Tips on Financing for Investment

• Make sure you have considered how you will structure your investment. The Mortgage Centre can liaise with your accountant if you wish, as correct structuring can make a huge difference to your tax benefit’s. Whose name is the property going in? Yours, Your spouse, joint names, family trust etc. In which entity will the tax benefit’s be greatest? It’s very important to get this right. Not just whose name the property is going in but in whose name the loan is going in.
• Consolidate your loans now. Do not pay exorbitant interest rates on credit card and other debts, This is an opportune time to restructure and increase your loan amount to pay out any “bad debt”.
• Your ability to purchase property is less to do with how much money you have in the bank but how much equity you have in your current home. Your home equity can act as a deposit for further property and you might be surprised how attainable it is to acquire property for investment. Not all investing is undertaken in property. Many people use the equity in their home for other investments such as shares, business ventures etc.
• You need to consider the holding cost of your investment. Most investment financing is Interest only. The additional cost each month of paying back the principal eats into your cash flow. What you would outlay in monthly principal payments could be the interest repayment on another investment and The principal component of a property investment loan is non tax deductible so there is no incentive to pay off the loan (unlike your home loan). Over time the value of your property’s growth will far outstrip the holding cost of the investment.
• The holding cost is the difference between your return on investment (For shares this would be dividends) and in property – your rental return. There is invariably a shortfall in the return as opposed to your holding cost (interest repayments). You will need to fund that cost each month and budget for it. Consider all the holding costs in your budget – rates, property maintenance, insurance etc.
• Talk to your accountant about ways to minimise your holding costs each month. Rather than get your tax break at the end of the financial year on your tax return, you may be able to apply to the Tax department for reduced tax payments every month – pre end of financial year.
• Insurance — All your hard work in choosing your investments and funding them every month could meet with disastrous consequences if you have no income insurance and find yourself unable to work for a period of time. The Mortgage Centre strongly recommends Income protection and life insurance and can set up an appointment with one of our professional affiliates.