Good debt or tax deductible debt can become a powerful wealth generation tool when used correctly. The right structure can become a powerful wealth generation tool. Appropriate structures wrapped around growing assets, like property, can increase at a higher rate compared to the actual cost of borrowing. Using equity to fund investments becomes a lot more efficient compared to paying off debt with surplus funds. Plus, good debt becomes tax deductible adding another cherry to the equation.
Creating good debt and the borrowing power you possess will become the cornerstone in your ability to achieve success as an investor. If you establish the right portfolio it becomes easy to build upon. You need to consider your investment plan and be thinking two or maybe even three loans in advance. People often make the mistake of sticking with one lender and cross securitising their properties. Or the focus is solely on the short term interest rate offered. Forgetting that the right structure can extend your line or credit and save substantial interest over the life of the loan.
Loan structuring is very individualistic as there are a number of variables that influence the outcomes. Plus, there are dozens of lenders and 100’s if not 1000’s of different products available each with their own individual characteristics.
What are the factors influencing the loan structure?
- The five C’s of credit and how they would relate to you
- Time frames
- Pursuit of an active or passive investment property strategy
- Risk tolerance and;
Not only should you consider what is best for you now, but also how those decisions will impact you in the future. Maintaining a clear plan of your property investment intentions will boil down to how you finance and structure your debt facilities. The right structure could save you a fortune and allow you to effectively build upon.
Setting your loan structure correctly (i.e. in line with your investment strategy) will create positive outcomes including:
- Tax efficiencies – by optimising your tax position it will help improve cash flow and cash flow is the life blood for any growing property portfolio. A common problem faced is the inefficient split of deductible and non-deductible debt. Larger loans should be associated with financing tax-deductible debt to offset against your income. If the larger debt was associated with your home loan this would not be possible. Don’t make the mistake of your home loan being too large a proportion of your total debt.
- Flexibility to be opportunistic! Allowing you to access money quickly to take advantage of an opportunity when it arises is hugely beneficial. Or perhaps refinancing if a lender comes out with a cracking rate. Flexibility really is key because, you will want and need, to make changes from time to time.
- Risk management and covering scenarios that may hinder on your ability to maintain payments i.e. illness, unemployment etc. If something unfortunate was to happen and you ran into difficulty you may decide you sell a property to free up cash and cover unexpected expenses. If you don’t have the right structure and flexibility then the bank could control the sale proceeds and force you to repay debt, rather than access the funds to stay afloat.
- Easier admin, straightforward account keeping, happy accountant and paper trail which should appease the ATO. Correct structuring ensures you have a sound basis for claiming deductions by separating the loans by each property and loan purpose.
- Stand-alone loans will create the greatest flexibility. Cross-securitising loans will lead you to trouble. Establish stand-alone loans secured against one existing property only. That way you could finance a 20% plus costs purchase and arrange a separate loan, secured against the new property for the remaining 80%.
- Planning! The right structure can create contingencies which will cater for life’s unexpected journey’s. Structuring correctly will let you plan your investments ahead. Therefore, it will allow you to execute your strategy to the anticipated timelines to achieve your goals.
So they are the benefits and the areas which they can be applied to are:
If you would like to get an understanding of the S.M.A.R. T method to structuring property investments be it through the loan type, ownership structure or utilisation of equity you can get in touch here.