in a trust etc…the above example is one of the 3 common ways to make Loan 2 tax deductible.Mick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Thanks Shape.
Shape wrote:siraitken wrote:Shape,In this example is the interest on Loan 2 tax deductible?
If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?
Regards,
Dave
It is.
There are many ways to achieve a similar outcome- it all depends on your overall LONG term goal and objectives ie planning a construction? wanting to buy it in a trust etc…the above example is one of the 3 common ways to make Loan 2 tax deductible.Hi Shape,
Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn’t be. Is this correct?
Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?
sweeny wrote:Hi Shape, Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn't be. Is this correct? Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?Hi Sweeny
Correct – it looks like you've answered your own question
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Jamie M wrote:sweeny wrote:Hi Shape, Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn't be. Is this correct? Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?Hi Sweeny
Correct – it looks like you've answered your own question
Cheers
Jamie
Thanks Jamie,
How do you manage the cash out from Loan 2, before you use it to fund an investment? Correct me if I’m wrong, but I would guess the following events would occur:
1) Loan 2 is approved, secured against existing property
2) Lender deposits $100k in a specified bank account
3) At some point, some or all of the $100k is used to purchase another investmentThe things I am unclear about are:
A) How do you prove to the ATO that the $100k you obtained in step 2 was used to fund the investment in step 3, if they do not happen in the same transaction (an they could potentially happen months apart)?
What do you do with the interest on Loan 2 before you purchase the other investment?
C) Let’s say the other investment requires $80k in cash, so of the $100k borrowed as part of Loan 2, you invest $80k and leave $20k as cash sitting in an account. Is 80% of the interest on Loan 2 is tax-deductible? Is it possible to make the other 20% tax-deductible?Given all these concerns it seems to me that it would be simpler to set up a LOC on the existing property for $100k, so when you want to purchase the other investment, you can just get all of the costs drawn straight out of the LOC at the time. What are the advantages gained in using the standard equity release/standard split loan over a LOC?
Borrowing and placing the borrowed money into a savings account is very risky as you would break the nexus between borrowing and investing. Once it hits the savings account it is no longer borrowings.
Some loans offer redraw, so you could set up a IO loan, new split of course, and borrow the money and then deposit it back into the loan. Once you have the investment ready then you borrow directly from the loan, via cheque,
LOC is generally easier.
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
Hi again Sweeny
With the $100k cash out – you just need it to be set up in a way so as you’re not paying interest on it until it’s used. This can be done via Terry’s method above, by using a LOC or placing an offset against the loan and transferring the funds into the offset.
If you only use $80k for investment purposes – that $80k will be deductible. The remaining $20k will simply sit there until you use it.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
interesting informative educational thread. Thanks all.
I have 3 IPs each with their own free-standing (not cross lateralised) interest only loans, and all of them have gone up in value. Is the simplest way to access the extra equity to set up individual LOCs for each IP? How do you stop it getting too bit confusing, once you get more and more IPs all doing the same thing?
Also Terryw re your method with an IO loan with redraw. Would that have a lower interest rate than a LOC? My current LOC rate is higher than the IO with the same bank.
I'd suggest you be very wary of making an investment decision based on the tax benefit you'll receive.
What do you do with the interest on Loan 2 before you purchase the other investment?
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