IP Accumulation Strategy - Please pick holes

Hi all,

I've been doing research on our next investment move. Currently have 1 IP valued at $410000 and owing $250000 so roughly $78000 equity available. Accessing equity and pre-approval shouldn't be a problem according to our broker. I can access a loan at 90% LVR without LMI due to my profession. We are looking at employing a strategy over the next 5-10 years of unlocking equity from CG to purchase the next property, and the next and so on using IO loans to maintain cash flow until we have maybe 5 and are in a position to buy PPOR either by selling down or accessing the equity of all properties combined.

Also keen on using a BA, at least for the next property to help select the best stock. I know there are no guarantees for growth but feel it will be better than me spending the next 12 months researching potential properties/honing my RE skills, especially if we look to purchase interstate etc.

I think its a pretty common strategy but would just like people thoughts, experience doing the same thing etc?

 

Strategy works if you make the capital gains ur after and able to continue to borrow, falls over if u don’t make the gains required to unlock equity
And hit borrowing capacity

 

It used to a common strategy.....

 

The hard part in Sydney is when land tax bites. Based on 2% of land value it can really put a dent in your income. Plus property is becoming much harder to rent.

 

Hi George,

It doesn't have to take 12 months of research to hone your skills

The strategy you mentioned works but it's a bit limited due to borrowing capacity constraints - you'll want to be sure your broker is strategic enough to be able to squeeze every last bit of borrowing capacity, especially if you're looking at 5-6 properties.

 

Thanks everyone. Does anyone have alternative strategy suggestions? I'm in the ADF so the plan is to rent while its cheap until we can afford to buy with cash (or a tiny amount of debt) down the track when we are ready to settle down (10 years or so).

 

then what?

 

Live mortgage free and work on payong down a couple of IPs for passive income.

 

you really need to check where the serviceability wall will be.

will you live in a place where you could save your way to buying a place for cash? In sydney this is unlikely.

overall you overestimate how much you can accumulate, how much you can save and how much cashflow an ip will generate. May be wrong tho, if apra loosens restrictions, you want to live in a cheaper city (not syd / melb) and you dont need much to live on.

 

Currently live in sydney because of work but the plan is to end up back regional where we come from. Saving is unlikely, part of the reason I am exploring other ways to acquire the wealth. The way I see it time is on my side and I want to put the right strategy in place now to be comfortable later

 

Hi George, if your budget allows I suggest you find a property you want to settle down in as a PPOR but rent that out in the meantime until you can afford to live in it. Otherwise if you can afford, move into that property for a year to claim the PPOR status (capital gains tax exemption if you sell later on) and rent it back out for the 6 years. Your proposed strategy - accumulating IPs and selling it later to buy a PPOR - will attract a lot of capital gains tax and transaction costs even with the 50% CGT discount. Also access IP equity to buy PPOR means you’ll have a large home mortgage with interest that’s not tax deductible. Better to use equity from PPOR to buy IP than the other way around, if a PPOR is your ultimate goal.

Otherwise, you can consider either selling your IP and using the funds to buy your PPOR - I know it’s a bad time to sell (and if you have a buyer) but if you are selling and buying in the same down market, it might work out easier with less competing buyers.

Then again you mentioned you want to end up back in a regional area presumably with lower capital gains, so maybe your strategy of buying IPs in higher growth capital cities like Sydney then buying cheaper PPOR in regional area makes sense.

 

Hi Doublebrick,

Can you clarify the point on using equity from IP being non tax deductible? I thought I had it the right way around? If I extract equity from an IP to use the debt sits against the IP and is therefore still deductible. The plan would ideally not to have a mortgage on the PPOR at all. If I extract equity from PPOR I would think that is non ded debt? Cheers.

 

Ah ok I mean if you use equity from your IP to buy a PPOR, you’ll increase the mortgage size of your IP and because the purpose of the increased loan is PPOR and not to derive income, the mortgage interest on the increased loan amount wouldn’t be tax deductible. I’m not a broker etc but maybe someone else can explain it more clearly.

 

Interesting you mentioned brokers when talking about tax. I am wondering if the average person believes brokers can give sort of advice?
From what I see many people think they can.

A quick tax law summary:
If you borrow to invest in something that pays income the interest would generally be deductible.

It doesn't matter what the security is for the loan

 

Actually just to qualify what I said above, while tax is important consideration, the psychological effect of renting out the house you want to settle down in is important as well. I remember renting out my first PPOR to save on the mortgage - I literally felt something died inside me when I was moving out and got a bit depressed afterwards moving back to my parent’s place despite the additional cashflow. It depends on what works for you and what you’re willing to give up. But there is nothing like the excitement of moving into a property you love and just bought. So on second thoughts, your strategy of accumulating IPs then sell one or some to find your PPOR could make sense, despite paying CGT.