My first IP (and post)

[poidda]

Hello all.

I've been lurking here a while and have found this forum very helpfull. I have just signed a contract on the following appartment and thought I'd better find out that I haven't done the completely wrong thing while I still have a cooling off period.

http://www.realestate.com.au/cgi-bin/rsearch?fslm=1&a=o&id=104501830&s=qld&snf=rbs&t=res
This unit is in the same complex with more pics.
http://www.realestate.com.au/cgi-bin/rsearch?fslm=1&a=o&id=104345008&s=qld&snf=rbs&t=res

Now the situation we are in, is that I bought our current PPoR in February just around the corner where this IP is. Our intentions are to eventually rent a larger house in the area, so while we have some extra cash we thought we'd buy out first IP in the same area. Any loss on the IP will also help me tax wise. Our PPoR is very similar to the IP except has a double lock up garage and second bathroom.

At present, I have 110k equity in my PPoR, and intend on borrowing 100% for the IP on an interest only loan. The IP has been rented long term at $320/wk with the lease up for renewal one month after settlement (60 days). After paying both mortgages and before tax breaks we will have approx $4k/month spare which we intend on pumping into our PPoR for the time being. We don't want to get ourselves to tight at the moment financially as we want the spare cash to do some travel next year.

AS I first asked, are we completely doing the wrong thing?

Cheers.

 

[alexlee]

Sounds pretty solid. Decent yield (for the area and inner Brisbane in general), looks like you'll get some good depreciation for it, and sounds like you have the right loan in place (100% IO).

Lease renewal isn't an issue: even if the current tenant doesn't renew I doubt you'll have any problems getting it rented again. Make sure you figure out what the market rent is.

Also sounds like you have a decent amount of spare cashflow. Do you currently have an offset account? If not it might be worth thinking about getting one against the PPOR. You may be thinking about renting a larger house in the future, but you might also end up buying one. That's when having the extra payments in the offset instead of paid into the actual loan account will make a difference.
Alex

 

[poidda]

Also sounds like you have a decent amount of spare cashflow. Do you currently have an offset account?
Alex

Not an offset as such, but can redraw at any time for a cost of $25. I live off the interest free CC each month, and pay that off on payday before putting the rest off the PPOR mortgage.

 

[alexlee]

Not an offset as such, but can redraw at any time for a cost of $25. I live off the interest free CC each month, and pay that off on payday before putting the rest off the PPOR mortgage.

That's not an offset. The biggest value in an offset is if you ever decide to buy another PPOR and rent out your current place. The key difference is whether the interest on the deposit on your new place is deductible or not.

Currently you would have to redraw, which makes the interest not deductible. If you had the money in an offset instead, in effect the deposit will be deductible (that is, interest on the now no-longer offset balance will be deductible).
Alex

 

[poidda]

alexlee, thanks heaps for the information. This is something I was unaware of, and still a little unsure.

As an example say I have a mortgage on my PPOR of 250k, but am 50k in fromt leaving interest on the 200k. I then redraw all of that 50k for a new PPOR to make the mortgage 250k again, and rent the unit out as an IP. Are you sayng that the interest deductible is only on the 200k?

Cheers

 

[alexlee]

alexlee, thanks heaps for the information. This is something I was unaware of, and still a little unsure.

As an example say I have a mortgage on my PPOR of 250k, but am 50k in fromt leaving interest on the 200k. I then redraw all of that 50k for a new PPOR to make the mortgage 250k again, and rent the unit out as an IP. Are you sayng that the interest deductible is only on the 200k?

Scenario A: PPOR starting mortgage $250k. You put $50k extra payments. Balance now $200k. You redraw that $50k as a deposit for a new PPOR, and rent out the existing. Interest deductions on $200k loan ONLY.

Scenario B: PPOR starting mortgage $250k. You put $50k in an offset account. Mortgage balance $250k, offset balance $50k. You use the offset balance as a deposit on a new PPOR, and rent out the existing. Interest deductions on the whole $250k loan against the original PPOR.
Alex

 

[poidda]

Yeah that's how I understood it. Thanks a lot alexlee. I will speak to my accountant.

 

[poidda]

OK, a question with regards to redrawing for personal use if your PPOR will eventually become an IP. If all the extra cash was redrawn, and invested in shares does this still mean interest deductions will be on the 250k again or still on the 200k? (as in the example above)

Then at a later date (say 3 months), is there anything stopping you from selling all these shares and using the cash for personal use? (after paying capital gains on the increase in value)

 

[alexlee]

OK, a question with regards to redrawing for personal use if your PPOR will eventually become an IP. If all the extra cash was redrawn, and invested in shares does this still mean interest deductions will be on the 250k again or still on the 200k? (as in the example above)

Then at a later date (say 3 months), is there anything stopping you from selling all these shares and using the cash for personal use? (after paying capital gains on the increase in value)

IF the redraw is to buy shares, then the whole $250k is deductible. Interest on $200k deductible against the property, and interest on $50k deductible against the shares. Redrawing to buy shares is for income producing purposes, so the interest is deductible.

Nothing to stop you from selling the shares (and paying CGT). But if you sell the shares, and do not 'pay back' the redraw, the interest on the $50k is NO LONGER deductible because you are no longer using it for income producing purposes.

How will the ATO find out, you ask? Not until they audit you, and do you really want to find out the consequences of a tax audit first hand?
Alex

 

[poidda]

Thanks once again Alex. And no, I will not be leaving myself open for sudit consequences.