Take the case of Tom and Joan. Tom is a plant operator on $41,000pa whilst Joan earns $32,000pa as a training coordinator. Both are in their mid 40's, their children have left home and over the years they have reduced their home loan to $24,000.

The current loan of $24,000 had been set up as a Line Of Credit, which receives both their salaries. They pay all their living and personal expenses with their credit card, which has a sweep facility to automatically clear the credit card every month from their home loan.

However, in embarking on an investment property strategy they needed to re-define their goals. The original aim was to repay the home loan as fast as possible to achieve an unencumbered house and to live on the pension. Tom and Joan now wanted to purchase an investment property for $150,000. They still wanted to repay their home loan as quickly as possible and keep their cash flow situation as it was, but also wanted to be able to keep buying investment properties to create wealth.

From a lending point of view, this represented a number of conflicting requirements that required a variety of loan products.

We settled for a discount variable rate home loan with principal and interest repayments, combined with an offset account. The investment loan, also at a discount variable rate but on interest only for five years was coupled with a line of credit.

This arrangement had the further advantage of clearly distinguishing between personal and investment loans, making it easier for Tom and Joan's accountant to identify and claim expenses.

How did this work?

Firstly their existing Line of Credit was converted to a Principle and Interest housing loan of $24,000 taking advantage of the bank's introductory discount rate. All income, including rental payments and salaries were directed to the offset account. Personal expenses continued to be met from the credit card and cleared monthly from the offset account.

This now meant that not only was the housing loan reducing, but the reductions were even greater. This was due to the combination of a cheap introductory rate along with the benefits of the offset account reducing the principal from which interest was calculated by the amount of both Tom and Joan's salaries together with the rental income, before funds were required to clear the credit card each month.

We then established an investment loan of $160,000 to purchase their investment property of $150,000 purchase price plus meet all the purchase costs. This had the advantage of not requiring Tom and Joan to contribute any cash funds to complete the purchase. It also meant that a larger portion of interest could be claimed as a tax deduction and returned to them as less taxation being deducted.

As there was still ample equity in the family home we set up a Line of Credit of $80,000 to enable them to fund the purchase of another investment property once they were ready. Now they could look around for a second investment property secure in the knowledge they could pay a deposit immediately. They could then put forward a loan application based on the full purchase price plus costs using the equity in the new investment property.

This structure gave Tom and Joan peace of mind as it only marginally changed their personal cash flow arrangements whilst maximising their ability to repay the housing loan, purchase an investment property with no cash outlay and provide for future investment property purchases. In addition, due to the level of borrowing and income, we were able to have most of the normal fees and charges waived.

So what are the 5 most important points to look out for when preparing to finance your investment property?

1. Ensure you set up an advantageous and flexible loan structure

2. Low interest rate means lower payments

3. Low fees…no one wants to pay fees

4. Interest only option for the investment property

5. Loan flexibility to ensure future purchases can be made easily.