When it comes to investing in property everyone’s goals and drivers are different. However, the values are similar – security, control, living life on your own terms…
To achieve this sense of security and control, people want to:
>> pay off their home at the earliest
>> Build an asset base which will provide them with options when they are unable to work as hard as they are able to right now
>> provide them the ability to reduce their work hours, so they can spend more time with their children
When Ryan and Julie reached out to us, they owned their home in the Hills District in Sydney, with an existing granny flat behind their home.
About Ryan & Julie: Couple in their late 30’s with two children. Ryan is a Bus operator and Julie is a high school teacher. Their family income is $190,000.
Where they were and what they wanted to achieve:
Ryan & Julie wanted to build an investment property portfolio to have more control, choice in life and to be able to spend more time with their children as ‘time is flying by’.
Ryan and Julie had drawn down equity from their home for future investing, with the assistance of a broker they had been working with for some time.
They had accessed equity in their property a couple of times previously. This equity was mixed with their personal cash savings.
The biggest challenge for Ryan & Julie was knowing how they can use their equity and savings effectively, have clarity on where to start on their investment property journey and how it will all work out.
This would go beyond just ‘checking borrowing capacity’ which they had so far done with their existing contact. Whilst checking your borrowing capacity is valid, it alone does not lead to people making informed decisions for their financial future.
It’s like going to a doctor and them telling you generic information on what you could do to improve your health, but not giving you advice on what you need to implement a better lifestyle.
Ryan & Julie wanted to know what they could and couldn’t do, and have someone show them step by step what they wanted was achievable, and give them the exact steps they had to take to enable their goals. They also wanted help with implementing this step by step plan to accumulate investment properties.
When they came to us, Ryan and Julie had a total loan owing of approx. $940,000 ($770k home loan and $170k existing granny flat loan), with $400,000 in the ‘offset account’ linked to the $770k home loan.
This $400,000 was a combination of their cash savings, and equity drawn down previously. They used the same account for their income deposits and day to day living expenses.
Issues That Crippled Their Chances To Save & Build Their Property Portfolio:
Given the loan set up and ‘mixed’ funds, Ryan & Julie’s couldn’t claim tax deductions effectively on the equity they had pulled to invest further.
- Tax loss from existing loan structure: $7,300 every year. That is, with the right set up they should be able to save $7,300 in tax every year.
- Simplistically, tax loss over the next 5 years ($7,300 x 5 years) is $36,500…plus more, where they continue holding onto the property over the long term.
If $400k is tax deductible, then the remaining $370,000 is their owner occupier home loan.
The $7,300 tax saving could be re-directed toward their home loan on a monthly basis. This could potentially shave their $370k home loan from 30 years to 18 years and 6 months.
Their current incorrect set up will not allow that to happen.
Proposed Solution with a Tailored Plan:
- Correct structuring of their existing home loan and investment loans to maximise tax returns
- Maximise cash flow and flexibility to pay off the home quicker by shaving off years off the home loan term
- Recommendations on repayment types suited to the various loan types depending on the purpose of each of the properties
- Modelling of scenarios to maximise borrowing capacity to fund the next property
Results:
Ryan & Julie are in the process of restructuring their existing home loan to make it tax effective to have tax savings of up to $7,300 per year, pay off their home loan faster, and purchase their first investment property
Equity available & restructured: $400,000
Investment Property 1: Investment property in Sydney worth c. $1 million, with a potential to build a granny flat
Purchase Price: $1,000,000 at 80% Loan to Value Ratio (LVR)
Funds required: $243,000 approx. ($157,000 Funds remaining can be used towards building granny flat)
Total Property Ownership including Home: $2.25 million
Growth Projection:
If the properties owned grow by a conservative 5% per annum, they will be adding $112,000 to their wealth every year, compounding year on year. In 10 years, this will be more than $1,400,000 in net assets. At the same time Ryan & Julie’s property rental income will increase as well.
Property doesn’t grow in a straight-line basis. Ryan & Julie’s portfolio may grow more in one year and less in another.
What’s Next for Ryan & Julie?
Once the existing loan has been restructured to be tax effective, Ryan & Julie will purchase their first investment property and build a granny flat on it to increase their income.
Property Twins team will continue monitoring the value of their portfolio to ensure it stays optimal and tax effective should Ryan & Julie wish to invest in other asset classes. This will further fast track their ability to pay off their home even quicker.
As you work through your own goals, dreams and aspirations, you can see that it is vital that you set up your finances tax effectively.
This is possible by having a ‘step by step’ plan tailored to your circumstances, established upfront by the Property Twins to enable you to keep moving forward.
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Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice
