The ideal loan structure for someone who has paid off the main residence

See my strategies tips on this. I have about 8 things you could do

 

possible idea, buy the IP in a trust, use your PPOR to secure OO LOC, on-lend to the trust at OO rates.
banks seem ok with this.

 

Not so easy to do these days. 3 major issues
a) banks don't want you to lend (their) money to related entities as it will be harder to recover.
b) cash out restrictions
c) investment rates will apply if not used for the main residence.

 

I'm looking to buy a new PPOR using a loan and covert my existing PPOR which I own outright into an IP. Are you suggesting I take out an OO LOC to buy my new PPOR which will then put the debt against my old PPOR that'll become an IP?

 

Between this gold nugget of a thread and your blockbuster original thread Terryw’s Ideal Loan Structure - PropertyChat, both are incredibly valuable reading for those new to investing. Kudos to you thanks Terry_w

As these threads were written 5+ years ago - is this strategy still valid in today's market?

I want to engage in the services of an investment-savvy broker in the next few weeks, and I would like to think I can show them this strategy to structure a loan for our first IP (and hopefully 2nd IP <12months!)

Our situation:

• 100% owned PPOR (~$950K value)
• $130K savings in bank
• Both working f/t and wanting to retire in 8/15 years respectively
• Wanting to purchase first IP (~$500-$600K)

The strategy:

• Setup a LOC / IO equity loan to cover 20% deposit (+ 5% costs) - LOAN #1
• Setup a second P&I loan to cover 80% remaining purchase - LOAN #2
• Put the $130K savings as an offset against Loan #2.
• Pay all rent into Loan #2
• Pay both of our wages into Loan #2
• After 2-5yrs, increase Loan #2 to reduce Loan #1 to $0.

If we were to consider a 2nd IP in 6-12 months, then we would create a 3rd /4th Loan using the equity in the PPOR. Separating each loan individually for each IP (for ease of administration).

The goal being to consolidate each loan into a 1:1 for each IP and no longer having the PPOR as security for either IP.

The buyers agent we're meeting this week is going to recommend a broker for us. I'm confident the broker would be investment-savvy (considering the BA primarily deals with investors).

I also appreciate that the broker is not necessarily able to provide tax-focussed loan structuring advice, so we will probably seek the advice of an independent tax consultant / accountant before signing anything.

 

I would avoid this. What will you live on? What about private expenses? If you redraw you would create a mixed loan. Better to pay these into an offset account instead.

Why not pay that money in an offset account attached to loan 1? This is likely to be a higher interest rate and also improve cash flow.

Considered just one loan against the main residence to buy the IP. Keep the IP unencumbered, get OO rates potentially under 3% IO with offset.

 

Apologies i should have specified that paying wages and rent was indeed meant to be deposited into an offset against the main IP loan. Living expenses to be paid via credit card that would be paid off ea month from the offset.

Good idea. TBH it would prob cover 100% of the equity loan value anyway.

I had not actually. I was simply following the strategy in the 1sr post. I am of course open to ideas. Nothing is locked in yet. Sage advice thanks @Terry_w .

You might even become our broker yet. Interstate document e-signing seems more common of late. Don't necessarily have to chose someone local to SEQ.

 

After a discussion with the BA, they suggested we seek independent financial advice through a broker prior to paying the engagement fee to commence the property search process. Ideally they said we should have finance pre-approved before they begin.

When you account for the considerable cost of a BA combined with property purchase costs (stamps, legals etc) it would seem that you could well be $40K down before you've even started. Yes - most if not all is tax deductable, but still a hard pill to swallow.

This must really put investors behind the eight ball for the first year of ownership. How many years could it take before you start breaking even and see capital growth exceed 40K? Probably 2-3 years min I'm guessing.

Ideally we would want to be paying P&I whilest aiming for a cashflow neutral situation - but this may only be possible with an IO loan for the first 5 years.

It's not like we can't afford to pay P&I - what else are we going to do with our wage savings?

Just can't help the feeling that year 1 of an IP is going to burn us.

Perhaps after engaging with a structured loan broker who can forecast our CG, cashflow and overall financial position over years 1-5, we will feel more comfortable with the idea.

I've read that it's preferable to have a local accountant, but the broker can be interstate.

We're still searching for both. Lots of good suggestions on this forum (incl the service directory). But most are NSW / VIC based.

 

I was hoping to use the BA for the future modelling for the CG of the IP.
Then use a broker (like ASAP) to provide the credit advice, loan structuring & property acquisition modelling.

Finally we would find a local investment savvy accountant who can look over the loan structure and advise if we're utilising maximum deductible debt.

Thanks for the feedback @Rolf Latham.

 

what do you mean by 'acquisition modelling'?

Forcasting capital growth is meaningless really. Pick a number at random between minus 10% and about 10% positive and the growth for any one year could be somewhere in between. I would probably work on around 1% above inflation to be realistic - and you should be doing your own modelling. I would put rent growth at inflation. Try the PIA software from somersoft. But keep in mind nothing turns out like these models.

 

It was something I noticed in @Rolf Latham's signature - it sounded useful.

The in-depth analysis and modelling of the asset selection that Streamline (BA) offer seemed very impressive. I realise of course predicting CG growth is like a wet finger exercise (that's why you pay the BA so much to get it right at the acquisition stage).

I guess I was hoping to get that same experience with a broker. They can forecast loan and cashflow structure over a period of years can't they? If I wanted to see our annual financial position over first 5 years. Maybe that's more the job of the accountant who I will show the broker's loan structure to prior to committing to anything?

I read somewhere on these forums that it can put your better half at ease with the whole IP idea, knowing that we'll only be out of pocket by a relatively small amount each year (maybe $2-$10K pa). All the while you have managed to purchase your first IP, watching it grow, and finding out the pros and con's along the way.