Using Equity or Cash for Deposit?

[nowork]

Hi Guys,

I am excited as I have been given full approval for my second IP, paid building and Land deposits and am awaiting settlement for a dual-occupancy house build which will be done in NSW.

I should have enough cash to pay the rest of the deposit by settlement and I will pay LMI. I also have approval to pull about $60K worth of equity out of my first IP.

I would like to get a third IP sooner rather then later, so I was wondering if with this opportunity I should continue to pay my deposit on the new build with cash, but take advantage of bank approval to pull out the other $60K and put back into Offset for IP1, so it is ready and waiting for a IP3 once I am happy where IP2 is at?

Thoughts? and of course thanks for taking time to read.


Cheers

 

[D.T.]

Always prefer using equity over cash. Keep the cash in offset account to reduce interest and save it to cover any unforeseen stuff.

 

[Jamie M]

Agree with DT.

Using equity enables the debt to be deductible.

Always important to keep a nice cash buffer for emergencies too.

Cheers

Jamie

 

[nowork]

Thanks for that guys.

 

[CHAOS]

I mean to hijack your thread

my question is along similar lines.

If you have equity say 50k that you have used for new IP purchase (deposits & costs) and you have 50k sitting in an offset against that loan (no non-deductible debt to offset) - which do you use for the next IP deposit?

Do you pay back the 50k to zero, reset the loan, redraw and use for IP purchase? (Obviously you lose deductibility of interest for the original 50k IP use).

Or do you look to another IP to draw equity from and leave your cash in offset?

 

[Redom]

Hi Guys,

I am excited as I have been given full approval for my second IP, paid building and Land deposits and am awaiting settlement for a dual-occupancy house build which will be done in NSW.

I should have enough cash to pay the rest of the deposit by settlement and I will pay LMI. I also have approval to pull about $60K worth of equity out of my first IP.

I would like to get a third IP sooner rather then later, so I was wondering if with this opportunity I should continue to pay my deposit on the new build with cash, but take advantage of bank approval to pull out the other $60K and put back into Offset for IP1, so it is ready and waiting for a IP3 once I am happy where IP2 is at?

Thoughts? and of course thanks for taking time to read.


Cheers

Heya,

Generally when you have the choice between the two, use equity, given the taxation treatment of debt. Taking out an extra $100,000 in a separate investment loan will provide an extra ~$4.5k in tax deductions, worth around $1.5k p.a in cash flow. Using cash, you won't get that. If you've got non deductible debt, it may make sense to use your cash to pay that down.

When starting out in the accumulation phase, depending on how 'aggressive' an investor is, using cash to build portfolios is the only option to get 'in' and build a larger asset base that typically assists in growing equity over time. Once a portfolio is mature, most investors just use equity and use excess cash to pay down non-deductible debt/live.

Cheers,
Redom

 

[Redom]

I mean to hijack your thread

my question is along similar lines.

If you have equity say 50k that you have used for new IP purchase (deposits & costs) and you have 50k sitting in an offset against that loan (no non-deductible debt to offset) - which do you use for the next IP deposit?

Do you pay back the 50k to zero, reset the loan, redraw and use for IP purchase? (Obviously you lose deductibility of interest for the original 50k IP use).

Or do you look to another IP to draw equity from and leave your cash in offset?

The taxperts may correct me - but paying down an investment loan to take the money out again doesn't have much benefit. It does for deductible debt, as you'd be 'recycling' non deductible debt to deductible debt. But no benefit for investment debt.

If the IP itself has grown in value, take out the loan against the 'new' equity.

If your using your cash to pay down the loan and reborrowing the same cash out = no benefit.

 

[Peter_Tersteeg]

If you have equity say 50k that you have used for new IP purchase (deposits & costs) and you have 50k sitting in an offset against that loan (no non-deductible debt to offset) - which do you use for the next IP deposit?

Do you pay back the 50k to zero, reset the loan, redraw and use for IP purchase? (Obviously you lose deductibility of interest for the original 50k IP use).

Not much benefit in doing this that I can obviously see.

What you're describing tends to work better when the offset account is secured against non-deductible debt, such as the mortgage on your own home.

In this case, you'd pay down some non-deductible debt using your offset account and reduce the limit of that loan. This creates equity.

You then borrow against that equity via a separate equity loan to fund the deposit.


If you've only got an IP and not a PPOR, then you might be better to keep the cash in the offset account in the event that someday you do purchase a PPOR. This would be best if you've got enough equity to make the next purchase, otherwise you're stuck with using cash; not ideally tax effective but if it gets you into the next property...

 

[CHAOS]

Thanks for the replies. Recently achieved offsetting the PPOR via recycling strategy. Excess savings now offsetting an IP loan. We are still in the accumulation phase. Until we complete that is against an IP the best place for our savings?
I was that focussed on getting rid of the non-deductible debt that now it is done I don't know what to do next.

 

[Peter_Tersteeg]

It's awesome that you've cleared your non deductible debt.

You've now got several choices for the surplus cash flow as I see it.

1. Start reducing deductible debt
2. Direct it to accumulating more investments.
3. Spend it on lifestyle.

Personally I'd try find a balance of all 3, but mostly number 2.

 

[CHAOS]

Thanks Peter

While we work out a plan we are doing a bit of all three. One IP is a lifestyle / weekender and that has been targeted as the one to paydown first and when we no longer need to rent it we will be able to 'lick that marshmallow!'

2. Isn't that easy - the million dollar question - where to buy! - and when can we get on the ground to do the buying!