Hi Forum,
Long time lurker and first time poster, I am looking for advice and encouragement on where to invest $400k.
Ive come across the specified amount of funds from inheritance, I am still renting and don’t own anything. I am on a single $70-80k income without dependants.I am currently a few chapters into Steve’s book and have purchased a few more others. Currently living in North Suburbs of Melbourne.
My family mentors are still in the old school way of buying a property and waiting for it to grow in value. Their advice is to get a $150k loan ontop of the $400k in hand and get a ‘nicer’ detached house some 20kms from the CBD and wait for it to appreciate whilst paying $150-200pw on Mortgage repayments.
Me, I have thought of buying a 1 bedroom unit/apartment somewhere near or close to the city outright and renting it out (for hopefully $300-$350pw, then with a small deposit from funds leftover, mortgaging a 2 bedder unit near me for me to live in. Using the rent from the investment property to help pay for my owner occupied unit.
Or could I somehow use split the initial $400k into Three x $133k deposit amounts and buy multiple apartments, 2 investment and 1 owner occupied. Which would mean not owning anything outright.
Which scenario would best be effective as a step towards passive income and leaving the rat race?
Straight away – you would be better using the cash funds fully towards purchasing your own home, and then a good investment focused broker can setup a line of credit/equity release against the property for you to be able to draw deposit funds for an investment purchase. This means you’ll have little/no mortgage on your own home (no/little bad debt), whilst maximising the investment debt (good debt). It’ll make your accountant happy and maximise your ability to borrow, whilst keeping more money in your pocket.
It’s not always about owning things outright from day 1, but sometimes debt used carefully can help you build a portfolio quicker, which then later can be paid down and a combination of growth in asset values over time to build your wealth.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Similar to Corey, I would borrow as much as possible and buy a main residence and then debt recycle the debt down.
This will have tax and other benefits
– nice large CGT free asset going forward
– no rent being paid
– owner occupied rates on investment.e.g your borrowing capacity is $600,000. You could buy a property for $750,000. Use an 80% loan of $600,000. Split it appropriately form the start – perhaps one loan of $200,000 and one loan of $400,000.
After settlement pay off the $400,000 loan and reborrow this to invest. Interest is now deductible.
Pay all wages and rents into an offset account on the $200,000 loan remaining as this is not deductible. Pay off the remaining $200k asap and reborrow that to invest further.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 Corey and Terry, your advice has really opened up my eyes into debt and the term positive debt. I’ll look into it further. Having a decent house sounds the more appealing option. Cheers. Jeezy
I had to read this about 5 times and when it finally sunk in. It was one of the biggest ahha moments I’ve had in two years. I really appreciate your breakdown.
Hi,
I would buy my PPR with as high an LVR as possible and then sit all my cash in an offset to reduce interest.
From there I would use the cash to manufacture growth in other deals which I would sell.
Eventually your PPR is owned outright and you would have enough spare cash for further investments/ deals to keep moving forward.
This is the way I am doing it in the current market. Less risk as you are not holding property apart from your PPR.
Hope this helps.
Rod
Trouble with this, Rod, is that when the cash is used the interest on the home loan would increase. This interest would not be deductible.
If on the other hand you had borrowed up to 80% and stored any excess cash in the offset account, when the time comes to use it you could split the loan, pay off one split and reborrow and use those borrowed funds to invest – then the interest could be deductible. For every $100k used this would increase tax deductions by about $4,000 per year which means savings of up to a bit less than $2000Terryw | 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
Sorry Terry I don’t think I follow. Could you please explain further?
I thought keeping the cash in an offset tied to your PPR would be most beneficial as this interest is not tax deductible?
Cheers
RodSorry Terry I don’t think I follow. Could you please explain further?
I thought keeping the cash in an offset tied you your PPR would be most beneficial as this interest is not tax deductible?
Cheers
RodIt is the most beneficial. But what happens if you take the cash out of the offset and use it for investment properties?
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 Pascoe82,
Once again, Terryw is “teaching us to fish” rather than giving us one. One super important learning re Offsets (and indeed ANY accounts relating to property – savings, redraw, cheque, etc) is spelled out rather succinctly by @terryw here:-
https://www.propertyinvesting.com/topic/4997918-redraw-from-an-offset/#post-5029521Have a very slow, thoughtful read through that, and DO go back to read the topic from the very start too. That is one of many really good inputs re Offset Accounts and things that can be overlooked even with the best of intentions. It is “what we don’t know that we don’t know” that can really trip us up.
And, if that piqued your interest, also read this one that has a few differing points of view on Offset Accounts – some good learnings in there too:-
https://www.propertyinvesting.com/topic/4997918-redraw-from-an-offset/#post-5029521Enjoy!!
Benny
Hi Terry,
Thanks for your reply.
Yes obviously your interest repayments would increase when money is taken out of the offset but the whole amount would not be used, just what is needed to do a deal. Once some money has been made off that deal it would be put back in the offset.
The whole point of property for me is to make chunks of cash, I’m not really concerned with going into complex structures to save $2000 a year.
Is this type of structure you suggest suitable for someone like me that is flipping property or more for someone that holds long term investment properties?
Cheers
RodHi Rod
It is hardly complex. Split the loan, pay it down and reborrow. Once you have sold the investment the loan can be paid down and kept open for next time. Little effort is needed.
Saving $2000 would be equivalent to 4 weeks work for some people.
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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