Help with finance strategy

[wpggtom]

HI all,

I'm keen to buy our first IP and not sure how to structure a financial strategy. We owe $168,000 on our PPOR and it's valued at $500,000. We also have about $90,000 cash in savings and a joint income of $115,000 gross yearly. From what I can evaluate, we could afford to buy more than one property but I'm not sure how to go about the finance side of things. Any suggestions would be greatly appreciated.

 

[alexlee]

HI all,

I'm keen to buy our first IP and not sure how to structure a financial strategy. We owe $168,000 on our PPOR and it's valued at $500,000. We also have about $90,000 cash in savings and a joint income of $115,000 gross yearly. From what I can evaluate, we could afford to buy more than one property but I'm not sure how to go about the finance side of things. Any suggestions would be greatly appreciated.

Sounds pretty straightforward. What would be (taxwise) best is borrow up to $232k as a deposit for investment properties. So theoretically you could, if you borrow 80% LVR, buy $900k worth of IPs.

Pay the 90k into your home loan first and then redraw the amount so that you maximise deductible loans. Or at least have an offset against the PPOR and put the $90k into that.

I'd start off with a few simple things. How expensive an IP do you want to buy? You can probably buy a lot, but if you've never bought before I suggest starting cheap and learning how it all works.
Alex

 

[wpggtom]

Thanks Alex for this advice. So what you mean is borrow against the equity in the PPOR for the deposit (20%) then secure another loan (IO) to pay the balance. Therefore, interest from both loans - 100% of property - is tax deductible. (sorry if this sounds obvious but it's all new to me) The 90k is aleady parked in the home loan available for redraw if needed.

Do you think it is a good idea to use a LOC on the PPOR to use for deposit/s? Also, would you use a different bank for the IPs?
Wendy

 

[Able]

wpggtom,
I would do the same to what Alexlee has recommended. If you have a PPOR with a balance still oweing on the loan then all cash should be directed towards it. Therefore you should try to use 100% borrowed funds for any investment.

The distinction with this strategy is while you use a LOC on your PPOR (for the IP purchase), you are not cross securitising any of the properties. That means:
1) You can sell any property at any time.
2) You can get maximum use of the equity in your properties.

The IP loans could be with the same bank or another, where ever you can get the best deal.

Regards
Able

 

[Rolf Latham]

Hiya WPG

What lender are you currently with pls ?

ta
rolf

 

[wpggtom]

Thanks Able, so you mean use always use the IP for security on the loan and not the PPOR (this is used only for deposits).

Rolf, the PPOR mortgage is with Heritage Building Society (basic variable).
Wendy

 

[Qlds007]

Wendy

Heritage are a nice friendly organisation but not really investor orientated.

If you are looking at getting serious in starting an investment portfolio have a look at the range of Professional Packages around with some savings on both interest rate and application costs.

Dont whatever you do utilise the redraw facility on your PPOR home loan to use as deposit as it will fail the simple "Purpose Test" applied by the ATO.

Use a 100% offset account and keep the funds separated.

 

[wpggtom]

Thanks everyone. So does this sound the way to go...

*Refinance PPOR basic variable loan to LOC
*Keep savings in this loan to offset interest (or offset account or pay into loan??)
*Use credit card on LOC for everyday expenses and withdrawals
*First IP create sub-account and draw 20% deposit plus expenses
*Obtain IO loan for remaining 80% from same or new lender
*Repeat for next IP using new sub-account for deposit.

ONly use equity for deposits and new IO loans for IPs.

Wendy

 

[Qlds007]

Wendy

Almost although i would rather have an interest only / P & I loan as the main loan and the LOC as the investment loan portion with sub accounts.

Link the offset account to the main account and your away.

Your broker should be able to fish out the right deal for you.

 

[wpggtom]

Why do you think it would be better to keep the P&I and not change over to LOC?

Wendy

 

[Modal Harmony]

Finance Brokers

Hi Wendy, in our humble experience to date (5 IP's), we found it a Godsend to secure the services of a reputable finance broker who could discuss the details of our particular arrangements in a straightforward, no-nonsense way.

If you're new to the Forum, have a good look through the replies submitted in the Property Finance threads - you'll see many brokers represented here. I see you're based in Brisbane (as we are). We found a good broker here who was happy to discuss face-to-face with my wife and me in this respect. I suppose it's not mandatory to do this, but having diagrams drawn and financial figures applied certainly helped us in a big way!

K&R