Is there any reason/benefit to drawing more equity than the deposit for an IP?

[albanga]

Let us say your property value is 500k and your remaining loan is 200k meaning 300k of equity or 200k useable equity before invoking LMI.

Now let us say you want to buy an IP valued at 400k including closing costs so only need an 80k deposit. Is there any reason/benefit to drawing more or all of it for the IP?

For the sake of this example I just want to concentrate on a single property as I know the best strategy is to probably use it to buy 2 or 2 properties instead.

Sorry if this is a silly question!

 

[S.T]

Much easier to get all the cash out before you really need it. In case bank change lending procedures, property goes down in value etc.

 

[Rolf Latham]

borrow money when you dont need it, for when the need really arises funds may not be available

Finance Risk 101

ta
rolf

 

[D.T.]

Always draw the max ya can

 

[Coota9]

As discussed pull out as much as you can and park in re draw thus allowing you not to pay interest until you require funds

Coota

 

[Aaron_C]

As others have said because the banker is the guy who holds your umbrella when the sun is out and takes it away when it rains.

 

[Jaggannath]

As discussed pull out as much as you can and park in re draw thus allowing you not to pay interest until you require funds

Coota

Offset instead of re-draw, in case you choose to turn PPOR into an IP!

 

[albanga]

So in my example is what you are saying is draw the maximum 200k and then park it in a redraw/offset facility on the PPOR so the interest payment is the same. Then take 80k from that to purchase the IP and leave the remaining 120k still available in the redraw/offset for if/when required.

If this is the case then I am also guessing it is good practice to get your property portfolio valued often for growth so you can continue to top up your redraw/offset?

 

[Terry_w]

Offset instead of re-draw, in case you choose to turn PPOR into an IP!

The opposite would be safer.
Borrow extra as a new split and pay it back into the loan.

Of course you would have an offset as well, on the non deductible portion.

 

[eggnog]

Could you clarify Terry. Why would you take a second loan and pay it back into the first?

 

[Jamie M]

Could you clarify Terry. Why would you take a second loan and pay it back into the first?

I think he means if OP takes out that $200k equity release - and uses $80k for the next IP. They would just need to place the remaining $120k back into the $200k loan. End result is a $200k loan with $80k used and $120k remaining.

Cheers

Jamie

 

[Terry_w]

Could you clarify Terry. Why would you take a second loan and pay it back into the first?

Because interest is only deductible if borrowed for expenses related to the production of income.

 

[Mick C]

1. No interest charged on the extra borrowing till it's used ( Presuming you have an offset account/ loc /redraw and structured correctly etc..)

2. Be "fund/cash" ready for the future..your focus might be 1 only now...but in 2-3 years time you may want to go ahead...it saves you from doing another credit hits and you are ready to go from the word go!

3. Risk of property market dropping ( rare) but it does happen in some areas.

4. Can use the funds for IP related expenses, renovations etc..

 

[albanga]

Thanks for all the responses, it is starting to make more sense. Could I ask then let us say you own 5 IP's and each has let us say 50k useable equity.

Would you be best to draw the 250k equity and put it into 1 single main loan and then use that to offset your PPOR to reduce the non tax deductible debt? Can this even be done? Or would you have 5 seperate 50k loans?

Also if it's best to draw the equity when it is available is this something that is done say annually? Or are there a number of costs involved such as a valuer that only make it worth while once you definitely know the market has moved or employed a value add strategy such as a Reno?

 

[Rolf Latham]

Would you be best to draw the 250k equity and put it into 1 single main loan and then use that to offset your PPOR to reduce the non tax deductible debt? Can this even be done? Or would you have 5 seperate 50k loans?

Also if it's best to draw the equity when it is available is this something that is done say annually? Or are there a number of costs involved such as a valuer that only make it worth while once you definitely know the market has moved or employed a value add strategy such as a Reno?

yes you can have a single pooled loan for the equity .............. The Margaret Lomas way.

personally, the finance risk associated with that strategy means that in most cases in makes little sense.

Its called cross collateralisation and many investors dont like it - some of the reasons listed here

http://somersoft.com/forums/showpost.php?p=120656&postcount=6


the equity harvest you describe is wirth doing regularly but only to a point. Your credit file may not like the many dead enquiries ( and thats one time where xcoll is beneficial - one enquiry for 100 k vs 5 enquiries for 20 a piece)

ta
rolf

 

[Mick C]

Would you be best to draw the 250k equity and put it into 1 single main loan and then use that to offset your PPOR to reduce the non tax deductible debt? Can this even be done? Or would you have 5 seperate 50k loans?

1. i wouldn't cross the properties into one loan for equity reasons....more headace in the future + you will need to uncross later on anyway.

The KISS theory applies. Keep it simple sexy

2. Do NOT ix your equity into your PPOR offset..the ATO uses the purpose test to determine if the interest if the is tax deductible or not.

Also if it's best to draw the equity when it is available is this something that is done say annually? Or are there a number of costs involved such as a valuer that only make it worth while once you definitely know the market has moved or employed a value add strategy such as a Reno?

No straight forward answer as it depends on your situation and long term goal, something you need to sit down with your broker/bank and plan out..

 

[Peter_Tersteeg]

Would you be best to draw the 250k equity and put it into 1 single main loan and then use that to offset your PPOR to reduce the non tax deductible debt? Can this even be done? Or would you have 5 seperate 50k loans?

As Rolf's link indicates, there's a lot of reasons to avoid cross-collateralisation, go down the route of separate loans.

Cross collateralisation essentially takes away your flexibility and control of the portfolio. It acts strongly in the banks favor and the main benefit to you is it's less work to set up the structure, there's rarely any financial gain.

Also keep in mind that equity access doesn't necessarily mean a separate loan to the original, usually the original loan can be simply increased, the structure doesn't need to be overly complex.

Also if it's best to draw the equity when it is available is this something that is done say annually? Or are there a number of costs involved such as a valuer that only make it worth while once you definitely know the market has moved or employed a value add strategy such as a Reno?

Most people will access their equity on a given property when there's equity available. A reasonable amount of equity might become available every 4-5 years on any given property but if the portfolio is diversified across different markets and locations, it won't all happen at once. Many portfolios are simply on a constant rotation.

Depending on the lender and the product, there may be some fees or there may not be, most lenders cover the costs under their 'professional package' fees. There's rarely valuation fees these days.

 

[Terry_w]

Thanks for all the responses, it is starting to make more sense. Could I ask then let us say you own 5 IP's and each has let us say 50k useable equity.

Would you be best to draw the 250k equity and put it into 1 single main loan and then use that to offset your PPOR to reduce the non tax deductible debt? Can this even be done? Or would you have 5 seperate 50k loans?

If you did this there are 2 issues:
1. Interest on the new borrowings would not be deductible, and
2. You will have created mxied purpose loans

 

[albanga]

Could someone maybe help me get me head around this with an example?
Let us say I have my PPOR valued at 500k with 300k loan.
I then also own an IP valued at 300k with 200k loan.

I now want to buy another 2 IP's valued at 350k (including closing) each and do not want to pay LMI. How is this BEST done keeping in mind the problems with and trying to avoid x coll?

 

[Rolf Latham]

Could someone maybe help me get me head around this with an example?
Let us say I have my PPOR valued at 500k with 300k loan.
I then also own an IP valued at 300k with 200k loan.

I now want to buy another 2 IP's valued at 350k (including closing) each and do not want to pay LMI. How is this BEST done keeping in mind the problems with and trying to avoid x coll?

take a separate secured loan on ppor for 100 k, to take to 80 % lvr

take a separate secured loan on IP 1 for 40 k to take to 80 % lvr

Ip 2 loan at 88 % + LMI , secured only to IP2

IP 3 loan at 88 + + lmi secured only to IP3

this results in some left over cash ready for another IP

this is only a very generalised idea, and may need very specific tailoring for your risk profile, resources and goals

ta
rolf

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