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I have to say, the attacks on NRAS as slums of the future are a little unfair.
There are only three types of property that can attract NRAS
1. Completed Spec Home
2. New Construction Home/Townhouse
3. Units/Apartments.Except for small unit/apartment developments, concentration levels for NRAS are limited to 30%. There are only a very small number of apartments/units small enough to have been awarded 100% NRAS concentration ( and most of those have been bought by institutional investors who will be very keen to maintain their assets) so the idea of NRAS properties becoming slums is pretty unfair.
NRAS stock was never intended for Mum and Dad investors. NRAS was intended for Institutional Investors- ie pension funds, superannuation funds, etc….and these institutional investors have so far accounted for about 40% of all NRAS purchases- mainly units. The limited number of developments where NRAS concentration has been allowed to 100% have been almost entirely swallowed up by institutional investors. Its unlikely that these investors/funds will allow their assets to be poorly managed, run down and left in disrepair, so the probability of those developments becoming slums is remote. In any event, those developments are not available to investors such as you and I, generally. The institutional investors almost always take the whole lot. So theres nothing for you or I to worry about with these NRAS developments.
NRAS was always intended to drive new unit and townhouse construction, in delivering its affordable housing objectives. It was aimed at providing centrally located, easy to manage medium to high density stock to institutional investors, at price points that suited NRAS ie-300-450K. Perfect for 1 and 2 bedroom metro units, and perfect for 3 bedroom units and townhouses in outer metro suburbs of some capital cities and major regional centres. However,as we all know, the GFC created difficulties for developers in the past 2-3 years, in obtaining development finance, so the number of medium and high density units FAHCSIA antcipated would be built and sold to institutional investors through NRAS, has been severely affected. The only other new construction finance that can be obtained relatively easily is residential property construction finance, so we've seen a shift in focus over the past few months towards house and land stock. Institutional Investors arent interested in owning hundreds of different houses in a variety of locations, so as a result, we are now seeing NRAS opened up to Mum and Dad investors.
Under NRAS guidelines, concentration levels for house and land estates are limited to 30%. The reality however, is that in almost every instance, the real world concentration levels have not exceeded 15% in any estate yet, as most housing developments have multiple stages and NRAS hasnt existed long enough for allocations to exist across 30% of the total development. So again, the probability of new housing estates where NRAS property is available, becoming slums in the next 8-10 years, is unlikely. With concentrations well below 30%, and the majority of other houses being owner occupied, the risks are low.
There have only been about 15,000 of the proposed 50,000 NRAS incentives awarded so far. Of the 15,000, the first 6,000 or so were bought up by institutional investors ( units mainly, as described above) and another 3,000 or so have been bought up by housing co-ops to provide affordable housing to their clients ( I would agree these have the potential to turn to slums in years to come because of the potential tenants they attract through their owners, but these are not properties you or I have access to- the co-ops have bought every NRAS allocation in those developments, so its not a valid consideration in this discussion) and that just leaves a few hundred units/townhouses available off the plan, and several thousand 3 and 4 bedroom house and land construction deals – which is the bulk of investment stock available to the public at this stage.
So all in all, unless you're buying one of the very few units in a development that hasnt already been swallowed up by a co-op or institutional investor, and that development is in a less than desirable area and has 100% NRAS concentration, its highly unlikely there is going to be any slum issue to worry about.
Remember, this is affordable housing, not housing commission. Tenants have to be working and earning money to qualify to be tenants. The target markets are police, ambulance, nurses, teachers etc… in their first and second years out, on lower incomes. There are significant compliance requirements that approved participants/property managers are required to undertake to keep the property NRAS eligible- and that includes valuations in years 1,4 and 7, plus rental re- appraisals annualy, as well as income checks and employment checks on the tenants…. all in all, I think people are making pretty invalid accusations about the risks and slum potential for NRAS properties.
No problem Galen. NRAS is really poorly understood unfortunately, so I'm happy to be able to provide some broader perspective. The tax benefits are what everyone is focusing on, which is understandable of course- after all, this is an investors forum, but for the lender being asked to provide finance against a security which is being entered into a scheme for up to 10 years, its more complicated. Because the scheme is being administered by a wide variety of different Approved Participants models, to the lender, the model is the most important thing..- as explained in my previous post.
If you search any of the NRAS websites online, or attend any property seminars where NRAS is being promoted, the "sellers" almost NEVER talk about the approved participant or model. I find this really astounding, as the model is literally the key to NRAS approved finance.
Anyway…having said that, I wanted to mention something else that's happening with NRAS. This might be a little controversial, and I am making no accusations and pointing no fingers, but it needs to be shared, just so that all forum readers are aware of it, and are aware of the risks, should they elect to take this approach. The reality is this – A lot of NRAS properties are being successfuly financed with lenders who do not actually accept NRAS properties as suitable securities. In other words, lenders who don't do NRAS deals. In addition, they're being financed at LVR's above 85%, which allows people who might not otherwise be able to qualify for a proper NRAS loan, to qualify for a conventional investment loan. ( because they don't quite have a 20% deposit plus costs, but they do have a 10-15% deposit plus costs) Now, this is obviously at odds with everything Ive written in my previous post, so anyone reading this should rightfully ask, how can this be? The reality is, the only way this can be done is by not disclosing that its an NRAS property, when applying for finance. Again, people should rightfully ask…how can this be? How can a lender not know its an NRAS deal? Well its actually very easy… as none of the contracts of sales associated with NRAS properties, mention NRAS. NRAS is entered into through the agreement with the approved participant. If you take another look at my previous post, the NRAS side of things is entered into via a Head Lease Agreement, Managed Investment Scheme or Non Entity Joint Venture. NONE of these three "model" types are mentioned anywhere on a standard residential property contract of sale, so unless you disclose it to a lender, they probably wouldn't have any idea the property has an NRAS allocation attached to it.
So while this may offer a short term solution to the problem of NRAS finance being limited to certain approved participants models, and having slightly lower LVR's and slightly more restrictive servicing ( except in the case of firstmac- who use the NRAS incentive towards servicing), its still a very rocky road to tread, because it essentially can be construed by a lender as a false and untrue declaration of income and circumstances. I wouldnt want to take a chance like this, get caught, have my 90% LVR loan called in, be unable to refinance, be forced to sell, and not even make enough back to cover the purchase price, legals and stamp duty I'd outlaid when I bought the place….
So again, I would recommend as strongly as possible that investors considering NRAS should be budgeting to provide a 20% deposit plus costs, to keep the deals at 80% or below, they should be buying property through one of the approved participants models approved by Westpac, Rams, St George, Firstmac, Bendigo Adelaide bank…. and they should definitely be disclosing NRAS to the lender when applying for finance.
Just my 2 cents…
- Prices have definitely been jacked up, no question. Easy to verify with a property search.
- 1/3 of the rebate is lost in fees. So that 91K (Qld!?!) is closer to 60K
Prices Jacked up- thats where valuations are key. This problem isnt exclusive to NRAS property.
1/3 lost in fees- its a broad statement but not entirely accurate- depends on which NRAS model you buy through.I'll try and provide some broader perspective below, because NRAS seems to be misunderstood. Perhaps this may assist;
First and foremost, its important to understand NRAS from the beginning. NRAS incentives are applied for through a tender process, by Approved Participants- otherwise known as consortiums. These groups have been appointed by FAHCSIA. Developers pay these AP's a fee to secure them X amount of NRAS incentives in a development, from FAHCSIA and the relevant state Housing authority ( because the NRAS incentive is made up of a state and federal component) The tender process is rigorous, and incentives are allocated to properties where both the state and fed departments believe there is a need for affordable housing. Approved Participants include groups such as QAHC, Questus, Aspire, National Housing Group, Ethan Affordable Housing, UAHA and others… a full list is available on the FAHCSIA NRAS website.
Once the NRAS incentives are secured, developers have a choice on how to market and sell their NRAS approved property. Some will use in house marketing teams, others will sell via property groups, seminars, internet etc. This is why you are seeing alot of property groups popping up when you do a google search for NRAS, showing lots of different properties. I must stress, in almost all these instances, the person selling the NRAS property is NOT the Approved Participant. They are usually a property group being paid a marketing fee to sell the property. Of itself this is not unusual or problematic. (After all, real estate agents are paid to sell properties, too.) but excessive marketing fees can be a problem, as valuers will look to reduce valuations on stock where they know the seller has a high marketing fee reputation. This isnt the case for all property groups though- so don't tar everyone with the same brush. Just be mindful..there are cowboys in every industry- so deal with reputable property groups who have been in business along time and have a proven track record. Some approved participants have deliberately capped the marketing commission payable to a property seller, to ensure there is no gouging. Ultimately though, lenders will undertake valuations.
OK…so the AP has secured X amount of NRAS incentives for a developer. The developer begins selling stock, marketing it as NRAS approved stock… whats next? Does the AP have any further role? Yes. Their first role was to secure the NRAS incentive for the developer, through one of the tendering rounds offered by FAHCSIA. Once that's done, their role changes considerably. Because NRAS incentives have eligibility criteria attached to them – ie mandatory 20-25% rental discounts, tenant income thresholds, etc- someone must be responsible for the administration of the scheme, to ensure compliance, and therefore ensure the investor is eligible to receive the NRAS incentive. That "someone " is the AP. Put plainly, most developers dont have the skillset or an interest in being compliance/property managers for 10 years, after their stock has been sold… so that responsibility goes back to the AP's.
This is where people start to get confused, and its the reason why finance for NRAS has been difficult.- because each of the approved participants approaches this role differently. Firstly, each has a different contract/model, which the NRAS investor is required to enter into, and each has a different set of fees and charges. There are three basic models;
One AP uses a Head Lease Agreement, and charges significant entry fees and ongoing property management/compliance fees. Properties are rented at 25% below market rental
One AP uses a Managed Investment Scheme, has lower entry fees and lower ongoing property management/compliance fees. Properties are rented at 20% below market rental
All other AP's use a Non Entity Joint Venture. Fees and charges vary. Properties are rented at 20% below market rentalBecause of the variety of different models, lenders have been reluctant to embrace NRAS. A lender would have to review and sign off on every model in the NRAS market in order to develop a straightforward NRAS policy- so instead, what you will be seeing is that some lenders are approving certain NRAS models only.. so its critical that you know which models are ok with lenders, and which arent. This is much more important than the actually property itself, because its the key to obtaining finance.
For example, QAHC's "head lease" model has been signed off by rams, westpac, st george and firstmac. Genworth has also signed off on the QAHC model. Each of the 4 lenders mentioned will officially lend for QAHC properties, subject to certain strict criteria. For example, they will accept only 65% of the normal market rental, and they do NOT accept the NRAS incentive as tax free income.( firstmac does, however- so they have the best borrowing capacity for QAHC) Westpac will do 85%LVR plus LMI. Others will do 80% LVR.
Questus use a Managed Investment Scheme model- and Genworth has also signed off on this model. firstmac and st george have also signed off on it, and will both lend against Questus NRAS stock. Again, firstmac accepts the NRAS incentive as assessable income, St G does not. NAB will probably also take a few Questus deals- case by case…but mainly through branches. They also wont use the NRAS incentive as income for servicing.
Ethan Affordable Housing uses a Non Entity Joint Venture. No entry or exit fees… Adelaide Bank and firstmac have signed off on this model. …..
What Im trying to demonstrate is this- the first question you should ask anyone , when considering an NRAS property, is "who is the approved participant?" Research the individual Approved Participants models, first. When you've done some comparisons, decide for yourself whether they have property you are interested in. If you find stock from a participant that doesnt have the support of lenders, you'll probably find it next to impossible to finance it anyway, so its probably a waste of your time.
As far as 1/3 of fees being lost is concerned- research the models. Some have very flat fees. Ethan for example, charges 7.5% of the NRAS incentive- thats it. Questus also has cheap fees. Others may not be quite as cheap…but its up to each individual investor who is considering an NRAS purchase, to understand the various models fees and charges… and do a comparison before deciding on what they wish to buy. Im not recommending one model over another. Im just demonstrating there are differences which need to be better understood by people here. If you want property in a particular location and its being sold under a more expensive model, and if you are not interested in other properties, available through cheaper models, in other locations… its something you'll just have to accept as a cost of doing business.
Bottom line…. look into the approved participants models and their fees. Be realistic about which ones the lenders support and how they assess borrowing capacity, and make your NRAS property and finance decisions on that basis.
keiko wrote:Bloody valuers, I would Keep it with the same agent, she sounds like she will work hard for you to get this sold, the agent may be able to make the change to the other properties that she sold by logging onto RPData and making the changes, that is as long as they have sold and are not still under contract, (I think this is possible but not 100% sure)
Another option, pay $500 or whatever the cost in your area to do a valuation and then tell that valuer you think it is worth $650,000ish, and provide him with the evidnce of the other sales and why your apartment is better, and hope it comes in somewhere around $620,000 and then have your agent go back to the buyer and say look here is a new valuation,
that other valuer didn't know what he was doing etcThats not going to assist, unfortunately. Neither banks nor mortgage insurers will accept a valuation that has been ordered by the vendor. Thats precisely why lenders have panels of valuers who they assign valuations to randomly, and its precisely why mortgage insurers have check valuation departments. Valuers are liable to lenders and insurers for the information contained in a valuation report, so they arent going to take chances. If they provide a dud report they could be cut from a lenders panel, and that means a huge hit on their income. Valuers are always, always always required to provide 3 comparable sales on a valuation report they prepare for mortgage and mortgage insurance purposes, at a bare minimum, which are officially recorded on an independent dtabase such as Residex or RPData, for example. The 3 comparables usually include one superior, one inferior and one similar sale. They will never never never use data thats not provided by an independent source, so your agent yelling at them and telling them she sold one for 642K wont have one bit of influence, I'm afraid. Until the 642K sale appears on rpdata or residex, the valuer will behave like it doesnt exist. Thats the cold, hard reality.
Besides, who says the valuation that the lender ordered on the 642K sale, was for 642K? It may have been lower. The valuer cant just work on the word of the selling agent. The selling agent has no idea what the valuation came in at. The buyers may have had loads of $$$ and the valuation may have been lower than 642K, but they just wanted that property so they tipped in extra money. No one knows how large their loan was or what LVR it was. You cant expect a valuer to work in theories. They just wont do that.
The only negatives to Cash Flow positive properties are the perceived negatives.
1. the properties must be cheaper and therefore are likely to be in less desirable areas and show less growth.
2. The types of properties that fit CF + profile. Student Accomodation, regional property etc. May be more difficult to borrow against and LVR's will be lower, generallyThese are all very real issues but arent necessarily limiting. They are certainly not a reason to avoid CF + property, if its the only way you can particpate. What I mean is that for some people, CF + is the only realistic way to go, as negatively geared property is something they cant afford. The monthly holding costs are beyond their budget. Its all well and good to run a property at a loss in the hope of achieving some tax benefits and long term wealth through growth, but that can only work if you can afford it. In those cases where people cant afford it, CF+ is still a viable investment strategy even though the growth MAY ( and usually will be, to be fair) be inferior. At least you are still able to get involved in some form of property investment. Something is usually better than nothing, right?
The ATO has passed a ruling this week ….
National Rental AffordabilityScheme AmendmentRegulations 2010 (No. 1)Select Legislative Instrument 2010 No. 78I, QUENTIN BRYCE, Governor-General of the Commonwealthof Australia, acting with the advice of the Federal ExecutiveCouncil, make the following Regulations under the NationalRental Affordability Scheme Act 2008.Dated 6 May 2010QUENTIN BRYCEGovernor-GeneralBy Her Excellency’s CommandTANYA PLIBERSEKMinister for HousingFederal Register of Legislative Instruments F2010L01193The amendments that have been identified as being necessary or desirable for thecontinued efficient operation of the Scheme include:– providing endorsed charitable institutions with the option to elect to receive a taxoffset certificate rather than a payment;– The intention of the Scheme is that the full incentive should be provided toparticipants in the Scheme who have complied with all relevant requirements.– Currently, approved participants which are endorsed charitable institutions arerequired to receive their incentive as a payment and where they act on behalfof other parties, they may expose those other parties to a tax obligation whenthey pass on a portion of any incentive payment received.– Where an endorsed charitable institution acts on behalf of other parties andwants to pass on the relevant share of the Scheme incentive to those partieswithout any reduction through the application of tax, this would be morereadily achieved by means of a tax offset certificate.– Accordingly, providing such approved participants with the option to elect toreceive a tax offset certificate rather than a payment is intended to offer analternative for recipients of incentive to access appropriate National RentalAffordability Scheme Tax Offset provisions in the Income Tax Assessment Act1997. The amendment will allow a choice of means for passing on anincentive to parties with the aim being, if possible, for those parties to receivea full entitlement that is not reduced through the application of tax.Requests were received from Endorsed Charitable Institutions participating in theScheme to have an option to receive a tax offset certificate rather than a payment.The Treasury, and through them the Australian Taxation Office, have been consultedon the amendments.I keep hearing that the majors are about to start doing NRAS deals. Seems the Head Lease Agreement issues have been ironed out/amended, and some of the leading consortiums have brought the relevant Govt depts and banks together to sort it all out.
Dont know if there are too many LOC's where Capitalising interest is possible now. Still, easy ways to trick most the banks systems. Just set up a direct debit to draw the interest payment out of the loan and back into the same account. Most the lenders systems will recognise the minimum repayment has been made, and in effect you are capitalising the interest. The beauty of internet banking!
Thats still possible shamematt. You'll still have access to equity but its just stricter now. No ones saying you cant get a Line Of Credit for legitimate purposes or access equity for legitimate purposes. That hasnt changed. The real difference now is that banks will no longer give anyone money with a "no questions asked" kind of approach, just because they have lots of equity and can service the loan. Banks want to know what the money will be used for and they want to be perceived as being more responsible in their lending practices. They'll give you the money but will demand to see evidence/quotes for what you are spending the money on. So if you legitimately wanted to get money to do renovations or purchase a car, thats fine. You'll now have to make a declaration regarding the purpose of the funds in the loan application.If you were renovating they'd ask for quotes, building plans etc. If you were just doing an internal tidy up such as paint or tiles or new shower or kitchen they'd just ask for some quotes. But be sure that you use the money for what you said you were going to use it for, because when you go back in 2 or 3 or 5 years looking to tap into equity again , they'll be taking a very close look at you assets and liabilities, and they'll expect to see some of the assets you said you were going to buy with the last money they gave you. All in all, still possible, but its just stricter and you have to have a clear idea of what the money is for BEFORE asking the bank for it.
As for the credit crunch you are referring to from a decade ago. There was a recession about 18 years ago, but there's never been a GFC like this. The Depression of the 30's was the closet thing from a perspective of scale and cost, but mortgages/lines of credit/equity loans werent really part of the picture then. It was stockmarket related. The difference with this particular crisis has been the trillions of securitised funds being written off- they're called RMBS Residential Mortgage Backed Securities. As I outlined in my previous post, thats a big part of the reason why there will continue to be stricter control and tougher entry criteria for mortgages for several years yet.
We just need to realise that we arent exempt from the effects of the northern hemisphere, and its not going to be as easy as it was 3 or 4 years ago to get cash for anything we want.
P.S does anyone think the banks will repeat the same mistakes one day and credit will once again become easy to get? Even if thats years down the track?[/quote]
Shanematt- the short answer is NO for the next few years at least. Cost and Supply and investor appetite will combine to put a lid on the availability of money/credit for the next few years. Risk will be a dirty word with banks ( in relation to mortgages at least) for the next few years at least. 3 years at least , and probably more like 5 years. People dont generally understand that mortgages are funded with borrowed money. If you were to ask a person on the street where money for mortgages come from, they wouldnt know that our banks don't have anywhere near enough money of their own to lend for all the mortgages they write. Australia's big banks get almost all their money ( probably about 80%) from two places- retail deposits and long term funding ( 3,4 and 5 year bonds) and they get a small amount ( about 20%) from other sources such as securitisation and short term funding ( 90 days). It varies from lender to lender but thats the basic idea. Second tier banks/building societies and credit unions – such as Suncorp, ING, AMP, IMB, Adelaide Bendigo, Members Equity and so on, are similar, but usually have less retail deposits so tend to get a higher percentage of their money from securitisation and non banks are almost 100% reliant on securitisation. At the end of the day its all money, but different organisations raise their money differently before lending it out for mortgages. Whichever of the 4 sources you look at, the costs for all of them has increased significantly. Why do you think banks are competing so aggressively for term deposits ? Also, the GFC is only 2 years old. Major banks have lots of old loans from before the GFC funded on 4 and 5 year bonds at ":cheap" margins, which will have to be rolled over to post GFC margins over the coming 2-3 years. The gap between pre and post GFC money is debatable, but is anywhere from 90-120bpts higher than pre GFC, so nomatter what the RBA does with cash rates, rates are going to continue to creep up as the major banks increase their margins to cover their costs in coming years. So thats the first part of the equation- cost
The second part is supply- APRA has proposed liquidity rules which will require the banks to hold more tier 1 capital than they've had to in the past. This is because the G20 is imposing these rules, and Australia wants to be seen to be in line with the G20 on a regulatory level. What it means for the banks is that they will have to stockpile lots more money than previously to ensure liquiidty in case something like the GFC ever happens again and funding markets dry up. Governments around the world will not pour trillions into keeping banks liquid if this happens again. Bottom line will be that banks will have less money to lend. Interestingly though, these rules wont apply to smaller lenders and non banks.. so maybe you'll see them relax credit rules sooner than the banks. Dont bet on it though. Securitisation markets are still pretty closed and its not as easy for non banks to raise new money to lend, either.
The third part is appetite. Basically, Australia is pretty much the only country on earth where 90 and 95% loans still exist. By sheer luck, our banks didnt buy into massive amounts of Lehmannesque toxic debt and have been able to continue to fund loans and raise new money thanks to the Govts Guarantee. But dont think for a moment that the same big investors ( pension funds, super funds, institutional investors etc) who fund British, Spanish, German, Irish, American, Portugese, Dutch banks etc are going to forget about the huge beating they have been enduring for the last two years and for years to come, and suddenly lower their standards regarding the quality of loans and lenders they will invest in. No one will be in a hurry to write risky loans again. This is why you're seeing restrictions on Lines Of Credit and cash out. This is why no docs disappeared, and why lo docs are barely available anymore. Its why every lender is cheery picking who they will and wont lend to. Its only going to be more of the same for the next few years. The banks have to make sure that they can raise money- and no one will invest in them if they are writing risky loans.
I wouldnt be surprised if credit gets even tighter throughout 2010. Its clear that even the two biggest lenders CBA and Westpac are pulling back. They need to slow down their lending. Its getting harder to attract retail deposits and they need to start provisioning for the new APRA requirements that take effect in 2011. But, one day it will all open up again. There will be 100% loans, Lines Of Credit with unlimited cash out etc…. history always repeats!!!!
What about finance?
I keep hearing that very few lenders will touch these.
Who are the lenders that will ?
Are they available through third party or only through select branches?
What LVR's will they look at?
How are they assessing serviceability? ie do they take 80% of the discounted rental ( which is already discounted by 20-25%) PLUS 100% of the NRAS tax free incentive, or 80% across the board?JPS
The biggest issue seems to be finance. Can you assist with the following?
What lenders will accept NRAS approved properties as security?
Are there any LVR restrictions?
How do they calculate the NRAS incentive for serviceability?shanematt, you're going to have a really tough time getting any lender to let you do this anymore. Cash Out is pretty heavily policed these days. The LOC you have in place is fine- you got that set up in the past where cash out wasnt scrutinised so closely, but when your LOC hits its limit (and it will eventually) and you go looking for more money I cant see you getting much joy unless you can show serviceability. Of course, this could change, but as it stands now- unless no docs come back to the market, or maybe, just maybe you could sneak through with a PAYG lo doc if you played it right and had a low enough LVR, I think you're going to run out of luck.
The closest you will get to achieving this is to invest in NRAS approved properties. Because of the federal and state tax concessions attached to the NRAS programme, they offer BOTH neg gearing and Cash Flow positive benefits in most cases ( I know that sounds too good to be true, but Google NRAS and do some reading) There are lots of sites that explain how it works. I think NRAS stock will be the only way to achieve what you want. 50,000 of these properties are going to be built in the next two years, by established/reputable building companies in a wide variety of locations. They are exclusively targeted at investors. There have been some negative comments made about NRAS as well as some very positive ones- take some time and read through some of these sites and decide for yourself;
http://www.nrasscheme.com.au/?gclid=CLTDtNjv2J8CFUwwpAodlVuBGA
http://www.housing.nsw.gov.au/Centre+For+Affordable+Housing/NRAS/
http://www.chfa.com.au/NRAS/
http://www.brisproperty.com.au/nras-property-locations?gclid=CKedn_rv2J8CFUcwpAodOSf2Gw
http://questus.com.au/
http://www.advanceinvestment.com.au/_pages/NRAS/QRIF%20Overview%20Brochure%20June2009.pdf
http://www.qahc.asn.au/modules/tinyd0/index.php?id=34A 95% strategy is completely unnecessary given your fantastic position. At 95% LVR, you wont easily find cash flow positive properties either, so you will have to top up the monthly mortgage payments, possibly by several hundred dollars per month. This will also limit your borrowing capacity. No need to rob Peter to pay Paul. If you have a significant income and can afford it, and want some neg gearing benefits, that might work, but why take the risk when you have so much equity? You could simply put a larger deposit towards each purchase and let them pay for themselves. You're in an incredibly strong equity position, but you didn't mention your income level so if you are going to be relying on rental income to contribute to servicing the loans on the investment properties you buy, stay below 80% LVR and you can still buy several properties and let them take their time to grow without any real risks. It would be beneficial to your borrowing power too.
So…
On property 1 you would get an I/O loan for 480K. ( 80% of 600K)
On property 2 you would get an I/O loan for 640K ( 80% of 800K)I'd start with one property only- lets say you get a 480K loan approved- you could easily go and buy 4 x 500K properties.
You put up 20% on each (100K) plus stamp duty. In NSW for example, that would be around 20K. So there's $2million worth of properties bought using 480K of your equity!!!! Then borrow 400K for each of the investment properties, and let the tenant pay the loans off. All loans would be at 80% LVR, so no LMI to pay. Also, be sure to use at least 2 different lenders for the investment purchases. Dont give one bank, all five loans. That puts too much control in one banks hands, and may impact on your ability to gear any further at a later date, if you wish to.You'll have 4 x rental incomes to service the loans. If you buy well, each should rent for 25-26K per year. That's100K across all 4.
You'd have an I/O loan of 400K for each one. At current rates (lets use 5.5% I/O ) your repayments would be 22K. 88K per year.
That leaves you with a little bit of a buffer for vacancies, repairs, insurances, property management fees etc and you dont need to put any of your own money in. Even if rates climbed 1.5% to around 7%, you'd only have a shortfall of a few thousand per year on each property, and because your PPOR is unencumbered and you have no mortgage, I will make an assumption that you could easily cover a small shortfall like that. This sort of a strategy may not provide the "maximum" number of properties or the "maximum" amount of growth, but this way you take no risks and can still own multiple properties. Nothing wrong with sensible geared investment, especially when you have such an enviable equity position to start from.You could then look at repeating the process using your other unencumbered property- but I'd look at putting a chunk of that money into a self managed super fund and buying a couple of the investment properties through it. You'll need to put up about 30% deposit on anything you buy in a SMSF, but the tax benefits are fantastic
Anyway, just an opinion, and to be honest these are just random numbers Ive selected. You could easily buy properties that are more expensive or less expensive than what Ive suggested- but I had to use an example for the purpose of the exercise.
Terry
There are a couple of lenders with a LOC who will approve the full 90% and just retain the funds until the borrower provides the COS for the investment purchase/purchases. That's just as good as having the money sitting there in redraw waiting to go, I think.
Do as Terry suggests, but consider taking a LOC up to 90% of the value of the PPOR so you are only repaying what you draw down.
1. Pay cash for a 500K PPOR. If you are a First Home Buyer you are exempt from stamp duty, and the FHOG will cover your application and legal fees easily. You should be left with several thousand dollars from the FHOG.
2. Take out an Interest Only LOC that features multiple sub accounts/splits, so that you have the right type of loan to grow your wealth. You should be able to secure a 90% LOC, so 450K.
3. Use the 450K to purchase however many Investment properties you wish to.If you purchase at the right LVR the properties should be comfortably cash flow positive. You may pay some tax, but so what? You will also be accumulating significant wealth.
You need to speak with a broker who can do some calculations for you. Just because you have 450K available to fund X number of deposits, your borrowing capacity will not be unlimited. Your income, your rental income and any liabilities ( personal loans , credit cards etc), plus dependent children as your circumstances change in future, can all have an impact. In your case, you should have no debt. Use cash to pay off all personal loans and credit cards, etc…Lets say you buy 3 investment properties worth 500K each. You provide 20% deposit on each ( 100K each- 300K total) plus whatever stamp duties and legal costs ( probably about 20K-22K on each property,but will vary from state to state ) In this scenario you will have borrowed $1.2 Million. ( 400K on each property) but you will have 3 x rental incomes and your own income.
You basically have countless options. The most important thing is that you buy your PPOR for cash and then set up a 90% LOC so you can take whatever opportunities you like. With that kind of money, I'd also be strongly considering a Self managed Super Fund to purchase investment properties. The Tax on any positive cashflow will only be at 15%, and the Capital gains Tax is NIL if you sell the property after pension age. Even if you sell beforehand, the CGT is only 10%. Go see an accountant /Financial Planner who has a good broker working with him. You'll need tax advice, financial advice and loan advice.
You're in an enviable position having 500K cash to play with. Your possibilities are almost endless.1. If the buyer has exchanged you can take your 5 or 10% and put it back on the market
2. Stick with this buyer and serve a notice to complete ( your solicitor will do this for you) and charge penalty interest.
Whatever you do- get your solicitor to seek an extension on your purchase immediately- buy yourself as much time as possible.Hopeful
The situation you and your husband are in is regrettable, but you are literally at the crossroads and there are only two options; pay up or sell up. Your bank has already extended you several months of grace, and they are not obliged to. Soon enough they will call in your loan and you will lose the property.
Regarding refinancing to buy yourself time to find work; realistically, unless you can immediately make up the arrears and keep the loan in good conduct for 6-12 months, no lender will refinance you. It's really that black and white. From what your post suggests, that's not possible. Im afraid that its black and white- you will not be able to refinance from your current situation.
It doesnt matter whether you try for full doc or lo doc. Neither the lender or their Mortgage Insurer will approve a refinance or any additional advance to any loan account that is in arrears or has been in arrears. I am not wishing to be brutal, but you will be considered a credit risk by any lender. Leaving conventional lenders and seeking private funding will only further exacerbate your situation. Once debt becomes unmanageable, it quickly spirals. If you seek a solution through a much higher rate, via private finance, you will only be burying yourself.While you can, you should cut your losses. Sell one of the properties, downsize your expenses by renting as cheaply as possible, securing work ( move back to your previous location if necessary)… but the bottom line is that you have to sell. If you do not, it's highly likely the bank will sell and they don't care what they get for the property as long as they get their money back. You could lose most or all of whatever equity you currently have in the property.
