Forum Replies Created
Maybe I'm missing something, but why doesn't she just take the new job? Whats forcing her to turn up to the shop every day? You said she'd be prepared to lose the 70k and walk away, so whats the difference between signing everything over for free and taking the loss, or just going on with her life?
I don't have any advice for your family member, but its so sad that questions like these always come after the fact. If they were so worried, all of this should have been written into some kind of business contract before they went into business together. Its strange, but its almost more important to get written agreements when doing business/investment with friends/family.
By redrawing, you're essentially re-borrowing. You're borrowing those funds to buy your PPOR. The LOC likewise is a borrowing to buy your PPOR. Neither of these are deductible debt.
Out of interest, if buying a new PPOR with greater than 100% lending is really something you want to do, to make things simpler (if your lender will allow it), I'd do a variation on your existing loan to reduce the balance to $325 (if needed, experts could advise) and take out a $155k LOC, so at least this way you've clearly separated the two types of debt.
Its probably worth doing the sums on just selling the IP, putting a large cash deposit down on the PPOR and then using that additional equity to purchase a new IP.
bjsaust wrote:The $3,500 loss needs to be funded somehow, so unless you get fancy, you probably gift that $3,500 to the fundThis was the part of my scenario above I was mostly interested in clarifying. How you handle this shortfall. The advice I received, was that rather than loan just the 20% (in my case my plan was and still is only 10%) to the trust, you loan a lump sum amount on top of that to cover shortfalls. So instead of say loaning $100,000 to the trust in the example above, you may loan $120,000. The extra 20k would sit…well technically it can sit anywhere, but logically you would have it offset in some way against either loan. For simplicities sake, lets say the IP loan by the trust is IO with 100% offset account, the extra $20k would sit in the offset account. So now instead of the trust needing to pay interest on its $400k loan from the bank, and the $100k loan from you, it now needs to pay interest on $380k for the loan from the bank, and $120k from you. So initially the numbers and interest are identical, however instead of you needing to keep funding the shortfall, the trust can just use the $20k sitting in the offset account.
There's a difference between administering, and managing.
Oh, ok. I stand corrected. I thought even in those cases it still got charged.
Well, technically he does. But yes.
First thing I would do is confirm that your loan on the PPOR has a 100% offset account. Then I would figure on an amount that I felt good about having as a reserve buffer in case of emergencies. For instance I like the idea of paying the car off asap, but if that left you with $5k savings and your budget is $7k p/m, then you have less than a months savings in reserve. Is that enough to sleep comfortably at night?
Then I'd save enough to pay the car off (if needed, maybe just one or two more months at your rate of savings) and pay it off completely. Bare in mind, not only does that take the liability off your books, but it also frees up the monthly payments in your budget.
At the same time, I'd be investigating why you're paying so much interest on your loan. Was it low-doc? Experts here might be able to give you more advice, but as an employee I can't see why you're paying more than low 7%s.
Then it comes down a lot to your lifestyle choices. If you sell for $420k, you'll have to pay agents fees/advertising/legals/etc. you may not walk away with any cash at all, but you will retire the debt. Are you allowing any emotion in your decisions, or is it purely from a financial point of view?
Does improve your position ASAP mean, improve your cashflow position today, or start preparing for the future?
Well, it depends on how much money you have to put into a loan. For instance, historically houses close to the CBDs of the capital cities have had the highest capital growth, so it makes sense to buy an investment property in a suburb fairly close to the CBD if you want to maximise capital growth over the long term. However, most people would struggle to put together even a 10% cash deposit for the prices you need to pay in those areas now. Bare in mind, you won't even get a 4% yeild in Melbourne inner suburbs now, so to be cashflow positive you'd need a significant deposit, at least 50% maybe more (assuming a basic buy and rent strategy).
On the other hand, you might buy a house in a regional town with a 9-10% yeild and have postive cashflow even with a small deposit, but you're much less likely to get similar capital growth over the long term.
So, it might be possible to settle onto something in between. Say a well located home in a thriving regional centre, or further out from the CBD in a capital city. Hopefully have decent growth potential, and get around 5-7% yeild. Then its just a matter of how much deposit you need to turn it into a positively geared property.
So, some reasons why:
If people want to use the equity in their PPOR, then its essentially a 100% (or higher) loan, so its not a simple matter of paying a bigger deposit to bring costs down.
If people think the market is growing quickly, it may pay to buy the place now even if its negatively geared and lock in the price, rather than risk the market growing faster than they can save a big enough deposit to make it positive, then they pay it down quickly to turn it into positive sooner rather than later.
If people think that while the property is negatively geared at purchase date, they expect rents to rise quickly and for it to soon become positive just through rents alone and they want to lock in the price.
And of course, the main reason the masses do it:
If people believe that the capital growth of the property will outweigh the negative cashflow, and in the meantime some of that negative cashflow comes back via tax return.
I can't remember where I read it (probably API magazine but maybe not) where the person being interviewed owned a lot of property, and the numbers were something like $350k rental income per year, net loss of $70k per year, but he compared that to capital growth of around $450k per year. Numbers might be slightly off, but they were what he was figuring on. To him, paying $70k p/a to get growth of $450k p/a was worth it, and obviously he must have a very good income in the first place to handle the negative cashflow.
Break it down using Terry's numbers:
1. You gift the money.
You gift $100,000 to the trust from your LOC. Trust takes out $400,000 loan. Your 'gift' costs you $7,000 each year in non-deductible debt. Trust pays interest on the loan, and say makes a $3,500 profit. It distributes that profit and you pay tax on it. Lets say you pay $1,000 in tax, so you get $2,500 net from the trust and have to fund the extra $4,500 from other income (again, you can't claim that $4,500 as a loss).
2. You loan the money
You loan $100,000 to the trust, and borrow $100,000 yourself from the LOC. This costs you $0 net in interest charges, so no profit or loss to you in a taxable sense. The trust however has to pay an additional $7,000 in interest, so rather than a $3,500 profit, it now makes a $3,500 loss. The loss is quarantined in the fund, so it can't be passed through to you for tax purposes. The $3,500 loss needs to be funded somehow, so unless you get fancy, you probably gift that $3,500 to the fund, so it has cost you $3,500 instead of $4,500. Not only that, but you do have a loss that gets carried forward in the trust. This means the first $3,500 profit you make (once rents increase enough, or if you sell and make a capital gain) gets offset against that loss, so you don't have to pay tax on the first $3,500.I'm actually going to meet my accountant in the next day or two to finalize a similar arrangement, so will get more details from him then, but that's the basics.
It depends on how much you outsource basically. You could (and I think many people do), setup the SMSF then get someone else to administer and make investment decisions on your behalf. I've chose the middle ground for mine, our accountancy firm has a superannuation division, they handle the administration and auditing, but I make the investments. On the simplest side, this just means I forward on any purchase/sale contracts etc, and the monthly statements from our property manager, however obviously if you want to make good returns with your super funds, you need to study a lot to make sound investment decisions. That becomes a bit of a 'how long is a piece of string' time frame.
Unencumbered just means there's no debt (mortgage) over the property.
chappy1970 wrote:I have a PPOR loan (i9nterest only) with a Savings Account used as an offset account.
Then I have my dedicated IP loan wich is Interest only.Is the savings account a 100% offset v's PPOR loan?
When you say all your salary goes into the PPOR IO loan, do you mean directly onto the loan itself, or into the savings account?
Assuming its a 100% offset account, I agree wholeheartedly with Richard. Put every cent you earn into the offset account. That has the same effect of reducing interest on your PPOR (interest which is non-tax deductible) and have the interest for both the PPOR and the IP taken out of the offset account. This means the maximum amount of your money possible is reducing your non-deductible debt.
Now, if you happen to stay in your PPOR forever, you're no worse off than if you had paid down the loan instead. Thats the purpose of the off-set account. If you sell, same deal. However if you do as a lot of people on here want to do, which is to move out and keep it as an IP then theres a big difference. If you save say 100k in the offset account, you can withdraw that (as its just savings) to use as a deposit on your new PPOR, leaving the existing loan on your current PPOR (which will become an IP) at the full amount. This debt is tax deductible now, and the debt on your new PPOR is a reduced amount.
On the other hand, if you've dutifully paid down the loan itself on your current PPOR, then when you redraw/refinance to purchase a new PPOR, the entire debt is non-deductible.
Big difference.
Since this has become a bit of a random "hows this lender?" thread, I was wondering if any of you have had dealings with State Custodians. I'm in the process of refinancing my PPOR there, but I guess any feedback before moving onto an investment loan would be useful.
I chose them because of competitive rate (6.79%), flexibility (i.e., split loan, 100% offset for portion thats being used to paid off existing PPOR loan and LOC for the portion thats unlocking equity). I also like the loyalty bonus of extra 0.2% after 5 years as against the usual honeymoon type arrangement. That said, I'm still not actually a customer so can't comment on how it all goes once its setup.
Somebody may have a better answer for you, but when I read this post, the question that comes to mind is "whats your plan?".
Why are you investing in property? Why did you choose Geelong in the first place? What attracted you to buying there? Is there any reason you believe St Kilda now suits your plan better?
I think part of the reason you're having trouble deciding, is you haven't really nailed down what you want. Even the fact that you "assume" St Kilda is a good buy now, based just on the fact that auctions are passing in. Do you know what you can actually buy there for? What they'd rent for? Are they bargains now, or were they overpriced before? Have the prices actually dropped, or just less selling? Are there any motivated sellers?
Think about what you want from an investment property. Think about your budget (both purchase price and any ongoing funding required), and then work out which area you can afford to buy in that meets your wants.
I doubt it, but it seems like a pretty simple phone call to find out.
Spandex wrote:So aim for a cheap shack, still pay my 35k tax a year. Over buying a new house that costs me something out of pocket?A fairly common approach is that of "adding value". For instance, if yields were 5% (an easy number that basically equates to weekly rents being purchase price/1000), then if you can buy a $200k "shack" and turn it into a $300k delight, then you've turned it from earning $200p/w rent, into $300p/w rent. Obviously the key is to spend a lot less than $100k doing so.
Another option might be if that "shack" is on a big piece of land, you could subdivide and sell off some of the land. For instance if you bought that $200k shack and sold off the back half for $80k then the front half (with the house) has cost you $120k (obviously way simplified numbers ignoring costs/etc), which maybe you can rent for $160 p/w.
Or you could build yourself on the back getting a second house for cost price.
Or sell both, and buy something with a big cash deposit from the profits. The more deposit, the less interest.
People on this site are obviously very anti-NG, but bear in mind, it has worked for people before. It is a form of speculation though. You're intentionally taking a loss on the hope that property prices rise and you make your profit from capital growth. You need to look at the market though. Its flat right now. Some people may anticipate a slow 6-12 months before it all takes off again (bulls), and some that we might be in for years of flat prices (bears). Some even anticipate a crash. So you need to decide what you think is going to happen, and then…well basically you gamble on being right. So, the simple (but not so easy) solution is to buy positive geared property. Then it doesn't really matter, you make money anyway. One thought, is that if you think rents will continue to increase, then maybe a negatively geared property that you expect to fairly quickly turn around into a neutrally geared property could work.
There are heaps of options available. Most of which require more active participation than NG, but lots of people make it work. I do feel theres a tendency to make it all sound easier than it is. As a newcomer to trying to find positive (or at least neutral) geared property, its a lot more complicated.
Also, LMI can reduce risk. Every time I've purchased (other than through SMSF) I've used LMI and got a bit extra as well. If you have a 100% offset or similar, you can park that extra in the account, so your interest is no more than it would have been if you didn't, but you now have a built in buffer in case of emergencies.
So largely it comes down to having everything ready to go, and then paying an hourly rate to the tradesperson who can get it done correctly for the cheapest price?
Does this mean you do a lot of measuring yourself before starting out? Do you need some specialised knowledge yourself in order to do this right?
