HOW TO INVEST IN HIGH GROWTH PROPERTIES WITHOUT HURTING YOUR CASH FLOW

Anyone use this strategy? Borrow extra cash in a line of credit, to pay the shortfall of a negative geared property. Assuming you have equity to pull out.

How to invest in high growth properties without hurting your cash flow - Property Update

 

Yes, but consider the tax implications.
Not a very practical solution these days because of serviceability.

 

Do you still use it?
Can you give us an example of what you did.

 

I have borrowed to pay the negative gearing shortfall of property in the past.

I don't do it anymore because of the negative tax effects. The interest on interest may not be deductible if you are doing this to increase deductions.

 

Would the interest on interest be deductible if you didn't do this just to increase deductions?

 

see my tax tip on capitalising interest

 

waiting for terry's post that will include the words "part iva"....

 

This is what I was thinking above when I said interest on interest may not be deductible.

See https://propertychat.com.au/community/threads/tax-tip-16-capitalising-interest.2715/

 

Awesome thanks terry.

 

Pay the interest on the LOC from an outside account so you are not double dipping.

 

This doesn't really matter as if the LOC is being used to pay interest it it already capitalising. Letting the LOC interest capitalise on top would be triple dipping!

 

Hi Barny,

I remember seeing a webinar a while ago about this type of strategy, where shortfalls were paid from borrowed funds/other equity..
I think over recent years in Sydney or Melbourne you would have done really well with this type of strategy... My only fear would be applying this to a flat or falling market...where property values are not increasing yet your borrowings are..
Combine a stalling market with a few interest rate rises and this could be a problem..

 

Ah right, thought the OP was talking about paying expenses not the shortfall.

 

Cheers Connor, thought about this too. Terry is the only person I know that has done it, and the m yardney. I don't think I have the balls to do it, but in a rising market I can see potential. Or if an emergency occurs and you don't want to sell yet

 

I have seen one client that is currently doing it - as advised by his accountant. I told him about the risks, but he thought he would be ok with it.

 

In one case a client did this. He was an accountant himself and advice form a firm promoting themselves as specialists in this strategy (has a name like tic-tac).

The strategy was employed for a couple of years and eventually unravelled via an ATO audit. A signification portion of his loans were found to be non-deductible.

Be very cautious with this type of strategy. Even with so-called expert advice it can go very badly.

It also relies on debt to service debt. IMO this can create a false personal budget and can easily get out of control. When the LOC runs out, you've now got more debt and if there's no capital growth, you're worse of then when you started.

 

I've done it. Pregnancy and upcoming property settlement. Was how to get it past the mrs.

Borrowed extra, didn't use it initially, however as rates increased and io periods ended, with less family income and another mouth to feed it was reassuring having extra funds handy.

 

Buy at the opportunistic part of a cycle. Negotiate hard, buying BMV and perhaps add some value. Price will be lower, less debt, less repayments, higher yield, less strain on cash flow.

 

Did you get worried at all with the interest on interest building up without the funds at the time. I'm assuming it was for a small shortfall amount?