All Topics / Finance / FINANCE & STRUCTURE for Beginners

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  • Profile photo of ALF1ALF1
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    @alf1
    Join Date: 2011
    Post Count: 237

    Structure

    • If you are serious to be a long-term investor get a structure in place to protect yourself and your assets.
    • If you are going to use any statistics for housing growth ensure you use 10 year growth figures. 1-year figures are deceptive and do not indicate possible future growth. During a boom even the poorer suburbs can experience growth that looks good. 10 year figures will most likely include a complete cycle boom through to slump. Shorter terms will miss part of the cycle and not be accurate.
    • I heard an interesting stat that out of all the banks long term interest rate predictions they have had poor odds at getting it right. This would be similar to economist’s long term property value predictions I guess. Past history is no guarantee of future growth and long term factors are very hard to predict as something usually happens to alter the forecasts. (Wars, terrorism, floods, earthquakes, Asian crisis). However saying that we can usually see into the short term and be semi reliable. Using historical growth and buying in the right location at the right price can put us ahead of those blindly purchasing to follow a boom.
    • A good way to protect yourself is to use the “What if’s” . Decide if you are going to protect yourself from anything that concerns you with regards investing. Most things that concern people and prevent them from investing can be covered by a well thought out plan. Do this from day one.

    Finance

    • Avoid using the one bank trap. This is simply where an investor gets comfortable with their current bank giving the bank complete control over their entire portfolio. Banks will like to cross-collaterise if given the chance. Using several banks spreads your loans around and reduces the risk of your portfolio being called up if the economy turns bad.
    • Banks use Loan to Value Ratio (LVR/ Equity) and Debt Service Ratio (DSR/ Cash flow) to determine your ability to acquire a loan. It is safer to drop back and keep your serviceability low at the end of a boom. This will enable you to have a buffer if things get tough and let you ride out any pending downturn in the market (Slump). Historically rents and house prices usually drop back from their peak.
    • Ramp up your serviceability leading into next boom. This is when you need to use your servicing to catch the wave and build some serious equity.
    • Just as it is sometimes safer to diversify your property locations, you should do similar with your borrowings. Interest rate diversification. Spread any fixed rate terms over a range of dates so all your loans are not expiring at same time. Interest rates move around regularly and you do not want to be caught out needing to have your entire portfolio expire at a time when rates may be high.
    • There is a large amount of opinion on Principle and Interest (P&I) loans versus Interest Only (IO). The general consensus is if you have non-tax deductible debt e.g. personal house mortgage, then use Interest Only on your IP and pay down the non-tax deductible debt with the money you will be saving in lower loan payments. Otherwise if you have no bad debt the choice is up to you P&I or IO. IO can allow you to accumulate more property but P&I can be good during a slump too as the debt is being paid off slowly.

    Profile photo of Paul DobsonPaul Dobson
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    Hi Anthony

    Great advice.  If I was asked to add one more ;-) I'd suggest you be very wary of making an investment decision based on the tax benefit you'll receive.

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
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    An alternative way to finance your home.

    Profile photo of Mick CMick C
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    @shape
    Join Date: 2010
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    Great Post Anthony!

    Regards
    Michael

    Mick C | Shape Home Loans
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    Profile photo of kong71286kong71286
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    Thanks Anthony! Always love to read your posts!

    Have you thought about writing a book?

    Profile photo of Jamie MooreJamie Moore
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    PaulDobson wrote:
    Hi Anthony

    Great advice.  If I was asked to add one more ;-) I'd suggest you be very wary of making an investment decision based on the tax benefit you'll receive.

    Cheers,  Paul

    Totally agree. We hear it so often – but the fact is, no investment strategy should be based primarily on receiving taxation benefits.

    Good point Paul and great post Anthony.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of slowachieverslowachiever
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    Great  topics ,I have just been tracing information myself for possible restructuring .
    I have found the same a few property groups I went to see , have been full on into tax benefits not interested at all about any positive gearing as it will attract tax .Although we do need to be tax effective in our property portfolios.
    But as  I think Steve and others have mentioned before , If we make money we pay tax and the reverse is also true if we are paying tax we are making money , which is good .

    Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account  and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving  for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
    Any comments Thanks .

    Profile photo of TerrywTerryw
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    slowachiever wrote:

    Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account  and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving  for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
    Any comments Thanks .

    Potentially very bad idea. A LOC should only be used to extract equity for investment purposes.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Mick CMick C
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    @shape
    Join Date: 2010
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    slowachiever wrote:
    Great  topics ,I have just been tracing information myself for possible restructuring .
    I have found the same a few property groups I went to see , have been full on into tax benefits not interested at all about any positive gearing as it will attract tax .Although we do need to be tax effective in our property portfolios.
    But as  I think Steve and others have mentioned before , If we make money we pay tax and the reverse is also true if we are paying tax we are making money , which is good .

    Could someone comment on Lines of Credit ,a bit concerned on these, never used before and a broker has suggested I convert my current loan to this and my accounts I have at other banks .Take out a line of credit on a property I own outright to release equity, to get ready for buying more property.I am used to having my pays go into one account  and also take all expenses out of there , then rent money from 3 properties goes into a high interest internet account for saving  for my next property deposit .I know one other way would have been to just get a MISA account going for property I owe on and put everything into that .
    Any comments Thanks .

    LOC is easier to get approval and less hassle…but it’s def not the best structure in the long term + less flexabililty and costly.
    I would suggest a standard equity release with a standard split loan…

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of slowachieverslowachiever
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    @slowachiever
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    Thanks guys , I have a bit more research to do .This broker has suggested I get a LOC setup as then will have theoretically
    a higher amount of loans with Combank which then I would qualify for wealth package loan rates .
    I have aleady got a business line of credit from a previous time $50,000 . Which were to use for deposits where needed .
    So it has been suggested to get another against my other property ,so I will  have 2 . 1 is for deposits the other for expenses related to property . Put the majority of all monies into the larger one I think to keep interest down .It were something like that
    arrangement .

    Profile photo of goldiesgoldies
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    @goldies
    Join Date: 2010
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    Shape: Can you please discuss a standard equity release with a standard split loan in more detail for those of us with equity who want to use it for the next IP?

    Profile photo of Mick CMick C
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    @shape
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    I will use round figures.

    Home worth $500,000
    Current loan is $300,000 — LVR 60% — lets call this Loan 1 ( can be PPOR or Invest)

    In the above question by slowachiever she/he mentioned a LOC to obtain the deposit ; the another option is a standard basic equity release.

    1. Refinacne with a cash out or top up the loan to a 80% LVR ( higher or lower based on your requirement)
    2. Make sure the bank sets up a “split loan” or in another word another mortgage for this “top up/cash out” – this way the loans are clearly separated for tax reasons and simplicity

    End result

    Home worth $500,000
    Current loan $400,000 @80% LVR

    Loan 1 ( as above) is still $300,000
    New loan called Loan 2 is $100,000


    Total : $400,000

    So in affect you have 2 mortgage secured by one property with the same bank-

    Most loan product theses days allow up to 2-5 splits.

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of siraitkensiraitken
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    @siraitken
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    Shape,

    In this example is the interest on Loan 2 tax deductible?

    If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?

    Regards,

    Dave

    Profile photo of Mick CMick C
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    @shape
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    siraitken wrote:
    Shape,

    In this example is the interest on Loan 2 tax deductible?

    If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?

    Regards,

    Dave

    It is.
    There are many ways to achieve a similar outcome- it all depends on your overall LONG term goal and objectives ie planning a construction? wanting to buy it in a trust etc…the above example is one of the 3 common ways to make Loan 2 tax deductible.

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of siraitkensiraitken
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    Profile photo of sweenysweeny
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    @sweeny
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    Shape wrote:
    siraitken wrote:
    Shape,

    In this example is the interest on Loan 2 tax deductible?

    If not, what alternative solution would you recommend if you still needed the $100k for a IP deposit?

    Regards,

    Dave

    It is.
    There are many ways to achieve a similar outcome- it all depends on your overall LONG term goal and objectives ie planning a construction? wanting to buy it in a trust etc…the above example is one of the 3 common ways to make Loan 2 tax deductible.

    Hi Shape,

    Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn’t be. Is this correct?

    Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?

    Profile photo of Jamie MooreJamie Moore
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    Join Date: 2010
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    sweeny wrote:
     Hi Shape, Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn't be. Is this correct? Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?

    Hi Sweeny

    Correct – it looks like you've answered your own question :)

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of sweenysweeny
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    Jamie M wrote:
    sweeny wrote:
     Hi Shape, Are you able to go into more detail about the tax-deductibility of Loan 2? My understanding is that Loan 2 would be treated as new borrowings, and its tax-deductibility would be determined by what you used the funds for. If you used the $100k to buy an IP, it would be deductible but if you used the $100k for personal expenditure it wouldn't be. Is this correct? Also, are you able to explain the other 2 common ways you mention to make Loan 2 tax-deductible?

    Hi Sweeny

    Correct – it looks like you've answered your own question :)

    Cheers

    Jamie

    Thanks Jamie,

    How do you manage the cash out from Loan 2, before you use it to fund an investment? Correct me if I’m wrong, but I would guess the following events would occur:

    1) Loan 2 is approved, secured against existing property
    2) Lender deposits $100k in a specified bank account
    3) At some point, some or all of the $100k is used to purchase another investment

    The things I am unclear about are:

    A) How do you prove to the ATO that the $100k you obtained in step 2 was used to fund the investment in step 3, if they do not happen in the same transaction (an they could potentially happen months apart)?
    B) What do you do with the interest on Loan 2 before you purchase the other investment?
    C) Let’s say the other investment requires $80k in cash, so of the $100k borrowed as part of Loan 2, you invest $80k and leave $20k as cash sitting in an account. Is 80% of the interest on Loan 2 is tax-deductible? Is it possible to make the other 20% tax-deductible?

    Given all these concerns it seems to me that it would be simpler to set up a LOC on the existing property for $100k, so when you want to purchase the other investment, you can just get all of the costs drawn straight out of the LOC at the time. What are the advantages gained in using the standard equity release/standard split loan over a LOC?

    Profile photo of TerrywTerryw
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    Join Date: 2001
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    Borrowing and placing the borrowed money into a savings account is very risky as you would break the nexus between borrowing and investing. Once it hits the savings account it is no longer borrowings.

    Some loans offer redraw, so you could set up a IO loan, new split of course, and borrow the money and then deposit it back into the loan. Once you have the investment ready then you borrow directly from the loan, via cheque,

    LOC is generally easier.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Jamie MooreJamie Moore
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    Join Date: 2010
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    Hi again Sweeny

    With the $100k cash out – you just need it to be set up in a way so as you’re not paying interest on it until it’s used. This can be done via Terry’s method above, by using a LOC or placing an offset against the loan and transferring the funds into the offset.

    If you only use $80k for investment purposes – that $80k will be deductible. The remaining $20k will simply sit there until you use it.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of House CallHouse Call
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    @house-call
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    interesting informative educational thread.  Thanks all.

    I have 3 IPs each with their own free-standing (not cross lateralised) interest only loans, and all of them have gone up in value.  Is the simplest way to access the extra equity to set up individual LOCs for each IP?  How do you stop it getting too bit confusing, once you get more and more IPs all doing the same thing?

    Also Terryw re your method with an IO loan with redraw.  Would that have a lower interest rate than a LOC?  My current LOC rate is higher than the IO with the same bank.

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