Managing ongoing finances for multiple properties

[ramblin]

I'm wondering if anyone has any tips for managing the actual payment of costs associated with multiple properties. We have 3 properties (1 PPOR and 2 IPS). All of them have rates, water, insurance, mortgage payments and the 2 IP's have body corp.

The 2 IP's have only been purchased in the past 2 months so we don't have a tax return completed yet. I've precalculated our first refund and it would be useful to have it sitting aside to preempt some of the ongoing costs but I also like the idea of putting the entire refund into our PPOR mortgage as we are keen to pay that off in the next 2 years.

I created a calendar when everything is due which gives me a great visual of when to prepare for costs but I feel like I'm handling a 6 headed snake in putting the right money in the right spots.

I guess the additional question is how to prioritise repayments. We are keen to pay our PPOR off first (given nothing is deductible). An american financial guru Dave Ramsey suggests the snowball approach of paying off the smaller loans first and then rolling those repayments into the next smallest loan and so on. It so happens our PPOR is our smallest anyway.

Any tips are gratefully appreciated

Our aim is to keep the properties as income earners for retirement which is far in the distance anyway.

Is there some magical method to managing this kind of beast?

 

[Of The Vultures]

Hi, what I do is have one account where all the rent income gets paid into, and all expenses get paid out of. It's an offset account which was linked to an investment loan (as we didn't have a PPOR). Normally you'd have it offsetting a non-deductible debt ie your PPOR.

Any extra repayments, including your tax return, I would put into that offset account to reduce your interest, while having ready access to the funds to pay for rates and whatever other unexpected expenses might crop up for your IPs.

My opinion only, this is what works for me, you can always talk to your broker/accountant for better advice.

 

[Richard Feynman]

On the IPs, assuming you have a property manager/managers for these, you could talk to them about paying outgoings. Might add an extra 0.5-1% to their fees though. How much is your time worth to you?

That'd just leave mortgage repayments which should be set up to automatically come out of the offset account against your PPOR. Same structure as OTV described.

 

[ramblin]

Thank you, that gives me a bit more clarity. I'm managing the properties myself. I think I have a way forward now in terms of 1 funnel.

Thank you

 

[Terry_w]

I'm wondering if anyone has any tips for managing the actual payment of costs associated with multiple properties. We have 3 properties (1 PPOR and 2 IPS). All of them have rates, water, insurance, mortgage payments and the 2 IP's have body corp.

The 2 IP's have only been purchased in the past 2 months so we don't have a tax return completed yet. I've precalculated our first refund and it would be useful to have it sitting aside to preempt some of the ongoing costs but I also like the idea of putting the entire refund into our PPOR mortgage as we are keen to pay that off in the next 2 years.

I created a calendar when everything is due which gives me a great visual of when to prepare for costs but I feel like I'm handling a 6 headed snake in putting the right money in the right spots.

I guess the additional question is how to prioritise repayments. We are keen to pay our PPOR off first (given nothing is deductible). An american financial guru Dave Ramsey suggests the snowball approach of paying off the smaller loans first and then rolling those repayments into the next smallest loan and so on. It so happens our PPOR is our smallest anyway.

Any tips are gratefully appreciated

Our aim is to keep the properties as income earners for retirement which is far in the distance anyway.

Is there some magical method to managing this kind of beast?

Here is a magic method.

Set up a LOC on your house (if you have the equity).
Using this LOC only for investment purposes you borrow to pay all IP associated expenses such as rates, insurance, repairs etc.
This frees up cash which can go into the offset on your PPOR or to pay off your PPOR.
All investment loans should be IO with no offsets yet.
All rents and other income such as wages, tax returns etc should go into the offset on your PPOR.

You could streamline things further by using a credit card with points to pay for the investment and all other expenses. Then refinance this loan by paying it from the LOC (not mixing business and private). This will give you points and save you interest as you are using interest free money for 30 days or so and keeping your cash in your account longer.

Once you have paid off your home then you can pay off your LOC - or not depending on several things. Report back then for further instruction.s

 

[Terry_w]

On the IPs, assuming you have a property manager/managers for these, you could talk to them about paying outgoings. Might add an extra 0.5-1% to their fees though. How much is your time worth to you?

That'd just leave mortgage repayments which should be set up to automatically come out of the offset account against your PPOR. Same structure as OTV described.

I don't like to do this because
1. I received a court judgment several years ago when a property manager missed some bills
2. You cannot borrow to pay these expenses if they are paying them out of your rent
3. You miss out on frequent flyer points!

 

[Angel]

HI, I too pay all IP expenses out of the same loan offset account that the rents go into. I used to have a calendar before IPs but now I have created a simple spreadsheet with future bills already placed in their correct month. This helps me to see future cashflow issues that may occur such as the month that all four insurances are due. Actually I have two spreadsheets, one for the household budget and a separate one for the IPs.

I haven't advanced to credit card frequent flyer points, I set up direct debits for a few days prior to the due dates for all my bills. So 20th Century, I know.

Remember that Dave Ramsay and his ilk are writing to an audience of consumers in a foreign country that has a completely different taxation system to ours. His ideas are also about reducing personal debt rather than business matters. Their information is useful but not vital. I prefer Suzie Ormond's advice to pay off the debt with the highest interest rate first ***

 

[devank]

You could streamline things further by using a credit card with points to pay for the investment and all other expenses.

Do you use the CC only for the investment related expenses?

Do you also workout the proportion of the LOC's interest for each property? Is that calculated on a daily basis or annual?

 

[Terry_w]

Do you use the CC only for the investment related expenses?

Do you also workout the proportion of the LOC's interest for each property? Is that calculated on a daily basis or annual?

The CC is treated like every other loan so the normal tax principles apply. There is no need to use a separate CC for investments if you are repaying the card in full each month. If you spend $50 for investments and $100 for privates then borrow $50 from the LOC and pay $100 cash - and pay into the CC on the same day.

Interest on the LOC should be apportioned for each property. But if you get it wrong doesn't matter as the overall tax position would be the same. Except if there are different owners. Then you should work things out on a spreadsheet. Just run multiple Amortization spreadsheets for each loan.

 

[devank]

2. You cannot borrow to pay these expenses if they are paying them out of your rent

Isn't the final outcome same between
1. expenses go out of the offset
and
2. expenses taken out of the LOC
?
In case no 1, you are paying more interest on the main loan. In case no 2, you are paying same interest on LOC.

If you spend $50 for investments and $100 for privates then borrow $50 from the LOC and pay $100 cash - and pay into the CC on the same day.

I would rather pay for a separate CC in that case so that I don't need to look at them every month.
Also you still need to do a bit of book keeping work at tax time separating different type of expenses for each property. It is lot easier to get a summary statement from a PM

Interest on the LOC should be apportioned for each property.... Except if there are different owners. Then you should work things out on a spreadsheet. Just run multiple Amortization spreadsheets for each loan.

Is this worth the frequent points?

 

[Terry_w]

Isn't the final outcome same between
1. expenses go out of the offset
and
2. expenses taken out of the LOC
?
In case no 1, you are paying more interest on the main loan. In case no 2, you are paying same interest on LOC.

No, it is totally different because the offset is cash sitting against your non deductible loan.

LOC is borrowing money.

e.g $1000 expense
Take out of the offset account = $60 pa. in extra interest incurred which isn't deductible.

Borrow $1000 from a LOC = $60 pa in extra interest incurred which is deductible because it is investment related. perhaps $24 savings in tax.

It is not much, but every little bit helps and you will be saving interest on interest so have the exponential effects.

 

[devank]

No, it is totally different because the offset is cash sitting against your non deductible loan.

LOC is borrowing money.

I thought the offset is attached to an investment loan NOT to the PPOR. I have one LOC (investment loan) and an offset account against it.

 

[Terry_w]

I thought the offset is attached to an investment loan NOT to the PPOR. I have one LOC (investment loan) and an offset account against it.

I haven't heard of a LOC that has an offset facility.

But assuming this was the case it would still be better to borrow from the LOC and to build up cash in the offset as this could be used for private expenses in the future, such as upgrading the PPOR. Using your cash now could mean you have to borrow more later.

 

[ramblin]

Thank you for all the input. I pay by CC at the moment to get points and transfer as soon as I've charged it.
I spoke with the bank today about an offset. The issue is I have 5 separate loan accounts (1 isn't eligible for offset due to the type of product). So I would basically need to set up different offset accounts for each loan and apportion some of my equity across each account...seems counteractive to what I want to do. Each account also costs me $9 per month so $36 in fees.
I think I'm going to set one up for my PPOR and use it as the one to get the benefit of all rents going into it and then pay out as I need.
I will also look into the LOC but I'm assuming that means an approval process and I think we have stretched the friendship with this bank for the time being on asking for money.

 

[Richard Feynman]

I don't like to do this because
1. I received a court judgment several years ago when a property manager missed some bills
2. You cannot borrow to pay these expenses if they are paying them out of your rent
3. You miss out on frequent flyer points!

Fair points.

 

[Terry_w]

Thank you for all the input. I pay by CC at the moment to get points and transfer as soon as I've charged it.
I spoke with the bank today about an offset. The issue is I have 5 separate loan accounts (1 isn't eligible for offset due to the type of product). So I would basically need to set up different offset accounts for each loan and apportion some of my equity across each account...seems counteractive to what I want to do. Each account also costs me $9 per month so $36 in fees.
I think I'm going to set one up for my PPOR and use it as the one to get the benefit of all rents going into it and then pay out as I need.
I will also look into the LOC but I'm assuming that means an approval process and I think we have stretched the friendship with this bank for the time being on asking for money.

Why would you need more than 1 offset? You just need one linked to your PPOR. Another perhaps if you have more cash than the remaining loan on your PPOR>

 

[bez23]

Here is a magic method.

Set up a LOC on your house (if you have the equity).
Using this LOC only for investment purposes you borrow to pay all IP associated expenses such as rates, insurance, repairs etc.
This frees up cash which can go into the offset on your PPOR or to pay off your PPOR.
All investment loans should be IO with no offsets yet.
All rents and other income such as wages, tax returns etc should go into the offset on your PPOR.

You could streamline things further by using a credit card with points to pay for the investment and all other expenses. Then refinance this loan by paying it from the LOC (not mixing business and private). This will give you points and save you interest as you are using interest free money for 30 days or so and keeping your cash in your account longer.

Once you have paid off your home then you can pay off your LOC - or not depending on several things. Report back then for further instruction.s

Terry, thanks for this recommendation. I am just wondering if you do this, do you use the LOC to pay for the interest of the mortgage as well? I read somewhere that the ATO doesn't like people claiming deductions on interest on interest.

My property manager is currently using all the rental income to pay for expenses first and I get the surplus of the funds. 1 good thing about this method is that they are able to delay payments for unpaid invoices if the rent doesn't cover the expenses. Eg, I bought a IP a few months ago and used about 5k for reno, the rent is still paying this off every month ie I don't have to pay out of pocket for this. Can you pay most bills with CC though?

Cheers,
bez

 

[Terry_w]

Terry, thanks for this recommendation. I am just wondering if you do this, do you use the LOC to pay for the interest of the mortgage as well? I read somewhere that the ATO doesn't like people claiming deductions on interest on interest.

My property manager is currently using all the rental income to pay for expenses first and I get the surplus of the funds. 1 good thing about this method is that they are able to delay payments for unpaid invoices if the rent doesn't cover the expenses. Eg, I bought a IP a few months ago and used about 5k for reno, the rent is still paying this off every month ie I don't have to pay out of pocket for this. Can you pay most bills with CC though?

Cheers,
bez

Hi Bez

In an ideal situation you would borrow to pay the interest - which is capitalising the interest. However, the ATO has indicated they may disallow the deduction of the capitalised interest if the dominant purpose is to pay off the non-deductible home loan sooner. So I would suggest you speak to your accountant about this before attempting it.


Property managers would only be able to delay payment of invoices from tradesmen, I imagine, council rates and water etc couldn't. I guess that is one advantage of letting them manage - but you could still pay the insurances, rates and water yourself. All of these could be paid by credit card, probably not the tradesman type.

 

[bez23]

capitalizing interest

How would this be different if I am building. Can I then use the LOC to pay the interest repayments of the build until it is complete?

 

[Terry_w]

How would this be different if I am building. Can I then use the LOC to pay the interest repayments of the build until it is complete?

Same principles apply.