I was wondering say you have a cashflow positive property that makes $10 000 pa, would you add that $10 000 to your general income stream or would you reinvest it back into that property to pay down the principle and therefore pay less interest and make more money the following year?
Hi Roadhog
My thoughts are that you would reinvest this money into further proeprties to keep the ball rolling. Since interest on investment properties is tax deductible, I would not pay down that interest. I may consider paying down non-interest deductible debt (on a PPOR) but only if I was close to my investing goal, otherwise keep that money working for you.
Cheers,
I'd suggest
1) Pay of all non-tax deductible debt first, then
2) Place all saved money into an OFFSET account associated with one of your investment properties.
Option two is the best of all worlds. If you are paying interest rates of 6% then this represents a fantastic after tax return (so equivalent to 9% pre-tax if investing elsewhere) while you look for the next oppurtunity. The money can subsequently be used in any way you wish (including say a holday etc). Once you pay down the principal then you cant get the money back. Park your money in an offset account while you save - this also acts as a good safety buffer should things go awry.
Wobblysquare
- Investing with confidence since 2010 !!
I hadn't really thought about the whole tax side of things so thanks for that, my properties already have a revolving credit so I had been paying it off that which is essentially a offset account anyway. Any other ideas out there?
Financially free by 22/05/2017
good topic roadhog !! i have struggled with this one myself over the past couple of years. i get the whole thing about investment loans being deductible, and always paying off non deductible debt first, but i have no non deductible debt. extra funds have been sitting in offset against IPs, but a book written by Anita Bell 'your investment property' highlights just how much of a snowball effect you get when you can pay down debt. Once 1 is payed off you would effectivly have their entire rent payment to put towards another property. Surely you could then accumulate more properties at a faster rate than only paying interest only, but still holding a higher LVR ? It would also leave you more open to financial hardship if rates ever went up significantly.
Obviously you want to be paying minimal tax, but paying tax also means that you are making money - so isnt that a good thing ???
Hi Roadhog,
It would depend on the phase you are in, building the portfolio, asset base/capital building – part 1 as per Steve’s example or part 2 – income generation.
If in part 1, I would agree with Wobblysquare’s option 2 and get the next deposit there at 80% LVR to save on LMI, and to give you a little buffer equity in case values slide or interest rates rose. I would use option 2 to the point that that particular property was cash flow neutral, and then apply to the next IP in an offset account until you need the cash.
When ready for part 2, income generating (passive), paying down the debt would be great (as suggested by Eilatan) or also selling off some of the portfolio to pay down others.
Lots of choices here depending on your strategy!
Regards
David
Thanks David, that makes a lot of sense
Financially free by 22/05/2017