All Topics / Finance / Loan type for buy/sell strategy

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  • Profile photo of NOS1NOS1
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    @nos1
    Join Date: 2008
    Post Count: 32

    Hi there,

    I was wondering if anyone on the forum can suggest the appropriate type of loan they recommend for a buy & sell strategy, as well as  buy & hold.

    Thanks
    Nos1

    Profile photo of Michael.LeeMichael.Lee
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    @michael.lee
    Join Date: 2009
    Post Count: 106

    Gidday Nos1,

    As I brace myself for the newbie flaming offer the following thoughts (new to this site, 22+ years in property).

    There is no particular loan product that can be generally promoted as the ideal for either of these strategies.
     
    However there are probably several needs that arise from your individual strategy, which leads to turning certain features on or off. This defines a loans structure.

    Once you have the structure right, it rules in or rule out different loan and lender combinations. Then all you have to do is crunch the costs based on your view.

    One general rule you can apply to a buy & sell is to factor in any Deferred Establishment Fees, Early Repayment Penalties (and whatever else the lenders like to call them) that are likely to kick in based on your view i.e. gear then sell within 2 years. That is unless you plan on rolling that debt to another asset – in whcih case, you need portability and should factor in the portability fee.

    Another general rule should be to write down the value of offset features for investment based borrowings, because there is no tax advantage, so you are only reaping the spread (which, admittedly, has been getting fatter over the last 18 months).

    Anyone who tries to tell you otherwise is a debt merchant trying to sell you some kind of loan.

    Profile photo of NOS1NOS1
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    @nos1
    Join Date: 2008
    Post Count: 32

    Thanks Michael,

    I appreciate your comments and advice.
    I'm a little green when it comes to finances, so I was wondering if you could explain in more detail one of your comments "Another general rule should be to write down the value of offset features for investment based borrowings, because there is no tax advantage, so you are only reaping the spread (which, admittedly, has been getting fatter over the last 18 months)."

    Thanks in advance

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    I totally agree with Michael that lenders realise to cover their interest spread (Because they tell you there is no money to be made in lending it out at standard rate for such a short period of time) they will try and recoup profit by charging an early repayment fee or similar.

    I work with many clients that buy and sell and there are still the odd lender that doesnt charge such an fee or where they do it is reduced toan acceptable level to make the deal viable.
    Obviously as far as your mortgage broker is concerned anything he / she earnes in the way of a commission is clawed back normally in the first 18 months so for these clients we do it on a fee basis so that their is a win win for both parties.

    The other consideration would be the entity you use to purchase the property in especially if you expect to be making a capital gain or trading profit. Structured planning in the early stages will make the end result more palatable.

    Richard Taylor | Australia's leading private lender

    Profile photo of Michael.LeeMichael.Lee
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    @michael.lee
    Join Date: 2009
    Post Count: 106

    "Another general rule should be to write down the value of offset features for investment based borrowings, because there is no tax advantage, so you are only reaping the spread (which, admittedly, has been getting fatter over the last 18 months)."

    Sorry, what I meant was to make sure you don't get sold too heavily on offset features/facilities for investment borrowings.

    Offset facilities (they have a few different names) reduce your loan balance for the purpose of interest calculations, which means less interest is due if you have funds stored in an offset facility.

    As an investor, interest is a tax deductible expense, which means that money in an offset account reduces your tax deductions, which for most people, is not the name of the game and this is especially true if you have an interest charging personal debt.

    If you can wait a month, I've given a more detailed explanation in next months Your Investment Property Magazine (sorry I hope this doesn't break advertising rules… it's not my magazine though!). Next moth being September cover date, edition 26).

    Profile photo of NOS1NOS1
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    @nos1
    Join Date: 2008
    Post Count: 32

    Thank you again gentlemen.
    Your insight is extremely helpful for novice such as myself. I'll be sure to checkout your upcoming article.

    Profile photo of Michael.LeeMichael.Lee
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    @michael.lee
    Join Date: 2009
    Post Count: 106

    Thanks Nos1, and of course that's next months, not next moths… blasted fat fingers.

    Profile photo of YossarianYossarian
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    @yossarian
    Join Date: 2006
    Post Count: 136
    mortgagedetective wrote:

    *snip*
    As an investor, interest is a tax deductible expense, which means that money in an offset account reduces your tax deductions, which for most people, is not the name of the game and this is especially true if you have an interest charging personal debt.

    *snip*

     
    I'm not sure i agree with any strategy that promotes spending a dollar to earn 50 cents. Unless the money that could be offsetting the interest bill is at work earning a return elsewhere, why pay more interest (and, therefore, reduce your yield) than you have to?

    Hell, why not do *even better* and increase your deductions by offering to pay your lender a higher interest rate!

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Yoss

    i totally agree with you. Why would you not utilise an offset account linked to an investment loan on the basis you had no other non deductible debt.

    Richard Taylor | Australia's leading private lender

    Profile photo of Michael.LeeMichael.Lee
    Participant
    @michael.lee
    Join Date: 2009
    Post Count: 106

    Gidday Yossarian,

    I'm not promoting any strategy, especially one to lose money. You simply grabbed a snip out of context so I'll try to get it back into  context.

    Your snip was from a clarification of an earlier post where I outlined a general rule to "write down the value of offset features for investment based borrowings" because you are only reaping the spread.

    To those who are unfamiliar with the term spread, I am referring to the difference between your cost of money and the return on that money. Now remember, I said write down, not write off, which means I agree offset still has some value regardless of individual circumstance, but how much varies to the individual.

    Any investor worth their salt has a loan structure that matches their needs well and delivers an effective rate in the range of 4.75% and 5% in current terms. There's a swag full of options that include offset, portability, top ups, etc in this range, so if you want them you can get them pretty easily at 5% or less.

    My point is not to get tricked into paying more than you should, simply for the lure of offset. I make that point because new investors often don't understand the severe dilution of the offset value proposition when switching from personal borrowings to investment borrowings. This is evidenced somewhat by Nos1 asking for clarification on the point.

    Now I know that some investors may have trouble scratching up a 4.75% return and for those, then an offset probably has a little more value.

    However a kid working at Mc Donalds for minimum wage can get 4% (4.5% short) on deposits with any number of government guaranteed banks, building societies and credit unions. So you really have to wonder why investors can't pass the 4.75% yield mark across a balanced portfolio, or even a property biased portfolio in this day and age. I mean crikey, even the ASX200 is pulling close to 5%.

    So Richard, if your clients aren't realising 4.75% yield, or have, as Yossarian put it 'offered to pay' the lender a higher interest rate, then yes, you are right. An offset on investment debt probably does make a little more sense for them.

    For the record, RP Data has released current rental yield data this week and the top yielding suburbs around the country are:

  • Sydney houses: Forest Lodge (5.8 per cent);
  • Sydney units: Ultimo (10.4 per cent)
  • Melbourne houses: Collingwood (5.1 per cent)
  • Melbourne units: Carlton (8.6 per cent)
  • Brisbane houses: Hemmant (4.8 per cent)
  • Brisbane units: Spring Hill (6.4 per cent)
  • Adelaide houses: West Richmond (4.8 per cent)
  • Adelaide units: Gilles Plains (6.6 per cent)
  • Perth houses: Tuart Hill (5.1 per cent)
  • Perth units: Glendalough (6.4 per cent)
  • Hobart houses: Risdon Vale (6.5 per cent)
  • Hobart units: West Hobart (6.3 per cent)
  • Darwin houses: Alawa (6.0 per cent)
  • Darwin units: Stuart Park (6.9 per cent)
  • Canberra houses: Holder (5.8 per cent)
  • Canberra units: Scullin (7.1 per cent)