Strategy on Negative V's Positive Gearing

[Mike S]

I have 4 Ip's worth $750,000 odd and a mortage O/S of $220,000 on P&I basis. I get rent total from 3 @ $35,000 PA, which pays all P&I, maintainence, rates, body corp fees with a residual of around $2,000 PA. I have a Wespac Professional Pak loan (old name) which is a discounted rate of .70 off the Std variable.

I am Australian, 42, and live and work as an expat overseas. I have a good salary income and disposable cash of around $3000 PF after all costs but am a little wary of getting into further morgage debt.

If I keep paying the mortgage off, I will have no tax credits break, if I dont pay it off and unforseen circumstances may mean I have no job and cannot get unemployment bens in Aust as means test may preclude me. How should I manage this situation?

Should I set up a side Bank account or similar, convert loan to Int only and deposit cash funds into a high yeilding account of some sort that provides me access to funds in the event of unforseen circumstances to either live off or pay off mortgage to be cash flow positive to provide me income?

If capital value of properties continues this will be a bonus in future years

I do look forward to any strategy plan that someone may assist me with that can alleviate a potentially difficult situation to manage. All the hard work to get the properties now largely owned would mean I would prefer not to HAVE to liquidate the properties in the event of unemployment or similar.

 

[always_learning]

Are the 4 IP's held in a trust? If not do you own them 100% or do you have a partner? Do you plan to live in one of these properties (PPOR) when you return to Australia?

Money for Unemployment Nothing wrong to immediately ask for a mortgage offset account with Westpac professional package and start paying money into this account, I have one.
Since you have a professional loan pac, guess you know what a line-of-credit (LOC) is? If my reading is correct after expenses you save $3000(PF = per fortnight) every two weeks ie $6K a month $72K/year? Gosh that's nice, would you like 2 cute daughters and assocated private/international school bills? Anyway given the above you should be able to get an 80% LOC of the $750K of properties, ie a total of $600K. Now this DOESNT mean you are in debt to $600K it just means you will have instance access to $600K-$current loan balance. Should you become unemployeed just use the money from the LOC, in the worst case how long would you be unemployeed for, 1 year , 2 years and how much per year do you need to survive?

Tax Now of course a LOC doesn't solve your tax issue, have you got depreciation schedules are you taking your full yearly depreciation amounts into your calculations? What about claiming for trips back to Australia to check on your properties? . Anyway I think paying down debt in the form of a mortgage offset account, making sure all deductions are claimed only then worry about any residule tax issue, my guess is that with a little talk and planning with good accountant you find that this is not such a big problem. After reading Dale Gatherum Goss's Trust Magic I now see how wonderful trusts are in dealing with this case

Future Planning
I know you are gun shy of more debt, but my next question is; You have $750K of IP, great, well done, but is that enough to meet your future (retirement/investment) goals? I have big plans and am working towards being unemployeed forever, unfortunately $750K is not enough!

 

[RPI]

Re the debt thing.

I try to think of it as the more "good debt" I get into the wealthier I become. We are raised to think debt is bad, but only "bad debt" is bad. Bad debt is only borrowed for depreciating items such as cars/ holidays/ furniture etc. Good debt is money borrowed to purchase appreciating assets (also called gearing).

You could borrow a lot more money to buy additional properties and setup a LOC, as "always learning" pointed out, as your backup.

A more conservative approach could be to change your investment loans to interest only and use the extra money to buy an additional property or properties.

You have a myriad of choices with your disposable income, if it was me I'd get myself in to a lot more debt by buying a lot more property and look forward to an rewarding (and early) retirement. But I'm me and you're you and you have to do what's right for you (and be able to sleep at night).

Rambling on a bit I know. Good luck

Darryl

 

[bundy1964]

Hi

JMHO I think I/O loans with 100% offset would be a better way to go. You must avoid the temptation to blow your buffer on buying junk.

bundy

 

[agent007]

Hi 230261,

Banks only let you money when you don't really need it however, they don't when you need it. So, what are you waiting for? go for it.
Good luck,
James.

Ps. Be waise with your $

 

[handyandy]

Hi

I would go for the offset. This way you do not affect the status of the loan if you need to access that money again, as it is your money.

I would also be inclined to transfer some of the property into a LOC so that you have this money do draw on when good investment oppurtunities occur.

Cheers

 

[WillG]

If you are consistently making money from your IP's you would be hit with provisional tax I think. Can somebody confirm this ?

I would change the loans to IO and dump excess $$ into a 100% offset account ready for your next opportunity whenever that may be.

Have you considered borrowing money to renovate your existing IP's to maximise income ?

Good luck !

 

[bundy1964]

Originally posted by WillG
If you are consistently making money from your IP's you would be hit with provisional tax I think. Can somebody confirm this ?

Hi Will

Provisual Tax was scraped when GST came in and replaced with the IAS system after 2 quarters reports the system was changed to exempt people with under 2k of tax liability for the year (I think) beyond their PAYE obligations. There is a copy of the IAS statement here -

http://www.ato.gov.au/content/Businesses/downloads/nat4192s.pdf

bundy

 

[Mike S]

Thanks

To all that have replied thanks a lot.

I have got some much stronger insights now that will allow me to make the next decisions with more comfort, ease and understanding.

Is anyone aware of the tax effectiveness of offset as opposed to placing funds in an alternative account, earniong interest and paying tax presumably on intrest bearing amounts?

MIKE

 

[Kevmeister]

An offset account against a mortgage will not be taxed. In effect, your "earnings" from the offset account are tax-free. So it is a much better strategy than using an independent bank account and paying tax on the earnings.

 

[Chris G]

One idea...

Hi peoples,

One idea to be shot down or added too....

If you are worried about not being able to support your debt if you become unemployed you could make sure your rental income will support the debts. 35k pa rent at 10% yield (should cover interest, maintenance etc) will let you borrow 350k to use for more IP's if you wanted....

This still leaves 400k of equity in your property and 250k (80% LVR) that you could access using a LOC if you needed it to survive for a few years whilst unemployed.......

Might be able to sleep easy at night AND buy some more IP's to help you sleep better in a few years too?

Hope it helps,

Cheers
Chris

 

[WillG]

Thanks for the info Bundy.

230261 must be right on the limit as he said he has a surplus of about $2k per year.

Is the $2k threshold calculated before or after depreciation is factored in ?

 

[Mike S]

More clarification

The amoounts quoted are strait Dollars as in Profit and loss.

IE: Total amounts collected on rent less total amounts paid on Loan repayments, Mainatinence, Rates, Body Corp fees, Pest Control, agent fees etc etc etc.

It does not include depreciation and or tax credits / payments.

My wife owns half of one house (our orginal residential property, but now overseas) so is positively geared on her bit and pays a small tax on the collections of around $180 per quarter in installments.

I have the other 3 properties in my name and over the last few years had credits overall and depreciation has been put into the tax calc.

But this year have got the loan down lower so will have an overall surplus at July of around the $2,000 at a P&L type level.

Does this alter the outlook any?

I really do need some serious strategic guidance I think?

 

[Pedro61]

I really do need some serious strategic guidance I think?


Maybe a chat with Steve Navra . . .

 

[Mike S]

HHHMMmmmmmm !!

Tks Pedro 61.

Excuse the ignorance who is Steve Nvra and how would I get in touch with him to discuss / email ??

 

[geoffw]

230261,

Steve is a member of this forum, and has been discussed many times. Do a search, there's plenty to find.

Also look at www.navra.com.au

I'd normally suggest people do one of his weekend courses- but I suspect he doesn't have one lined up for Jakarta.

 

[Mike S]

Tks

Tks Geofw

I will search and find I hope?