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Strategy to start out. Buy a PPOR first shortly followed by IP.

Discussion in 'General Property Chat' started by ExcuseMyFrench, 18th Jun, 2016.

  1. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Hi guys,

    Lots of great advice on this forum. In a couple of weeks I have learned a lot about things I didn't know I didn't know.

    We are renters, 2 kids, good income, investment in high growth business and 150k cash. We stayed away from buying real estate because at first we weren't sure if we would/could stay in Australia, then we didn't have a big enough deposit to buy a PPOR we'd be happy with and not comfortable using that deposit to invest in something we knew nothing about.

    Now with interest rates so low I'm feeling pushed to make a move. Our cash sitting on a bank account is losing value...

    I'd love to eventually be able to start purchasing IPs with the aim to support retirement.

    We will try and buy a 4 bedrooms unit in inner Melbourne next wkd (wish us luck). With the current interest rates, costs of owning would be less than our current rent (excluding stamp duty).

    After 2 years of "owning" PPOR, we should have $65k in the offset and the loan down to 80% LVR (assuming a 2.5% annual property prices increase) without any actual capital repayment as loan would ideally be set up as IO.

    At that point in time how would you proceed to purchase an IP?
    Use the cash in the offset as a deposit? I assume we couldn't get a loan against the PPOR equity as LVR ratio would be too high?
    Or would it be too early to think about IP?

    I'd appreciate any pointers, any books recommendation and the like from people with a similar trajectory. Just trying to lay out a long term strategy before starting out!
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    AS long as you can service it should be doable.

    At that point you might use your cash to pay down the PPOR debt and borrow against this for the debt and costs for an IP
     
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  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Don't use your cash - pay it into your home loan, split it off and redraw it for the IP deposit and costs.

    That way you reduce PPOR debt and increase deductible IP debt.
     
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  4. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Serviceability should be ok. So one can borrow 105% for an IP? So as not to use the cash in the offset?

    Off to research what you mean by split it off :D

    ETA - Oh I see, so I split the loan with one portion of $65k and the other portion is the balance. So effectively the first portion is fully repaid, and according to my calculation I would have now $58k usable equity in the PPOR that would become my deposit for the IP. So I would redraw this and the bank would lend me the rest to purchase the IP?
    Im not sure I see the difference with using the cash in the offset account.
     
    Last edited: 18th Jun, 2016
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    You don't want to use redraw because that would not be tax deductible debt. Instead, you could take a new loan against your house (assuming there is enough equity, or you could use some of the cash in offset account to pay down house loan) for the purpose of buying the investment property, your total debt remains the same but more is not tax deductible.

    Have you received a conditional approval for the purchase you are hoping to make this weekend?
     
  7. Elives

    Elives Well-Known Member

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    how is this legal but putting rent into ppor and then taking it out as equity using that to pay for ip io loan repayments is illegal?

    both scenarios are done to get a tax deduction.
     
  8. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    The ATO has decided that you can't borrow to pay an interest expense and have that new debt be deductible. You can borrow to pay for some other expenses and claim a deduction against that interest.
     
    Last edited: 18th Jun, 2016
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  9. Elives

    Elives Well-Known Member

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    so you can't borrow to pay for loan repayments, but everything else is ok?

    etc rent goes to ppor then equity comes out to pay for all property expenses but loan repayments. and this interest from ppor loan is now deductible?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is not correct.
     
  11. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    Not for every expense - Rental properties - claiming interest expenses | Australian Taxation Office

    You can claim the interest charged on the loan you used to:
    • purchase a rental property
    • purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
    • make repairs to the rental property (for example, roof repairs due to storm damage)
    • finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
    • purchase land on which to build a rental property.
    You can also claim interest you have pre-paid up to 12 months in advance...

    Hope that helps.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I don't understand.
     
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  13. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    4 Br unit?
    Why not a house?
     
  14. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Yes we have, however we haven't requested an IO loan. I assume once/if we are successful at auction we can then shop around for the best deal?

    Priced out a long time ago of our favourite suburbs... We chose to sacrifice space/house for convenient location. I don't think this property has much CG ahead of itself but should be CF +ve straight away when we decide to turn it into an IP.
     
  15. JackKeily

    JackKeily Active Member

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    Personally I would put the money from the offset account into the mortgage, then acquire a new loan using the equity in the property.
    Doing this will reduce your non-deductible debt in your PPOR, meaning smaller and easier repayment.
    The downside to doing this would mean you will most likely need to get a 105-110% loan, being completely tax deductible, but most likely negativly geared, so just make sure you can afford the repayments if you do it this way.
    Personally I would only do this if I could get a 80% or lower LVR.

    Of course this is just what I would do, I'm not a financial planner so you should look into yourself a bit more.

    Do you plan on turning your PPOR into an IP down the track? If so, are you aware of the advantages and disadvantages of doing this?

    As for book suggestions, I would suggest Margaret Lomas as she teaches a lot and is simple to understand, and of her books will help, but each books always has something new.

    Feel free to send me a message if you want any more information.
     
  16. Angel

    Angel Well-Known Member

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    Not necessarily If you have only been given pre-approval for a P&I loan, then there is no guarantee that you will get an IO loan. They may still demand you take Principle and Interest

    .[/QUOTE]Priced out a long time ago of our favourite suburbs... We chose to sacrifice space/house for convenient location. I don't think this property has much CG ahead of itself but should be CF +ve straight away when we decide to turn it into an IP.[/QUOTE]

    Why not keep renting where you wish to live and buy an IP straight up? What is the point of buying a unit (I didn't even know units have four bedrooms) that is not likely to have any capital growth? Wanting to buy in inner Melbourne, you could easily end up with a loan against a property that decreases in value.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are a number of strategies to consider. Angel's suggestion may make sense.

    It sounds like the LVR will be high to start with and that you will incurr LMI so renting it out may make it cheaper to keep renting and to claim the loss on the property. You would have to do the numbers and work out the after tax cost of renting v moving into the property now.

    After a few years it may then make sense to move in.

    An alternative strategy would be to move in and establish it as the main residence and then move out again and rent it and then rely on the 6 year rule.
     
  18. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    @JackKeily Thanks a lot for your detailed answer, very much appreciated. I'll get onto Margaret Lomas book.
    Yes we plan onto turning that PPOR into an IP which is why we want to set up our loan correctly from the get go.

    @Angel Thanks for your thoughts. That's exactly what I discussed with my husband this morning.
    Yes buying/moving into this PPOR will mean that we will save cash quicker but we wouldn't make any money from CG. I don't think the unit would go down in value but I might be wrong.
    At the end of the day it isn't our dream PPOR and we would see it a stepping stone towards our "ultimate" PPOR. Is it the right stepping stone or are we painting ourselves into a corner...

    I'm going to do a couple of scenarios where we keep renting our current place and we purchase 1 or 2 IPs now with an aim for CG.

    @Terry_w LVR would be 85% and I'm hoping that's low enough to find a loan with no LMI.
    I did the sum about moving in or renting it out. It was an interesting exercise given the rental income is on par with our current rental expense. After tax though it would cost us ~$7-9k to keep renting.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would be very suprised if there were the case - it may be the other way around.

    I don't think you will be able to avoid LMI at 85% (unless you are a doctor, lawyer, accountant etc)
     
  20. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Really? I may have made a mistake in my excel file...
    While rental expense and rental income would be on par, an IP would cost us more because of higher interest rate and the MP costs. Not sure what I missed.

    Good to know about the LMI. I'm an accountant but from overseas and I don't have the CPA/CA equivalence yet. Should come through end of this year, so might be worth waiting a little longer...!