Investment Strategy

[superAndrew]

Why wouldn't have an offset account in both circumstances?

Say you had a negatively geared property, what happens if you get a large windfall which you intend to use the funds to buy a property with, but the one you are after isnt available yet. The funds need to be parked somewhere - where better than an offset account?

Because that would reduce your interest. If you reduce your interest you will save 5% (interest rate). But if you don't you can get back 30% (your marginal tax rate) of the taxable loss as a tax refund (if there is a taxable loss that is and if you have already paid enough tax).

If your strategy is to "stay negatively" geared then you don't want to reduce your interest.

Personally I don't use negative gearing. Theoretically negative gearing can work but in reality it doesn't always since capital growth is not guaranteed and is only an assumption.

Andrew

 

[Corey Batt]

You still have to lose a dollar to save 30 cents, that's not a strategy.

It's a cog within the greater machine of an investment.

 

[neK]

Because that would reduce your interest. If you reduce your interest you will save 5% (interest rate). But if you don't you can get back 30% (your marginal tax rate) of the taxable loss as a tax refund (if there is a taxable loss that is and if you have already paid enough tax).

If your strategy is to "stay negatively" geared then you don't want to reduce your interest.

Personally I don't use negative gearing. Theoretically negative gearing can work but in reality it doesn't always since capital growth is not guaranteed and is only an assumption.

Andrew

So let me ask, if you had a negatively geared property with a debt of $500k which you were doing for tax purposes. This is the only property you own. You like rent with friends to minimise cost also because the location you rent is convenient to you.

Then you inherited $500k (not something you were expecting and practically happened overnight). You've always had goals to invest further, so you the intention is to use these funds to buy another 2 or 3 investment properties with it or even a site with development potential.

However as a property investor, you know it would be foolish to just jump in and buy the first property you see.

So my question is where would you park these funds given that if you put these funds in an offset account linked to a negatively geared property you would "reduce your interest".

 

[superAndrew]

Sorry neK I can't give you investment advice to your situation on a forum. I would need to know all you financial details, income, tax, etc.

I can only give general advice.

 

[neK]

Sorry neK I can't give you investment advice to your situation on a forum. I would need to know all you financial details, income, tax, etc.

I can only give general advice.

Andrew, its not specific investment advice. The answer to this question is no different to the answers you have provided previously. If the answer to this question is deemed as specific advice, then so were your previous answers which would put you in breach already.

Anyway, its a forum for healthy discussion. If you know something particular that challenges the norm, the rest of us would be more than happy to hear about it.

And please disregard those who are crapping over you about your website - i think its great you're sharing - just know that others are just being careful, hence questioning your motives.

Me on the other hand, I'm curious to understand your thinking and if I can assist in correcting mistakes so you can help others, all the better (I'm constantly learning too, so the more I learn, the more I can share with others - so we can avoid getting eaten by sharks).

 

[AVS]

It should *always* be an interest only loan.

Hi DT,

I have heard this earlier, can you please help me understand this. If you have a interest only loan and if it neutral or positive for time being, once interest rate changes, it can go negative or be more -ve if it was already. Why wouldn't you pay some capital when you can to make sure it will have good cash flow.

When it is to a stage when tenant is paying capital+interest, don't need to worry about it and just get the capital growth.

For some reason I feel that to continue having debt is not the best idea. I am just learning so I may be wrong but would love to know more on this.

 

[AVS]

AVS suggested negative gearing as a strategy.

Hi Andrew,

Negative gearing is definitely not my preferred strategy but as I mentioned, I would not mind it if it is negative geared to start with as long as it can be changed to neutral or positive in some time.

 

[Corey Batt]

Hi DT,

I have heard this earlier, can you please help me understand this. If you have a interest only loan and if it neutral or positive for time being, once interest rate changes, it can go negative or be more -ve if it was already. Why wouldn't you pay some capital when you can to make sure it will have good cash flow.

When it is to a stage when tenant is paying capital+interest, don't need to worry about it and just get the capital growth.

For some reason I feel that to continue having debt is not the best idea. I am just learning so I may be wrong but would love to know more on this.

A couple reasons:

• If you have a PPOR or any personal debt it is better to direct any excess cash flow into these debts first, as they are not tax deductible, as opposed to an investment loan. If you don't have a PPOR and intend on having one in the future, interest only with excess funds in offset would be more suitable, as these funds will be available for your PPOR deposit, and you will maintain full tax deductibility on your IP loan.
• If you have excess cash flow and no personal debt these funds can be used towards further purchases.

Sure if you've passed the accumulation phase and now consolidating your position it may be suitable to pay down your investment debt, but generally this is after an extended period of having your IP's on IO terms.

 

[HD_ACE]

Hi DT,

I have heard this earlier, can you please help me understand this. If you have a interest only loan and if it neutral or positive for time being, once interest rate changes, it can go negative or be more -ve if it was already. Why wouldn't you pay some capital when you can to make sure it will have good cash flow.

When it is to a stage when tenant is paying capital+interest, don't need to worry about it and just get the capital growth.

For some reason I feel that to continue having debt is not the best idea. I am just learning so I may be wrong but would love to know more on this.

The point is you pay interest only and have an offset attached. You pay the interest only and then the principle payment into the offset account. The net effect is the same but you are in control of your surplus cash. Can come in handy later for tough times or to buy a ppor with less debt.

If you already have non deductible debt then the surplus should offset this as it is more beneficial.

Cheers

 

[AVS]

That's the best time to do the Kansas City Shuffle.

"They look right... ...and you... go left."

Aka buy when everyone is selling and sell when everyone is buying.

It sounds good nhg but if one has to wait for long it can harm. A mate bought a house in enfield in Adelaide before 3 years and there has been hardly any growth on it.

Now I can go and buy a property in same suburb at price close to what he paid without paying interest for 3 years.

 

[Corey Batt]

It sounds good nhg but if one has to wait for long it can harm. A mate bought a house in enfield in Adelaide before 3 years and there has been hardly any growth on it.

Now I can go and buy a property in same suburb at price close to what he paid without paying interest for 3 years.

Which is more a symptom of the price correction which happened in 2011, than the Adelaide market long term. In a number of Adelaide areas which I follow, there's been circa 10% rises in prices from 12 months ago, but it's still a subdued market.

 

[AVS]

A couple reasons:

• If you have a PPOR or any personal debt it is better to direct any excess cash flow into these debts first, as they are not tax deductible, as opposed to an investment loan. If you don't have a PPOR and intend on having one in the future, interest only with excess funds in offset would be more suitable, as these funds will be available for your PPOR deposit, and you will maintain full tax deductibility on your IP loan.
• If you have excess cash flow and no personal debt these funds can be used towards further purchases.

.

The point is you pay interest only and have an offset attached. You pay the interest only and then the principle payment into the offset account. The net effect is the same but you are in control of your surplus cash. Can come in handy later for tough times or to buy a ppor with less debt.

If you already have non deductible debt then the surplus should offset this as it is more beneficial.

Cheers

Thanks guys.

I agree it makes more sense to have access to fund to buy PPOR when required but how it is more helpful to buy other investment property?

If the other property is going to be positive, it will work but if it is negative or if does not have good growth then will be paying interest for 2 properties where as if it was only one it could have change to positive (though will lose potential capital growth on second property in this case).

 

[Corey Batt]

Thanks guys.

I agree it makes more sense to have access to fund to buy PPOR when required but how it is more helpful to buy other investment property?

If the other property is going to be positive, it will work but if it is negative or if does not have good growth then will be paying interest for 2 properties where as if it was only one it could have change to positive (though will lose potential capital growth on second property in this case).

Piling funds into a dud investment doesn't make it more cash flow positive, you're just propping up a dud investment. If it's a dog of investment which requires cash put into the deal to make it worth it (neg geared + no growth) you might as well cut your losses, not funnel further potential deposits into it.

 

[neK]

It should *always* be an interest only loan.

There is an exception to this rule... that is if they really really suck and managing their own money - at which point force savings is probably the best thing for them.

 

[Singo]

There is an exception to this rule... that is if they really really suck and managing their own money - at which point force savings is probably the best thing for them.

Agree. But those who cannot manage their money won't be successful investors.

 

[D.T.]

There is an exception to this rule... that is if they really really suck and managing their own money - at which point force savings is probably the best thing for them.

I see the merit in that. But, wouldnt they then just get into more trouble because they have more outgoings each month?

 

[neK]

Agree. But those who cannot manage their money won't be successful investors.

Who said anything about being successful investors. The fact they are able to continue paying their loan and have a roof over their head is success in itself

 

[Singo]

Who said anything about being successful investors. The fact they are able to continue paying their loan and have a roof over their head is success in itself

Of course, paying off the PPOR is a good achievement and brings peace of mind. But this is a property investing forum and those who want to be successful investors better know how to manage their money. So here, it is always interest only!

 

[neK]

I see the merit in that. But, wouldnt they then just get into more trouble because they have more outgoings each month?

Not really because from a money management point of view, these people will usually find ways to spend all their pay packet (interest rate cut = more money to spend on stupid stuff)

At least this way they'll be forced to cut back.

For these people you would not allow them to borrow more than they can afford with a 2-3% interest rate buffer on the calculations.

You may even consider completing the forms so that their regular repayment is higher (just to compensate so that when interest rates rise, they are still ok).

 

[neK]

Of course, paying off the PPOR is a good achievement and brings peace of mind. But this is a property investing forum and those who want to be successful investors better know how to manage their money. So here, it is always interest only!

Sorry, I disagree... but only because you didn't mention "plus offset account"