A few options - Property equity

Discussion in 'Investment Strategy' started by TaylorTako, 20th Feb, 2017.

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  1. TaylorTako

    TaylorTako Active Member

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    Hi,

    To give you a brief run-down of my current situation;

    - 25 years old
    - have recently purchased house & land package (PPOR), which is currently being built.
    - I only plan on living in the PPOR for 12 months (To satisfy the FHOG) and then most likely rent.
    - I have been periodically investing $2,000 per month into a diversified share portfolio (mostly ETF's) for over 18 months now . (I presume this will increase serviceability due to dividend income)
    - 100% of any pay rises I receieve from work/career will be used to pay down debt (will be deductible debt post 12 months).

    Basically this is the point where I need to work out what to do, I thought i'd post the question to get some suggestions/critique.

    Option 1:
    I can split my loan up into 10k splits (roughly 30 of them) and as I pay down each 10k split, I can redraw that amount and use this to invest into index funds.
    I thought this would be better set up as a debt-recycling strategy if I was to keep my house a PPOR, but since the debt will be deductible anyway, maybe this isn't the best option?

    Option 2:
    As I pay down more and more of the debt and the property grows in value, i'll be generating equity, at a certain point i'll draw down on this equity through a LOC,
    I'll use this LOC to purchase shares (index fund such as VAS).

    Option 3:
    Same process as above, but instead of using LOC to purchase shares, i'll purchase another IP instead, this will obviously increase debt and deductible interest by a lot, utilising leverage. This is the more riskier option.

    Appreciate any input & advice..

    Thank you!
     
  2. Steven Ryan

    Steven Ryan Well-Known Member

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    Option 4.

    Use a suitable lender and set up an offset account against the property and drop all surplus income in there so you preserve debt and don't lose what may be deductible interest in the future.

    When the time comes to "debt recycle", split what you need (tick and flick form w/most lenders) and go from there.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Option1 may be good if you plan to move back in to the property. But what are the chances of this happening?
     
  4. TaylorTako

    TaylorTako Active Member

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    Unlikely!

    That's not a bad idea, so basically rather than paying down the debt, I use an offset (which reduces the interest). This may give me more flexibility later on (with a deposit for another IP)
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    If this is going to be an IP, there's no need to pay the debt down, and debt recycling isn't really a thing for debt that's already deductible.

    Get yourself a loan with an offset, save into that and use that to invest in shares/efts or so on if you want too. That way when the time comes to buy another PPOR, you have liquid assets that you can use and don't need to borrow too much.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    you seem to have 2 choices
    a) pay down investment debt and reborrow to invest shares; or
    b) use cash to invest in shares


    I would be inclined to use cash if there is little chance of moving back in to the property.

    You can always later debt recycling by selling shares and borrowing to buy more. Not as easy with property because of the costs.
     
  7. TaylorTako

    TaylorTako Active Member

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    So @Terry_w To clarify:

    Option A:
    Pay down IP debt, use equity to purchase more shares.

    Option B:
    Pay down IP debt, use equity to purchase more properties.
    Personally, I prefer shares > property, but the leverage is appealing.

    Option C:
    Pay off the bare minimum on IP debt, use additional income to purchase more shares.
    Potentially long-term with CG, use equity to redraw to buy more shares??

    Thoughts?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I would be inclined to use cash if there is little chance of moving back in to the property.

    You can always later debt recycling by selling shares and borrowing to buy more. Not as easy with property because of the costs.
     
  9. TaylorTako

    TaylorTako Active Member

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    Hi Terry,

    What if, instead of turning the property into an IP - Deciding to live there long-term instead..

    That way, I can rent half of it out to my partner (roughly half the mortgage), and continue building my share portfolio, possibly look at splitting the mortgage into 10k splits (following your debt-recycle strategy).

    Do you think this would be more optimal than my original plan of turning the property into an IP and then renting myself somewhere else?

    The way i see it, I would save a lot on all the associated expenses of running an IP, including the risk of vacancy etc..

    But my debt would be non-deductible (until it is recycled).
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    By partner do you mean spouse?

    What abotu the CGT consequences?
     
  11. TaylorTako

    TaylorTako Active Member

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    Girlfriend.

    Doesn't concern me, as i won't be selling within the CGT period anyway
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think you may find the ATO may want to disallow the interest as this is a private expense.
     
  13. TaylorTako

    TaylorTako Active Member

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    I wouldn't be claiming the interest as a tax deduction
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Sorry i assumed when you said 'rent to my partner' that you were going to claim.

    Yes that might be a good thing, living in there, as you can then focus on debt recycling.
     
  15. TaylorTako

    TaylorTako Active Member

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    That's okay!

    Wouldn't it be better to use my income to purchase more shares, let the equity build up in the property and then take out a LOC against it and invest in shares.

    Rather than splitting the loan into 10k splits, paying down the splits with my income and then drawing on that to invest in shares?

    Which is the more efficient route I wonder.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    i can't comment on buying shares, but you could claim more tax by paying down the loan and reborrowing to buy the share.s
     
  17. TaylorTako

    TaylorTako Active Member

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    Okay,

    To put it into perspective, obviously these numbers won't be 100% accurate, but for the sake of the argument, i'll compare two options;


    Option A:

    - Invest income of $2000 a month ($24k PA) into an index fund, reinvested imputation credits and dividends, total yearly return 10%.
    - Continue doing this whilst my PPOR (300k) generates 10% CG PA
    - Paying full non-deductible interest
    - Means I can continue growing share portfolio while PPOR has its natural growth
    - Once equity builds up, take out LOC against property (80% LVR) and invest in an index fund (10% PA return). - At what point should i do this? 2 years down the track? 5? 10?? How much equity is enough ??

    Option B:

    -Split loan into 30 x 10k splits.
    - Income of $2000 a month is put into an offset, once this reaches 10k (at 5 months), pay down one of the splits.
    - redraw completely on that split and invest in an index fund (returning 10% PA as above).
    - Effectively reducing my non-deductible debt and generating good, deductible debt..
    - My tax refunds from the deductible debt will be shoved into the 10k splits for a snowballing effect.
    - Long term this will eventually reduce my PPOR debt to $0, and I now have an investment debt of 300k, with a large share portfolio.
    - Can i also draw down on the equity using this strategy? or is it just the splits i draw down on?


    In your experience, what has been the more successful route?
     
    Last edited: 23rd Feb, 2017
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There would be greater tax deductions on option B as you are debt recycling.

    You could still end up with the same amount invested with either but may be slightly be more option B as you are saving more tax.
     
  19. TaylorTako

    TaylorTako Active Member

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    The thing i don't like about splits is this, looking at a PA basis, with 24k invested into the splits per year..

    If i'm investing $24,000 a year into these splits, which will be a tax saving of $1080 PA (at 4.5% Interest).. (Due to reducing my PPOR debt)
    However, I draw down on the split and take out another $24,000.. this will be a deductible debt so ($24,000*0.045) multiplied by my marginal rate (0.325).. is only a tax savings of $351..
    The 24k splits that i draw down on will be invested into an index fund..
    The same result will occur the following year, 24k split.. overall debt won't change, but % of debt that is deductible will, which will be another tax refund of $351.. hardly worth it..

    However, If i use this 2k per month to invest as i usually would into an index fund.. continue paying down the house at the usual rate, I can then let a bit of equity build up, draw down on this equity with a LOC in a couple of years and debt recycle this way...

    Surely this would be more beneficial than splitting in 24k splits for $350 tax savings each year?