Advice needed



From: D B

I have posted before but can't seem to find what i posted, so i'll have another go. I have read 2 Jan books and bought the PIA software and have worked out that a property will only cost me 8 a week, which i find amazing, can this be correct?

Also i was wondering what would be better, paying off my home loan or paying it off and buying an investment property at the same time. Also does having an investment property actually help pay off a home loan, if so how?

I will appreciate any advice people can throw my way, thanks.
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Reply: 1
From: Rolf Latham


Here is a repost of something a couple of weeks ago that addresses part of your questions.

How to kill Private debt.

1. Loan Management and Manipulation Systems that "shift" private debt to tax deductible debt.

2. Get onto the property/shares bandwagon and generate equity growth in addition to that generated by your home. Realise that extra equity growth and use the after tax profits to pay down the home loan. This is a common strategy where there is a FIXED end in mind, for example someone is 50 and has a 30 year mortgage to go on their home.

Another version of this is to buy a run down property or one you can develop. Spend the time and the money to improve the equity position, refinance and do this again. In the process aquiring more property and thereby increasing (hopefully) your equity position.

3. Use a loan that allows you to pay more and or provides for an offset acct. For an average earning couple the effect of an offset loan can be to pay down a 30 year loan in about 17 to 19 years without any extra repayments. BUT beware actually do the sums whether this type of product is in fact suitable for you. You need the offset balance to be quite high for it to actually work in the way the banks set it up, because these loans tend to have an interest rate premium of between .5 to .7 %.

Many of my clients use a variety of systems that their tax advisors are "happy" with. The two more common ones not involving trusts are:

1. Instead of paying the operating costs of your business out of cashflow, you can borrow the operating costs and bank the cashflow.

This means in IP speak, instead of sacrificing your home mortgage when paying rates insuances and body corps on your property, borrow these costs instead. While your overall debt burden does not change the mix of the debt turns to tax deductible more rapidly. Commercial reason ? - cashflow.

2.Pay the interest on your Ips out of another line of credit. As long as you service the interest on the new line of credit there is no capitalisation of interest. Once again this means that the ratio of private to business debt increases over the traditional methods. Commercial reason ? Risk Management by increasing cashflow.

Seek the opinion of your own tax people on these, Opinions as to the "allowability" and indeed the benefits vary markedly

PIA is a great software package, a great tool for the analysis of one deal compared to another. It will in itself though not replace a defined property and financing strategy. I suppose thats why your are here :eek:)


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Reply: 1.1
From: Webmaster (Somersoft)

Hi DB,

Rolf seems to have summed up the situation very well and very comprehensively, but I will add my two bits worth as well...

For a start you, like many others who examine the cash flows from property investment for the first time, appear to be amazed at how affordable investment property can be. Even more amazing, some properties (positively geared) may cost you nothing at all after tax is factored in, though these properties will generally be high yield/low growth investments. If you have trouble believing what the PIA software is telling you, simply print off a financial report and bounce it off your accountant (maybe even he/she might learn something!).

As far as paying off your home loan is concerned, as Rolf has indicated, the primary goal should always be to reduce your non-deductible debt as quickly as possible. For most people, this usually means paying off the home loan as quickly as possible with whatever spare cash they can afford. Again as Rolf indicated, there maybe ways of managing several loans so that additional cash flows can be used to reduce non-deductible debt at the expense of deductible debt. In fact, if you focus more on building wealth than on reducing debt, you might find that buying an investment property before having repaid the entire home loan is the way to go.

The PIA software may not offer you a well-defined property and financing strategy, but the Linked Loan Analysis component of the software does enable you to evaluate such strategies. For example if you were to:

(a) simulate your current home loan repayment schedule in the Home Loan Analysis spreadsheet,
(b) simulate a prospective investment property in the Investment Analysis spreadsheet, and then
(c) combine them and link the loans in the Linked Loan Analysis spreadsheet,

then generate the linked home loan report and compare the build-up in equity for the two scenarios for the same outlay. You might be surprised at how much more wealth you can build by purchasing the investment property sooner rather than later.
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