All dressed up but nowhere to go

[johnnyb]

Hi All,

I'm all set up to start investing, but am yet to actually do anything. I've set up a trust, have$100K cash (from an inheritance), have done lots of reading and talking to people over the last few months, and have enrolled in Steve Navra's next course in Brisbane. Until recently I have been renting out my PPOR (while we were O/S) so I also feel I have a bit of a feel for property investment. In short, I'm ready to go!

I have been looking for IPs in Brisbane, but due to my lack of experience and the (IMHO) overheated state of the market I'm yet to find something that suits me. I'm not giving up, but in the short term (up to 6 months) I want to make some use of the money I have while I'm looking for properties. I'm thinking of just putting most of it in a term deposit. At least it will earn a bit of interest (more than just sitting in my savings account anyway), and will be fairly accessible if I come across a good deal.

Does that sound like a reasonable plan? Is there something else that I could be doing to make better use of the money? Thanks.

John.

 

[asy]

Hiya John!

Why don't you come along to the BIG meeting next Tuesday, meet some people, and maybe get some ideas!

Look forward to meeting you!

asy

 

[Jamie]

Hi John,

Why not get along to the next meeting of the Brisbane Investing Group... details are in the thread below:

http://www.somersoft.com/forums/showthread.php?s=&threadid=9293

This group of forum members get together once a month to discuss many of the things you mentioned in your post.

Best wishes,

Jamie

 

[Jamie]

Great minds asy... check the times on our replies

 

[asy]

HAHAHAHAHAH!!

Nicely done!

You win, since you actually linked the post!

asy

 

[GeeVee]

Perhaps you could park your dough in a "certain" managed fund???

 

[johnnyb]

Hi again,

I was going to try to get to the BIG meeting next week, so hopefully I'll see you there.

As for investing in "certain" managed funds, is that a viable option for short term investing? Apart from the risk of a short-term decrease inthe fund's value, I'm guessing that entry costs would make it not as attractive as a simple term deposit (assuming I need to pay a financial advisor to submit the application to the fund, or is that something an individual can do?)

John.

 

[Lily House]

Hi Johnny,

No to any managed fund if you need to access the money in the next year. IMHO even better than a term deposit are the internet accounts.
I have one with ING (Savings Maximiser) and currently get 4.75% interest paid monthly with no fees and no minimum balance. Money is available with one days notice. You may be able to access your money this quickly with a term deposit but I believe you miss out on your interest if you access the money before the term is up.

Lily

 

[johnnyb]

Thanks for the suggestion Lily. I've seen some ads on TV recently about this ING account. I'll check it out.

 

[Garry K]

johhnyb

try this


http://www.ingdirect.com.au/[/URL]

Geekay

 

[Ruby]

Or

http://www.dragondirect.com.au

Ruby

 

[always_learning]

Originally posted by johnnyb
Hi All,

I'm all set up to start investing, but am yet to actually do anything. I've set up a trust, have$100K cash (from an inheritance), have done lots of reading and talking to people over the last few months, and have enrolled in Steve Navra's next course in Brisbane. Until recently I have been renting out my PPOR (while we were O/S) so I also feel I have a bit of a feel for property investment. In short, I'm ready to go!

I have been looking for IPs in Brisbane, but due to my lack of experience and the (IMHO) overheated state of the market I'm yet to find something that suits me. I'm not giving up, but in the short term (up to 6 months) I want to make some use of the money I have while I'm looking for properties. I'm thinking of just putting most of it in a term deposit. At least it will earn a bit of interest (more than just sitting in my savings account anyway), and will be fairly accessible if I come across a good deal.

Does that sound like a reasonable plan? Is there something else that I could be doing to make better use of the money? Thanks.

John.

Just some observations, which you may or may not have already considered:

• Do you have any kind of mortgage on your PPOR ? if so park your money in the PPOR mortgage! If you have 100K in after tax cash donft use it for a deposit on IP, pay down your PPOR mortgage!
• Do you have a Line Of Credit (LOC) on your PPOR? If not get one organized! Use the LOC on your PPOR to finance the 100% of the deposit and costs of any IP you purchase.
• Given state of the market it is my personally opinion that rushing into anything right now isn't going to help you much in the long run. All the pieces are in place for you to make quick purchase decisions when you find something that is right for you.
• Think gHow many IPfs can I buyh, if you purchased $150K IPfs that are (or with some cosmetic improvements) geared at neutral level then you could purchase 3 or 4!

 

[MichaelM]

I made the mistake of parking my first deposit in a managed fund for a short term period (2-3 months while I searched for a suitable property). The only problem was I had it in a technology fund just before the crash.

My hard earned deposit was cut by over 30% when I found a suitable property and pulled my funds out at a loss .

 

[johnnyb]

Thanks again everyone for your suggestions (and warnings!).

Always_learning,

We don't have a mortgage on our PPOR, we paid it out with some of the inheritance money. So we actually have 100K cash, and about 220K equity in our PPOR. I don't yet understand the advantage of LOCs. I've been trying to get my head around it for a while now. Why would I use the LOC for a deposit on an IP when I could use cash?

John.

 

[Chris G]

Originally posted by johnnyb
Thanks again everyone for your suggestions (and warnings!).

Always_learning,

We don't have a mortgage on our PPOR, we paid it out with some of the inheritance money. So we actually have 100K cash, and about 220K equity in our PPOR. I don't yet understand the advantage of LOCs. I've been trying to get my head around it for a while now. Why would I use the LOC for a deposit on an IP when I could use cash?

John.

Hi John,

A LOC will allow you access the 220k equity that you have in your PPOR. Once it is setup it is then available for you to use when you choose so you could set it up now and not use it until you find the perfect IPs. You simply draw money from your LOC and use it as a deposit for your new IP. You only pay interest on the money that you have actually borrowed so if you have a 220k LOC setup but have only used 50k of it you only pay interest on that 50k. You can then also repay and reuse the $ in your LOC as you need to.

Hope it helps
Cheers
Chris

 

[always_learning]

In regard to what is an LOC let me post some diagrams

First you go to your bank (or better get a mortgage broker to do it) and open a LOC on your PPOR. Normally you can get a LOC for 80% of your PPOR value.

Then you can buy an IP using some of your LOC (in this case 40K)

Every cent of the interest bill is tax deductable from your rental and salary income.


OK in your case you are in a better position. You could use 100K of your LOC for the deposit on the house, then put your 100K cash back into the LOC (as an offset account). Sounds pointless, until you consider the question "What happens if I upgrade my PPOR". If you want to buy a $400K PPOR, and had used your $100K cash as a deposit on the IP, then if you withdraw it you cannot claim the interest as a tax deduction. Reason is that the $100K is used for your personal benefit not for income producing purposes. Oh dear thats confusing isnt it...I need to make more pictures...

I guess I just thrown petrol on the fires of confusion

 

[johnnyb]

Wow! Someone has too much time on their hands.

Seriously though, those diagrams are great. What you have explained almost makes sense to me. Correct me if I'm wrong:

1. Use the LOC for a deposit on an IP (eg, $40K)
2. Use my cash to put back $40K in to an offset account for the LOC (so I'm not paying any interest on the LOC). Up to this point it is the same as if I had just used my cash as the depoit directly.
3. If I want to use that $40K for non-income producing purposes (upgrade PPOR, buy a car, etc) then I take it back out of the offset account, and start paying interest on the LOC, which is deductable. If I had just used cash as a deposit, if I redrew the $40K from the equity in the IP I could not claim deductions on the extra interest?

How does that sound?

 

[Jacque]

Jonnny,

I'm not sure you can do 3 as the money used has to be classed as income producing, if you are going to claim the interest on tax. New cars, holidays and improvements to your PPOR definitely are not giving you an income (unless you do something highly creative with them!)

 

[johnnyb]

If you can't do point 3, then I'm afraid I don't see the advantage of the LOC. It just looks like an extra complication to me.

John.

 

[always_learning]

Originally posted by Jacque
Jonnny,

I'm not sure you can do 3 as the money used has to be classed as income producing, if you are going to claim the interest on tax. New cars, holidays and improvements to your PPOR definitely are not giving you an income (unless you do something highly creative with them!)

I think the basic is that you can point the loan and and say " The interest bill was for this loan was to provide capital to invest in this income producing asset " Ie we must be able to show to the tax office that the money is being used for an investment. Maybe Dale can comment on the tax deductablity of point 3.

However lets introduce another finance device, I have one with my LOC, the concept is of a "mortgage offset account". This is an account for which the balance is offset against the debt of any mortgage, for ever dollar in my offset account is one less dollar I have to pay interest on in my mortgage. BUT they are different accounts, hence clearly separate and easy to point to the loan balance an say "this is used to provide capital to buy income producing assets, so Mr tax-man please accept the interest is a tax-deductable against my income".


Below is a big picture of this difference between a LOC (mortgage) and a mortgage offset account.

The point is that you can take withdraw the offset account funds to use as personal spending (car or better PPOR) and still clearly be able to point to which money is used for investment and which money is being used for you own personal benefit.

Now the most wonderfull purpose of a offset account is in handling the problem " I want to move my PPOR and make my old PPOR into an IP". If you remove the capital in your old PPOR as a deposit for your new PPOR, you cannot claim the interest. Why? Because the capital is being used for your personal benefit ie in a new PPOR. It is not what what the loan is secured against that is important it is what the cash/capital is being used for that matters. An offset account is perfect to handle this situation, you park your funds in an offset account against your PPOR, if you ever move your PPOR then you can just remove the offset account money and park in in the offset account of the new PPOR. Not much can be done with this idea for your situation right now.