My situation......ideas on moving forward.

[Reality Cheque]

Hi,

Just after some advice/ideas/opinions on my current situation and how best to reach my goals.

Current situation-

Age 37, married with kids, wife a stay at home mum.

PPOR val $315,000 (debt $263,000) Fixed for another 5 years@ 7.99% ouch! Huge cost to break the loan and no offset available so have decided to just keep paying the max extra repayments of $10,000 pa. Chalk that one up as a mistake.

Block of land val $170,000 no debt

Cash $260,000

Currently saving $25,000 /year

Super $85,000 in shares

Goals-

To cease fulltime employment in approx 10 years (at 47). Not looking to replace my income completely just looking to accumulate around $1.5m in property with a passive income of say 7-8% to allow me to leave the rat race and pursue other (less stressfull/less profitable) business interests.

These are the options I've looked at so far-

1. Using the cash as deposits, borrowing to the max and negative gearing. Sell down after 10 years and repay debt.

2. Pay $150,000 cash for an IP (regional ,approx 9% yld). Borrow to buy another and pour two lots of rent plus savings into owning ASAP. Keep repeating....

3. Borrow $120,000 +$30,000 deposit to buy IP as above. Put $120,000 in an offset account. Repeat.
(this way I'll have the cash to pay off the PPOR loan when the fixed term ends in 5 years.)

Would also either sell the block to put into IP's or look at building on it to produce income.

I know option 1 is the most tax effective way forward but I'm not keen on high debt levels seeing as I'm trying to exit full time work not be tied to it if property prices stagnate. Also realise that option 2 is a tax nightmare.

Any opinions or other suggestions welcome.

thanks

RC

 

[Aaron_C]

Option 1 seems to be the best option if you want to grow your portfolio with enough time to take advantage of growth to sell in 10 years. Keep paying down PPOR loan and redraw if possible to repeat investing.

 

[Terry_w]

That is a terrible situation you are in.

Random thoughts out aloud...
$263,000 loan at 7.99%, with none of the interest deductible but $260,000 cash also.

If you broke the loan now what would the fee be?
If you had an offset account there would be no interest payable.

Using the cash to buy properties for investment would mean you are eating up cash which could be used to pay off this loan when it comes out of the fixed period.

Ideally you would want to pay the loan down and borrow the money again.

You could possibly pay an extra $10k pa off the loan without penalty...

Would you be able to rent this home out?

$263,000 x 7.99% = $21,0137 pa in non deductible interest.
Where is the cash now?
Say it was earning 3% then that is $7800 pa in interrest recived. say 25% tax = $5850 in the hand. That means this set up costs you $20,428 pa.

If you broke the loan then you would be saving this much each year.
You could then borrow by setting up a LOC on this property and then get 80% loans for each new property. Subject to servicing you could get approx $1mil in property. Using the loan maybe another $600,000.

Is cash in the name of the non working spouse?

 

[Noodle]

Guessing your exit costs are going to be around the $30K mark given current 5 year fixed rates.

In the absence of an offset account, the first thing I'd check is who's name is on the account the cash savings are currently sitting? As if its yours then you are basically giving away thousands each year to the tax man. As your wife is not working, put it in her name as she won't even hit the threshold meaning it will be tax free, much like an offset account.

Re the acquisition strategy, I think a variation of option 1 is your best bet, as 10 years isn't a great deal of time and your projected passive returns of 7-8% (net?) are quite ambitious to say the least.

Also bearing in mind that when adjusted for inflation (say 3%) $1,500,000 in todays dollars in more like $2,010,000 in 2023. Or that 8% of $1.5M in passive income today ($120K pa) is the equivalent of $90k pa in 2023.

Sorry I can't be more helpful, but sometimes its the small differences that make a big impact.

 

[Reality Cheque]

That is a terrible situation you are in.

Random thoughts out aloud...
$263,000 loan at 7.99%, with none of the interest deductible but $260,000 cash also.

If you broke the loan now what would the fee be?
If you had an offset account there would be no interest payable.

Using the cash to buy properties for investment would mean you are eating up cash which could be used to pay off this loan when it comes out of the fixed period.

Ideally you would want to pay the loan down and borrow the money again.

You could possibly pay an extra $10k pa off the loan without penalty...

Would you be able to rent this home out?

$263,000 x 7.99% = $21,0137 pa in non deductible interest.
Where is the cash now?
Say it was earning 3% then that is $7800 pa in interrest recived. say 25% tax = $5850 in the hand. That means this set up costs you $20,428 pa.

If you broke the loan then you would be saving this much each year.
You could then borrow by setting up a LOC on this property and then get 80% loans for each new property. Subject to servicing you could get approx $1mil in property. Using the loan maybe another $600,000.

Is cash in the name of the non working spouse?

Cost to break the loan is $40,000.

Currently paying the extra $10,000 off the loan.

Cash is in spouses name earning 4%.

We have thought of building a PPOR on the block and renting out current house. Still an option but current house is our preffered place to live.

Not sure I follow the figures on the set up costing $20428.

Wouldn't it be $21013 - $5850= $15163 . Still terrible I know but just want to make sure I'm not missing something.

Maybe the $40,000 fee is justifiable?

I obviously need to change the structure before doing anything else.

thanks

RC

 

[Terry_w]

RC

I was thinking along the lines that if you rented the place out all or part of that breakfee could be deductible. That would make it much less painful. Check with your tax advisor first though.

Also do the numbers properly. Paying $40k to save $15k each year for 5 years may even be worthwhile.

 

[Rolf Latham]

h.

Also do the numbers properly. Paying $40k to save $15k each year for 5 years may even be worthwhile.

more to the point, the increased flex to do what you SHOULD, vs what you CAN with the current restriction may be worth a bunch, AND act in a reverse compound way.

ta

rolf

 

[tobe]

RC

I was thinking along the lines that if you rented the place out all or part of that breakfee could be deductible. That would make it much less painful. Check with your tax advisor first though.

Also do the numbers properly. Paying $40k to save $15k each year for 5 years may even be worthwhile.

Repeated for emphasis

 

[Reality Cheque]

Will definitly look at the figures carefully for breaking the loan.

I like the idea of borrowing to buy an IP and have the cash in an offset account.

I haven't had an offset account before but like the idea of keeping my cash to be paid off the PPOR loan when the fixed term expires.

So from my limited understanding I think I could do the following-

Buy the IP I'm looking at for $140,000 with a 9% gross yield in my wifes name.

Put up $28,000 (20% deposit) borrow $112,000 and put $112,000 in an offset account.

Income of approx $9000 net with interest offset which is 6% on my $140,000 invested/used. Not taxed in my wifes name.

Compared to the current $140,000 invested @ 4.65% = $6510 (not taxed)

So I'd be $2490 pa better off.

Am I looking at this correctly?

Just looking at the maximum I could be getting out of that cash to do a proper comparison on breaking the loan and paying it out.

Obviously there is stamp duty and I'll have to do all the figures more thoroughly but just want to make sure I've got the concept right.

Thanks

RC

 

[Rolf Latham]

I haven't had an offset account before but like the idea of keeping my cash to be paid off the PPOR loan when the fixed term expires.

so didnt your broker or banker provide much feedback on the options here ?

-

Buy the IP I'm looking at for $140,000 with a 9% gross yield in my wifes name.

if you can get 5 or more of these would you ?

ta
rolf

 

[Reality Cheque]

so didnt your broker or banker provide much feedback on the options here ?

-


if you can get 5 or more of these would you ?

ta
rolf

I'm going to see the bank next week. Just trying to get a bit of a handle on it so I know what questions to ask.

Probably wouldn't want 5 of them but would consider a couple.

RC

 

[Rolf Latham]

Probably wouldn't want 5 of them but would consider a couple.

RC

if they are making money and you could fix the loan why not ?

Just playing with the logic ?

ta
rolf

 

[Reality Cheque]

if they are making money and you could fix the loan why not ?

Just playing with the logic ?

ta
rolf

If they were available in a range of areas that I was happy to invest in then yes, the more the merrier. However, I'm not sure that they are.

RC