Nervous First Timer..

[Mikeyba]

Hi Guys..

I am a first timer and would appreciate some comments on an investment strategy. I guess firstly have concerns and issues getting over the 'fear' factor of getting into debt. (even though it is godd debt!!)

The strategy that has been put to me is below.

1. My PPOR (has about $250k equity)

2. We have Car Loan, Credit card debt of $15K.

Strategy.
1. Setup 4 Line of Credit Loans.

- 1. Personal (Payout Car/Credit Card, all income goes into this a/c, C/C gets cleared monthly from here, interest payments on other loans etc.. and P&I mortgage on PPOR) - $20K against PPOR.

- 2. 20% Deposit for IP. - against PPOR

- 3 80% for bal of IP - against IP (from different lender to 1 and 2)

- 4 50K Managed Fund (Income Generation) to offset any shortfall in costs from IP - against PPOR.

On a 350k IP the above would look like using about $150k of the equity on the PPOR..

What are your thoughts..

cheers Mikey.

 

[Simon]

A LOC is a little more expensive and I would question why loan #3 is not just an IO loan.

I would also consider an offset account against your home. against the $20K you still owe on the PPOR. You will soon outstrip the $20K. As you seek to borrow more for investing then draw from LOC #2 and topping up the limit as required.

If your overall LVR approaches 80% then just transfer in savings from the Offset account.

It is amazing how quickly funds build up when you get the setup correct and practice some discipline.

Cheers,

 

[Mikeyba]

Thks Simon..

I think I might have confused myself..

This is our current situation.
1. PPOR Value is 580K (Current P&I Loan bal of 315K)- leaves the $250k equity, Car Loan, C/C of 15K


All the LOC's as outlined would be interest only, including the 'personal', I agree with setting up offset a/c against the P&I Loan (should all income , salary plus rental income and payments go here rather than into the Personal LOC?) what I am confused about is the 'personal' LOC which pays out the current c/c and car loan, ) is an Interest only loan how does the 'prinicpal' amount of this LOC ever get reduced. As the principal is a depreciating asset it is not helping any, unlike the other LOC's.

hmmm ??
Mikey

 

[Rolf Latham]

Hiya

You mean Good debt .

Pretty much what Simon Said.

Locs are a handy tool for pulling equity, but arent ideal for many owner occ situations for any number of reasons.

Smells like a Stg portfolio set up or the like ?

ta
rolf

 

[Bandita]

Hi Mikey,

Welcome!!! You will get an overwhelming amount of knowledge here!

First thing - separate you're good debt (used towards investments - i.e investment property (not your PPOR) and shares) and bad debt (personal loan, car loan, PPOR, - anything not tax deductible and that doesn't increase in value over time). Make sure your LOC's are separated this way, or you're just making your life much too difficult come tax time!

If it was me, I wouldn't have the "bad debt LOC" as IO (car and personal loans) - it's better interest than a normal car/personal loan, but not tax deductible, and I would pay them off ASAP- yes, there's theory on how you can use the savings from the IO to invest, making your money work better for you, and if you do do this with the savings from not paying principle on the bad debt LOC then go for it - but it's hard to justify, and I say pay it off - and then use that LOC for investments

Onto your specific questions - if you pay IO, the principle is never paid off - but you can (sometimes - depends on the year the property or other asset was built) depreciate it - meaning that the amount the asset depreciates each year comes off your taxable income (a depreciation schedule can determine this, or if it's pretty simple, you're account will be fine at estimating) - remember that when you sell, this gets added back onto your Capital Gains. I love depreciation - it's free money (loss) come tax time It's irrelevant if your loan is a LOC or normal IO property loan - if it's IO - you're only paying the interest on the loan, that's it - the debt value will still be exactly the same today, tomorrow, 10 years, 50 years from now (but the love of IO is - inflation results in the actual value of your loan going down over the years - saying that - if it's bad debt, get rid of it)

Not sure if I'm answering what you're asking - ask more questions!!

Cheers,
Jen

Thks Simon..

I think I might have confused myself..

This is our current situation.
1. PPOR Value is 580K (Current P&I Loan bal of 315K)- leaves the $250k equity, Car Loan, C/C of 15K


All the LOC's as outlined would be interest only, including the 'personal', I agree with setting up offset a/c against the P&I Loan (should all income , salary plus rental income and payments go here rather than into the Personal LOC?) what I am confused about is the 'personal' LOC which pays out the current c/c and car loan, ) is an Interest only loan how does the 'prinicpal' amount of this LOC ever get reduced. As the principal is a depreciating asset it is not helping any, unlike the other LOC's.

hmmm ??
Mikey

 

[Mikeyba]

ok then.. so here is the plan...

LOC 1 - 20,000 P&I(Secured aganst equity in PPOR)
'Bad Debt'
Use to payout existing Personal Loan and Credit Card.
Also to be used as SLUSH fund.
- 'New' C/c for living expense (cleared monthly)
- Salaries (deposited)
- Rental Income / Tax credits etc
- Income from LOC 4 - Managed Fund
- Costs for Rental Properties.
- Loan repayments

LOC 2 $70,000 IO (secured against PPOR, 20% Deposit on $350K IP)
'Good debt'

LOC 3 $280,000 IO (Secured against IP, using different lender to above, 80% value of IP)
'Good Debt'

LOC 4 $50,000 IO (Secured agains PPOR, Income generating Managed Fund to offset cost of IP)
'Good Debt'


So based on this I would have $140,000 secured against the equity I have in the PPOR. As I build equity in IP (or more IP's as I add them) I can transition the security from my PPOR to the investment property and also use this equity abolish the existing P&I Home loan on the PPOR, buy new IP's. In ten years after having 10 IP's I can sell five pay off all the LOC's and the balance of my P&I home and live off the rental income of the remaining five. During this time LOC 1 (Bad debt as P&I should be gone other than its use as a transactional a/c..)

Sound's like it would work ???

Mikey

 

[myla]

hello,

can you afford the payments on 140k?

shouldnt you aim to get the cheapest possible rates, no frills?

what sort of income do you think you will pull from managed fund? as this costing you lets say rock bottom 7.6%

thankyou

myla