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Save the next deposit or equity release?

Discussion in 'General Property Chat' started by Paterson00, 6th Oct, 2016.

  1. Paterson00

    Paterson00 Well-Known Member

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    Hi all

    I'm pretty sure i know the answer but I'm looking at releasing the equity i think i recently accrued due to market shifts on my two investments so that i can buy a third. Should i save or release?

    If i release the equity to go buy the third ip then i could be purchasing within a few months. If i wait and save the deposit then it would likely take me 18 months.

    The consideration is that if i saved then i could miss out on any increase of the property that i could of bought if I'd released the equity.

    The two properties are both cash flow positive and would still remain that way after the equity release although not by as much of course.

    I'm leaning towards the equity release giving me a purchase price of roughly $260 - $300k. I would then have one ip at 90% ltv and one at 75% after the release so still reasonably comfortable.

    Are there any major points that I'm likely to be missing? Despite studying property investing quite rigorously I'm still a novice in experience.

    Thanks all

    Paul
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best not to use cash unless you have fully paid off a main residence and have apare cash laying around.
     
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  3. Paterson00

    Paterson00 Well-Known Member

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    OK not heard that one before, i know that I'm better paying down ppor first but curious as to why you say what you do. Is it for the same reason?
     
  4. Tony Fleming

    Tony Fleming Well-Known Member Business Member

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    Keep in mind that the 1st IP at 90LVR will require further LMI.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think i wrote a tax tip on this. See tax tip 9.


    Basically you will be losing tax deductions and paying more non deductible debt.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not if you borrow 80% secured on the property being purchased and 25% secured on another property - while avoiding cross coll
     
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  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I agree with Terry, an equity release is a much better tax position for funding deposits and costs.

    The other side of it is that this can be a bit of a trap for servicing purposes. Over the years I've seen countless examples of people accessing equity which drains their serviceability. The rent's and personal income tend not to increase as quickly as equity, so eventually constantly going back to release equity will make you hit that 'serviceability brick wall'. If nothing else, their portfolio is perpetually negatively geared.

    If people bought the property, perhaps released equity once to recover their deposit and then never borrowed against it again, eventually the property will become positive geared, generating income, helping pay off debt and contributing to servicing overall.

    If you've got personal debt (such as your PPOR), by all means release equity and borrow the deposits. At the same time, try to pay down the non deductible debt at least as fast as you borrow against the equity.

    Easier said than done of course, but part of investing should be saving.
     
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  8. Perthguy

    Perthguy Well-Known Member

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    ^^^ this, if you find a good deal and don't just buy something because you can ;)

    ? I don't think that is correct. The additional interest would be allocted to the new IP and would not affect the cashflows of the existing IPs.

    Personally, I think it is doable. I would prefer to have cash sitting in an offset account against my non-deductible debt.

    This is certainly something to consider but I wouldn't dismiss equity release outright. To weigh up is the opportunity cost of waiting 18 months vs the hit on serviceability vs potentially putting cash in an offset account against non-deductible debt. Also need to consider the long term goal of this portfolio. If the goal is to accumulate 5 IPs the financing strategy will be different to a goal of 10, for example.

    The other consideration is that it's not so bad if a portfolio is perpetually negatively geared if you have non-deductible debt you are paying down or offsetting.
     
  9. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    You will get a credit for the previous LMI paid if staying with same lender so usually a small increase. Make sure your broker / banker is aware you have paid LMI previously so they dont double up.
     
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  10. Beelzebub

    Beelzebub Well-Known Member

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    My understanding is that the general rule of thumb is to borrow 105% of purchase costs on IPs to maximise deductability and put the cash you would otherwise use in an offset account against your PPOR.
     
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  11. Perthguy

    Perthguy Well-Known Member

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    That's what I did for my share of IP#2 and IP#3. It worked out really well for me.
     
  12. Darlinghurst Boy

    Darlinghurst Boy Well-Known Member

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    Terry
    I will need to make an appoitment with u soon

    How much do u want for 1 hour and do u privide any other services?
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    $660 for a consult. I provide structuring advice from a legal, taxation and lending point of view including asset protection and estate planning advice. I am also a finance broker.
     
  14. Paterson00

    Paterson00 Well-Known Member

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    Thanks all. The reason behind borrowing as much as possible makes sense vs saving all the time I have a PPOR to pay off too. Deductible debt vs non deductible.
     
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  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Providing you use a debt recycling strategy in addition to that ideology and you will be way ahead of the save strategy. Assumed you get growth on the new ip of course

    Ta

    Rolf
     
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