Money Out

I have finished reading the Dolf De Roos book on Real Estate investment and also have spoken with a guy who has been to the henry kaye seminars.
They both talk about being able to get IP's revalued and being able to refinance them and actually pull money out of the deal and it sounds like its yours to use as you see fit. IS THIS SO?
HOW is it done?[laymans terms please] What is the downside?
It would seem to me that I would be abusing any equity gains.
Thanks in advance.GEEVEE
 
A friend of mine also attended the HK seminars (cost a heap of $).

Basically, if you buy a property for $100,000 and 3 years later it is worth $150,000, then you have made a $50K equity gain.

Your original finance was probably at 80% loan-to-valuation ratio (LVR) or $80K. Assuming it was an Interest Only loan, the balance would still be $80K after 3 years.

Your house is now valued at $150K so an 80% re-finance would take that to $120K. The difference (120-80=40K) is money that could go in your pocket. Alternatively you could use the extra $40K to go towards another investment property.

The clinch, however, is that now you have a $150K property with a $120K loan, but only $80K of it is now tax deductible (assuming the $40K you've pulled out is used for private purposes such as living expenses, a car etc).

The concept is no different whether it's an investment property or your own home.

This seemed to be a favored technique of HK in regards to off-the-plan properties, with a twist. The idea is that if you bought a property "off the plan" for say $100K and construction takes 3 years (as might happen in a very large complex), then after 3 years the capital growth *may* have made that property now worth $130K.

If you can get a bank to agree to it, you get a loan for 80% of valuation (ie. $130K) as opposed to contract value (ie. $100K) which means you get a loan of $104K. This pays the entire contract price of the property and the $4K might be enough to cover [at least some of] the expenses.
 
I have a question, if you refinance a property and put the money in to an offset account of another IP for a business purpose of consolidating equity. Would the new loan amount still be taxable, or in doing so you are hurting your self tax wise other then there should not be any change in interest (excluding refinancing costs and interest on both IP's are the same)? I know if you used it for personal usage then the difference of what was borrowed before is now not tax deductible. But if is for business purposes then does this count.

or what happens if you buy shares (asset) then resell them and use the money sold for something else .. Would this then change the borrowing purpose? I guess it could become an accounting nightmare with out good records. (Maybe even with them)
 
Hi Nicholas,

As long as you are using the increased equity for an investment, the interest is tax deductable.

For example, I have borrowed the increased equity on a rental property to buy shares. The whole loan is tax deductable as I used the money to invest. However, I think the tax department would be umimpressed if I then sold these shares to, say, take an overseas holiday. In this case the original (share) loan is no longer for an investment.
In the same way, if you borrow against your own (ppr) home for an investment, you can claim that part of the loan that is invested, even though the security for the loan is a personal one (though be careful to keep your personal mortgage seperate from your investment loan). The important thing is to look at the purpose of the loan.

Lily
 
Lily,

I suspect the bank would be even less impressed if you sold off their loan security (the shares) without repaying the loan! :D

Bob
 

Sim

Administrator
Actually Bobq, the shares are not the security in Lily's case - it's the property... it was an equity loan used to buy the shares.

So what you end up with as a result of selling the shares is a debt which if you are unable to maintain payments - the bank will come and take your house away ! It's important to remember these things when dealing with equity loans - which is why I hate the CBA adverts on TV at the moment - saying you can buy anything and everything with the equity you have in your home... I just hope someone is explaining the facts of life to people when they apply for these loans - if you can't meet the repayments on the money you spent on that nice big boat... you WILL lose your house and probably all the equity you had built up in it.
 
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