Over past few weeks I've received quite a few emails asking what financial structures and strategies I've utlised to maximise my tax deductions and cash flows to build the substantial size portfolio I've attained. I hope the following is of some help in broadening your understanding of what should not be (but often can be) a very complicated subject. My preferred model is a structure whereby Lines of Credit (LOC), secured against equity in the existing property (PPOR and/or IP's), are first established. This can be done at the time of purchasing your investment property; however, it is far more advantageous to have had them already established ahead of making a property purchase decision! WHY? Simply because it takes the guess work out of what you can afford and simplifies the process enormously once a purchase decision is made. There are several financial products (offsets/redraws etc) that have the similar characteristics as a LOC, but with different names. For myself as an investor, the LOC’s ought to be split into two: 1. One for personal (or non deductible) expenses. 2. One for investment (deductible) expenses. This is necessary come Tax time so that “business” or investment expenses are kept separate from personal non deductible expenses and therefore easily identified for your tax returns. The following is an example only and assumes one satisfies their lender’s serviceability criteria to do what is suggested: Your existing home is financed with Bank A. You establish two new lines of credit, secured against existing equity in your home. You decide to purchase an investment property and have Bank B finance it. Because you have first established your Lines of Credit with Bank A you have approved funds already available to use. You make application with Bank B to fund your new investment purchase. Bank B assess your application and agree to lend you up to 80% of the property’s valuation; without lenders mortgage insurance (LMI) and without any additional security offered (i.e. assuming that you satisfy their lending criteria). The balance required to settle your new investment purchase will be the difference between what Bank B lends you, and the purchase price of the property plus stamp duty and legal costs. This amount would come from your Bank A Investment LOC; but your family home is not used as security by Bank B. Assuming Bank B values your investment property at full contract price; the balance you will need to draw from your Bank A LOC is 20% (plus costs). Please understand, however, that Bank B will instruct the valuer to value the proposed investment property according to a set of conditions that remain confidential between those two parties. Many in the industry believe these conditions amount to a “fire sale” price; however, neither party would agree with that (nor will they disclose those conditions). Regardless, experience strongly suggests that in the majority of cases bank valuations will come in at contract price or lower. You need to have enough funding available from your investment Line of Credit to pay the difference between what Bank B loan you and what you need to settle. By repeating this strategy of only offering a lender the security of the new property you want them to partially fund, you will avoid the stereo‐typical bank approach of cross‐securing your assets. In each case you will draw the balance required to settle (i.e. the difference between the contract price and what they are lending you plus costs) from your investment LOC. Having all of your properties “stand alone” has many advantages and gives you maximum control over your investment portfolio. This same strategy of NOT cross‐securing your investments can still be achieved in cases where you have multiple properties with the same lender or across multiple lenders. Capitalising expenses (adding them to the loan): Given enough available equity (equity pool in own home) and given confidence in capital growth ‐ then negative cashflow can effectively be eliminated by borrowing against equity; using the investment LOC. Consider it “unrealised capital gains”. Using this example the investment property (or properties) can possibly be held without any cost from your cash flow at all. It may also be possible to pay down any “bad debt” on your own home faster by using this cash flow model as posted by Terry_w. This example assumes using an 80% loan to value ratio (LVR) but you may want to go up to 95% if you are more aggressive and can possibly work around recent changes to the lending environment. Consider this, but purely as an example… If purchasing an investment property was going to result in an average after tax weekly shortfall of $60 during the first two years; one would need to commit to one of following two options: 1. Set aside $6,240 from one's next two years income 2. Borrow some or all of that additional amount up front; that is assuming one has both a. sufficient equity to borrow against. b. the ability to service the increase in my borrowings. Option 1: This option is pretty straight forward; you have to find $60 a week from my budget. Option 2: This option means that one's shortfall for the next couple of years is already accounted for in advance as part of their initial loan in the form of available credit in a separate investment line of credit. The effect on one's cashflow is NOT $60 a week, rather the interest on servicing that $60 a week… or $3.30 a week (tax deductible); assuming an interest rate of 5.5%. Capitalising Interest: By funneling all sources of income (including wages and rent) into your personal LOC; and then paying all interest payments from this same personal LOC (i.e. interest on your investment property loans, the investment LOC and your personal LOC) you will avoid the “trap” of capitalising interest (claiming interest on interest). All interest on your investment borrowings is tax deductible; regardless of the source you pay that interest from. If you pay your interest from you investment Line of Credit, the next months’ interest charge will be a little more as it will now include interest on last months’ interest paid. While there is a “lot of argument out there” as to whether this capitalisation of interest is allowed by the ATO or not; the general consensus is “avoid a problem and don’t do it”. By making any and all interest payments from your personal Line of Credit and simply claiming those individual payments at tax time, your accounting should be vastly simplified and your claims unquestionable. Any ongoing investment/property related expenses (such as rates, body corporate and so on) can legitimately be capitalised. As a property investor who has followed this borrowing strategy, I have been able to: purchase investment properties without using any of my own cash reserves. service the shortfall on my purchases without adversely affecting my cash flow. Now I know the above will not suit everyone's individual circumstances and as such I strongly recommend you seek the advice from your chosen Finance Broker, Accountant and/or qualified Financial Advisor - preferably one with practical experience in creating wealth through investment property of their own. I hope this provides some food for thought.