Structuring Your Property Investments

One of the biggest issues for property investors is their discipline in trying to pay off their first mortgage. Sounds strange, but the dominant theory of directing as much disposable income as possible towards paying down the mortgage and building equity becomes somewhat of a liability for anyone whose future plans include property investment.

Think about the standard scenario for a young couple. Purchase a property in their mid-20s, usually in the outer suburbs, dedicate their time to paying down as much as possible so the principal starts to reduce, then all of a sudden circumstances and future goals change. Invariably, earning capacity will increase as they are promoted, whilst space starts to become an issue as possessions are acquired and children considered.

The natural response is to look for a home a bit closer to the suburb where they grew up, usually with another bedroom, but it must be close to schools and where they are happy for the children to be raised. There is also the consideration of building wealth for the future, so they don’t want to sell the current home – this will become an investment property. Great idea! The couple can claim interest expenses and other maintenance costs, whilst simultaneously moving into their dream home and receiving rental income.

Unfortunately, this is where extra payments on the initial mortgage start to become an issue for many investors. The ideal structure will involve maximising the amount owing on the tax deductible debt, whilst reducing what is outstanding on the principal place of residence. Instead, most will have paid extra on the initial mortgage, which will have tax deductible interest charges in future years, and borrow the maximum on the principal place of residence.

For anyone disciplined enough who can foresee this being a realistic scenario in the near future, I recommend you review how you’re managing your money immediately. If the couple in the abovementioned example had redirected any excess funds to another account from day one, rather than needing to borrow more to purchase their next home, they could have these funds immediately available to contribute towards the deposit. Don’t think you can get around this by using redraw either. The Australian Taxation Office (ATO) uses a purpose test to define what can be claimed as a tax deductible expense on an investment property, so you won’t be able to redraw on your existing property to pay the deposit on your new home, then later claim this amount back (I can audibly hear accountants across the country cringing at the mere thought).

Whilst this is a far too common scenario that I encounter, there are many other simple errors investors make, which can be costing them tens of thousands of dollars:

• Failing to utilise interest only options on their investment property loans
• Retaining ‘old’ interest rates without reviewing what is available on the market today
• Paying more than the minimum on their investment loan whilst still having a mortgage on their principal place of residence
• Failing to claim maintenance costs and depreciation on their investment property
• Not understanding the power of an offset account

If you are unsure if your investment loans are set up correctly or haven’t had your loan(s) reviewed in the last two years, please call me on 0402 087 478 or email andrewp@acfg.com.au to organise a complimentary appointment.

Choices today for a secure tomorrow.

Andrew

*Please note, I am not a taxation accountant, so it is recommended that you obtain independent financial advice before proceeding with any investment strategy to ensure you are aware of the associated risks