Keep paying down IP's or invest again.

I am currently trying to decide if I should keep paying down current investment properties or invest again to minimize tax again.
Current situation is as follows:

43 single, no dependents with stable job earning approx $120k
PPOR is owned and worth approx $700k
IP 1 worth around $380k and I owe $280k P&I
IP 2 worth around $580k and I owe $410k P&I
Shares etc worth about 150k

The situation is both IP properties are now getting very close to becoming positively geared and combined I am paying and extra $400 a week on the P&I loans.

My question is should I continue to pay down the IP loans (as eventually it would be nice to own them) and enjoy the cash flow by not purchasing another IP. However this means would start paying more tax as the years progress.
Or reduce payments on current loans and use the additional funds to purchase another IP. This would reduce tax again but I know it would be a strain on cash flow.
I know this question is very much a personal decision but I would be interested in other peoples opinions.
Thanks.

 

If I were in your situation, I would try and buy another 1-2 IPs dependant on servicing.

 

You are comparing paying down debt vs increasing debt for the purpose of tax minimisation and you are really missing the point by saying this.

If the debt is wealth-producing, then more debt is better (provided you can service it) because the more debt, the more wealth you are creating.

For instance, if your portfolio was growing at 7% with bank interest of 4.5%, then 2m of property would provide you a higher total return than 1m of property.


The other side of the issue is being forced onto P&I meaning that even though you are neutrally geared you have to contribute 20k/yr, so another 500k property in this situation might be another 7k/yr negative after tax deductions and holding costs, but it would be around 16k/yr negative if on P&I. So your negative cash flow on P&I would be 36k/yr with your other repayments. At what point would you consider yourself at risk? Can you still continue to build and hold cash buffers big enough for an unforeseen life event like job loss, family medical problem, or if rates rise 2%?


Without APRA making it difficult-to-impossible for many to get IO, getting more wealth-producing debt instead of less is a no-brainier. Paying down investment debt without being forced to is one of the worst ways to invest your money because you are not getting more capital growth since the properties are growing regardless, and the lower holding costs after paying some off an investment then mean you also lose the tax deductions on those holding costs. The end return is terrible. But the new APRA imposed rules are here and can't be ignored.


But don't make the fundamental mistake of thinking that less debt is better just because you will 'feel' better. If that is the case why wouldn't you sell one of your IP's to pay off the other.

 

hi @Scar, welcome to PC, and well done with your current portfolio, $1mil of equity, great achievement.

re your question of whether purchasing another IP, are you happy with your current portfolio? (repayments, growth, time to pay them off complete).

 

With your situation for me I would most definitely be building my investment portfolio. Look longer term gains 5-10 years and you will be fine.

 

Why not just pay the minimum on the property loans and save in an offset account?

You shouldn't be buying property for tax, but only investing if you think you can make money.

 

In the current market I would pay it down. You will lose nothing by paying off your debts.

 

Hi Scott, congrats on creating a nice nest egg with your current situation - Job well done. I'd really like to know what you're hoping to achieve from current properties and potentially future ones? Ie what are you goals with property in general? I think you need to be fairly clear with what you want with investing and you can work backwards from there

 

You can comfortably do both. Your existing debts are P&I and you have said they are basically self servicing already. You are PPOR mortgage free. You can be as aggressive as you wish, or as conservative as you wish.

If you decide you want to be conservative and dont wish to carry any more debt , you will still end up with an unencumbered PPOR and 2 x unencumbered INV properties in the next 15 years or thereabouts ie by your late 50's /early 60's. Hardly a bad outcome to be facing Those telling you this creates a tax problem are obviously forgetting that in order to pay tax you first need income... so paying some tax is a good problem to have , not a bad one.

However, if you decide to be more aggressive so you can do even better for yourself, you could offset any risk ( or perceived risk ) of carrying too much debt by purchasing for yield. Add 2 or 3 CF+ properties to what you already hold. This would ensure all your INV properties can run P&I and be self servicing from day 1. This would enable you to hold a larger asset base with no additional cash flow risk... and they will just pay themselves off over 25-30 years. More like 20 years or less if you can keep topping the repayments up by 20K per annum like you are already doing. This would take you right up to retirement... you'd be set!

Also, you'd still get some juicy depreciation and interest deductions to significantly reduce your taxable income along the way - if that appeals to you.... all while paying them off P&I and making extra repayments as well. Really, this would be the best of all worlds.
Completely removes P&I re-sets from the equation and still sees you set for life by the time you are in your 60's. Pretty much bullet proofs you against a market correction as well, because you aren't relying on growth to set you up for retirement and you arent ever going to be under pressure to sell and you can ride out this tighter credit cycle for as long as it takes.... in the end , as long as you get them paid down and the income stream from the unencumbered portfolio is there in retirement, who cares whether the market goes up, down or sideways over the next handful of years....?

Of course, you could also consider a complimentary 2nd strategy, by deploying some of the surplus cash flow into extra super contributions as well... to start building that asset up ... and possibly add a strong CF+ property in your SMSF ( if you and your planner can figure out if that works for you) .... That would easily be paid off by retirement, leaving you with a much larger asset base and a strong tax free income stream.

So you'd have a PPOR unencumbered ( already do ) several INV properties unencumbered and generating a 6 figure income , and an INV property in your SMSF also unencumbered and generating a tax free income in pension phase. #chaCHING!


Not quite sure you understand how powerful a position you are in ...

 

Thanks everyone for the opinions and ideas. As demonstrated by the many varied responses I could go either way in my situation. Take on more investment debt and build my asset portfolio or just kick back with what I have.
My ultimate plan is to retire around 55-57 and have a comfortable retirement. Nothing spectacular, enough money to enjoy a modest lifestyle.

Update on the figures.
IP 2 worth around $580k and I owe $370k P&I (410k was what I originally borrowed)
Super is sitting about $300k
Putting in $100 weekly into Super with additional 6% from employer.
Adding an additional $100 weekly to managed fund/Shares.

I live well now and within reason want for nothing.( eg No 200K Range Rovers as a new car but can afford 40-50K new car) I am trying to weigh up if I give myself more cash now to have a bit more fun (maybe 100K car and a few more holidays) or build a bit more wealth so retirement will completely worry free.
Once again I appreciate the opinions and feeback.
Cheers

 

You could put the INV loans on interest only, don't use more debt and put the surplus into LIC's/ETF/Super/Managed funds. There doesn't have to be a whole lot more debt involved if you'd rather not over-commit.

 

You would like to retire in 12 years - what do you regard as a modest income compared to your current $120K income? What income do your IPs and shares contribute and what do they cost (ie when you don't have a job bringing in an income, will the investments be costing you or adding to your income). How much capital will you require for your required income at certain yields?

I like diversification myself and would add more to income producing shares (not knowing what shares you currently own and if they add income or not). If you're wanting to retire before your super kicks in, you will need an income stream greater than your costs.