Hi everyone,
This is my first post after reading on and off for 3 or 4 years now. I, like many, have read till my eyes hurt and day dreamed of how I was going to structure my approach to building a simple but effective portfolio. I am now at a point where my wife and I are ready and feel the market conditions are right to commence purchasing IP's. My dilemma is that I have no skills in accounting and while I can get a rough idea on the principals of setting up finances correctly I would hate to miss something and be selling ourselves short. I'm hoping I can get some innitial comments on the best/most appropriate way to structure our finances so we move forward correctly. (note: we will be seeking more specific advice from an accountant and broker)
OK, so our current situation is this;
PPOR with a conservative value of $500K with mortgage of $240K and offset with roughly $30K (P&I with Heritage bank)
Sepparate saving account totaling approx $15K
No other debt.The plan is to purchase properties in regional areas that are neutral or slightly possitive after holding costs. From initial research it appears properties around the $200-$250k mark seem to be the most likely to present this neutral/possitive return based on an 80% LVR with IO loan. Does this sound about right?
I am unsure of which approach to take in regards to the speed of aquisition but I guess the market and our comfort/risk profile with set that. Ultimately I would like to have a portfolio that can offer us an upgrade to the current PPOR in about 5 to 7 years and an opportunity to ease back to part time work by 50 (currently 33). Of coarse anything beyond this is a bonus!
Now to the question(s), how best to structure things right from the start. Are we short changing ourselves by having the current finances and mortgage structured the way they are? would we be better off having the PPOR mortgage as IO considering there is a chance that it will become an IP when we upgrate? My wife is of the school of thought that if we change to IO (or change the loan in anyway for that matter) we loose all the hard work we have put in so far in regards to extra repayments to smash down the intrest. Would it be of far greater advantage to have it as IO and chanel the excess toward deposits for further purchases and why? (this question if for my wife as she doesn't believe me that stopping paying down the mortgage is a good idea and I can see why she feels that way but I don't have the knowledge to structure a rebuttal)
I understand that a good structure is to have a set up of 3 loans
1.PPOR (P&I or IO)
2.Deposit and costs OI against PPOR
3.Balance of new purchase OI set up with offset to accumulate equity for next purchase?What is the best way to access the current equity/capital we have. I can see 3 options
1. leave everything as it is and use the funds in the offest and savings to raise a deposit
2. Pay offset and savings into PPOR loan and pull out the $50K ish to use as deposit (keeping as P&I)
3. leave offset and savings, change loan to IO and pull $50K from equityI have so many more questions the more I write! So best I leave it at that for now so I don't confuse myself let alone everyone else. As you can see there is a heap of info I'm trying to digest and my mind is not wired to accept accounting/finance common sense. Any advice on how to best setup the scafolding for a successful introduction into property investing will be most graciously accepted.
I have questions on Trusts and companies too but I'll hold off on this post.
Cheers
KrisHi Kris
Yikes – 4 years of reading and this is your first post!
It looks like you've absorbed a lot of the info and have a sound understanding of how to structure the deal.
If your current PPOR is going to become an IP down the track, then please convert to IO with an offset now. There's no point further reducing this future deductible debt – your basically throwing away money if you continue to pay down the principle. Instead, continue to make the "would be" principle repayments into the offset account – this enables you to achieve the same result in the short-term and maximise the tax benefits in the longer term.
If you're planning on purchasing a few IPs early on, then I'd be inclined to tap into a large chunk of equity with your current lender (providing they allow for this – and it doesn't have a detrimental effect to your future borrowing capacity). This loan should be set up as a second facility (IO or LOC) and used exclusively for deposit/costs on your IPs.
You would then set-up separate, stand alone loans for the remaining portion for each IP.
At this point, lender selection is also important. I don't know what your borrowing capacity looks like but for new clients looking to purchase quite a few IPs, we generally start off with the least generous lenders (such as Heritage) and work our way up the line to the more generous lenders as serviceability becomes tighter.
Hope this helps.
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]
Thanks Jamie, I was hoping you would be the first cab off the rank to lend some advice being a Canberra man like me.
What figures are required to determine borrowing capacity? Our combined income is 140K
Am I correct that this is what you mean;
1.change current loan to IO (this would be a loan with residual of 240k so we would only be making repayment on interest amount on 240K) Is this right?
2.Pay remaining (of what we currently pay as principal) into the offset (does this have to stay there for tax purposes or can it be used for renos to this property or personal use?) Also does the interest get calculated on the 240k minus what the balance of the offset is? I'm assuming yes but want to make sure.
3. Apply for an (equity?) loan with the same lender against the equity in the property. would I be correct in saying that give the figures of assumed value of 500k with residual of 240k. 80% of total being 400k and difference to 240k being 160k. Taking this we "should have" access to a maximum of 160k equity? If this was the case would we be taking too much of a risk to pull out this amount (in your opinion)
4. use this equity loan as the deposit and costs facility for future IP's.
5. apply for IO loans for balance of new IP's. Should these loans have offset to enable equity draw out or not?I have been thinking of approaching the purchases through a trust with a company as trustee (wife and I as directors) Would this be a wise way to approach things or could it have a detrimental effect on borrowing capacity?
Does anybody know if Heritage is a lender that will conduct pre application valuations? Is this something I should organise? I assume this should be the first move to see where I stand exactly.
I really should have been asking these questions earlier.
Cheers
KrisHi Kris
Rather than answer each question individually why not drop Jamie a line and get him to sort it all out for you.
Cant think of too many professions where you can get expert advice for nothing.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I would be inclined to go for IO with offset right now. Every dollar you pay off this loan means you need to borrow another dollar for the new PPOR down the track. And that means your tax position will be getting worse.
Also the $15k separate savings account, you might as well put that in the offset.
Then set up a separate LOC on this house. This LOC will be for investment expenses such as deposits and every other cent you spend on the next investment property other than interest – eg. rates, insurance, deposit etc.
Every dollar borrowed for your investment frees up a $1 for your new ppor and enhances your tax position. Never use your offset money for investments.
Generally, never have 2 directors of a company. It only doubles the risk. If something were to go wrong it would be best if only one of you went down with the company. Having one person can ehance borrowing capacity too because the other person can avoid giving a guarantee. But, it may be necessary to give a guarantee sometimes – at least with this way you will have a choice.
Be careful with land tax when buying in a trust and watch out for losses.
If you are buying in rural area make sure you consider things carefully. There is generally less capital growth which is the main driver in getting you rich.
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 for you response Terry.
Trusts and companies are a potential mine field. Do you tent to get charged more for land tax?
Also, if there were plans to enter into syndicate arrangements would it be better to include yourself as a sepparate entity to the "family" arrangements. ie a different company contributing interest to a trust that holds the syndicate assets?
Cheers
KrisYes, companies and trusts are extremely complex and 99% of those going into them don't understand most of the issues.
Land tax is a state based tax and the laws vary will from state to state. So wether you will pay more in land tax by using a trust will depend on what state you are in and what other property you own in that state. eg. In NSW an individual will get a land tax free threshold of about $370,000 in land other than their main home. After this they will pay 1.6% pa in tax based on the value of the land exceeding the threshold amount.
so if an individual that owns no other land were to buy a house valued at $600,000 with $300,000 land value then they would probably pay no land tax. But if the individual already owned say 5 houses then he may pay 1.6% x $300,000 pa = $4800
But if a trustee were to buy the same block there would be no tax threshold. So the trustee would pay $4800 pa from the start.
So if an individual with no other investments then a trust would cost $4800 pa extra in land tax compared to buying in own name.
But if the individual already owned a few houses they would be paying this in land tax anyway so no extra.
(this is a lot of money to fork out each year!).
If you were wanting to start investing with others then you should use a new entity. You probably want to look at a unit trust in such a case. But you could have the units of this trust owned by your discretionary trust.
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
Hiya Kris
Always good to see another Canberran on the forum.
1. Yes and yes
2. No, it doesn't need to stay there for tax purposes. I wouldn't use "cash" for IP purposes though. Instead, I'd use your equity loan because the interest is deductible. Yes regarding the way interest is calculated.
3. Yes re the $160k – I'm not sure if your current lender will allow such a large cash-out. They will question it's usage – and will want to see that the purpose (the purchase of IPs) will service on their in-house calculator (Heritage has one of the least generous borrowing capacity calcs).
4. Yes
5. Yes – and no to the offset accounts. You only need ONE offset account, set-up against your non-deductible $240k PPOR loan.Cheers
Jamie
KrisM wrote:Thanks Jamie, I was hoping you would be the first cab off the rank to lend some advice being a Canberra man like me.What figures are required to determine borrowing capacity? Our combined income is 140K
Am I correct that this is what you mean;
1.change current loan to IO (this would be a loan with residual of 240k so we would only be making repayment on interest amount on 240K) Is this right?
2.Pay remaining (of what we currently pay as principal) into the offset (does this have to stay there for tax purposes or can it be used for renos to this property or personal use?) Also does the interest get calculated on the 240k minus what the balance of the offset is? I'm assuming yes but want to make sure.
3. Apply for an (equity?) loan with the same lender against the equity in the property. would I be correct in saying that give the figures of assumed value of 500k with residual of 240k. 80% of total being 400k and difference to 240k being 160k. Taking this we "should have" access to a maximum of 160k equity? If this was the case would we be taking too much of a risk to pull out this amount (in your opinion)
4. use this equity loan as the deposit and costs facility for future IP's.
5. apply for IO loans for balance of new IP's. Should these loans have offset to enable equity draw out or not?I have been thinking of approaching the purchases through a trust with a company as trustee (wife and I as directors) Would this be a wise way to approach things or could it have a detrimental effect on borrowing capacity?
Does anybody know if Heritage is a lender that will conduct pre application valuations? Is this something I should organise? I assume this should be the first move to see where I stand exactly.
I really should have been asking these questions earlier.
Cheers
KrisJamie 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 help Jamie, it's appreciated.
Terry, thanks for your expertise on land tax. I hadn't thought of things that way. It would make a lot more sense to get a few properties under our belts and utilise the benefits as indeviduals before creating companies and the like.
The little ducks are starting to line up.
Cheers
KrisKrisM wrote:Great help Jamie, it's appreciated.Terry, thanks for your expertise on land tax. I hadn't thought of things that way. It would make a lot more sense to get a few properties under our belts and utilise the benefits as indeviduals before creating companies and the like.
The little ducks are starting to line up.
Cheers
KrisIt may make more sense from a land tax point of view but this is only one thing to consider. Sometimes it may be worth paying more in land tax (which is deductible too) to get some other benefit such as:
– asset protection
– income tax flexibility
– trust assets not forming part of your will and safer from being challenged
– flexibility
etcTerryw | 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
Hell Terry – Kris will now spend another 3/4 years learning about trusts
Thats ok as long as he doesn't catch the disease 'analysis paralysis'.
I have been studying trusts for about 13 years now and am still learning.
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
Terryw wrote:Thats ok as long as he doesn't catch the disease 'analysis paralysis'.I suspect Kris might have already copped a dose – 4 years is quite a while
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]
Lets just say I'm a slow learner. Turns out I haven't actually been reading the posts or reading the right ones for that matter. If I had of understood how simple financing was (in regards to the correct set up and reasons behind it) and where to look for deals I could have started long ago.
Anyhoo, we live and learn. I guess the important thing is the torch is lit now and I've made the step to engage with people like yourselves. You would be surprised how clouded you judgment can get talking to the wrong people who have the undying belief that you work hard smash your mortgage and raise your family. I was of the belief I was doing well (relatively speaking). Thanks for putting on the blinkers for me.
Yes, you don't know what you don't know do you.
Same with all areas of life.
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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