Forum Replies Created
Hi P@ck,
after computation, i’ve found out that my borrowable or useable equity is 92K.
Current valuation is $502,500 then? 80% of that is $402k, and you owe $310k – difference = $92k. How’d I go? ;)
based from my readings, simple rule of thumb is to multiply the useable equity by 4. Which means my max purchase price for IP must be within $368K mark?
If your purchase costs were $92k, you’d be correct. However, they are nowhere near that amount usually. With no LMI, and with a smart MB on your side, purchase costs can be as low as 3%, or up to 5%. So, more like $13k to $20k. You should be able to purchase one IP with an 80% lend up to a value around $440k.
But then, as Richard said, if your goal was to build a portfolio, you might be better off to pay LMI to use less of your equity, and perhaps allow the purchase of two IP’s in quick succession.
So much of what will work best for you is up to YOU, the investor. The equity side is one half of the equation. The other is serviceability – how much you can afford week-to-week. There is a lot to learn, but you’ve taken the first steps – now keep on reading and learning, and even talking with a MB to nail down the figures. It helps to know how much you can afford before you start looking.
While you are in learning mode, do check out the posts in the thread linked below too – I think you will find most of them very useful… ;)
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Benny
Hi P@cketeer,
I’m referring to property equity. what is borrowable equity?
Let’s say your property is worth $950k and you have $190k equity. That says you have an 80% loan. You may borrow more, but that would depend on serviceabilty (your income – is it enough?) and whether you are wanting to borrow at 90% (which would release $95k for you to use for other investments. In that case, your property equity is $190k, but borrowable equity is only $95k at a 90% lend.
But if your home is valued at $500k, and you have $190k equity, this means your loan is $310k, or just 62% of value. You can borrow up to 80% without paying LMI, so there is $90k for you. Or borrow with LMI to 90% and you can borrow $140k. Those borrowings can be deposit/costs for a new IP. And the loans to purchase the IP should be tax deductable.
In that second case, your property equity is still $190k, but your borrowable equity is much higher thn the first example. Hope that helps.
Welcome aboard, packeteer – there is lots of good information hanging about. Do check out the Articles found in the “Training Centre” (on the right of the page) as these are formulated to give you a lot of information in an easy-to-read fashion. Good luck,
Benny
Hi Woohah,
So the question is, Is equity worth it if the immediate on-selling prospects aren’t too great?
Were you planning to on-sell it soon – e.g. a flip? Or does it have a role to play for you as a renter first? Does it have reno capability, or subdivision? Do you have the funds to accomplish those, and does this fit with your goals?
It sounds like quite an opportunity on the surface. Using some figures as an example, let’s say you are purchasing a property for $200k and it would be worth $300k (50% equity increase, yeah?) You will have costs to buy it, and costs to sell it (inc CGT) if you suddenly needed to sell it. You may well need to discount it to sell again (much like the previous seller is doing, allowing you to buy cheaply).
How much would you need to discount it if you had to sell? Run the numbers – there are one or two possible surprises in there for you. One of these is the fact that you are buying with a 50% uplift, but it would only need to drop 20% or so on a resale to have you in serious trouble.
e.g. Sell a $300k house at a 20% discount = 300 – 60 = 240k Then subtract buy and sell costs, RE comms, any CGT, borrowing costs, etc and that remaining $40k could disappear quickly, even into negative territory.
Look for ways where you DON’T have to onsell it – will it pay for itself as renter, leaving you the Equity to draw against for other opportunities. It could be a great deal – but, as you have done, be sure you understand your Exit plan before buying.
Great question,
Benny
PS I just paid more attention to the Title – seems you are looking at half-a-million profit? Wow !!
If that is right, then that changes my figures in the example SUBSTANTIALLY, and perhaps even the whole message !! Anyway, it should give you a guide – and keep in mind that Stamp Duties on purchase can climb ferociously as the values go up. Take special note of these duties in your State !!It could also amplify any discount you may need to apply if you need to on-sell it quickly (fewer buyers can afford these higher-priced deals, so you are likely in a marketplace with other investors who will be sharpening their pencils before buying from you.
Re-doing the numbers:- Buy $1m, gain 50% = $1.5m Now, if re-selling quickly, a 20% discount brings you back to $1.2m. This leaves $200k to hopefully cover all buy/sell costs (esp Stamp Duties), RE agent comms, etc. There may even be a little left for you. But watch the discounting carefully – your 50% gain only needs a 30% loss to have you underwater !!
Hi Derric,
And a big welcome to you !! You’ve come to a good place. Good on you for taking a look at IPs – there is lots to learn, so don’t be in too much of a rush to go out and buy – just yet.Of course, you may have already done some research, thought about things, and are now READY to buy. But if not, do school up (on here, in books, meeting/talking to others who are already into property, etc). Have you thought about your goals, your strengths, the particular path you want to take? This latter could be – Buy and Hold, reno’s, development, flips, etc. Then drill down into your chosen way to read all about HOW to avoid the pitfalls and make it work.
As an example, when I started, I took 9 months to just learn before buying a thing. That “gestation period” wasn’t planned to take exactly that length of time, but it did “give birth” to a confident, budding investor (me) who went out and bought 2 IP’s in a week to start off, then a third within the first year.
I am a “numbers” person, so, much of that 9 months was spent developing spreadsheets that told me how things would work out if I went the way I was planning. My plan was to only buy existing houses, with good sized blocks – nothing flash, just good median or below properties, allowing me to renovate them down the track when the time was right.
If you are REALLY new (as in, not even sure of the basics) this thread below should give you some of those basic, good-to-know ideas :-
https://www.propertyinvesting.com/forums/general-property/4349450Hope it helps,
BennyI’ve been very happy with Kirstie at Qld Law Group in Springwood – they have offices in the city too, if you are nearer the CBD.
Benny
Hi Pati,
So, are you guys saying this is not a good enough investment?
I’m saying the example is looking OK – but is there an actual property on offer that meets those numbers? I reckon it would be hard to find one in this day and age.
The figures look quite OK, and yes, positive geared by a little bit – but when an ACTUAL property comes along, have them run the actual numbers to see if it really does measure up. I’m thinking there might be words like “Well, the numbers aren’t QUITE the same…” and then a whole bunch of positive features rattled off that have you thinking “That sounds good”, then a contract put under your nose….. etc. And the ACTUAL numbers might see you -$50 each week rather than +$36. Who knows !!!
Just be careful – those numbers are fine, but it seems they are an EXAMPLE,designed to pique your interest.
Benny
Hi eyelove,
If we were able to access some of the equity to buy the PPOR it would make things so much easier as we had earmarked the cash on hand for other purposes.
As long as you don’t “contaminate” any current loans on the IP that are deductible, then go for it. Go for a totally new loan against the IP – the new loan will be non-deductible, but ensure it is a new and SEPARATE loan and not a current loan increased (as Catalyst warned). Set the Offset up against that new one, and you are on your way.
That is the ideal one for an Offset, and rents, etc should go into that one.
Benny
PS the usual – you know “This is not advice, just my opinion”…. ;)
+1 to ltroeth
Benny
Hi Adrian,
I’m not an accountant, so do check my thoughts with the right person – but here is what I believe to be true.Purchase Costs are allowed to be claimed over a 5 year period – so, not as a lump sum. If you were to sell again in the future, any unclaimed amounts remaining can be cleared at that time. I think Building and Pest would come under Purchase Costs, but could be wrong.
I would think any reno items would be difficult to claim as “maintenance” (you are not renting it yet) and would likely be added on to the Capital Cost of the property. You effectively “get that back” via a higher cost base, so less CGT on eventual sale. I think the ATO presumes that you would have paid less to purchase a house needing a renovation, and any costs to do so become part of the Capital (along with an expected lift in Equity, yes??)
But then, you DO get some payback in Depreciation, and the new kitchen items would boost that total, allowing you to claim 37% or so in the first year as a tax deduction. So, some relief there….
Hopefully an early revaluation showing Equity growth will allow you to borrow back YOUR money (plus a bunch more hopefully) thus effectively providing another Deposit to go do it all again.
Anyway, do check my answers with your accountant or other qualified adviser – or maybe other posters can,
Benny
Hi Claudio,
Good on you for asking the questions first – smart move !! You have already received some invaluable knowledge from several qualified members, each offering good reason to question this loan and where it may lead.This is a very important decision for me and my family and I am a bit scared to take the wrong choice, I hope someone can help me to find the best (if there is one) solution./
Absolutely right. I’d suggest you check the other answers you have already received, and contact one of the repsonders (maybe the one whos response seemed to “click” with you. But really, any and every one of them would be able to explain what loan type would be best for you, and (maybe) WHY this loan could become a problem into the future.
Pick up the phone and call one of them. :)
Even as a non-adviser, I could see several holes in the advice you have already received fro. Never ask a barber if you need a hair-cut – you know what the answer will be, right?) :p Get the answers from one of our residents – I’m sure you will be much more confident and knowledgeable after spending time with one.
We are buying our first home
Well done – your needs might be different to those of investors right now, but remaining flexible is the key. Who knows – you might want to become an investor a few years into the future. Thinking of your loan structuring NOW is a really good move. Well done.
Now, where’s that phone!!! :p
Benny
PS Just to help you get up to speed on a number of basics, try this :-
https://www.propertyinvesting.com/forums/general-property/4349450Benny
Hi Claudio,
And a big welcome to you – I see this is your first post.On an loan of 450000$ means an interest of 60000$ in 30 years, 2000$ at year, and this is the reason why we have decided to go with them.
Just so you don’t get too confused later on, I wanted to point out that you are missing a zero on both of those amounts.
One year’s Interest is ~$20,000 and not $2000 (otherwise everybody would be wanting one !!!) :p
Therefore, you will be paying $600k over 30 years. Still a good rate in this day and age though,Benny
Hi Wiwin,
Exit strategy for every purchased ip is kind of hard.
I think the real reason for the seminar to mention this is because we don’t automatically think of this when buying things – at least, not to any depth. e.g. when you buy a new handbag, do you naturally think “This will do me for just one year, then I will pass it on to St Vinnies” or, if we buy a new car, we might have in the back of our minds “Ah, this will do me for 5 years, and then I’ll buy another one”. We don’t really think about HOW to get rid of the old one, how much it might be worth then, where would we sell it, etc.
With a purchase as expensive (and immobile) as a house, it is worth thinking this through before buying. Even if your plan is Buy and Hold, events may happen that might change this intent, and it would be good to have already considered what to do before it happens. Like, you might leave the country suddenly, and want to take all of your assets with you – unplanned, but that’s life. Take the time to think through “What would I do if I had to sell it quickly?” before you buy it, and maybe watch the markets for peaks and troughs, in case it suddenly becomes useful to take a profit to get into something completely different.’
I think the process of thinking about the exit is just so that your subconscious mind can be “doing its thing” as you live your life. Having previously thought through the process, your mind will be triggered when you hear of someone selling their place in your area, and you might want to revisit whether Buy and Hold is still the right thing to be doing.
See, over time, Councils change their bylaws, and Govts change laws – any of which can affect your investing. You don’t know today what may change tomorrow, but if your subconscious is aware “You might need to sell one day” then you can go about your life, knowing that you have it covered if you did need to sell.
What if you lost your job right after buying an IP? It probably won’t happen, but it could – so be sure to consider just what you would do BEFORE buying it. Would you take a loss to move it quickly? Do you have an alternative job in your mind? Do you have sufficient savings to “ride the storm” for six months? Can you alter the use of the place to make it MORE attractive to buyers so it will move quickly?
It is probably also a part of getting Finance – when you take on finance, you must have a way of paying it back !!
Benny
Hi Pati,
This is just a scenario, they gave me. They will probably recommend 3 bed 2 bathroom house and land from Brisbane.
Ah, no wonder everything seems “above board”. It is designed to show the benefits of negative gearing. Actually FINDING a house that would meet those numbers would be the hard part. e.g. in Kingston (Logan City) new 2bdr units in a block of 12 have an asking price around $320k. The land size per uunit is TINY !! And I can’t see a $25 a year increase in rent being viable.
It seems to me this is a sales model – a “pie-in-the-sky” chart (pardon the pun). Watch the numbers change markedly once true figures are known, or watch the “house” become a 2bdr unit or townhouse….. If they CAN find a house that would fit with those numbers, I’d love to know where it is….
Benny
Hi Pati,
Welcome aboard, and a great suite of questions. I’ll have a go, then see what others can add (or to pick me up if I get it wrong… eeek! :p )1) How can this scenario be positively geared.
Except for the Tax deductions, you would be losing ~$85/week in the first year, then $65 in year 2. They assume a rental increase of ~$25/week each year (is this viable? Could be…. but no guarantee).
After Tax deductions, you are positive by $36 a week in year 1, 40 in year 2, etc. You can get this weekly by filling out a Withholding Variation Form, allowing your employer to take LESS Tax out of your weekly Income. Or have it arrive as a cheque from the ATO at year end.
2) I am not sure the stuff listed under Non-cash deductions.
They have calculated the building cost at $215k, so just $135k remaining to cover land cost – small block? Their Profit will be in there somewhere too. Where is this IP being built? Is it a House, Townhouse, or a Unit?
Fittings are $24k (could be about right, depending on just what you are buying). You also are allowed to write off some of the costs associated with the purchase (borrowing costs) as well as Interest on the Mortgage. I see nothing untoward in most of that.
3) Does the assumptions and rates make sense.
I was pleased to see them allowing 7% Interest after 3 years – this could show an expectation that the low rates of today won’t remain at those levels (good thinking). Note that, in Year 5, you are only just breaking even – this is because your non-cash deductions have all but disappeared, and rental increases haven’t yet gained enough to cover the losses of deductions.
DEPENDING on what is being bought, and where, the numbers look sensible enough to me. Do try to ascertain whether a $25/week rental increase each year is viable, as well as their projected equity growth of 7% pa. These are the real “unknowns” that need a bit more digging.
Let’s see what other points pop up from other members,
Benny
PS Just my opinion – I’m not an adviser of any kind !! ;)Hi Cooper,
Simply scroll right down to the very bottom of this page and you should see this line :-2001 – 2014 PropertyInvesting.com Pty Ltd, All Rights Reserved Terms & Conditions | Privacy Policy
Click on the links to read them,
Benny
Hi Knox,
Am I right in saying that using this method I’m basically freeing up more cash to purchase more IP’s?
Correct – the bank only asks that you pay Interest – nothing needs to be paid off the Principal – so you “pocket” the extra, putting it to work in your Offset account (which helps to REDUCE the Interest owing each month).
And you keep your spare dollars “freed up” too, as you may remove the total contents of the Offset at any time, at which point the original loan and Interest/month reverts to its original settings – which leads on to your next point:-
How does maximizing my tax deductible debt benefit me?
The ATO allows you to claim any IP losses against your personal Income (wages), thus reducing your “Taxable Income”. Now, we have two common scenarios with this:-
1. If an IP is negative geared, you are losing money each month in hopes of a later equity gain. The loss after all expenses, less rental income, is applied to your personal Income for the year. This loss reduces your Taxable Income, but your employer would have been paying Tax for you as though your wage was your only income. With your Taxable Income reduced (by the negative geared loss), the ATO will write you a cheque as a Tax Refund.2. If an IP is positive geared, you are making money each month. Your accountant adds the Income, less all expenses, to arrive at your total gain for the year from the IP – this is then added to your Taxable Income, and YOU write a cheque to the ATO for the extra. By paying Interest only, you are not spending after-Tax $$ paying down the Principal, but you ARE reducing the Interest paid, so your deductions do get less, and you make more of a Profit each year (and write a bigger cheque to the ATO). Same as if you worked an extra job – you make money from it, you pay extra Tax.
BUT, when you find another use for the $$ in Offset, like buying another IP, and you take those $$ out of the Offset, your original loan and Interest remain at their original amounts, thus you are making LESS money (paying more Interest), so you pay less Tax.
Instead of using your after-tax $$ to reduce the Principal (thus the Interest owing) on an IP, you keep the Principal at its highest, and use the Offset to lower the Interest. THEN, when opportunity knocks, you use those after-Tax $$ you have saved in your Offset to generate another Income by buying an extra IP, or you might use it as a deposit on a PPOR. You don’t have to “ask the Bank” to get some more Equity out of your house to buy another one. No need to – you are your own bank !!
So yeah – HUGE gains and flexibility by utilising Offset accounts (as per that LONG example I linked you to – read it a few times and see if it starts making sense to you),
Benny
Hi Knox,
Maybe an earlier reply re a “IO vs P&I” question might help. Note how, using IO and Offset, you may CHOOSE to pay at a P&I rate, while keeping your funds in Offset. The result can be similar, but your flexibility is WAY higher by going IO/Offset than by paying P&I.Especially, see the last post in the thread where I foretell a “worst case scenario” (and it is pretty damn good) :-
https://www.propertyinvesting.com/topic/4410595-im-a-bit-confused/Benny
Another area that raises a lot of questions is around LMI (Lenders Mortgage Insurance) – how it can be used, when/where it should be used, and why it makes sense to “gear higher” in some situations.
I am looking around for articles and threads that go into detail on this…. If you see one that seems well-written and could be used here, please post a link so that the good stuff can be shared,
Thanks,
BennyPS – Corey Batt has come to the fore with exactly what I was looking for. Onya, Corey. *applause*
Go see his contribution here:-
https://www.propertyinvesting.com/topic/5016475-lmi-friend-or-foe/-
This reply was modified 8 years, 6 months ago by
Benny. Reason: Adding a link to an LMI thread - Nov15
Hi Mitch,
Further to what Jamie has said, do read up here :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Some great answers to many questions – including “IP first, or PPOR”, “IO vs P&I mortgages”, etc. Enjoy !!
Benny
Hi Aque,
My goal is to buy a PPOR and aim at a strategy I can have all my saving in PPOR
I’d suggest you add the extra bit at the end that keeps your options open :-
My goal is to buy a PPOR and aim at a strategy I can have all my saving in an Offset Account against my PPOR loan….
See, though you might buy a PPOR now, you MIGHT, in later years, want to turn it into another IP. By using an Offset account, your savings offset the mortgage payments as you save. But, when you withdraw YOUR cash from the Offset account, the original loan is still in place (allowing you to claim the Interest on the full mortgage as a Tax deduction on what might be your new IP – your old PPOR).
Talk about this in depth with the right adviser, or read on here all about it. Be sure to know of this choice before buying your PPOR. One link that helps to answer a lot of early investing questions, including re Offset accounts, is this one :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Thanks for adding that extra information re your circumstances,
Benny
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This reply was modified 8 years, 6 months ago by
