in need of assurance

[CJT]

Hi all
My partner and I are in need of a little advice and hope someone can point us in the right direction.We are very new to this and have not got any spreadsheets etc to check numbers.
1:My ex-PPOR (3br bk house) is now our IP and valued on the market now for approx. $235k. I refin. last Jan at a very conservative value of 195k (80% 156k) and I owe 146k on a LOC. Renting at 220pw.(Almost neutrally geared).
2:My partner's place (2br unit) is now our PPOR until we finish reno.(approx 2 mths). She payed $243k (owes $170k) 15mths ago and we have references for similar at approx $320k.(Rentable at approx. $300pw)
Our intentions are to make the unit into another IP (because we don't want to live in a unit for too long) and rent ourselves and buy another IP.
BUT we both have redundancy hanging over both our heads with a package of about 20k each.
Do we panic and let the world fall in or do we look to advance more into IP's even if we have to pack shelves at woolies?
Hope this doesn't just sound like too much waffle and not a lot of substance but our aim is to earn an income from IP's and enjoy the fruits of life while we're still youngish.

Regards CJT

 

[Jas]

Peter Spann started his property empire from woolies (the checkout, not the shelves).

If you end up with the money, you'll have to start investigating other options - like low/no doc loans.

Alternatively, talk to Steve Navra about his solutions. Or get into shares, or lease options, or become a wrappee, or....

What I'm trying to say is that there are lots of options available. The game plan might change (heaven knows, everyone's does), but the goal is the same.

Enjoy the journey and other cliches

Jas

 

[CJT]

Thanks Jas
Yes you are right and there are a lot of options, it's just a matter of getting educated in them to choose the right ones.
Just sitting back and reading this forum is an education within itself. It's almost a fulltime job looking up the lingo.
But yes, the options are there and the journey has just begun!

CJT

 

[simonjulie]

Hi CJT
It sounds like you have a great base to move forward from.
So that the task ahead can become less daunting for you, here is some simple rules that I apply that have helped me through the jungle.
1 Know what you value!
this will help consolidate your personal relationships and give you a clear understanding of the next rule.
2 Know what you want!
Establish an outcome as to what you desire to achieve.
3 Know what you need to do to get what you want.
4 Know who can help you achieve your outcomes.
Start by asking yourselves questions like. Who do we know who is already financialy independant?
Hope this helps
Kind regards
Simon

 

[CJT]

Hi Simon
Yes, it seems as though we have fallen on our feet off the bat unintentionally (not complaining one bit!) but now we need to ensure we follow through in the right direction. Goals have been set but with clouds hanging over our jobs the short term goals need to be flexible at the moment.
I'm sure whatever happens and we are in need of suggestions or someone to throw a few options at we know where to come to!

Thanks CJT

 

[simonjulie]

Whatever you do try to keep in a position of control with good safety nets in place.
Simon
PS I read a good piece of advice on another forum yesterday It went something like this."never invest in anything that you can not explain to someone else how it works."

 

[Kevmeister]

... because if you can't explain an investment to someone else you don't yet understand it yourself...

 

[noddy]

More out of curiosity than help, but when the refinance was done, if your previously owed $100K and then boosted the loan to $156K, were you aware that the interest on the extra $56K borrowed is not tax deductable?

I ask this as I have seen a few people think along these lines (drawing down extra equity to buy new PPOR) without understanding that they will get knocked back for the extra deductions and could end up in a difficult cash-flow position....and possibly being fined!!!!

Cheers,

Noddy.

 

[simonjulie]

Hi Noddy
Good point!
It depends what the purpose of the loan is for as to whether interest paid is a tax deduction or not. If it was to refinance a new investment property I would imagine that would be OK legit tax deduction.
Kind regards
Simon

 

[CJT]

Hi Noddy/Simon
OK, I bought the house 4yrs ago owing $125k with a LOC to $146k with the only intention to live in and no idea of investing in anything other than super and banks! I refinanced (LOC to $156k) last january for home improvements. To make a long story short I now know a little more than I did previously and have this house on the rental market.
So what you are saying is that I can't claim that $10k difference worth of interest? But if I refinance to use for another IP the possiblities are that I should be able to in the future.
CJT

 

[simonjulie]

It all comes back to the purpose for the loan as to what is and is not tax deductable.
Simon

 

[noddy]

OK, I bought the house 4yrs ago owing $125k with a LOC to $146k with the only intention to live in and no idea of investing in anything other than super and banks! I refinanced (LOC to $156k) last january for home improvements.

Hi CJT,

DaleGG is much better at explaining this stuff, but my understanding would be that the interest on the original $125K would deductable, but the $31K ($156K-$125K) may not be.

If you can show a direct link between the actual withdrawal of the funds to pay invoices for the improvements then you may be able to. If you transfered the money into cash and then paid the invoices you may not be so lucky. Speak to an accountant experienced in property!!

Also, did you get a depreciation schedule for the improvements??.You should be able to claim depreciation on the improvements.

You may be better off using an Offset instead of a LOC account as the withdrawals of extra payments can remain tax deductable if set up correctly. Try Rolf the resident broker is good on Offset vs LOC stuff.

Hope this helps.

Noddy.

PS..Dale..Is this covered in the tax Battles manual??

 

[Jas]

Originally posted by noddy
You may be better off using an Offset instead of a LOC account as the withdrawals of extra payments can remain tax deductible if set up correctly.

This took me two tries to understand, so I thought I'd have a go at explaining again.

The tax deduction issue relies, as mentioned, on the purpose of the loan. If the purpose is to create an income, you get a deduction on the interest. However, unless the money was used to repair something, you can't claim a deduction from tax on the funds. If you improved the house (i.e., reno'ed it a bit), you can claim depreciation on the improvements.

This is where people are saying, don't use the cost of the improvements, use a QS. Quite often they assign a higher cost than you paid, so you get an extra claim. Should they say something cost less than you paid, you 'find' the receipt and show them the error of their ways.

What Noddy is talking about is something separate. The scenario is you first buy a PPOR and you have the intention of using it as an IP eventually. If you buy normally, pay down the loan (cause it can't be a deduction), then turn it into an IP while you go and buy another, you are left with little tax deductible debt (on the original place) and high debt on the non-deductible place.

So, instead you set up an offset account against the PPOR. You place money into the offset account, which offsets the interest on the loan (just the same as if you had paid the loan itself). However, when you move to a new place (and the PPOR becomes an IP), you can take the money out of the offset and use it to buy the new place. In the tax office's view, you never paid down the original loan, so it never mattered that you had money in a 'savings' account (the offset).

So now you have a large deductible debt on the original place, and a small non-deductible debt on the new. Except of course, you've set up the new place with the same offset idea so you can do it all again in another few years.

Clear as mud?

Jas