IP Strategy & structure

[galumay]

Just double checking in case i missed anything, I think its pretty simple in my case.

About to buy my first IP, have 20% deposit plus extra cash, no other debt. No PPOR, live in company provided accommodation, basically rent free. Have been there many years, plan on staying until retirement.

Have organised simple P&I loan, variable, (but interest capped by bank at current rate for 2 years), property is very strongly positively geared. (unique town with special circumstances)

My plan is to simply pay all rent into loan, pay off as quick as possible, pay any expenses and tax out of my primary income.

Will get a depreciation schedule done.

I also have a small business FWIW.

Wife also works full time flexible, one child.

We both salary sac maximum possible into super, and have a sizeable share portfolio.

Are there any obvious things I am missing in terms of strategy or structure?

 

[D.T.]

Just double checking in case i missed anything, I think its pretty simple in my case.

About to buy my first IP, have 20% deposit plus extra cash, no other debt. No PPOR, live in company provided accommodation, basically rent free. Have been there many years, plan on staying until retirement.

Have organised simple P&I loan, variable, (but interest capped by bank at current rate for 2 years), property is very strongly positively geared. (unique town with special circumstances)

My plan is to simply pay all rent into loan, pay off as quick as possible, pay any expenses and tax out of my primary income.

Will get a depreciation schedule done.

I also have a small business FWIW.

Wife also works full time flexible, one child.

We both salary sac maximum possible into super, and have a sizeable share portfolio.

Are there any obvious things I am missing in terms of strategy or structure?

What are you actually trying to achieve?

Most around here will say don't waste your time with P&I, instead just pay IO and use the difference toward additional properties.

The rest seems ok. You may want to consider ownership structure, especially if you have a small biz.

 

[Mick C]

Structure definitely wrong...strategy can't comment as have no idea what your trying to achieve and where you bought etc...

A few things wrong with this Structure

1. P/I - Paying down your IP debt is not the best structure because;

- The property is highly positively geared, as you pay down the debt the more tax you will pay
- This is your first purchase, and most lilly won't be your last-- so why are you trying to pay down your first investment??? keep some cash for your future PPOR

- Young family, from the sounds of things your a young family ? if so you want to keep as much cash as possible in your offset as cash reserve for education/kids/emergency/

2. Risk tolerance

- You have a lot in shares, which can be risky so to offset this you want as much cash as buffer as possible---- by keeping this cash in a offset account you will REDUCE the interest and overall achieve the same outcome.

- Emergency cash buffer

- Keepign some cash for the business...running a small business is not easy; cash is king. Having an "cash insurance" policy is much more important then paying down this IP Debt...you won't be paying down this debt over night....However one accident or one life mistake with the business or health can and will be a costly mistake for you and your family.


3. Fixed rate - Sounds like your on a fixed rate?? which is ok....but i hope it;s not a full fix and you have a portion that has an offset???? + there's only a certain MAX you can pay down into your fixed

That's all i can think of at this oddly hour

 

[Aaron_C]

Stop paying P&I on the loan and change to interest-only.

 

[Rolf Latham]

Lots of various views on things - what do you want or even need ?

Maybe need or want to buy PPOR at day x ?

The outcome of that may turn your finance structure upside down

ta
rolf

 

[Terry_w]

Just double checking in case i missed anything, I think its pretty simple in my case.

About to buy my first IP, have 20% deposit plus extra cash, no other debt. No PPOR, live in company provided accommodation, basically rent free. Have been there many years, plan on staying until retirement.

Have organised simple P&I loan, variable, (but interest capped by bank at current rate for 2 years), property is very strongly positively geared. (unique town with special circumstances)

My plan is to simply pay all rent into loan, pay off as quick as possible, pay any expenses and tax out of my primary income.

Will get a depreciation schedule done.

I also have a small business FWIW.

Wife also works full time flexible, one child.

We both salary sac maximum possible into super, and have a sizeable share portfolio.

Are there any obvious things I am missing in terms of strategy or structure?

Several things to consider:
-Borrow 105% to maximise deductions and free up cash later for PPOR if need be.
- IO loan with 0ffset
- Name to buy in for asset protection
- name to buy in for serviceability reasons/tax reasons etc

 

[Colin Rice]

all of the above but would be a good idea to go 50/50 variable/fixed interest only so you can link an offset to the variable component and accumulate cash savings from wages x 2 plus rent from IP (investment property).

Cash is king, control the flow.

You be in control not the bank!

 

[galumay]

Thanks guys, didnt expect such a rush of replies so late at night!

I should have added more info & context.

We are in our early 50's, the business is an aside to my full time job, I work shift work and the business is a successful little sideline for my days off, but its not something I plan on building. Its debt free, and makes a small profit each year.

We also have very good super (i am in a defined benefit scheme.).

I am happier in shares, but my wife was keen to have some position in property so we are buying to gain the desired position. We are not looking to build a portfolio of IP's.

My idea is to pay this one down ASAP to line up with my proposed retirement in about 8 years. It will then provide a substantial cash flow for us.

Hope that helps give some context.

 

[tobe]

where are you going to live in eight years time?

Why pay the loan off while you are working? Why not save the same amount is another account, or shares, and then pay off in a lump sum at retirement? Its just more tax effective.

 

[galumay]

where are you going to live in eight years time?

Why pay the loan off while you are working? Why not save the same amount is another account, or shares, and then pay off in a lump sum at retirement? Its just more tax effective.

We are planning to rent when we retire, we have no where that we specifically want to live and plan on living half the year in Australia and half overseas, renting in our locations of choice.

I must be missing the obvious here, how is it more tax effective?

 

[Aaron_C]

The reason is that paying your loan down for an investment means you lose flexibility straight away, and you also reduce your interest bill which creates a situation where you pay more tax to boot. An offset account for your cash creates the same effect but with 100% flexibility as it is all cash.

 

[Rolf Latham]

I have a simple finance risk management policy

Once you have a loan, DONT extingush it unless you must .

Challenge and opportunity often come to those who are ill- equipped.

ta
rolf

 

[galumay]

The reason is that paying your loan down for an investment means you lose flexibility straight away, and you also reduce your interest bill which creates a situation where you pay more tax to boot. An offset account for your cash creates the same effect but with 100% flexibility as it is all cash.

Ok, I get the flexibility bit, but the only reason you are paying less tax is because you are making less profit, as far as I can see.

So reduce interest, equals more profit, equals more tax. As opposed to maintain interest charges, maintain profit, less tax than previous option.

I have never minded paying tax, in fact my aim is to one day pay $1m tax!

Obviously tax effectiveness is a different animal to reducing tax at the expense of profits.

I still suspect I am having a blond moment and am missing why you are all so strongly in favour of IO as opposed to I&P. (aside from flexibility and opportunity)

 

[Mick C]

It's about planning for the future; If you keep as much cash in your offset your essentially paying less interest already - BUT later 4-10 years? when you do buy your PPOR you can transfer this cash into your new PPOR offset ( reducing interest on the non-deductible debt) and keeping your current IP debt as high as possible ( original amount) for tax reasons and deduction.

 

[galumay]

Thanks Mick - and that really leads to my next question, if I go IO should I use an offset account, or just put it in my cash account?

I can see the advantage with the offset that it will decrease the interest charges (and therefore, more profit, more tax.), and still allow the flexibility to use the money elsewhere.

It does seem to contradict the advice to use an IO loan for the tax advantage - because the use of an offset account removes any tax 'advantage'.

(sorry if I am still missing the big picture!)

 

[Mick C]

Do you even have an offset account attached to your mortgage? if you do then yes place the cash into the offset not the cash account.


Your missing the bigger picture- think long term...not what's gonna happen right now...

 

[galumay]

Do you even have an offset account attached to your mortgage? if you do then yes place the cash into the offset not the cash account.

Your missing the bigger picture- think long term...not what's gonna happen right now...

The mortgage we have pre approval for can have an offset account attached if we wish, it can also be changed to IO from I & P prior to finalising if we decide to go that way.

I understand what you are saying about thinking long term, I get the added flexibility and ability to take other opportunities that may arise. What I fail to see still, is where the tax advantage lies in using IO over I&P - unless people were only referring to the fact that if you make less profit, you pay less tax.

 

[Aaron_C]

The mortgage we have pre approval for can have an offset account attached if we wish, it can also be changed to IO from I & P prior to finalising if we decide to go that way.

Pre-approval...don't count on it!

 

[starter]

The mortgage we have pre approval for can have an offset account attached if we wish, it can also be changed to IO from I & P prior to finalising if we decide to go that way.

I understand what you are saying about thinking long term, I get the added flexibility and ability to take other opportunities that may arise. What I fail to see still, is where the tax advantage lies in using IO over I&P - unless people were only referring to the fact that if you make less profit, you pay less tax.

If all you do is leave the cash in the offset account and never touch it then it makes no difference tax wise whether you go IO or I&P. However, consider the situations when you actually need to use the cash in the future.

Eg. If you want to buy a PPOR or even use the money to go on holiday. You can then take the cash out from the offset and the original loan would be tax deductible for this amount. However, if you pay it into the loan itself as principal, when you redraw the extra repayments out this portion won't be tax deductible if you don't use it for an investment purpose (eg. PPOR or personal use).

 

[galumay]

Pre-approval...don't count on it!

Of course not, but we are so far within the boundaries for the size loan we are considering with zero debt and large asset base that its unlikely to be an issue.

We put in 3 offers today, so if one of them is accepted then we can move forward and get final approval.