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Structuring finance for future investments

Discussion in 'Property Finance' started by c_west, 8th Nov, 2015.

  1. c_west

    c_west Active Member

    Joined:
    22nd Jun, 2015
    Posts:
    42
    Location:
    Adelaide
    I have been looking into investing in property for about a year now and have had to put my first IP purchase on hold due to finance being knocked back due to APRA. With an inevitable move for work occurring in 2 years I would like to ask for opinions on future finance structuring.

    Current Situation:

    PPOR – Adelaide Northern suburb (Hillbank) Value $325k – current mortgage at $200k

    Single income – approx $70k gross

    Wife working very casually (nurse) with two kids and one planned in the near future.


    Currently on one income and with two kids we are saving about $20-25k cash per year. My move for work at this stage will likely be to Brisbane, where work will provide me with a cheap rental property (through DHA – I work in the RAAF) for about $500 per fortnight. At our current rate of savings I expect our mortgage to be at approx 140k-150k in 2 years time. Luckily my employer will cover all associated selling costs so all of the profits will be in our pocket, if we get a little bit of growth and I finish tidying up the house I am hoping to walk away with $200k cash, assuming we sell for 340-350k.

    What I have thought about doing from there is using the cash as security for deposits on IP’s instead of equity. Then with the added benefits of no mortgage with low rent costs plus the benefit of my wife returning to work in a few years (70k a year) we will have stronger Cashflow looking forward.

    As the IP’s value increases over time the cash used for security will be able to be released back to us to either buy more property or a PPOR. I wouldn't use all of our available cash to invest I would leave a buffer in I guess a 'savings' account that we continue to pump money into.

    Pros – Cashflow, renting so don’t have to worry about maintenance etc, no non-deductible debt, house purchases for investment only so no emotions involved, flexibility if I get moved for work again

    Cons – No PPOR to increase in value and gain equity over time, renting so can’t make the house our ‘home’, miss out on Defence loan which is currently paying $220/month off my current loan with a larger loan this could be up to $300/month

    I’m after some opinions on this strategy particularly with utilising cash as security with regards to future ‘release’ of cash. With the new lending environment I am thinking that this might be a lower risk strategy allowing me to have cash buffers in place.

    Thanks in advance for your replies.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,785
    Location:
    Perth WA
    Can I ask who knocked you back? The lenders can vary a bit so while one said no there may be others that say yes.

    Other than that, would you consider keeping your PPOR as an IP and still using equity/cash to further invest? It could work out well tax wise as you can keep it as your main residence for tax purposes up to 6 years and still pay no CGT if you sell. Also you'll be able to claim any interest on the loan once it's an IP.

    If you were to consider this there are things you should do straight away to make it a better option, for eg, saving into offset rather than paying down the loan to preserve as many tax benefits and retain cash for any future PPOR.

    Just a couple of things to consider as you plan.
     
  3. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,603
    Location:
    Adelaide, SA
    Hey there,

    Have a chat to @Corey Batt who is in Adelaide - he has navigated me around all the APRA hurdles with no problems at all.

    When you relocate for work, you could keep the Hillbank place as a rental? Rents up there are fetching about $320 a week which will cover the level of mortgage you currently have. You could probably look to restructure the mortgage to allow for this.

    When you move to Bris, what will be your living arrangements there? If you want to invest, you could see if your employer will provide accommodation - this will likely give you a big boost in servicability.

    Tax wise better to use cash for ppor deposit and equity for IP deposits, but at the end of the day - rack up assets :)
     
  4. c_west

    c_west Active Member

    Joined:
    22nd Jun, 2015
    Posts:
    42
    Location:
    Adelaide
    Jess,
    The main thing stopping me from holding onto the Hillbank house as an investment is that I don't see any real growth there for a long period of time and think that having IP's elsewhere would be more beneficial.
    Since reading on SS and here in the last year I have stopped making extra repayments and saving into the offset in case it is to become an IP, but I will take onboard what you have said with the tax implications regarding CGT.

    Hey DT, it was Corey that I saw for finance and he was looking at using CBA for me.

    If I go to Brisbane I would likely be living in a DHA (defence housing) house in a new development light years from the city, if I purchase an IP in Brisbane within a certain radius (I think its 40km) from the base I must live in it otherwise I get no form of accomodation or rent allowance, no biggie I guess but handy to have the extra cash.

    I see what you mean with cash for ppor and equity for IP, I guess if my cash is tied up in invesments it kind of locks me into DHA accomodation.