Conflicting advice about financing an investment property?
You hear one story from your accountant. Another story from well-meaning friends. And a completely different story from real estate agents.
Many of my clients have experienced it too. The problem is, when you follow the wrong advice, that investment golden goose can turn into a confusing nightmare.
For example, a client of mine, Anne (name changed for privacy), a key grip in the film industry, had specific instructions from her accountant for her and her partner (head gardener at Heidi) to buy an investment property. They were given free accommodation courtesy of her partner’s employer which meant they had no rent to pay and therefore had a good disposable income. They figured that this would be a great opportunity for them to create some wealth, put their money to good use, and purchase a property.
Their accountant advised them that their loan set up should be as a principal and interest loan. The aim was to start paying the loan off from day one. Why would you do this? In this case because their superannuation balances were quite low…this was going to be their way of creating their own retirement nest egg. As they had very few expenses they wanted too and had the capacity to pay off the debt quickly.
However, just when all seemed to make sense, one of their friends told them, “You don’t pay principal and interest on an investment property loan. It should always be interest only…you don’t want to pay the loan down, simply pay the interest owing each month as that is the only portion that can be claimed as a tax deduction”. Confusion, now reigned supreme…who’s telling the truth, who do I believe?
That’s when Anne rang me, completely confused. I reinforced exactly what her accountant advised her to do and explained the reasons why. The advice from her friend was wrong in this instance! Simply put her friend was superimposing a view that may have been appropriate for her but it did not reflect Anne’s and her partners circumstance. In this case Anne and her partner had poor superannuation. So by paying their loan down from day one and with impending capital growth, this is going to produce a far superior result dollar wise rather than simply paying the interest payable on the loan.
I don’t believe that her friend was ill-meaning, but everyone’s situation is different and her advice didn’t apply in this case because they wanted to pay the property off quickly to help create some wealth and retirement options.
The next step was to actually find the right property. Anne thought the whole process was going to be really difficult but was pleasantly surprised when I introduced her to a buyer’s advocate who helped source and purchase the property for her and the conveyancer who took care of the legal side of things and ensured that there was nothing untoward in the Contract of Sale and the Section 32 that would adversely affect them.
So, if you’re thinking of buying an investment property, let’s touch base and I can give you an idea on the right loan structure for you. And even put you in touch with a buyer’s agent who can do the legwork for you.