Strategy: Don’t Keep Large Sums in Offset Accounts

Discussion in 'Investment Strategy' started by Terry_w, 16th Jun, 2017.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    ok example time

    $100,000 home loan at 4%, with $100,000 in redraw.

    $400,000 LOC which was used for investment purposes at 5%

    Split the home loan, into 2 splits of $100k each. Redraw $100,000 and pay into the LOC
    now $300,000 left on the LOC at 5% and $100,000 of it converted to 4%

    Paying one loan off with another is a refinance and doesn't change deductibility of interest so the $100k used to pay down the LOC will be deductible where the LOC was deductible - the interest components I mean.

    Check with your tax lawyer...
     
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  2. Johnny Utah 87

    Johnny Utah 87 Active Member

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    Hi Terry this is a great article and not something I would have thought of myself, but definitely something I will plan on using in the future.

    Is there a maximum amount you would consider keeping in the offset account in Bart's scenario? Maybe 50k - 100k incase you need case for purchases or an emergency?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The amount you keep as a buffer is really a personal decision. Some can get by with nothing while others wants hundreds of thousands in offsets.
     
  4. Beerman

    Beerman Member

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    Hi Guys,
    I've only recently found this community with this being my first post. I've tried to read as much as i can to answer a couple of questions i have about set up/strategy, with this thread being about the closest so far. Our situation goes like this;

    Wife and i have have our first IP under contract. We are debt free and own our PPOR which is worth $2 - 2.5M and have approx 135k in cash earning 4%. Purchase Price of first IP is <$200k for a 2 bed unit. We plan on borrowing 80% on IO and using some of our cash for the deposit and expenses. Later this year, or possibly early next, we plan on buying a 2nd or maybe 3rd property. My super is quite healthy, although the wifes isn't. We also have a separately held share portfolio of ~$110k in the wifes name.

    I'm open to any suggestions on structure or strategy re property finance, LOC, Offset acct etc.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    get your own tax advice, but I would borrow 105% of the purchase, without crossing securities, as this will give the greatest flexibility to save tax.
     
  6. Beerman

    Beerman Member

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    ATM, tax isn't our problem, we are trying to build some inflation proof passive income. I only want to work for another 5-7 years*, although could go longer if i changed jobs.

    As for getting professional help through and Accountant/Advisor/Tax pro, my current Accountant does not provide financial planning advice and of the others i've reached out to, I either don't like their style or are too conservative. I.e. 2 months ago we were told to keep doing what we were and let compounding take care of our super until 60. When i mentioned possible a possible IP purchase, he said 'what for". So you can understand why I walked away and am still looking for some advice.................
     
  7. Lindsay_W

    Lindsay_W Well-Known Member

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    Why that property?
    What's the net yield?

    LOC doesn't really exist anymore just FYI.

    How much 'passive income' do you need and by when?
    Is resi property the best product for passive income? Unit's particularly with Body Corp fees (insurance) aren't what I would call inflation proof.

    Tax may not be your problem, but structuring loans effectively for tax should be considered as part of the overall strategy.
     
    Last edited: 4th Sep, 2023
  8. Beerman

    Beerman Member

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    Ideally ~30-40k/pa passive in today's money. My super will provide the majority of income. Time frame is flexible but approx 5 years.
    Body Corp, insurance and sinking fund is $2600pa ATM.
    2 bed unit rents for $270p/w, exp Aug 2024. Purchase price <$200k.

    Yes, agree 100% on tax considerations, any tips?
     
    Last edited: 4th Sep, 2023
  9. Lindsay_W

    Lindsay_W Well-Known Member

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    If you truly can live on that then more power to you, well done.

    The rental income from the proposed property is $14,040 p.a. Gross.
    You mention it's costing less than $200K so I'll use $190K Purchase price as an example.
    Repayments on an 80% LVR loan (even with IO repayments @ 6.24%) is $9485 pa.
    You've got $14,040 rent - $9485 loan costs - $2600 BC fees = $1955 p.a. or more likely a negative return once those other things are factored in such as Rates, landlord insurance, property management fees. And remember that's with no principal repayments on the debt.

    So does this property help you achieve your end goal?
     
  10. Beerman

    Beerman Member

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    It's CF+ from day 1 for us because of our equity. However if a 2nd or 3rd property is to be purchased, I'll need to do those numbers again at the time.
    Any passive income from RE is supplementing my Super, when that time comes.
     
  11. Lindsay_W

    Lindsay_W Well-Known Member

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    Ok, by how much its it cash flow positive and what do you mean "because of your equity"?
    Can you show the numbers?

    You mentioned you're borrowing 80% LVR right?
     
  12. Ruby Tuesday

    Ruby Tuesday Well-Known Member

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    FYI, LOC's do exist I have 4 of them.
     
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Are you both on the same tax rates? earning the same income?
    What are the land tax implications.

    If you are going to buy a few properties it is important to consider all this up front.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  15. Rentforlife

    Rentforlife Active Member

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    Quick scenario Terry:
    IP1 400k loan (200k offset) 550pw rent
    IP2 400k loan (0 offset) 550pw rent
    IP3 150k loan (0 offset) 320pw rent

    All on 6% rates.
    IP1 and IP2 shared loans. IP3 individual loan.
    Obviously making more per month from IP1 but would the cashflow be better for us to completely offset IP3? Even though IP3 is in my name and at a higher tax rate?
     
  16. Beerman

    Beerman Member

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    We have $135k cash. My plan was to use some of the cash for a 20% deposit and other costs. The remaining cash was going towards an offset act or similar (hence comment re CF+) with a view to use this for purchase of other properties later this year/early next year.

    That was the plan, unless someone can suggest a better alternative.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have made some suggestions above.
     
  18. Lindsay_W

    Lindsay_W Well-Known Member

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    Yeah you can't really get them anymore though, existing LOC's remain. True LOC's were Interest Only for the full term, which was a benefit of using them. Once that stopped being a feature they were 5 and 10 year IO periods only, therefore became irrelevant as you could achieve the same outcome by using an IO variable rate loan, which have cheaper rates and fees than LOC's and no repayable on demand clauses. So most lenders stopped offering them. Hence my comment because OP doesn't have an existing LOC.
     
    Last edited: 4th Sep, 2023
  19. Lindsay_W

    Lindsay_W Well-Known Member

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    I think you could achieve better cash flow by investing in a different asset class than residential property. There could also be a benefit of targeting capital growth from the property in the next 5 -7 years vs cash flow. You might benefit from 1 good property vs 3 sub par properties.
     
    Last edited: 4th Sep, 2023
  20. Beerman

    Beerman Member

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    No, we are on different incomes and tax rates. No land tax implications yet, but I need to buy in another state if we are to avoid land tax for my 2nd or 3rd IP. Shares are in wifes name only
     
    Last edited: 4th Sep, 2023