We talk about property investment a lot at Kelly+Partners. And for good reason. It’s a sound strategy to secure the financial future of you and your family. Nevertheless, even though most people borrow money to buy an investment property, few give any real thought to the structure of these loans.
Setting up the best loan structure for your own particular circumstances will help make sure you get the best return on your investment – and save tax – right from the very start.
Is investing during a pandemic a good idea?
You may be wondering if you should put your investment plans on hold, what with a global pandemic still happening. We wrote about that very thing right here and stand by our opinion there are still opportunities to be had, particularly in regional areas.
With remote working now well and truly established, more Aussies are looking to move away from inner city and urban areas. This has led to a shortfall of available rental properties in some regional areas which is great news for investors.
Why is tax structure so important?
Most people buy property to build their wealth and create long-term financial stability. But if you get it wrong, the Australian Tax Office (ATO) could potentially take a big chunk of your hard earned money. Unfortunately, that’s why so many wanna-be property investors are just that – wanna-bes. They buy one property and, having not sought out professional financial advice, never manage to build the property portfolio they hoped for.
With all that in mind, let’s take a look at common loan structures savvy investors use to optimise and build their wealth portfolio, and that offer you as much flexibility as possible.
1. Borrow the maximum amount, then use an offset account
You get one chance to maximise your tax deductions and that’s through the initial amount you borrow. If you put lots of cash towards the property and take out a smaller loan, thinking you may borrow more later, this may have major tax implications. What this means is you can’t claim as much from the ATO as you’d planned as these subsequent loans may not be tax deductible.
What to do with all that extra cash?
Open an offset account to reduce the mortgage interest. It makes no difference to the bank, interest wise. They’re only charging interest on the difference between your loan amount and the cash in your offset account.
But it does make a difference to you. You have access to your cash should you need it because it’s not all tied up in the property. It also means you can do renovations and upgrades to the property, thus increasing its value should you decide to sell.
2. Interest Only Loans
As a property investor, you should consider the benefits of taking out an interest only loan. This way, you’re only paying the interest accrued on the loan, not the principal amount itself.
This is beneficial to you because:
Surplus cash – all the cash you would be paying against the principal loan amount will be sitting in your offset account. Easily accessible to you.
Tax benefits – as you’re not paying down the principal, it stays at the original amount. This can be used to reduce your personal income tax.
Risk reduction – your risk is minimised. Should you have a change of circumstances, such as being stood down at work due to a global pandemic, you can still service your loan.
This may also prove to be the difference between a positively geared or a negatively geared property.
Not sure what works best for you? Contact us for an appointment today
3. Diversify where your loans are held
Depending on how large your property portfolio is, choosing to invest with and borrow from different lenders is a shrewd financial decision. One of the main reasons is banks and other lenders value properties differently. You can then borrow from the lender who offers you the best value and best lending deal.
Banks and lenders all offer different rates. Choose what works best for you, then play them off against each other to secure the best rate.
While you should only ever borrow what you can afford to repay, it doesn’t hurt to have relationships with different lenders. And these days, you’re spoiled for choice as smart investors seek out alternative lending solutions.
4. Loan Security
Don’t offer the bank more security than it needs. The old loan to value ratio rule is still 80/20. That is, you retain at least 20% of the property value yourself which allows you to still get the best interest rate without the bank needing more security.
Likewise, don’t offer the bank security over more than one property if you don’t have to. This is called cross-securitisation and can complicate matters if you want to sell one of the properties. As well as this, having one clear title deed (mortgage free property) means you can approach other lenders to borrow more money to buy more investment properties.
5. Investing for the long haul
Many investors are long term borrowers and need to become comfortable with the idea of long term ‘good’ debt – debt that’s tax deductible. If you fall into this category, it makes good sense to sometimes use fixed mortgage rates, especially when interest rates are extremely low (as they are right now) and to stagger the expiry dates of those fixed rates. This gives you the flexibility to review and/or renegotiate your loan rates at regular intervals, ensuring they’re all still working to your advantage.
While this may seem complicated, when you break it down, it’s simply good financial common sense to set up the best, most tax effective loan structure you can.
Whether you’ve only just begun to research how investing in property can work for you, or you own multiple investments already, it’s always a wise idea to check and re-check that your investment loan structures are still working in your best interests.
If any of the ideas mentioned in this blog have got you thinking that a better deal could be out there, reach out so we can see if it's the right fit for your situation.
At Kelly Partners, we have our in-house finance specialist, James Russell, available to assist with all your home and investment loan needs. To speak with James directly, you can contact him at 0414 448 388.
Not sure what’s the best option for you? Call to book an appointment where we can discuss all your Investment property structuring needs.
Any advice/information contained in this newsletter is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person or company. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. These articles have been written for general informational purposes only, and are not intended to provide, and should not be relied on for, tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisers before engaging in any transaction. Information in this edition is correct as of the date of publication and is subject to change.
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