Are you involved in property investment, or would you like to be? If so, then you need to understand what property investment loans are all about. This brief article will give you a start.
Funding for property investing - investment loans
An investment loan isn’t a lot different than an ordinary home loan. At one time banks would have charged more in interest for an investment loan, but most lenders today will give you the same low rate for either one. The cheapest home loans should still be available for that purpose. The investment loan is also likely to have all of the same features as the corresponding home loan – they can be identical. However, there will be a difference in how you use it.
The character of loans used in property investment
What makes an investment loan something that provides a tax deduction is not the name of the loan product, or the property that secures it, but rather, it’s what the money has been used for that’s drawn out of it. You need to be able to clearly trace the path that the money takes from the loan to the purchase of an income producing investment. Ideally it should be a direct path, but if that’s impossible, then you should be able to show a transaction of a precise amount into an account, and then a short time later another transaction for the precise amount going out of that account for the purchase. While you can sort out the details with your accountant, just be aware that this is a very important matter, so plan ahead. It’s often when people are unprepared that they get “forced” into doing it the wrong way, and they end up paying for it.
Multiple property investment loans
It’s very common to have more than one loan used in property investment. One loan may be against the family home or another property, using the equity generated there for the down payment, and the other loan could be secured by the investment property itself for the remainder of the purchase price and related expenses. This enables the investor to borrow 100% of the costs involved in purchasing the investment property and maximise the potential tax deduction.
Investment loan amount and risk
It’s important for you as an investor to work out your attitude towards risk. This will affect how much you will borrow. You might be wondering how does that fit in with borrowing 100% of the purchase costs?
That’s a good question. Let’s say that our friend Joe has a home worth $500,000 and that he now only owes $200,000 on it. That has been the result of his “savings” strategy where he has been paying extra into his home loan. He feels that $100,000 of those extra repayments is money that he would like to put toward an investment property. Joe has located a suitable investment property that is going to cost him $350,000 all up. So, in terms of risk management, he will borrow $250,000 or a bit over 70% of the cost, with the remainder being his “cash” savings. His overall borrowings will be something on the order of 65% of the total value of the two properties. He is comfortable with that level of borrowing. So, with that we tick off the risk management issue.
Given that he is happy with the overall level of borrowing, we now want to implement it in a way that maximises the benefit to him. So rather than just redraw the cash from his home loan and use it for part of the purchase, he will actually restructure his loan so that he can draw the money from a new investment loan portion. That way, under current tax laws, he should be able to claim a tax deduction for as much of the interest as possible.
The same is true if he has put money into other investments that he is now going to cash in to use for the purchase of the investment property. He should pay that money into his home loan, then have the new portion created for the investment property and draw from that for the purchase.
Loans for property investing
If you are contemplating an involvement in property investing, give the friendly credit managers at State Custodians Mortgage Company a call. They are very experienced in providing the finances for such an investment and will be very helpful to you. Call today on 13 72 62.
