Planning for first IP - what else should I be doing?

Hi. I bought my first property, a townhouse PPOR, 6 months ago, and now that I've settled in I'm looking for feedback on preparing to buy my first IP around 2016/2017. I'm currently putting as much money as I can into my offset account (P&I, with credit card for everyday expenses) as well saving a cash buffer of 4 months salary (also sitting in the offset). I want to use equity in the PPOR to fund the deposit for an IP. At the rate I'm going, I'll have about $50k by end of 2016 in the offset.

Is there anything else I should be doing in the meantime, or should consider for future planning? E.g should I pay money straight into the mortgage instead of putting it into the offset? Is there anything else I can do to build equity? Should I set up a trust (as per Steve McKnight's book) later next year for the IP even though I'm not in a job that has a high risk of litigation?

A couple of other things: I'm 40 and my goal is to have $50k in passive income (via property and shares) to supplement my super in retirement. Still doing homework on my strategy, but I'd like my first IP to be cashflow positive. Also, I'm considering turning my PPOR into rental in about 5 years time, and buying a separate title home as my next PPOR. Not sure what else I'll need to factor in if I decide to do this.

 

Since the PPOR will become an IP one day, you should change your loan to IO instead of P&I now, this will be more tax effective. It'll also allow you to save much faster.

 

You could think about renting out your townhouse and your loan becomes deductible. Not sure about your financials but it may give you more $$ in 15 months time

 

Get some advice on trusts relevant to your situation and strategy. Ideally multiple professional opinions. Can be a big expense and more hassle ( including ongoing expenses ) if not optimal or really needed for your situation.

Trusts are a structuring tool not a fashion accessory.

 

Do some more reading!

 

Thanks for your responses. I just want to make sure that I'm focussing on the right things that people should be consider when preparing to buy an IP shortly after buying a PPOR.

@D.T. and @sandyfeet - I'm also looking at ways to free up cash for renovating the kitchen and bathroom of my PPOR to make it more attractive to renters (bathroom is 20 year old bodgy DIY job). Switching to an interest-only loan could help me do this sooner rather than later.

@wombat777 and @Terry_w - agree, I wouldn't do a trust just because someone says its a good idea, although it would be interesting to hear from other PC members who set up trusts why they did it. cheers

 

Really depends where you're buying and what your situation is. I only did it because I reached land tax threshold and where I buy you get a fresh start each time ya get another one.

If you're buying in a state where land tax is a pain in the bum, like ACT or NSW, then perhaps its not worth it. Depends on your family, your occupation risk, your tax rate, and a bunch of other things. Simpler is often best.

 

I wasn't referring to trusts, but the book you mentioned.

I am a lawyer that specialises in structuring and I would say most people have strange understandings of trusts and think they are some magical 'thing' that they need. Most people that come to see me about setting one up don't end up setting one up after I have set them straight.

 

Some other things to consider

1. Borrow 104% of every purchase if you can - full purchase price and costs.
2. Keep all receipts, even on the main residence. All interest expenses, rates etc can be used to reduce CGT later if the property becomes a rental. Even expenses while you were living there.
3. If you have a spouse conisder keeping all finances separate.
4. If you don't have a spouse consider acquiring one
5. Spouses can lend money to each other and this can be a strategy to give you extra tax deductions.
6. Consider borrowing for all expenses, other than interest.

Not all of these will be possible, but worth considering.

 

@Terry_w How does #5 work, as I've done #4

 

Tax Tip 47: Spousal Loans as a Tax Strategy https://propertychat.com.au/community/threads/tax-tip-47-spousal-loans-as-a-tax-strategy.4452/

and

Legal Tip 38 Spousal and Related Party Loans https://propertychat.com.au/community/threads/legal-tip-38-spousal-and-related-party-loans.1872/

 

@Terry_w - why is it better to get a 104% loan rather than 80% or 90%? Is this to maximise tax deductions and to keep the cash in my PPOR offset available for non-deductible things?

 

Because interest on the full amount will be deductible if it relates to the purchase of the property and that property now or later becomes an investment property.

If you go for 80% LVR that is 24% extra funds that is tied up and not able to be used for the future main residence purchase.

 

What kinds of lenders will give you 104% now?
What is the serviceability criteria do they look at?
Don't they look at your savings history etc?

I'm currently looking for IP no.2 have a large amount sitting in offset on IP1 ($100k+) awaiting to strike. Wondering if I should buy an IP on 104% and a PPOR with the equity?

Probably should start a new thread...

 

Using equity it is possible to get 104%. No lender would lend based on a single security.

You should always buy an investment property on 104% loan. If you don't you are basically throwing money away.

 

Hi John,

104% is achieved by accessing equity in existing property and using that as a deposit and costs for the IP. That way you can achieve a 104% lend and put no cash into the deal yourself.

Best to get a good broker to do it for you though as there are tax implications and the potential for poor structures if set up incorrectly.

 

@Jess Peletier - Thanks, I currently have a broker, but they haven't discussed anything like this, which is why I'm interested to find out more so I can have an intelligent conversation about it with them.

 

@John Wood Not all brokers/bankers specialise in investment lending so just be aware they may not know what you're talking about, or worse, they will set you up with a terrible structure that can be very costly to fix.

Most brokers and banks would cross-collateralise the two properties rather than set it up in the correct structure, which involves two stand alone properties and two applications.

By all means have a chat with them but please be ready to move if they aren't all over it from the get go - it can be costly to fix especially if LMI is involved.

 

Point of clarification on this... your Legal Tip 8 is to avoid cross collateralisation. Is using equity in 1 property (be it IP or PPOR) to pay the deposit + costs not a form of cross collateralisation? Or will a lender actually let you secure a 104% loan against a single property?

Perhaps I am misunderstanding when the phrase "release equity" is used - does it mean to use part of the value of a property as security on an additional loan (often to be used as the deposit + costs on an additional property purchase)?

Cheers,
Inertia.

 

Glad you are paying attention Inertia.

Yes avoid cross collateralising where possible and it is possible in most cases.

This is how it could be done:
PPOR $100,000 in value. Loan $50,000
Bank is westpac
Set up a new split for $30,000

Go to ANZ and request an 80% LVR loan on new property which will be investment.
$100,000 value
$80,000 ANZ loan.

$25,000 from the new westpac loan.

105% loan, no crossing.