Hi All,
Been a long time reader over the past few months and have finally started to settle into a strategy.
Would appreciate any feedback on things that I've missed, and any advice you could give to a 1st timer!
So, my current situation is:
I'm a small business owner, which means that each year I have a take home income of ~$120k and then about $80k in "profit" which ends up staying in the business as operating capital. I have to pay the tax on the $80k, but can't touch it to ensure bus. cashflow.
To the ATO, it looks like I make $200k PA.
Current Rent – $500 p/week
Monthly Savings – $3.5k
Current Savings ~75k cash/stock
What I'm thinking about doing is:
– getting an IP apartment in an inner west suburb in Sydney (Enmore, Camperdown) priced at $400-500k
– getting an IO loan for the place
– *fingers crossed* that there's strong capital growth over the next 5-7 years
– In about year 3, I plan to buy a PPOR and then move into that.
– I would be looking for an established property, on a quiet street which has good long term capital growth.
– Expecting rental gross yields to be ~4%
– Don't expect to be claiming much depreciation on any fittings/furnishings.
– I'm a first time buyer, with access to "new homes" FHOG, however I'm not keen to buy off the plan.
– I plan to use the money that I have in my business to park in the off-set account of my IO loan to reduce monthly loan repayments. This to me feels like paying off the loan (interest reduction)… without having to pay off the loan. I can then just move the cash back and forth each month (interest on bus. accounts is only ~3%).
A couple of questions:
– is it better to get the IO first, and then purchase a PPOR? A couple of my friends went down the FHOG, lived in it for 6 months (for PPOR), and then moved out. What sort of options are there for me to better manage this?
– Should I go IO, or should I go principal and interest?
– Is 400-500k realistic? Is there much investment grade prop. in that region?
– Is my thoughts on using the offset account legal? is that how the offset works?
Thanks for taking the time to read and to respond. I really value all of the expertise, advice and time that you dedicate into this community
Cheers,
Steve
Hmm… I'm not sure if people can see this? Sorry.. going to try to comment on it to see if it'll become public?
Hi Steve
Firstly welcome to the forum and i hope you enjoy your time with us.
Wont explore the question of whether the deal can be financed as we don't have enough data and that is the subject of another post.
Couple of comments in regards to your questions:
1) Whether you purchase an IP or a PPOR taking an interest only loan with a 100% offset gives you choice and flexibility. Nothing to stop you purchasing it as a PPOR obtaining any concessions / Grants that are available and then renting the property out once you have met the relevant conditions.
2) Assuming your Tax Returns show the loan can be serviced then no reason why you can't go to 400-500K purchase price. I don't now the suburbs well enough to comment as to whether you will find a suitable property for that price.
3) Don't see an issue in transferring your funds from one account to your PPOR offset account. When Peter Costello was Treasurer he actually suggested small businesses could utilise their GST and Tax money for working capital and cash flow until it was due.
As long as you don't contaminate the loan interest i don't see an issue.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Is the IP in Camperdown a 1 or 2 bedder also what would you paying for strata? On the face of it I dont think the numbers will add up. Good idea staying away from off the plan and new developments because the strata on those developments seriously kill off any yield.
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Hi Steve
Richard has provided some great advice. If you don't already have a good finance person on board, then it would be worthwhile giving him a call.
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]
Hi Steve,
I had a couple of thoughts about your situation.
What entity does your business trade and operate in? If you are trading in a trust you might be able to do something more tax effective with your $80k profit each year. Possibly distribute the profit to a company which can lend it back to the business with interest. In this way you only pay 30% tax on the $80k profit rather than the highest tax rate for individuals of 45%.
Purchasing an IO might knock you out as a first home buyer so you might miss out on the FHOGs if you buy a PPOR later. Check your state and federal rules.
Check with your accountant before taking money out of the business to place in your offset account. Depending upon your setup there could be issues.
Hope these points add value.
Cheers
Richard
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