Pay down PPOR or purchase new IP

Hi, I'm new to the forum and am asking for advice about my current situation.

Long story short is I was previously with a financial planner, however I was sick of being in the dark about what was happening with my finances, so I started reading about wealth acquisition and want to be more in the know about what is happening with my finances. I've currently run into a dilemma, about what I should do over the next year.

I currently own two properties, one is my PPOR the second is an IP.

My two properties were initially 100% loans IO w/ offset account each secured to a 10% Term Deposit. However due to the recent increase in IO rates (4.47%) , I have changed them to P+I (3.92%).

IP
Loan: 498,000
Value: 510,000
Rent $500/wk

PPOR
Loan 495,550
Value 510000

Each loan is secured by a 50,000 Term deposit (2.6% interest)

In addition I have 80,000 in savings, previously in offset account

Income $200,000/annum

My primary goal is 2000/wk in passive income in 10 years.
My secondary goal is to minimise tax (PAYG) to improve cash flow

1. According to Jan Somers book (More Wealth from Residential Property) at this point, I should aim to pay off my PPOR. So would it be best, to change my IP to IO and funnel all money into paying off my PPOR as quickly as possible.
2. Or would it be better to pay off both of the loans at the minimum P+I and use my savings to buy a second investment property.

Many Thanks

 

Jan Somers books are very old now. The general principals still apply but there are new strategies to speed things up.

If it best not to use savings to purchase an investment property (or pay the deposit) because you will be paying more non-deductible interest. Instead pay down the main residence loan and reborrow. For every $50,000 that you pay down and reborrow you would be generating an extra $2,500 per year in tax deductions (at 5% pa). That could put an extra $1000 cash in your pocket each year without much effort.

 

Speak to your accountant - that cash- secured structure is very expensive to hold and there’s no real benefit especially if your PPOR is going to stay that way long term.

It’s good as a temporary measure to retain deductible debt, but unless you’ve got a specific plan to exit within a reasonable timeframe I’d look at potentially unwinding it.

 

Thanks Terry,

Could you recommend any more up to date books to read.

Kind regards

 

There aren't really many good books to read on property investing I think. The forum is the best resource. See all my tips and strategies too.

 

I suggest the Armchair Guide to Property Investing. They do a podcast as well called the Property Couch.

These guys are legit and run a successful mortgage brokerage and buyers agency. They routinely drop nuggets of gold and lay out the fundamentals in a structured, easily digestible manner.

 

Put the investment property to P&I redraw and borrow money from your parents to help pay down the principal part of the P&I loan.

Every couple of years refinance the parents loan on the investment property and the new interest on the “old parents” loan becomes tax deductible.

And instead of it being your parents it could be a brother, friend or family trust.

This way you will get a lower interest rate and end up with 100% of the IP loan as tax deductible.

Get the strategy and tax effect written up by a smart cookie so you have something to refer back to later on.

If you buy another property start thinking land tax as well.

 

Hey thanks the the suggestion, I had a listen to their podcast today on the way to work. Gold mine!

 

Hey Ross,

Thanks for the suggestion.

For the novice, a redraw facility seems very similar to the offset account I currently have against my PPOR. Would you care to explain the difference.

From my reading about tax deductible debt and non tax deductible debt. I’m considering changing my IP to IO and then using cashflow to pay down my PPOR. My only concern is that when I move out of my PPOR into my new PPOR in 4 years time, I will have less tax deductible debt on it.

 

Pay the extra funds into an offset account against your PPOR, that way you can transfer the funds to your next PPOR and retain the current debt for when it becomes an IP.

 

Offset accounts are great but if you go P&I you are compelled to pay down the principal.

I was talking about a strategy where you can effectively have a P&I loan but utlimately, through a second loan that is refinanced later on, keep the tax profile the same as an IO loan.

 

You have tons of cashflow but no equity. Fast way to get equity is to pay down a little and then leverage. So I would accumulate in PPOR offset until you have enough to pay down and reborrow deposit + costs (eg 25%) of your next IP. Each dollar they let you borrow is another four worth of assets that you get working for you. Keep doing this until you hit servicing limit (or reach more debt than you are comfortable with).

 

Thanks for your suggestions. Some people have suggested paying down PPOR and using it as a redraw facility. From what I understand the following is how it is effective.

Scenario 1 - purchase IP with cash
PPOR Value 500,000
Loan value 450,000

Offset 100,0000

Looking to purchase
IP Value 500,000
4500,000 Loan
50,000 Cash deposit

Result
Tax deductible Debt (IP loan) = 450,000
Non-tax deductible Debt PPOR loan = 450,000

Scenario 2 - purchase IP with equity
PPOR value 500,000
Loan value 450,000

Savings 50,000
- Pay down PPOR to 400,000 Loan Value

50,000 redrawn for deposit for IP.

IP Value 500,000
450,000 Loan
50,000 Redraw

Result
Tax deductible Debt (IP loan + IP deposit redraw) = 500,000
Non-tax deductible debt PPOR loan = 400,000

So lets say I do this for another 8 properties, each worth 500,000
So that the result is

Tax deductible Debt = (8 x IP 450,000) +( 8 x IP deposit redraw - 50,000)
= 3,600,000 + 400,000
= 4,000,000
Non-tax deductible debt PPOR loan = 0

By then would you look at revaluing your PPOR and see if it had increased in value, to continue this strategy or would there be another next step?

Is this kind of forward planning viable, or do to many things change with regards to lending/realestate conditions over a 15-20 year period to make the following scenario improbable? (Not saying to predict the future, but more so have people had a plan previously only to have it unable to come to fruition due to changes out of their control)

 

Yes that's how it works.

You would probably check the value of your property sooner and borrow up to 80% so as to not use your cash if you can. Good to keep a buffer. But if not much equity pay it down and re-borrow.

Don't forget you need to split the loan before you do this