Hi all,
All the above answers are great in theory.
1) What generally happens in reality if you put an investment property on Interest only?
- You have one way to get ahead. You need capital gains.
- What happens if you don't get them?
2) Where does the savings actually go?
80% or more of households are shit with money. So you don't pay $100 per week on the rental as principal. Instead you leave this in the overall spending pot. In theory it is going to go onto your personal revolving credit, and reduce the debt on your personal house. But generally it dissappears.
a) pay principal on rental, yes not as tax effective but at least overall debt going down
b) pay interest on rental, and in most cases the principal part just disappears.
So in reality, for most people, a) is actually better for them
3) How much is the actual difference in dollar terms?
$100 per week paid in principal, $5,000 per year
Year 1 - Interest is $150, so max tax saving $50
Year 2 - Now $10k, so $300 interest saving, max tax saving $100
So yes it does add up, but often it's not as major as you think!
4) With some structures the extra cash in the rentals will be the entities and not yours, so be careful around this.
OVERALL
I would split loans on rentals, put some on interest only, and have some on P&I, so that your overall loan on the rentals is slowly going down. This is the simplest and easiest way to get passive income long term.
Generally with interest rates getting lower, your repayments will be lower, plus rents have really jumped up. So if you have had rentals for a few years, you probably won't even notice $100 going to principal each week. But over time loan will get less and less, meaning less interest, meaning more surplus cash = winning cycle
CURRENT - note in the current covid-19 environment, I would put all loans on interest only short term, so that you are maintaining max cash buffer.
Ross
All the above answers are great in theory.
1) What generally happens in reality if you put an investment property on Interest only?
- You have one way to get ahead. You need capital gains.
- What happens if you don't get them?
2) Where does the savings actually go?
80% or more of households are shit with money. So you don't pay $100 per week on the rental as principal. Instead you leave this in the overall spending pot. In theory it is going to go onto your personal revolving credit, and reduce the debt on your personal house. But generally it dissappears.
a) pay principal on rental, yes not as tax effective but at least overall debt going down
b) pay interest on rental, and in most cases the principal part just disappears.
So in reality, for most people, a) is actually better for them
3) How much is the actual difference in dollar terms?
$100 per week paid in principal, $5,000 per year
Year 1 - Interest is $150, so max tax saving $50
Year 2 - Now $10k, so $300 interest saving, max tax saving $100
So yes it does add up, but often it's not as major as you think!
4) With some structures the extra cash in the rentals will be the entities and not yours, so be careful around this.
OVERALL
I would split loans on rentals, put some on interest only, and have some on P&I, so that your overall loan on the rentals is slowly going down. This is the simplest and easiest way to get passive income long term.
Generally with interest rates getting lower, your repayments will be lower, plus rents have really jumped up. So if you have had rentals for a few years, you probably won't even notice $100 going to principal each week. But over time loan will get less and less, meaning less interest, meaning more surplus cash = winning cycle
CURRENT - note in the current covid-19 environment, I would put all loans on interest only short term, so that you are maintaining max cash buffer.
Ross
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