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Hi, I only paid P&I off my first home. Then I found out my mistake.
I have a low LVR, but I have a very low risk threshold. Plus that gives me good cashflow, which was my aim so I can retire. Very difficult to retire with a high LVR but people have high LVR’s to build a portfolio faster. Some then sell down to increase equity and cashflow to retire. But there are many different strategies to get to your goal.
I’m confused by what you are saying here:-
I see the benefits but also see a lot of risks but I am sure there is reward due to this. It sounds like you could get away
loosing $25,000 (currently) in one year because of no income from a property or loan increase dramatically or whatever I cant.I would not be in the same financial Situation if I did Interest only??
PnI = Worth 550k Loan 380k = 170k Net worth
IO = Worth 550k loan 450k = 100k net worth.What have you done with the other $70K (in the IO example)? It sounds like if you pay IO you are throwing away the money you would be paying if P&I. You still have $170K net worth if you have it in the offset account (or better still have invested it in something that returns more than the interest you are saving.
I think you are over thinking it. Where are you located? PM me and I’m happy to have a chat if you like.
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This reply was modified 8 years, 12 months ago by
Catalyst.
People who “make it” don’t leave money idling in P&I accounts. While they are in the accumulation phase anyway. Depending on your SANF (sleep at night factor) as to how much you “have” to leave there. I know many investors who are happy to have 85% LVR. I am not one of them.
If you pay P&I and do not withdraw equity to buy again, it’s a slow road to the top (unless you are on a high 6 figure salary. You need to save deposits each time you buy.
Also don’t forget Capital Growth. So as your property goes up you take some of that growth out (via the offset) to buy again. If you paid P&I you would have to get the property revalued in order to ASK the bank if you can have some of your money back. Believe me this is a pain in the backside, especially once you have multiple properties. The bank wants to see ALL your statements etc. Of course not many people have enough to buy a property without borrowing any money.
Hard nosed investors buy as soon as they can so any “spare” money is put into investing. This is why I don’t like P&I. I would advise against it for everyone that has self control. If a person spends every cent they earn and have a massive credfit card debt (a sign of lack of control) IO is not for them. It’s all about using other people money.Always pay non deductible debt (eg a PPOR home loan) you are better off paying that off. But again do it via an offset in case you ever decide to make it an IP.
Property is about compounding.
Example. If you have 2 properties worth $500K each. Your happily paying down the loans. 10 years later your properties have double (theory I know) and they are worth $1M each = $2Mill. Assume you have paid off $300K so you owe the bank $700K. Your net worth is $1.3MInstead of paying P&I you pay interest only and buy another 2 properties $500K each.
After 10 years your properties are worth $4Mill. You haven’t paid any off so you owe the bank $2Mill. So your net worth is $2Mil.
I left buy property investing journey until I was older so needed to buy a lot in a hurry. I used equity to do that.
I bought a few houses under market value (before the boom of course- Sydney), did a quick reno and pulled my deposit back out to buy again. My LVR did not change due to the reno increase in value.
Of course this is pretty basic and there are a lot of other things in the mix (depreciation, rent etc but I hope it makes sense)
Hope that answers the question. If not ask further questions.
Rich different to different people. Rich to me is being able to do what I want when I want (nearly there).
Jaxon it seems you don’t understand how an offset works.
You still paying the same amount off the loan but instead of GIVING the money back to the bank you are LENDING it to them. It sits in the offset (which reduces the amount of interest you pay, the same as if you were paying it down) BUT YOU have the option to pull it out if you want.
eg a) Loan of $300K- you’ve paid down $200K = you pay interest on $100K
b) Loan of $300K, you have $200k in your offset = you pay interest on $100k.The difference is a) you can ASK the bank if they will lend you say $100K to buy yhour new PPOR or
b) yo9u TAKE the $100k out to buy your new home (NO asking for permission, it’s YOUR money to do with as you please.Also if you then change the first property to an IP in a) only $100K is tax deductable. in b) $200k is rax deductable. That is a HUGE difference at tax time.
If loans went to 10% nothing changes your loan is at the same level that it would be if you had paid P&I.
And interest only is not a fixed period loan. google to help yourself understand how it works. Of the hundreds of people I know who invest in property I only know one that has P%I loans. It is just too restrictive on your ability to grow a decent property portfolio.
Of course if a person is hopeless with managing money then IO is not a good idea, but then they will never be rich anyway so it doesn’t matter.
One of my favourite quotes which has helped me on my investment journey. You don’t know what you don’t know.
NO!NO!NO.
DO NOT pay down the loan. Change the loan to interest only NOW!!!! See if you have an OFFSET account attached to the loan (NOT A REDRAW).
If not get one with an offset.
Pay interest only and put any extra money into the offset.The reason for not paying down the loan is that if you decide to keep this house as an investment then you have no loan (deductible debt) but you will have to take out a big loan to buy your new PPOR (NON deductible debt),
If you pay IO and put extra money in the offset you can then take this money out of the loan and all of the loan on the first house is tax deductible.
I hope I’ve explained to you understand it.OK! Get that sorted then think further to what you want to do. From the information given it’s hard to say what you should do. Do you like the area? What is your current income (will it support a bigger PPOR loan?) etc. Also what city are you in? That makes a huge difference as market conditions are different.
Don’t worry that it’s in yours and your wife’s name. That’s fine. If you are looking at having a multi property portfolio then you may want to look at trusts etc but don’t get too hooked up on that yet.
Post more questions as they arise.
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This reply was modified 8 years, 12 months ago by Catalyst.
Can you elaborate on the particular situation?
There’s lots of options but at the same time if you’re “exiting” you will no doubt be selling the place…
Why do you say that? I assume the OP means exit strategy by exiting the workforce (the end goal), not exiting property.
There are quite a few different exit strategies. Everyone is different. It depends on your timeframe, structure etc.
One strategy is buy heap of properties, wait for CG then sell half and live off the rent.
Some Live off Equity (or a mix of rent and equity)
Others sell everything and invest in shares.
If time permits (or if you manufacture CG) you can just live off the rent without selling. That’s what I’m doing, mixed with some income from shares.
You need to figure that out yourself because that will in turn define your start strategy and your goals along the way. But keep in mind things change along the way so your goals change as you learn and grow.
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This reply was modified 8 years, 12 months ago by Catalyst.
With assets of $750,000 (assuming they are income producing) with the low interest rates you’d be lucky to get $30,000pa (4% return). That is in no way a comfortable retirement. So how are they thinking these people are going to live?
You would have to dip into the capital, so it wouldn’t be long before you did qualify for a part pension.
Where’s the incentive to be a self funded retiree?
You need a hell of a lot more than $750,000 in order to retire. Their REAL aim is to get people to work longer. Buy raising the pension age and lowering the asset base people will have no choice.
Captain? you don’t go under the threshold and get the full pension. You get a part pension until you drop to a very low level of assets.
Adding the family home will be next.If you are under 30 you had beter start sorting out your retirement quick smart or you’ll be on the street by your 60’s.
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This reply was modified 8 years, 12 months ago by Catalyst.
We’ve done quite a few in Sydney. How do you post photos on this site?
We typically paid 2,500- 3,500 for each one. We installed a few ourselves and paid for a couple to get installed.
If you are willing to demolish yourselves and you don’t move the plumbing it’s not expensive. Did you want to do some yourself or have someone do the whole thing? PM me if you need assistance. I’m having reno withdrawals at the moment.
Do you have photos of yours?
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This reply was modified 9 years ago by Catalyst.
No you missread my post. I didn’t say I don’t have public liability on the houses. I said I don’t have Landlord Insurance on the houses. Building insurance covers public liability on the houses. Whereas the strata building insurance only covers common areas (not inside my unit).
The $20M is what one of the policies has. Who cares if it’s too much? What if someone dies in your property? Or is permanently disabled? That can be $M payout + legal costs. It’s a worst case scenario.
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This reply was modified 9 years, 1 month ago by Catalyst.
@Catalyst….if someone injures themselves in one of my IP apartmetns…..how is it my fault? eg just because I own it doesn’t make it my liability.
This is my point exactly I think people are “over insuring” and if the sh1t did hit the fan would NRMA insurance really say oh yeh we’ll pay the person who tripped down the stairs drunk $1m……no way they would say not our prob bob…..
Thoughts?
Wrong! Wrong! Wrong!
This is EXACTLY why you need insurance. You don’t even know what you are liable for. Look it up. That’s why my insurance covers me for $20,000,000 Legal Liability. Even if the payout WAS refused, how much extra cash do you have to fight it in court?
If someone injures themselves on YOUR property YOU ARE liable. No one said it’s your fault but that’s the law.
Nathan that is a common misconception. In fact strata insurance is only liable for common areas (not your property).
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This reply was modified 8 years, 12 months ago by
