Investor by circumstances

[madstu]

Hi All,

I've been lurking on the forums for a while but have finally decided to sign up.

I'm an investor almost more by circumstances rather than by design. I bought my first home a few years ago and subsequently found a lovely woman to couple up with who also owned her own home. When we moved into the house I own together we started renting her property out.

We are slowly playing catchup with structuring finances etc to get best value out of this setup.

We have decided that looking to the future we want to upgrade our PPoR. What has our head spinning is the best way to proceed. What we are looking to do boils down to the following:
1) Refinance both houses to release equity
2) Use equity and additional loan to purchase property 3.
3) *an idea i'm unsure of. Rent property 3 out for 6 months so that all funds on existing properties are tax deductible, then move in as PPoR

Here's where I'm a little stuck and need a bit of advise. Is step 3 required to get best tax benefits? (We are going to accountant to get professional advice, just with to get opinions of the wider audience) How would you best structure loans, IO on property 1 & 2 and P&I on 3? Who's currently fixing interest rates and who's variable? Benefits of each?

The figures:
Incomes:
$76,000 and $74,000

Property 1
Value: $420,000 approx
Loan: $270,000

Property 2
Value $520,000 approx
Loan $200,000
Rental income $420 PW

Proposed Property 3
Value: Up to $650,000.

 

[Brady]

You're in a good spot decent equity and reasonable incomes (haven't seen any unsecured debt like personal loans or credit cards so assuming there arent any).

If you're buying for $650,000 you will need approx $35,000 for purchase costs, so $685,000 total.

Suggest a loan against the purchase property @ 80% $520,000 ($650k x 80%). Which would leave you needed $165,000 which could come from any combination of equity from your existing property.

The key is to ensure that none of the loans are x-coll and I would suggest changing all loans to IO w/offset and having all funds offset the new PPOR loan. Remembering that deductability is determined by what the purpose of funds are used for, so even if you make the purchase property and investment property for 3-6 months so the loans are tax deductable, once you move into the property they are no longer tax deductable.

As for fixing thats a personal choice, I have a decent mix of around 50% fixed & 50% variable, but all my debt is for IP not PPOR. Could be an option to have both the $270k & $200k loan fixed IO and keep the PPOR variable with offset and all funds into the offset. But again fixed is all personal choice. Rate alone is not the best reason to fix.

 

[madstu]

Hi Brady,

Thanks for the feedback. You are correct in your assumption about $0 personal debt, although between us we have CC limits of $6,500.

With the renting property 3 scenario I mentioned, I had been told is I refinance and withdraw equity from loan on say property 2 (refinance to $400,000 loan to draw $200,000 equity) any deductions I take on that can only be claimed 50% if the reason for drawing equity was for PPoR, but I could claim 100% if drawing equity was for investment.

* I'm not sure I've made myself any clearer there, but I hope I have.

 

[Brady]

I'm out at lunch and on phone so harder to give a detialed response.

But sounds like someone has suggested topping up loan, you don't want to do that as you would have a mixed purpose loan. $400,000 loan 50/50 for IP & PPOR isn't what you want. You want $200k IP & $200k PPOR separate loans.

Also the deductibility only applies whilst it's an IP. So yes you could claim for 3-6 months whilst it's a IP but then the deductibility goes once you move in and it's PPOR

 

[Greg Reid]

I think you missed the first critical component, what do you want to achieve?
If it is to live in #3, then you need to work out whether you want to take on more personal (non tax deductible) debt or have a home you own with a much smaller personal debt .

If your goal is to live in another property and maximise your property portfolio and be tax effective, then considering buying #3 as an investment property (IP) and rent in the area you want to live in for a period. There are ways to structure this so the 105% cost to purchase (including stamp duty) can all be funded by borrowings and interest is all deductible.

If you want to live in your own home, consider selling the two existing properties, as both were PPOR's, should be no CGT implications (depending on timing) and you now have $470k of your own funds. Buy a $650k PPOR, borrow the remainder say $210k and your repayments are around $875/mth IO or $1,127/mth P&I.
Alternatively borrowing $680k (via equity release and new loan) would require a IO payment of $2,833/mth or P&I of $3,650/mth (using 5% pa).

If you then want to have an IP or more, set the finance on your new PPOR up for an 80% loan facility, $210k for the owner occupier loan (as above) and $310k facility for investment purposes.
Buy one or more IP's using different lenders at 80% or slightly higher and funding the settlement from the $310k facility.
That would be a far more tax effective way to do this. Sure you are up for 2 lots of stamp duty but I would run the numbers on this basis and compare the two then make a decision.