Hi Guys, So we are just about to buy our first investment property. We have had some amazing help from our broker who has helped us to set up a proper financial structure to get started. It is something like this: OO - extract equity as cash out investment loan Investment Loan - Use equity loan for deposit, renos, all other purchase costs to maximise tax deductions. What we are struggling with is that due to the Investment loan being 'borrowed money' we are required to pay interest on this loan, we understand that this is all tax deductible, but when doing our calculations to hold a property in the area we are looking at (Logan - Brisbane) which will produce pretty good yields of 6%, we are still out of pocket each week by say $50-75. Now I know this I before we have our date with the tax man at the end of the year and we can expect to get some of this out of pocket expense back, I am just sending out the feelers to see if this is a normal practice, to have to put up some out of pocket expenses to hold your initial properties when starting an investment portfolio. We were a little naive re: using the equity and didnt factor in that we would need to pay interest on the equity used for the purchase of the property. Just asking for some advise on where we can learn more about this, or even just clarification that this is within normal practice. Cheers,
Yep. And have you factored into your equation: - PM fees - Insurance - Maintenance - Non tenanted periods Etc?
It is normal, so it's always wise to have a plan to get it to at least nuetral asap to stop the bleed. Things like reno's - which it looks like you're doing - subdivisions + build, and so on give ways to increase rent and cashflow to minimise holding costs. Ask your accountant about a tax variation if cashflow is tight - this basically gives you your tax return in small chunks every pay, rather than waiting until the EOFY - it can help with cashflow if you think you'll find it hard to hold. That said, if it's hard to hold, maybe keep looking for something that is bit kinder to your pocket - if rates rise you don't want to be under pressure.
Its super normal. It would be incredibly unusual to have a cashflow positive property after borrowing the full purchase price and costs.
The structure your broker is setting up is the right way to go about this. There are other ways to go about it, but what's being done here is by far the best structure given the info provided. Honestly I suspect your cash flow analysis is a bit optimistic. As Mikey7 has suggested, not everything may have been taken into account. Structuring the loan differently won't change this because structure doesn't actually change the amount you need to borrow. Sorry to say, but most people who state simply that their strategy will be positive cash flow properties are probably going to be disappointed. It's incredibly rare to find cash flow positive properties in any urban location. A tax variation to give you your refund with each pay packet can be helpful, but personally I prefer to deal with the monthly cash flow and get a lump sum refund at the end of the year.
Agree - don't underestimate these costs. That is not to say they should stop you - just preparation is the key. Also, don't forget to look into a Depreciation schedule that may help. Happily recommend @Depreciator