Breaking my IP cherry!!

Gidday to all, this will be my first IP. Firstly my situation. I am soon to be moving out of my PPOR and will be putting it on the rental market as my first IP. I am moving to a new state, where I will be living under Government subsidised rent. I will be able to take advantage of this subsidy for at least 3-4 years. I am planning on taking full advantage of this, and will secure another IP immediately. I have crunched some basic numbers, with the two properties we can achieve a LVR of 84%, and a DSR of 88%. So from the lender point of view we shouldn't have too many problems.
Now I want to get these investments set up properly in the first instance, rather learn any costly mistakes. To add to the equation, I have had a windfall of around $30,000 which has not been commited anywhere yet. Obviously I could put it staight into my plan to reduce the aforementioned %'s, but I don't see this as an advantage as I could qualify for the loans without it. The other option is for the second IP to be set up as an offset P&I loan (putting the 30 grand in as offset). We would concentrate all cash flow in to this account, letting it grow for future IP's. The first IP will have an IO loan.
That is my plan at this stage. This will be, hopefully, put into place early next year. Any comments or life experience with this plan, or similar, would be appreciated. Also any suggestions of better approach. As I said, I want to get it right the first time, so let me have it!!!!! ;)
 
Why use P&I for the second IP especially if you're going to have an offset against it? IO would give you more flexbility, since you won't be able to easily access the 'P' payments.
Alex
 
My thinking was making the 2nd IP our main concentration. With having subsidised rent, we would put as much money as possible into one property. A P & I loan would force us to do this. I was also a little naive and thought offset was not available with IO, bad me:rolleyes:
 
I just read a thread by rolph latham "Best to take an IO loan with 100 % true offset, and make the PI payment into the offset acct, same effect on interest long term, but with much more flexibility." It makes perfect sense to me now.
 
Does it though? if you make a lump sump off your Principal, you've also reduced your interest because the value is less now?
 
all good info....thanks for guidance..... my intention was to accelerate equity, to give me more investment opportunities. If i was to use IO and no offset facility, any suggestions as to the best way to include the 30 grand into the scenario. I would like to be able to position it to help with accessing the 3rd IP in the future....:confused:
 
all good info....thanks for guidance..... my intention was to accelerate equity, to give me more investment opportunities. If i was to use IO and no offset facility, any suggestions as to the best way to include the 30 grand into the scenario. I would like to be able to position it to help with accessing the 3rd IP in the future....:confused:
Why wouldn't you use an offset facility to park the 30K? You would be paying interest on 30K less of the principal effectively earning you a return of whatever your interest rate is (8%?) tax free on that 30K. Then you have the flexibilty to just take that money from the offset to use when you need it without having to worry about redrawing your loan. The other option is to pay it straight off the loan and then redraw it when you need it, but I think an offset account is a neater solution, provided you don't pay extra fees and charges for having the offset account.

Or else you could use the 30K to buy shares or some other fairly liquid asset which you could sell when you need the money, but that is a much riskier proposition.
 
G'day Jeremy,

I'm with Fozzy:-
Fozzy said:
Why wouldn't you use an offset facility to park the 30K? You would be paying interest on 30K less of the principal effectively earning you a return of whatever your interest rate is (8%?) tax free on that 30K. Then you have the flexibilty to just take that money from the offset to use when you need it without having to worry about redrawing your loan.
By having it Offset, one of the OTHER advantages is that you can withdraw it for either Personal or Investing purposes (or a bit of each) WITHOUT creating an Accountant's mightmare. Offset is so CLEAN compared to redraw - and it is instantly available. I wouldn't be looking at any other way personally.

Regards,
 
G'day Jeremy,

I'm with Fozzy:-

By having it Offset, one of the OTHER advantages is that you can withdraw it for either Personal or Investing purposes (or a bit of each) WITHOUT creating an Accountant's mightmare. Offset is so CLEAN compared to redraw - and it is instantly available. I wouldn't be looking at any other way personally.

Regards,


Ditto... offset.

Redraw is not so much a pain, but can be a tax question mark... if you use the redraw for non-deductible expenses then that redraw is no longer a tax deduction... if you spend your offset account money on a non-deductible expense (say an Ipod ), then your principal is offset by less, and thus, the ipod is (magically) a tax deduction... well... it's not, but the effect is the same.


caveat: offset *May* carry higher fees etc.... but shop around, you never know.
 
Ta rastus2 and Les, my plan for the extra cash in the offset was to leave it there until i can get my LVR and DSR back on track for my next IP, there are no other plans for the 30k, so it does seem to be the best option (to me anyway).....i have at least 3 months before i can act...so if anyone has any better options....let me have it:)

Jeremy
 
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