Strategy for next IP? What to do in this scenario

Good afternoon all,

Was hoping on some opinions on “where to from here” in my current scenario. Been driving me nuts lately - i know i need to do something. Im a sole income earner raising a young family & slugged with a huge tax bill. i know i should be investing 'smarter'.

My goal is to build as mush passive rental income (say $50K p/a ) as quickly as possible.

I enjoy my PAYG job in IT sales ( have been for almost 20 years!) but yes, I have ‘those days’…


Current situation as follows

* Married with 2 children – 5yrs & 11 months, Wife with home duties. Wants another child…soonish

* Salary $170-$190K per annum ( Base = 120K & regular commission).


Primary concern is PPOR in SE QLD, Loan Balance = $500K ( Val - $670K,)

Obviously my focus is to bring this down asap!


I currently have 1x IP.


· IP 1 ( Settled a few months ago) – Contract price $385K (purchased early 2016)

· 1 Bed/1 Bath/1 Carpark in St Kilda VIC, Boutique block of only 36, Some Unique properties such as Art deco façade, no pools etc.


IP Loans fully drawn ( Bank Loan = $345K, Equity Loan against PPOR - $40K)


At least its positive Cashflow - Renting for $400 p/w,

- Full depreciation, low BC & outgoings (approx $3000 p/a)

- Very Aware that the apartment market in Melb is oversupplied in some parts, limiting CG

i have about $50-60K in an offset for my next opportunity

Now, what to do for IP2 purchase?

My head is saying

Option 1: Due to serviceability & lack of equity, Focus on low cost properties (140-170K) with few high yield, cashflow + properties (purchased under Trust structure) so wife can be distributed Tax free income.

Option 2: Let go of St Kilda apartment & purchase IP with more “manufactured Growth/cashflow possibilities – ie larger land component with Dual Occ, Subdivision potential, etc

Option 1 feel will be a bit more ‘predicatable’ but a slower, option 2 a little riskier but faster with higher equity potential, which can turn into more cashflow?

Thoughts on what others would to do & why??

 

Given that trusts are coming under the spotlight, it may pay to simply buy in your wife's name rather than a trust. That way she gets the income regardless.

Don't use cash for your next deposit - make sure you recycle it through your PPOR to maximise tax efficiency.

Be careful with super cheap properties - the yield may be high but so are the expenses as a % of property value. A blown HWS can cost you all your cashflow and then some, which would be counter productive.

A subdivision and new build could work well, especially if you hold the new one and sell the old, and use the funds to reduce you OO debt.

 

That level of pay, and that asset base....... 50k wont be nearly enough for you, would it? Your clearly spending a lot more than that.

 

your right $50K passive wont be enough to leave the day job - but would sure ease the pressure of having to constantly earn the commissions. I just used that figure as a short term goal to hopefully achieve asap!

 

Thanks Jess, so i can simply buy under my wifes name as a full guarantor? & wont matter to lenders if she is working or not?

RE, recycling through my PPOR, what do you think the best way to do this? simply paying down the loan PPOR & drawing out deposit funds via an equity LOC? or would u prefer using Split loans. ( im sure is a thread on this forum re: this! )

 

Just a split loan is fine with most banks. You keep your low rate then too.

Most lenders are fine with Hubby servicing and property in wife's name - they understand it's a tax thing.

 

How would one go about doing this?

 

Buy them on the asx?

 

Think i would pay off a bit more of my PPOR - but im conservative. (Funds into offset)

 

Thanks Yman,

I don't think any comparable 1 bedders have sold since completion ( been keeping an eye on this info to potentially use for equity drawdown benefits
only a 2b ( i think was in high 500's)
301/18 Grey Street, St Kilda, Vic 3182 - Property Details

and a 3b
201/18 Grey Street, St Kilda, Vic 3182 - Property Details

Will read more on REIT's & haven't considered these previously... thanks!

 

Hey I work in IT and maybe cz I'm single but I managed to get another IP approved on less than that pay.. Maybe another look at whether you can afford to buy again without having to sell? Can you look at releasing more equity in PPOR and see if you can maybe afford a place with land in another city?

Could you work further with what you have? Airbnb the st kilda pad lease out the car space separately?

 

This concerns me. What do you mean by it?
If you have cash in an offset you would generally want to use it to pay down non-deductible debt and then borrow to invest.
If it is, or was, borrowed money, tax deductibility could be an issue.

Look at various strategies to recycle debt.
Growth is where you make the most income so don't just buy something because it is cash flow positive - you need growth too.

Get some legal advice on ownership structure and funding structure.

 

Hi
A few general comments:

What is the desire to build the passive stream asap? When are you planning on retiring? Building more equity and buying a high CG property may be better off in the long run - you can always liquidate it later and switch into higher yielding investments from a higher capital base.

There is potentially an Option 3 (which isn't sexy), which is to pay down the PPoR (how much is up to you) as the debt is non-tax deductible, cashflow burden. You will then have more equity and better serviceability for other opportunities. There are always opportunities and in my view, probably no urgency to have to act. Building a buffer/holding cash is not necessarily a bad thing in the short term.

 

Hi Jess
Hoping you could provide more comments on what you mean by trusts under the spotlight. Do you mean in the sense of Shorten potentially forcing a 30% minimum tax? If so, I agree that it is unwanted attention but I would have thought that you could distribute to a bucket company (unfortunately more costs) and then pay fully franked dividends at a later point (potentially in a low tax year).

 

Apologies if I am reading wrong, but I don't think that using the cash in the offset against the PPoR is tax effective at all. The loan purpose is for the PPoR. I would have thought that using a subloan redraw or LoC against the PPoR into the next investment would make sense from a tax perspective.

 

No it wouldn't be effective - but people often do strange things like borrow and put the money in the offset and assume the interest is deductible.

 

A few providers I use are Centuria, Charter Hall, Australian Unity (there is a fantastic Healthcare one). They provide great single and multi property syndicates. The best gains have come from my Parramatta office, Sydney CBD and Sydney Fringe (e.g. Australian Technology Park, Eveleigh).

There are some free research reports that you can read also:
PIR - Unlisted Funds

Note: This is NOT personal advice. I don't work for any of the above companies but I hold units from all of the above - the syndicates I am in are close ended, so there is no conflict of interest.