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Hi Benny
Thanks for the information in this regard.
Truth be told, I will never want to have a single loan with multiple purpose (I stated this quite clearly). So now it comes down to whether or not I want to have multiple offset accounts, each offset account linked to a different loan, and those offset are independent of each other.
Seems Line of Credit option is less recommended under most circumstances (most people I talk to seem to favour Line of Credit less). There is one broker however, seems to think LOC is a better choice but when I questioned him as what are the difference between the 2, he avoids my question and just said something along the lines of “they all work the same”… So… that’s a sign for me to not consider using him…
Thanks Terry, your answers were helpful, much appreciated.
My previous post wasn’t directed at you.
OK, that’s fine. Thanks for all the advice.
But I have to say when I originally asked those questions, I was more thinking if someone can give some general information.
For example, using “what’s the pros and cons of H&L package”, I would expect the answer to be “while in some exceptional circumstances, H&L package appreciate, but under most circumstances they do not appreciate”. Or something like “the PROs of H&L packages are ABCDE, while the cons are XYZ”.
So much in the same manner, I was hoping someone could say “the PROs are LOC is blah blah blah (From what I read, one of the Pros of LOC is it is more flexible), while the cons are blah blah blah (again, from what I read, one of the Cons is LOC is more expensive interest wise). Also, at the other hand the PROs of taking it out as a separate IO + Offset loan is yadiyadiya while the Cons of doing it this way is this this that”. or something like “The key difference between LOC method and IO + Offset method is 12345”
My expectation is very simple. I was inquiring Pros and Cons of each or someone can explain the difference between the two method (or more methods if there are more), but instead the whole conversation turned into “why do you want to know pros and cons of each”, which is really not goal of asking the questions at first place.
May not be a good idea to have just one loan as it would then be a mixed purpose loan which can create tax issues, especially if one purpose is not deductible.
Yea.. that’s exactly what I was trying to say all along
A single loan with multiple purposes, it gets messy.
What I am trying to say is by taking the borrowed funds on a detour you a muddying the waters of interest deductibility. It is not clear if the interest on the $80k loan would be deductible
Hi Terry
OK, so if both Line of Credit and Offset options are bad ideas (LOC being expensive in terms of interest rates and Offset being muddy with if interest is tax deducible), what would be a 3rd alternative based on your experience in that area?
Hi Jaxon
In that case, are you able to advise how do I keep track of which invest against the combined total of the interest is being charged?
Say, the original 400K gets charged 2000 per month Interest (Interest Only)
Once I use that 80K, the interest becomes 2500 per month. (Interest Only)The numbers are not accurate, but for illustration purpose only.
In this case, it might be easy to for me or for you to say say 2000 interest against original investment and 500 interest against new investment, but let’s throw in another variable here…
What happens if the original 400K loan is for my Principle Home (PPOR) that is being repayed P&I rather than IO, and I am using equity of my PPOR to invest in a new IP?
In this case, the interest for that original 400K loan would vary every month (due to I am paying Principle too), this means the monthly repayment for that single 480K is different every month.
So if I just “top it up” and make that a 480K single account, then how do I tell how much of the combined total interest is for my PPOR (therefore NOT tax deducible) and how much of that combined total interest is for my new IP (which is tax deducible)? The calculation becomes a nightmare in this case…
I didn’t borrow any money yet, I am just asking and trying to understand the different options here.
I apologize if I sound like I am asking stupid questions, but it is something I have never done before and I am trying to understand based on the information I read.
In the example I gave, that 80K I put in offset are borrowed money. As in, it is the equity my lender released for me, so I did after all, borrow that 80K from a lender.
So unless I got my understanding totally wrong, otherwise I would say that 80K is borrowed money, but temporally put into an offset account (different offset account from the offset account that is used for offset the original 400K loan).
Like this:
Account 1: 400K loan
Account 2: Offset for the 400K <— This is were I put extra money to offset the interest for my original 400K loan
Account 3: 80K loan
Account 4: Offset for the 80K <– This offset account is created specifically for that 80K loan, it is an independent offset account than the one used to offset my original 400K loan, and I put the borrowed 80K into this account temporally until I use itHi Terry
Understand where you are coming from. My concern however is I don’t know when the invest will happen.
For example:
I want to buy a new investment property and I really don’t know when I will find the right one. I might not find the right one for a while or I might purely by chance stumble across one that I really like, and when I do find one, I want to have the deposit ready rather than having to “wait for the deposit to be approved”.
So with the interest only + offset strategy, the scenario come to my mind is like this:
1. Suppose I take out 80K equity release as a separate loan, interest only + offset, and then I park the 80K into the offset, so it is not generating any interest what so ever.
2. I am not able to find a property that I think is worth investing until March, meaning I incur 0 interest for 2 months. It also means I make 0 repayment for 2 months because this is an Interest Only loan and I am not paying any Principle (not until IO period is over anyway)
3. During March, I found the right property and I spend that 80K to invest in that property, and bank start charging me interest since I used that 80K, and the interest starting from March becomes tax deducible
4. Meaning starting from March, I can write the interest for that 80K off as cost against my profit.
5. So yes, there are 2 months when I am not being charged any interest as I didn’t make use of that 80K, but I am also not making any repayment either, so there is nothing for me to lose during that 2 months.. but starting from March on wards, interest charged due to those 80K being spent on investment becomes tax deductible (unless I got this totally wrong and that interest from March on wards is not tax deducible?).
Yes, I am fully aware that the loan goes up, but I don’t want to “top up my existing loan”.
So suppose currently my accounts look like this:
Account 1: 400K loan
Account 2: Offset for 400KAfter the equity is released, based on my own studying, I see that there is a choice of the following (there could be more choices but so far I see there are those 3):
Choice 1: Line of Credit, so my accounts look like this:
Account 1: 400K loan
Account 2: Offset for 400K
Account 3: My Line of Credit of 80KChoice 2: top up existing loan so my accounts will look like this:
Account 1: 480K loan
Account 2: Offset for 480KChoice 3: restructure the loan so my accounts look like this:
Account 1: 400K loan
Account 2: Offset for the 400K
Account 3: 80K loan
Account 4: Offset for the 80KBetween Choice 2 and 3, I would rather avoid Choice 2 if I can.
The reason is because:
1. the 80K is to be used as a cash deposit for the next investment and I don’t want to pay interest for that 80K unless that 80K is actually being used. This is why I park that 80K into Account #4 above so that 80K loan generates 0 interest until I use that money.
2. Of course I get what you are saying, just top it up to a single 480K loan and park that 80k into the offset of the 480K loan (which is essentially choice 2). But problem with that is, how do I know how much interest is charged for my 400K loan for that IP and how much interest is charged for that 80K that is used for the next investment? It becomes an accounting nightmare. So separating them out is much easier to manage from that accounting and taxing perspective.
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So regardless of whether you agree with this or not, my initial question is very simple:
Is it better to take that 80K out as a line of credit — Choice 1
Or is it better to take that 80K out as a separate loan? — Choice 3What is really the difference between Choice 1 or 3?
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This reply was modified 6 years, 5 months ago by
Steven.
No I mean like this:
I have a 500K property, with 400K existing loan.
Over time the property value increased and a valuation report produced by bank indicated the value of the property is now say 600K
so in theory, at 80% LVR, I can take another 80K (600*80%=480. 480-400=80)But rather than “topping up” the existing home loan from 400 to 480, the loan is restructured so it becomes 2 loans:
first loan is still the existing loan with 400K
Second loan is the equity released loan with 80K, and borrow it as IO + 100% offsetI then park the whole 80k into the second loan, making it produce 0 interest (meaning 0 repayment as well since it is IO), while at the same time I continue to pay the 400K repayment as usual.
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So question is whether this method is more preferred over “line of credit” method?
I understand how you calculated it, but that was not the intention of my question.
I was actually asking:
When you say get those 8-9% return for those “west bris” properties, were you able to get those properties at market value and still get 8-9% return (meaning west bris is such a fantastic area to invest in that we should really get to it while we can now and if one can buy at market value and still get 8-9% return then one should be able to get an even bigger return — such as more than 10-12% — if they apply good research and negotiation skills to buy below market value)
Or it is not possible to get those 8-9% return unless you try to apply good negotiation skills to buy at a sales price that is significantly below market value?
My instincts tells me it is the latter….
Jaxon, when you say 8-9%, is this in the sense of 8-9% without buying below market value
or you need to be below market value to get that 8-9%, otherwise you’d only get 5-6% (like how much we get in Melbourne if we don’t buy below market value)
2. Seems correct as far as the wording goes, except they have forgotten one major thing – the one you buy and move into CAN’T then be your PPOR if you are keeping the first one as “PPOR exempt” while you rent it. We cannot own TWO PPOR’s at the one time (except for a short period when changing from one to another). If you were to do it as mentioned in quotes, the SECOND house would NOT be CGT exempt (i.e. NOT your PPOR).
I think legally speaking, you do get a 6 months overlapping period….
But I don’t know if ATO will want to consider one of them to be “partially CGT exempt” and back charge that partial CGT tax one way or another.
Just curious, what sort of rental return did you get, since you mentioned it was good return.
Hi Steven,
The important lesson I was hoping to reinforce — via my own experience — is that it is better to buy something that is already established and second hand, and do some minor cosmetic makeover, rather than buying something that is brand new.
You said it – and I can think of a number of ways this is true. Can you add to my list?
1. A seller of a new H&L property is less likely to budge on the price they will take – so, no discount when buying
2. A buyer can have rose-coloured glasses on when inspecting a brand new house, thus having their emotions lead them toward buying THAT one (even if their head is saying “Wait up a bit!”)
3. A buyer expects to find things “not right” in a second-hand house, and their psyche is ready to accept that (and negotiate the price down) if deemed to be easily fixed.
4. An established suburb already has a “history” that can be accessed – i.e. you already KNOW this suburb is deemed to be “good value” before you buy. Not so with H&L (if in a new estate, as most are).
5. No (or few) “points of difference” between one H&L house and the next one – everything available is pretty much “same same”. Not so with second-hand houses in established suburbs.
Steven, I’m sure you will have found more things too that have led you to your conclusion. Go ahead and list them – and others too – jump in with your thoughts, as they all help,
BennyI will add one to that list:
Houses that are built as “brand new” are not necessarily built using the best materials and products either.
For example, if I build a brand new home for myself, I’d choose the best quality products. But if I only “build a new home so I can sell it”, I will use the cheapest materials and what not.
While I myself have not seen it, but my parents have come across that before. My mom said a while ago one of the properties near her house was erected, and she knew the property was meant to be sold for profit rather than for owner to live in. She saw it with her own eyes that the builder used cheap materials. In particular, she noticed than when building the roof, the builder used those very thing wood rather than the thick ones.
The result is that within less than 1 year, the person who purchased that property already had to climb up the roof to fix small bits here and there multiple times. Not very pleasant experience for that buyer.
Thanks Benny.
The part about having extra income is not really the main point though.
The important lesson I was hoping to reinforce — via my own experience — is that it is better to buy something that is already established and second hand, and do some minor cosmetic makeover, rather than buying something that is brand new.
Of course, don’t go out of the way to buy a property that suffers from structure problems, as that would cost too much and take too much time to fix. But if we can buy something that only requires some minor cosmetic makeover, it is generally a good buy.
Unless there are some very special circumstances, otherwise if a problem has some cosmetic problem, that actually gives us as buyer some leverage to negotiate the price, and usually it is much cheaper for me to buy that property with some minor cosmetic issues and then I fix them up, than buying a brand new one (vendor will certain try to charge me premium price if I buy brand new).
I used to have a difficult time understanding this concept, but by going through that experience, I now fully support this approach.
Hi Steven,
The difference is that the place is newly-developed, in an area of (likely) low-cost new houses. It is likely to an “outer fringes” property and surrounded by similar new houses. Since it is a larger block, it could be that they got the land really cheap (what was its past history??? not an ex dump I hope) and the developers are hoping the larger land adds an appeal to a home-buyer who wants a backyard for the kids.
Since it is a “solution property”, (i.e. brand-new) there is no meat on the bone for you. You can’t add any value by fixing anything. In fact, it is likely to be selling at an above-the-median price – making YOU the meat on THEIR bone if you buy it. ;)
Benny
PS These can be a way in for FHB’s – but any value gains are likely to be ten years away – over time, it becomes “just another suburb” with values reflecting its appeal at that time.Hi Benny.
Yea, in fact, the only difference I can find is one is new and the other is second hand or something like that, as well as they do get the option to build say a granny flat (since they do have the size of land) if required compare to those H&L with only 300 sqm of land… so probably slightly “better” in this regard.
But still, I got my first hand experience when buying my own home just a few weeks ago. Scenario like this. Basically to prove buy existing + do my own cosmetic makeover = more profitable than buy new.
1. Area where most 4 bedroom house (with 600+ sqm land) cost 1.25-1.35M if second hand… up to 1.7 if brand new.
5. Vendor was motivated to sell their 5 bedroom property (with 650 sqm land) because they need to move close to where their daughter live due to daughter giving birth soon (Chinese family, so you know they rely on old folks in this regard a fair bit).
3. Some appliances in kitchen, while in workable condition, are best replaced.
4. Vendor pricing range put down as 1.15-1.25M
5. We offered 1.18 and got it. While still expensive area to live in, but people think relatively speaking we got a good buy as we bought for 100K lower than average price in that area.
6. We replaced Cooker, Sink and Dish Washer. Total cost of buying the new equipment + installation fee = less than $3000. Otherwise nothing else was replaced in the kitchen as it only needed some minor cosmetic makeover, nothing serious that needs repairing. So costed us about $0 for that and just an afternoon of cleaning time really….. We figured if vendor replaced those appliances on their own and did their own cosmetic makeover prior to selling, they’d probably charge 20K-30K or so on top of the existing price. (renovation in Melbourne is expensive now days)
7. My family took up 3 bedrooms, and with 2 spared bedrooms sitting there doing nothing, we advertized in a university that is 2 suburbs away from us and got 2 students living with us in a boarding scenario…. helps us to pay down the loan as well.Hi all,
Thanks for the replies. Appreciate your input. The main reason behind us to invest in New Zeland was that I have heard there are positively geared properties for very law prices. But after some research i could see it is not the case in most of the major cities as Kavi described. Given that there are less capital gain, we decided to continue in Brisbane for the moment, which we think is a better place with good capital gain and it is also possible to find positively geared properties.My opinion on that one is:
If there are positively geared properties to be snatched up, they would have been snatched up already.
I would imagine if an area where properties on the market (not off market) can be bought for positive cash flow, then it’d immediately become an investor hotspot and those positively geared properties would run out very quickly. (everybody knows about them and everybody rushes in to buy them… it is a cash of even monkeys can make money)
So no… I believe positively geared properties are always “hidden” rather than “on the market”, in the form of “buy below market value”. When you “buy below market value”, you already get an “innate capital growth”.
eg: Market value for properties in Suburb A is 500K and you buy a property for 350K, then that’s already 150k “built-in” capital growth for you, so you don’t need to “wait for a few years for capital go grow”. Coupled with you are getting a loan based on 350k rather than 500k, but you are collecting rent on 500K basis, that’s positive cash flow for you.
Hi Jaxon
You cover New Zealand too?
This is something to ask the person giving you credit advice. The bank will probably do nothing as you will have a 30 year loan term and probably have not committed any default.
Thanks.
I won’t go down this path then.
I don’t need the equity released urgently, as the investment I am looking into won’t happen until sometime in Feb-March next year, so I will try to work out something else instead.
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This reply was modified 6 years, 5 months ago by
