All Topics / Help Needed! / Start small on 1st IP or wait

Viewing 19 posts - 1 through 19 (of 19 total)
  • Profile photo of Hagget1Hagget1
    Member
    @hagget1
    Join Date: 2013
    Post Count: 5

    Hi I’m new here and wanting advice(obviously).
    I am keen to buy an IP to kick off on my goals. Am I better waiting
    To get a bigger deposit or find something smaller(1bed unit) before
    Prices start to rise again? I only have about 8k in my mortgage offset
    Account and my wife and I have about 450k equity in our ppor. Any sort of advice would be greatly appreciated. Cheers Mark

    Profile photo of Hagget1Hagget1
    Member
    @hagget1
    Join Date: 2013
    Post Count: 5

    PS my goal is to be cash-flow positive but am ok starting off cash-flow negative then getting on top of it. Our combined incomes are approx 130k with a 125k mortgage cheers Mark!

    Profile photo of DerekDerek
    Member
    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Mark,

    While your 'savings' level is on the low side – you have plenty of equity in your own home. This equity can be released and the monies made available used for a deposit on another property.

    It sounds as if you need to grab yourself a decent broker and work through the possibilities.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Mark 

    Welcome aboard.

    Have you considered using the equity in your PPOR rather than your own savings to purchase your investement property?

    Accessing equity in a PPOR to kick start an IP portfolio is one of the most common scenarios we come across.

    There's two good reasons why this would benefit you.

    Firstly, the equity that you access will be tax deductible (whereas the cash that you use won't be). In fact, using cash from your offset will only bolster your non-deductible PPOR debt.

    Secondly, you'd be able to extract enough equity to cover a 20% deposit and costs so you won't need to pay mortgage insurance on the investment property purchase. If you were to use a small cash deposit – you'd be up for mortgage insurance.

    With accessing equity, it's important that it's structured correctly so that you don't cross collaterise your PPOR with your investment property. It's also important to structure it in a manner that enables you to identify your tax deductible debt (the equity release) from your non tax deductible debt (your current home loan).

    Hope that helps.

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Hagget1Hagget1
    Member
    @hagget1
    Join Date: 2013
    Post Count: 5

    Thank you Jamie
    If I borrow for my IP from a different lender does that avoid cross collateralizing or is it something else? My wife and I are joint directors of our family trust and hope to use that rather than the ip be in our names. Will this throw up any issues?

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    No worries.

    You don't necessarily have to use a different lender for your IP to avoid cross collaterising.

    You just need to make sure that the bank doesn't list both securities on the application and the loan offer docs.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    How are you calculating equity? Also is capital growth in the plans or are you only looking at cash flow?

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    For something different. How about you sell your own home for 575k (assuming your 450k equity and 125k loan). Go rent somewhere for 300-500 a week and use the 440k ish (after sales costs) plus your savings and income of 130k per year to buy some neutral/positive cash flow properties. The reason why you would sell over redraw as a loc on your home is that you're maximum borrowing power will get limited by your income. Let's assume roughly 1.5 million with a 130k joint income. Plus rental income.

    Selling would enable you to quite easily borrow over 2 million at under 80% LVR. That could be the difference of another 1,2 or 3 properties depending on your price points. If you did target neutral/positive properties the surplus funds could go toward paying for your rent and or another PPOR in the future which could be paid for by your property portfolio. 

    Profile photo of N@thanN@than
    Participant
    @n-than
    Join Date: 2010
    Post Count: 241

    Easy Solution… Give Jamie a call! At least you know your loans will be structured correctly and you will be making the most of your deductible debt. I don't think you realise just how much you can borrow with $450k equity!?

    Profile photo of Hagget1Hagget1
    Member
    @hagget1
    Join Date: 2013
    Post Count: 5

    Hey thanks for the comments. My equity comes from our house valuation (580-600k) minus 125k mortgage.

    Selling is def out of the equation, if it was just up to me..maybe. How on earth do I cover 1.5m even after rent is taken into account. I've looked around on a few sites for properties but the figures haven't added up yet. Going by my own figures i'd be happy borrowing about 300k at the moment and meeting the shortfall after rent with our own money.  The aim is to get on top off the first IP for pos cash flow then go from there.

    Am I making any sense? Is this the way to get started in IP's? I do appreciate the feedback cheers Mark

    Profile photo of BigCubezBigCubez
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    @bigcubez
    Join Date: 2012
    Post Count: 48

    Hagget,

    With all that equity you don't have to necessarily start small with your first IP. Take out a sub loan on your PPOR to release the equity then use that as a deposit on your IP. Then both the sub loan and the mortgage on your new IP will be tax deductible.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi again Mark.

    If your property is worth $600k and you have a mortgage of $125k then you've got $355k of useable equity. This is calculated by taking 80% of it's value and then subtracting the current loan amount. Some lenders allow you to access equity up to 90% of the properties value but this isn't really relevant in your situation as $355k is plenty to start with.

    Without knowing the specific details of your situation, the first step would be devising a longer term plan and working backwards from that. What is it that you want to get out of property investing? ie. a certain level of passive income by a certain age? From there, you can work out what sort of properties and the size of the portfolio that's required to get this done.

    Once you know where you're heading – it's a matter of putting the plan into action.

    The first step will be accessing some equity in your current PPOR.

    How much to access will be dependent on your longer term plans and is something that should be discussed with your broker/banker.

    Once your equity release is set up and you've got an idea of exactly what sort of properties you're looking to purchase, you can start shopping.

    A decent finance person will structure your loans in a manner that ensures you don't hit a borrowing capacity wall too early, that your properties remain uncrossed and that your loans are structured in the most tax effective way. 

    You'll be surprised at what you can accomplish with a bit of knowledge and a large chunk of equity.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Common way of calculating equity but not quite the correct way.

    You can borrow up to 80% of the value of the property minus any existing debts you have on the property. So let's say that your property is worth $600k, then at 80% lend the equity you have is $480k minus the existing loan of $125k leaving you with an equity of $355k. 

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Also how long are you planning to be in your current PPOR?

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
    Email Me | Phone Me

    Residential and Commercial Brokerage

    Profile photo of wilko1wilko1
    Participant
    @wilko1
    Join Date: 2010
    Post Count: 510

    My 2 cents would be that  I wouldn't use your home equity to purchase a negatively geared property.  For one thing I see it as even risker then buying a neutrally geared or positively geared property. Lets say you lose your job and get fired. 

    If you had a negatively geared property with a shortfall of 100-200 a week, well those mortgage payments are gonna keep coming and you'll still have to find that money per week.  Lets say  now you have got your  3rd IP and you still think paying the shortfall with your income is a good Idea lets add another  100-200 a week to your shortfall costs. Your level of risk has now gone even higher In my opinion. Plus your Serviceability has now gone out the window  your costs are now 400 dollars a week towards some ip that could see some captial growth when in the future though your not sure. Can you see how that strategy has it limitations. You can still have your cake and eat it too if you are looking for properties to reduce your tax bill. Neutrally geared property with depreciation. . 

    Going with buying a neutral/positive geared property. It might become apparent that its a bit harder to just buy these types of properties these days. You could instead buy a property for 100k at 80 % LVR you'd need approx 25k to cover stamp duty and deposit. Your loan is now 80k. A property like that could rent from 140-200 week. Your loan repayments would be $85 weekiah @ 5.6%.

    banks usually consider 80 percent of rental income as income. So if you are renting it for 140 dollars a week. The banks will consider 80 percent of that so 112 dollars.

    your mortgage payments are $85 a week. So you have now added $27 a week to your Servicablity or $1404 for the year . 

    Yes I acknowledge the extra costs of rates insurance water etc. But for who it really counts for and who's going to lend you the money to start your portfolio. Then all that matters is what the bank view. 

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Every investment decision comes with an element of risk. 

    I understand where you're coming from in terms of highly negatively geared properties impacting on future serviceability but the fact is, without some capital growth the portfolio is going nowhere. 

    Cheap properties in the sub $100k mark are generally found in rural/remote locations with little chance of future growth. After you take into consideration holding costs – even a $100k property with a healthy yield isn't going to provide enough cashflow to let you retire.

    You'd need to have dozens of these to even come close – and at that point, you've got dozens of tenants to keep happy which feels like a job in itself.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Hagget1Hagget1
    Member
    @hagget1
    Join Date: 2013
    Post Count: 5

    Shahin I don’t plan on leaving our ppor anytime soon if at all. As far as neg gearing and serviceability issues go I was always planning on getting Ip1 pos geared before progressing further. Thanks for your input guys.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    No worries – and I've responded to your PM.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Hagget

    Better late than never.

    Just talk to Jamie and get some proper structured advice.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

Viewing 19 posts - 1 through 19 (of 19 total)

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