Structuring your investment property portfolio in your personal name!
Today we are going to discuss ways to help you set your portfolio up in the most effective way to assist you in achieving your property investment goals. This might be the accumulation phase or even the debt reduction phase, however these tips will be instrumental to help you be successful and get the most out of your portfolio.
Security Structure
When building a property portfolio and you have multiple securities, the banks typically attempt to have you cross secure your properties. What this means is that you will have one mortgage secured by two or more of your properties. What this means is that you will have your owner-occupied debt and your investment debt secured by the owner occupied property and your investment property.
It’s important to note this may not be the most effective option depending on your plans. If you wish to borrow further funds in the future and your properties are cross securitized, you now need to obtain a valuation on each secured property, and this can incur an additional fee as the banks will generally only cover one valuation fee.
Alternatively, you may wish to purchase another property in the future using equity. Now, let’s just say that you have two properties, one property has performed well, and the other property has sat flat, as you may have purchased in a small regional town with no fundamentals for performance. The first property you purchased with a 5% deposit plus costs has now grown 15%, sitting at a loan to valuation ratio (LVR) of 80%. The second property you purchased with a 5% deposit plus costs which hasn’t grown at all, sitting at 95% LVR. This means across the two properties, you would be sitting at 90% LVR, where it’s going to be difficult to leverage equity to purchase another property. At Taylored Property Wealth, we help you mitigate this risk by helping you secure properties primed for growth, balanced with cashflow, so that we don’t have under performing properties within our clients’ portfolios.
Now if you have these properties individually securitized, you can be selective with which property you would like to extract equity from. You could choose to extract equity from the property that has performed well and take it back up to 90%. Yes, you would likely pay lender’s mortgage insurance, however this is the opportunity cost to leverage a larger asset base. Not to mention that it can also be a tax deduction over the first 5 years on an investment property – Always speak with your accountant regarding tax deductions.
Interest Only Repayments
Borrowing money from the banks with interest only repayments can help you to significantly improve your cashflow position. Interest only repayments mean only having to pay the interest applicable on the loan balance, opposed to principal and interest repayments where you must pay the interest applicable on the balance plus a portion on the principal.
Interest only repayments can be powerful in the accumulation phase or the debt reduction phase. When you are accumulating properties at the beginning of your journey, this allows you to reduce your repayments which ultimately increases your cashflow position. If you take advantage of this opportunity, you can increase your savings buffer which you can ultimately put towards your next purchase. This may result in you being able to use a cash deposit or a combination of equity and cash for your next purchase. This can be powerful if you leverage the first purchase at a high LVR position, and you may not have to wait for enough equity on the first purchase to leverage the second.
If you are in the debt reduction phase, interest only repayments can still be effective. This means that your minimum repayments each month are reduced, however you can keep your cash buffer within the offset account, offsetting the mortgage. This cash buffer will increase faster due to the repayments covering just the interest; however, the funds will still be offsetting the balance of the mortgage in the same way as if you were making principal and interest repayments. This provides you with greater flexibility, as you can then access the funds in your offset account at any time. It is important that you discuss any tax implications with your accountant.
An important consideration is that you can only have interest only periods for a maximum of 5 years. After the 5 years your lender will allow you to reapply for another 5-year period, keeping in mind this would be a full assessment. Once you have come to the end of your 5-year period, you could refinance to another lender and obtain another 5-year interest only period with a new lender. This is one way of mitigating the 5-year period. This will always be a full assessment of your income and expenses, if you know that your income or expenses will change in the future, you be proactive and refinancing before your circumstances change.
Offset Account
An offset is an account that is linked directly to your mortgage account, this could be linked to your owner-occupied property or your investment property. Effectively, the balance held in your offset account would offset the balance on your mortgage. For example, if you had a mortgage of $500,000 and you had $100,000 in your offset account, you would only pay interest on the difference being $400,000. This being the full loan balance ($500,000) minus the offset account balance ($100,000) to obtain the amount of $400,000.
Which account should I link my offset account to?
A mortgage on your own home, also known as your owner-occupied property, is not a tax-deductible expense. Given this, it would make sense to link your offset account to the owner-occupied mortgage in the first instance. This will help you reduce your interest paid on your owner-occupied property and will mean that you pay your mortgage off sooner.
If you don’t have an owner-occupied mortgage and you are an investor, you want to link you offset account to your investment property mortgage. If you have one investment property mortgage it will be obvious which loan you want to offset however if you have multiple investment property mortgages you need to ensure that you link it to the correct mortgage.
If you have two mortgages and one is sitting at 3.00% and one is sitting at 3.50% you want to link your offset account to the mortgage with the higher interest rate. Why? Because this is going to mean you are effectively offsetting the balance and saving interest on 3.50% and not the lower 3.00%. This will mean you save more interest and pay the debt down or increase your cash buffer sooner.
Account structure
Once you have determined which mortgage loan is most applicable to be linked to your offset account, you want to set your offset account up in a way that all your income and expenses come and go from this account. This will include your wages/self employed income, rental income etc as well as your daily living expenses and associated property expenses that you would pay. For example, your landlord insurance. This account can be used as your savings account, you just need to ensure you can manage your money effectively. What this will then mean is that you will enable this account each day to be at the highest point possible to effectively offset the mortgage, saving you interest, paying down debt and increasing your cash buffer. This is because mortgages are calculated daily, and interest charged at the end of the month.
You want to ensure that you automate all bills relevant to the investment properties for your Property Manager to pay. This means that you don’t need to think about paying these each quarter, once you build an extensive portfolio this can become a very time-consuming task. Remember property is a vehicle to create more time in your life.
Each billing cycle you’ll receive your weekly rent, and the expenses will be deducted from this amount. Your property manager will then credit your offset account the difference and provide you with a rental income statement.
When investing we must remember that how we structure our finances are just as important as sticking to the fundamentals and selecting an asset that is primed for growth while maintaining a strong cashflow position. This can mean that you will get to your next property sooner or help you to pay down debt more effectively. Remember to treat your portfolio like a business, whether you have one property or ten, your processes and structure will help you to manage your portfolio with ease and save you time which is one of the main reasons we like to invest.
I hope that you have found value in the blog today, if you have any questions, please reach out to us at info@tayloredpropertywealth.com.au. Keep an eye out for next week’s blog where we discuss Debt Recycling and how it can be a powerful tool when building your portfolio.
Disclaimer: Contents within this email are of general nature only and should not be relied upon solely when making an investment decision. Taylored Property Wealth nor any of its directors, associates, staff, or associated companies bear any liability from any actions derived from the contents of this email. One should always seek third party investment information from relevant parties such as legal, finance, and accountancy enquiries.
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