which is the best finance structure to use?



From: Dan D

Hi all,

I need some advice.

The overall goal is to accumulate many IP's over the next 20 years, ultimately sell a few of them to pay off the remaining IP's which would then become my door to financial freedom.

I have two options, that I'm aware of, which I can use to finance my first IP.

1. obtain a 100% loan using the IP and my PPOR as security. What are the pros and cons of this?

2. I use the $26,000 of cash available in my PPOR as a deposit and other purchase costs for the IP. Pros and cons?

Appreciate your comments.

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Reply: 1
From: Manny B

Hi Dan,

well out of the 2 options you outlined, the first would be the one best to use (my opinion only), as if you followed option 2, it makes your financial structure kind of messy (in terms of claiming a tax deduction on the interest paid for the deposit amount out of your PPOR loan).

Option 1 would be the way to go if you have enough equity in your PPOR to proceed, that way you can take out a loan of 100% plus expenses (possibly as I/O) loan, making your tax situation more manageable... Speaking to a good mortgage broker would also help, ie. Rolf.

You may however look at who's name you make your purchase under (as it is your first IP) & to consider whether a trust is the way to go? (this varies from person to person) If you do a search on trust you may dig up some good info from past posts OR speak to your accountant re: benefits in your situation...

just my 2cents worth...

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Reply: 2
From: Sim' Hampel

On 6/24/02 10:04:00 AM, Dan D wrote:
>1. obtain a 100% loan using
>the IP and my PPOR as
>security. What are the pros
>and cons of this?

Pros... easiest way to go, banks will not give you too much grief about this if you have enough equity in your PPOR and enough servicability for your IP.

Cons... this is cross-collateralising (if you don't know what that means... search the archives). Basically, you lose flexibility in that if you want to refinance, you have to refinance EVERYTHING, not just one property. Also, puts your assets at greater risk, as they are all secured together, you can potentially lose all of them if things go wrong.

It also confuses things where some of the loan is for your PPOR and some of it for an IP... best to keep them separate.

Most good independant mortgage brokers will advise you against this structure and will suggest alternatives such as use a LOC to access equity in your PPOR and use that for the deposits.

>2. I use the $26,000 of cash
>available in my PPOR as a
>deposit and other purchase
>costs for the IP. Pros and

$26K of equity in your PPOR I assume (you said "cash")? Which of course you would then draw down as cash in the form of a LOC or equity loan. This is my preferred approach... it keeps things separated cleanly (the LOC or equity loan is totally separate from your PPOR loan, so no confusion there), and the two properties are not cross collateralised, so you get the benefits of that too.

Option 2 gets my vote - this is what I do myself. Check with an independant mortgage broker AND with your accountant to make sure that the structure actually suits your situation.

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Reply: 2.1
From: Duncan M

I'd also add that you should uses deposits as small as you can get away
with, use Lenders Mortgage Insurance whilst its available to you. It will
cost you a couple of $1000 extra on each property but it means that what
equity you have will stretch further..

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Reply: 2.1.1
From: Geoff Whitfield

Added to this. Using option 1 with a small deposit means the bank will take the combined value of the two houses when calculating mortgage insurance. Using option 2, LMI is calculated only on the property you are buying.

I had a case where the costs would have been $10K plus using option 1, $2.5K option 2.
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From: Gail H

Yes, I'd avoid option one. Keep the loan for the IP 'stand alone'. It is not hard to claim the deposit as a tax deduction - simply ask your PPOR lender to open up a new account on the loan and keep the funds separately designated for investment purposes.


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