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How do you pay down your multiple IP loans?

Discussion in 'Property Finance' started by Mr Darcy, 1st Nov, 2015.

  1. Mr Darcy

    Mr Darcy New Member

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    First time poster but long time reader of SS/Property Chat. Firstly, a very big thank you to everyone who posts their experiences here – I have learnt so much.

    My question is when you have multiple IP loans how do you allocate payments to paying off the loans? About to pay off the PPOR (ie its in the offset) as all IP income goes towards the PPOR and all IP expenses are coming out of a LOC. So how do you allocate excess cash above the rents to the IP loans - is it via amount owing, interest rate (all my IP rates are the same), highest tax rate, equal payments, pro rata? All properties are neutral after tax and I want to pay some principal down. My scenario is this:

    IP#1 – Loan $190k – my name on title (my tax rate is higher than my partner’s tax rate);

    IP#2 – Loan $330k – partner’s name on title;

    IP#3 – Loan $580k – joint names;

    IP#4 – Loan $1m – my name.

    Each loan has an offset account so this is where the payments will go.
     
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    What is this pay off loans business you speak of? :p

    Set them all to interest only except your PPOR. Once that's paid off, I'd top it back up again and use these proceeds to invest in more houses with. You can then use those new ones and your existing ones to help pay this down (it'll be quicker, since there'll be more of them).

    Really wouldn't waste your money on paying down IP debts though - that's money you could be putting towards more IPs, or towards a better PPOR, or saving a buffer.
     
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  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I'd put it in the offset of the least deductible one. Ie, if partner is in highest tax bracket and you're in lowest, offset your IP debt first.
     
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  4. Blacky

    Blacky Well-Known Member

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    D.T types quicker than I do.

    My thoughts were the same. Debt re-cycle and re-draw against your PPOR. Buy more and build asset base and income.

    Assuming of coarse you have no other non-deductable debt.

    Blacky
     
  5. HUGH72

    HUGH72 Well-Known Member

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    Once the ppor is offset or paid off put the excess funds in the IP#2 offset as your partner has the lower marginal tax rate.
     
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  6. Jayy

    Jayy Member

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    Hey guys, also a long time reader of both forums, but first time poster.

    I've been wondering the same; when is it time to pay down debts? Once you are happy with the income generated from the properties? If you keep redrawing and buying more, sure that's great but when can can you see the positive cash flow?
     
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  7. D.T.

    D.T. Adelaide Property Manager Business Member

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    A couple different ways
    - Sell off a couple. Eg buy 10, sell off 2 to leave with 8, the reduction in debt from selling those 2 (since they've all gone up since you bought them)
    - Keep debt as IO and if you bought well, should edge towards being positive cashflow anyway over time
    - Redraw and invest in commercial property or dividend paying shares which pay over and above what your repayments are anyway
     
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  8. SaiMan23

    SaiMan23 Member

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    This seems to be a common idea - why then not just invest in commercial property from the outset?
     
  9. D.T.

    D.T. Adelaide Property Manager Business Member

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    Likely don't have enough equity/deposit to get something nice. Residential property is pretty good at generating that equity.

    Also because of lending serviceability. ie, you can fill up on resi and then buy commercial, but not vice versa.
     
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  10. Jayy

    Jayy Member

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    With rent increases over time, if the increase can cover PI payments is it ever worthwhile to do this?
     
  11. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Rarely do first time investors have 400k+ available for a deposit and the risk + education level required is a few leagues above buying a simple resi property. Muck up with a resi purchase, you might have a lower than expected rent and poor capital growth potential - much up with a commercial purchase and you might have a 50k-60k p.a repayment required with half a decade of vacancy. Very different risk profiles.
     
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  12. citystar

    citystar Well-Known Member

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    All of my loans are Interest-Only with the offset being linked to the PPOR as it is non-deductible. Even the PPOR is IO as you never know if it will end up as a rental years from now when I upgrade or relocate for work.
     
  13. mcarthur

    mcarthur Well-Known Member

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    Yes, if your exit strategy is LoR (living off rent), then you need to have paid off much more of the IP(s). Rent increase has only been marginally better than inflation over the past 10 years - I seem to recall about 3.3% on average (which of course doesn't mean much since it's over all of Australia!).
    To LoR you'll need much more than 3-5 IP's with $100pw cashflow positive - if you can get 10x IP's then your rent is looking better, but good luck building that portfolio now/soon given serviceability. So it's better to wait to exit, then pay down the 3-5 IPs so you're generating $300-500pw rent each.
     
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But if your strategy is to retire sooner you might want to consider paying into offset accounts rather than into the loan. Same interest effect, assuming you are not tempted.

    The difference is you can start drawing on the offset money at a period before the rents are enough to retire on. This also has the effect of making your retirement tax deductible as any purchase you make is like borrowing to buy the item, the difference being the interest on this 'loan' is deductible whether it is investment related or not.
     
  15. Mr Darcy

    Mr Darcy New Member

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    Thanks for all the replies - much appreciated. I'd like to LOR so will focus on getting cash into the offsets starting with the least deductible loan first.
     
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