Structuring finance for 1st IP.

[beachside]

Hi everyone

Just wanted to check on a technicality of structuring finance on an IP so that I do not disadvantage myself as far as tax deductions etc.

I realize that money borrowed for the “purpose of investment” is tax deductible regardless of whether the security is IP or PPOR. Is there any catch if you borrow money, say a LOC or similar, on PPOR prior to locating an IP? I’m not aware of any but a broker has got me having a small doubt.

The situation is that I can probably get a loan @ 6.57% with low fees but this would not be available beyond the next couple of weeks (won’t go into reasons here). This loan would be a LOC or similar and based on my PPOR for security and not taking into account any rental income.

Alternatively I could wait until I find an IP (have pre approval) but the best rate I have come across in a LoDoc from a few calls so far is 6.99% with higher fees etc. I would then get one loan for max LVR on IP and another for balance using PPOR (or maybe a couple of deposits) - don’t want to x-coll.

Although my borrowing capacity is less if I take out the max loan on just my PPOR up front, it should be sufficient for the first IP and I have some cash which I can add if needed. (The cash was to be put in an offset account so the balance of the loan/interest would be the same either way). I could then take out a loan on the IP later etc etc.

Any disadvantage in taking out the loan up front on my PPOR? There would eventually be a paper trail to prove it was purely “for the purpose of the IP”. One advantage, apart from interest rate/fees, would be that I would be in a better bargaining position as I would have cash available.

I hope I have explained myself clearly without going into the nitty gritty!

Thanks

[Jamie]

I realize that money borrowed for the “purpose of investment” is tax deductible regardless of whether the security is IP or PPOR. Is there any catch if you borrow money, say a LOC or similar, on PPOR prior to locating an IP? I’m not aware of any but a broker has got me having a small doubt.


Hi beachside,

I dont think you have a problem at all. A LOC is simply a facility - you set it up now, and use it when you find a property you like. If you dont withdraw/use any money from your LOC, then you have no interest costs to worry about - the balance stays at zero. Its not a loan where you have to start making repayments - you only pay interest on the portion you use.

Im sure if you ask your broker, he/she will be able to explain anything youre not quite sure of regarding the LOC facility.

Jamie.

[beachside]

Thanks Jamie

I did not think there was a problem. I realise that I only pay interest on the balance of the loan once I draw on it. Waiting to confirm if it is actually a straight LOC.

As for asking the broker, I seem to know more than some of them! So far I have not found a broker with the best deal who is also investment savy.

For example:

Broker 1 - "there is nothing wrong with cross collaterisation, don't know what people go on about"

Broker 2 - he didn't seem too sure of what he was saying, kept confusing himself.

Broker 3 - "You can only claim interest on the loan on the IP, not the loan on your own home used for the deposit"

Broker 4 - the only one who was on the ball, obviously had plenty of experience with investors. He just didn't couldn't offer the best loan - but will keep him in mind for when my borrowing ability gets tighter - which is probably his specialty.

I suppose you get what you pay for!

[Rolf Latham]

Hi Beach

The loan is deductible if the proceeds are used toward an income producing asset.

To what property the loan is secured against doesnt really matter.

Lo doc at 6.99 might not be a bad option, although there are now products around for self employed startting from around 6.5 ongoing.

My main comment to you is to structure your finance in such a way that it will allow you to maximise whatever "assets" (cash/equity/income/income produced from where etc) you have, now and into the future.

It looks like you have plans to buy lots more IPs. Do you know where the loans for say your next 2 or 3 ips are coming from, both in terms of deposit/costs and core lending ?

Price is often the refuge of the weak (in terms of experience and/or knowledge) in any sales scenario - mortgages are no exception.

Ta

rolf

[beachside]

Hi Rolf

Thanks for your reply.

The purpose of my post was to determine if there was any catch (tax wise) to taking out a LOC type loan PRIOR to finding and IP - at that stage there is no evidence it is for a IP and not personal use. As no one has commented on this I assume it is not an issue.

Ideally I would like to set a structure for future investment as you have mentioned, but as my situation is changing from month to month at this point it is a little difficult to plan precisely for my 2nd and 3rd IP. My situation may change for the better and give me much better borrowing ability, so no point in structuring for the worst and at higher costs. If I wait until I have certainty (which is always subject to the unexpected and therefore change) I may never buy my 1st IP.

I am aware that by paying higher fees or interest I may be able to borrow more money and will do so when required. I am not a person who buys the "cheapest" product, quite the opposite, however at this first stage there does not seem to be any benefit in paying more than what I need to achieve the same result. X-collat appears to be the main mistake to avoid for building a portfolio which is why I am avoiding it from the beginning.

Thanks

[Rolf Latham]

Hi Beach

I wasnt having a go at you, rather the sales tactics used by people with less knowledge and experience

I thought I suggesting that maybe Broker 4 may have been a better choice for you in the end. As you have commented yourself, he/she was more knowledegable, but couldnt present you with the best loan.

Is that because they didnt have access to the product you liked, or............ ?

May I ask what caused you to choose the product you did, was it a particular feature, borrowing capacity, capitalised lmi etc ?

This is as much a learning experience for me as any others :O)

Ta

rolf

[4GH1RH]

Beachside, I have just done what you are thining about a couple of weeks ago. I guess we are at very similar stages in getting our first IP.

I would *recommend* that you set up your LOC for your deposit before you line up your first IP. I found setting up the LOC was not instant, and involved some learning along the way for me. I have my LOC waiting in the wings for when I am ready to put a deposit on IP1.

In the mean time I am looking at properties and talking to brokers and property managers until I feel confident to make offers on properties.

I have also ordered Dale's books while I wait for appointments and inspections over the next few weeks.

I reccomend you make sure when you establish the LOC that you will need to have separate reporting of investment interest. I did not make that explicit to my PPOR lender, and they set up everything into one LOC account which was messy. They have since assumed that I will be getting a second loan from them and want to xcoll (wrong!). This means another trip to the bank to get them to separate PPOR loan from LOC for IP deposit. But I am glad I am finding these things out before I had an offer on a property.

Go well, hope its a Christmas to remember!

[beachside]

Rolf - I'll PM you.

4GH1RH

My loan is soley for IP and will be for full purchase, not just deposit, thanks for the warning though. I'm sure somewhere along the line I'll forget something I've learnt and do something wrong! I'm in the process of cross checking some info to make sure my broker hasn't told me the wrong thing which will stuff up my plans further down the track.

Hope you find a bargain IP.