Important tips for managing your Line of Credit
I would always highly recommend that if you have a Line of Credit set up, that you use it solely for the purpose for which it was originally established. This could be either for personal purposes or for investment purposes.
By correctly establishing the separate loan types into what is personal and investment right from the start, you’ll be able to easily identify which interest expenses are tax deductible.
As soon as you start to pull money in and out of an investment Line of Credit for personal expenses and then repay personal money back in, you start to get into all sorts of mess. And this mess ends up having to be sorted out by your accountant so he is claiming the correct amount against your investment. His extra time and effort will hit your hip pocket in the form of higher fees. So do yourself a favour and stick to the rules on this one!
Line of Credit for Investment Purposes
An investment Line of Credit should be used to invest in assets that appreciate in value. Any properties you buy are a typical example.
You can use your Line of Credit to help meet some of the costs associated with your investments. This will reduce the amount of cash you need to use from your personal savings or regular income.
During any twelve month period there can be large expenses associated with holding your properties such as rates and taxes or an unexpected maintenance issue. Even the lack of a tenant can put stress on your regular income. These are times when it can be useful to have a Line of Credit set up that you can dip into to meet these costs.
Your Line of Credit would also be the account where you deposit your rental income as well as place any tax refund you might get as a result of holding an investment property. Your Line of Credit can also be ‘topped’ up by transferring a set amount of your regular weekly income over to help with the running costs of holding your investment property.
Line of Credit for Personal Purposes
Typically, you would deposit your wages and investment property tax savings into your personal LOC.
However, these investment property tax savings may need to be transferred over to your investment LOC from time to time, to ensure the longevity of your investment LOC.
If you have an LOC set up for personal use, then any interest charged by the banks on this account will not be tax deductible* and will be just like having a credit card bill.
Important things you should know about Line of Credit Loans
Interest will accrue on your LOC and one thing that most borrowers rarely realise is that when interest rates rise and the interest continues to accrue, there will start to be a draining effect on your LOC. If you are not aware of this or you don’t manage it carefully, this situation can quickly bring you to your LOC limit.
You have extra take home pay because of your investment properties. This should not be spent and should be invested back into your line of credit or better still to reduce your bad debt – your home loan.
A Line of Credit requires Discipline!
These types of loans require financial discipline and good budgeting skills to stay within your financial limits. They are a little bit like having access to a credit card with a huge limit.
If you have a LOC set up to help manage your property investments, its rule number one that you must NOT dip into this account for personal spending.
A big mistake many investors make is they see a nice tidy sum of money sitting in a LOC readily accessible and then decide they need a holiday or they want to buy some new expensive ‘toy’. Next minute – boom! The line of credit balance drops and before long they can find themselves having difficulty with the holding costs of their properties and now have no surplus finds to assist.
When a LOC is set up to assist with your property investments it must only be used for that purpose.
Be sure to keep in regular contact with your bank to ensure you are receiving the best interest rate possible. Just this week, for the second week in a row, we have been given a reduction in the interest rate we are paying on some of our loans. I wrote all about it here last week. I’ve just updated the post to include our most recent reduction.
On that note, I’d like to remind you to constantly review your finance structure to be sure it is as optimized for your investing. You can always have a free, no obligation review with the team at eChoice.
*The information in this article is not meant to replace professional advice.
Here’s to your success!
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