First IP loan structure

I am interested in starting a ip portfolio which will eventually be of 5 or 6 IP's.

My PPOR is valued at 480K,i owe 170k on the loan which is P/I. I have income of 100k gross. My question is this, what is the

best loan structure to pursue to allow me to reach my goal? Any help would be much appreciated, thanks!

Suggested structure would be:

1) Line of credit or interest only loan secured against your PPOR to cover 20% of the new purchase price & acqusition costs.

2) Separate standalone loan for 80% of the purchase on the IP.

When value of the IP increases draw the loan upto 80% of the increased valuation and pay back the LOC.

Repeat.

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Thinking of buying your next investment property using a SMSF. Email me for a copy of my SMSF EBook.

Thanks Richard. So if i am correct, i would be paying P/I loan on PPOR, as well as the LOC, and an IO loan on the IP?

This has raised a couple more questions for me.

1. Which account would i deposit my wages and the rent from the IP?

2. Would the ATO frown upon me leaving the LOC deductible interest unpaid for a period whilst paying down the loan on the PPOR in regards to tax minimization?

3. If i used the LOC as deposit and costs for a second IP as well would this result in the two IP's being cross collaterized?

Thanks in advance!

Hi Soloman

Yes the PPOR could be P & I or interest only.
If you think you will live in the PPOR forever and a day then P & I is fine.
If you think one day you might move out and rent the property I would go interest only.

Either way i would be linked a 100% offset account to the loan and this is the account you would deposit your wages and rents into.

Sub loan would interest only or an LOC.

If you really wanted you could have the LOC split so that you could identify which 20% went to which property.

Might be over cooking it though.

If you use 2 separate lenders then it is simple the loan cannot be crossed.

Drop us a line if you need more info.

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Thinking of buying your next investment property using a SMSF. Email me for a copy of my SMSF EBook.

Thanks, now i have a much better idea of how to proceed

Solomon,
If you just wanted to purchase 1 IP, go with what Richard has suggested.

If you want to build a portfolio, I would consider going to an 80% LVR with a LOC of about $210k on your PPOR.  The reason is so you have the funds available for the deposit for the 2nd IP and have a large safety net & also be able to debt recycle.
I would convert your existing P&I to an IO with a 100% offset. This frees up some of your cash flow and using the offset has a similar effect to a P&I anyway. My view is that you need about $120k funds (savings or equity) per each median priced IP purchased. This allows about $70k to $90k deposit and costs and $30k to $50k safety net and recycling ability.
 
I would use a IO loan from a second lender for your IP and may go to an 85% LVR or so, depending on how quick you want to build your portfolio. The selection of the IP needs careful analysis, what characteristics in the IP do you need to have to be able to then show you can service the 2nd IP? Do you need a better income, do you need lower initial costs, do you need capital growth, etc.

 In relation to your other questions, set up a separate transaction account on which you deposit part (or all) of your wage - this is your budget you establish for day to day living. The other portion of your salary, direct into your offset against your PPOR loan.
Rental income goes into your offset. Your LOC pays all the IP expenses including interest only loan on the IP from the 2nd lender.

The ATO  may not like it but it is a practice the ATO accepts and that savvy investors use. We are still allowed to manage our own affairs to our best interests as long as we are not intentionally doing it purely for tax avoidance purposes.

The LOC secured against your PPOR is with one lender (A) and the main loan to purchase the IP is with another lender (B). Lender A has security over your PPOR, lender B has security over your IP. They are totally separate.
Good luck in investing
Greg

Reid Consultants
Helping People through Finance

Thanks for the advice, more to think about! I'm also considering properties that can be subdivided, so as to create two properties from one. This appears to need a bit less money up front than buying two separate ones,taking into account building costs etc.

I spoke to my bank, they want an annual fee of $ 325 for the LOC, is this about right? Should be tax deductible if only used for investment i think.

Negotiate, go to another bank and see what they offer and then go back to your original bank and see if they will match. Better yet switch banks if they will do it for $0 (covering your exit fees as well). They want your business and ~$10k you are giving the other bank every year anyway with your current loan. For IP always use IO never P/I.
Keep your properties in different accounts. It means it will be easier for you and your account to find where income and expenses have come and gone from and make tax time a cinch so you get your tax return ASAP, no use being in the ATOs account. Anyway if it costs you $325 in account keeping fees so what, its a tax deducting and cheaper than spending 3 of your hours sifting through statements for your accountant in June. Do not get me wrong 0 is better than 325 but if you do no not ask you will never ever get.
My recommendation, go with another bank and meet someone new, you will need to anyway at around your 3rd IP. Consult your account and see what s/he thinks. Happy Investing.

Thanks for your thoughts Jimbo, will definitely pay me to thoroughly research the correct structure before i begin. Must do something though,having a fair bit of equity in PPOR just sitting there is pointless.

Great comments. Whats the benefit of using the LOC loan to fund purchasing costs for the IP instead of adding them to the second loan that used to purchase the IP?

Soloman

Not sure who you Bank with but $325 per annum is expensive for a LOC unless they are giving you an exceptionally discounted interest rate in exchange for it.

Sorry Dazz i couldnt understand the thread of your post in relation to adding the purchase costs to the second loan. If you care to explain what you are asking we can answer the question further.

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Thinking of buying your next investment property using a SMSF. Email me for a copy of my SMSF EBook.

Thanks Richard I should have quoted.

acquisition costs are covered by the LOC loan. Is that better than adding them to the second loan?

Richard,
               Im with Bankwest, but thinking of refinancing with Pacific Mortgage Group, need more investigation. They have been ok until now, but if i can find a better deal i won't hesitate to move across.

Dazz,
The reason you use the LOC to fund the settlement costs is that you can no longer get a 105% LVR loan. The maximum LVR for an investment loan is around 90% (some lenders may got to 95% and it seems to be easing a bit in the current market, but the mortgage insurers make it difficult) so you need that 10% plus stamp duty etc and you use the LOC for this, so effectively borrowing 105% but from 2 lenders.

If you use 1 lender and cross securitise, you can but then you are restricted in 'moving forward'! Not a preferred option for an investor. As I said earlier, if you only ever want to purchase 1 IP, then it may be a good way to go but you miss out on debt recycling ability to reduce non deductible debt. If you don't have any in the first place, then not a problem.

There are better rates around than Bankwest and be careful of mortgage managers, DEF can be an issue. I do use them but make sure they match your longer term needs.
Good luck
Greg

Reid Consultants
Helping People through Finance

Greg,
         Could you explain debt recycling in simple terms please? Thanks.

In simple terms - increasing deductible debt and reducing non deductible debt.
 It is done indirectly, rental income and tax benefits go to reduce your non deductible interest expense (generally by way of an offset against a PPOR home loan) and all IP expenses are paid by use of an investment LOC.

There are a number of threads explaining the use of this technique. It can be and is very effective used properly, especially if you have multiple IP's.Good luck
Greg

Reid Consultants
Helping People through Finance

The latest Bantacs.com.au newsletter mentions that a recent private ruling on a debt recycling strategy was disallowed. So it is essential that you set the strategy up properly and seek your own private ruling before arranging accounts etc. If you do it incorrectly you could be in trouble.

Terryw
Finance Broker
Solicitor

Terry, you've mentioned many times that this needs to be setup properly. What is properly?

You need to set it up so that it doesn't look like a scheme. There may be a number of ways to do this such as having other commericial reasons, other entities, different banks, offset accounts, cashflow reasons etc.

Terryw
Finance Broker
Solicitor

Can somebody please confirm if this is the Ideal setup for PPOR and IP loan to make best use of funds..

I have combined information from current and previous posts. This is assuming you want to have offset account only (no LOC) and PPOR may be turned into IP in future.

PPOR and IP loan with different lenders.

(1) PPOR (IO Loan) (non-tax-deductible)

- Have an 100% offset account linked to the PPOR loan
- All salaries goes to this offset
- All rents from IP goes to this offset
- Personal bills, personal purchases and loan repayment are paid from this offset
- Credit card can be linked to offset if required

(2) Investment (IP,shares,etc) (IO Loan)
- Set up a Offset when you have build up enough equity in IP (To start with, you may have to put funds into offset yourself)
- IP interest, IP bills and capital for share trading are paid from this Offset

When you have build enough equity on IP, top up your offset attached to IP which can be further used to purchase subsequent IPs. (Not sure if increased equity can be added to the existing offset of the IP loan to fund future IP purchases or new offset has to be setup)

When you have build enough equity on PPOR, go to maximum LVR (85% or 90%) allowed by Lender and use equity increase to setup another loan account. (These funds can be used to pay for deposit and other initial cost for subsequent IPs)

Please advise if I have missed out anything??