Finance Structure

[ChrisA1]

For your proposed structure, are you going to specifically pay all expenses from each IP offset (eg specify that all expenses for IP A come from IP A's offset account and so on). I am interested in how this works, especially with many IPs.

From your diagram, it sounds as though my description above describes what you are looking to do. Interested how you will specify what account pays what bill, especially as the number of bills and IPs grows - could become quite a task!

Going back to your original post, what are you seeking feedback on? Compliance with tax rules? Availability of funds going forward? Best way to use structure?

What will you be discussing with your accountant? What info are you seeking from them?

Terry has asked some probing questions for you above. If you aren't confident in your accountant, possibly ask Terry if he's willing to do a single appointment to clarify your situation (and possibly a conference call between you/your accountant and Terry if all are agreeable!).

If you're looking for a new loan or loan structure, there are also several brokers on the forum who will correctly structure a loan for you. Just need to be clear about how to use it going forward (either they may be able to explain this to you when the loan is established or see Terry or another tax expert for guidance - there's also Paul@PFI who posts on SS).

It would be good to clarify your central question to direct the thread.

 

[7DD4]

I'm sure there is a preferred structure used by investors with multiple properties who buy and hold.
Was hoping/trying to put this into a diagram to help others.

 

[Terry_w]

I'm sure there is a preferred structure used by investors with multiple properties who buy and hold.
Was hoping/trying to put this into a diagram to help others.

There is no one structure that fits all.

 

[Peter_Tersteeg]

Hi ChrisA1

I have made changes to the diagram on what i propose to do, hope its more easy to understand now.

That's a terribly inefficient structure. You've got quite a lot of money offsetting the IP loans when it would be better served offsetting the PPOR mortgage.

Get rid of the IP offset accounts, run everything through the PPOR offset account. It's simpler, safer and more cost effective.

 

[Peter_Tersteeg]

Thanks Terry

Would the diagram be correct ? (see attached)

Not to sure what you mean by Utilise related party borrowings where possible ?

The first diagram in this post actually works better than your second diagram.

Personally I've never found assigning bills to each property to be very difficult.

 

[Terry_w]

There is no one structure that fits all.

But, generally for someone owning in their own names with a bit of equity and no need for related party loans, then this for the borrowing structure:

IO or PI on the non deductible debt with offset account attached. Loan 1

Then set up a LOC to access the equity on the PPOR (or IP). This loan should not be an IO loan with offset with the money drawn and parked. Loan 2.

When purchasing the investment property take a separate IO loan up to 80% or 90% LVR depending on the circumstances. Loan 3.

All rents should go into the offset account as should all wages, other cash, lotto winnings etc. No borrowed money should ever be placed in here.

Deposit for the investment property should come from the LOC. The LOC should never be used for private expenses ever (or it will be mixed). The expenses for the IP such as rates, insurance can be borrowed from the LOC. The interest should be deductible under s8-1, but check with your tax advisor before doing this if Part IVA could be applied to deny the deduction.

Interest on the LOC should be paid each month out of the offset. You should not let the interest capitalise without tax advice. Interest on loan 3 should be paid out of the offset as should loan 1.

Once a deposit has been paid for IP1 from the LOC you should consider converting this part of the LOC to an IO loan. Purpose is to get a lower rate and to convert to a normal loan which isn't 'at call' or payable on demand as a LOC is. The usused portion of the LOC should be kept as a LOC for future investments. If the investment property has grown in value you should also consider taking the loan up to 80% and using the extra portion to pay down the LOC. This will be a refinance if done properly and deductibility of interest will not change. e.g You buy a $500,000 IP using $100,000 from the LOC and a $400,000 IO loan (Loan 3) . After a while the IP may be worth $600,000 so you could increase the IP loan 3 to $480,000. This will leave a $20,000 balance outstanding in the LOC. The idea is to get each IP loan secured by only the IP it was used for.

Once you have enough income and equity you can set up loan 4 for the second IP. This will be a IO loan at 80 or 90% with the deposit coming from the LOC.

The LOC may then be used for 2 properties. This is not a problem in the short term as all the interest is deductible. However if you start paying expenses for the IPs from the LOC it may start to become difficult to work out the portion of the LOC which relates to each property. Therefore if possible split the LOC in different portions. Keep money borrowed for each property separate. this way if one IP is sold you will easily be able to pay out the portion of the LOC relating to that specific property.

Doing the above will maximise deduductions, avoid cross collateralising loans and make you richer quicker.

 

[7DD4]

Thanks for your great reply terry_W

I have tried to put you explanation into a diagram

how did I go ??

 

[Nem]

Thank you Terry! I really appreciate your posts on this forums
I am reading above post few times

 

[Terry_w]

Thanks for your great reply terry_W

I have tried to put you explanation into a diagram

how did I go ??

I can't read diagrams or draw them. Not sure what the green boxes are under each of the top loans.

 

[7DD4]

The Green box under the investment house are the loans I got after I refinanced the property back up to 80%

When I asked the bank to give me more money because the the investment house value has increased, they increase the loan back up to 80% by given me a separate loan.

I'm opposite to you i understand pictures more than words.

 

[Terry_w]

The Green box under the investment house are the loans I got after I refinanced the property back up to 80%

When I asked the bank to give me more money because the the investment house value has increased, they increase the loan back up to 80% by given me a separate loan.

I'm opposite to you i understand pictures more than words.

And then you put the borrowed money in the offsets?

I wouldn't recommend this. But since you have done it be very careful and don't put any other cash into these offsets.

 

[7DD4]

No not offset.

Once I have got the new money from the investments. I transfer this money back into the original LOC I first started out with on my POPR.

"investment property has grown in value you should also consider taking the loan up to 80% and using the extra portion to pay down the LOC. This will be a refinance if done properly and deductibility of interest will not change. e.g You buy a $500,000 IP using $100,000 from the LOC and a $400,000 IO loan (Loan 3) . After a while the IP may be worth $600,000 so you could increase the IP loan 3 to $480,000. This will leave a $20,000 balance outstanding in the LOC. The idea is to get each IP loan secured by only the IP it was used for."

 

[7DD4]

Just found this structure setup from and old post :

 

[Terry_w]

Just found this structure setup from and old post :

Not sure why you would want a household account. If this was not an offset account it would be costing you more interest..