Forum Replies Created
In essence you are correct. You still need to qualify for the new loans being able to show sufficient income.
In your example, although you have a $100k equity, you will not be able to access all of that, you could refinance that first property to perhaps an 80% or some lenders may go to 90% lend, meaning you may be able to set up a separate loan facility of $60k or so (taking to $160k overall at an 80% LVR).
That second loan is still secured against your first property.You can use some of that $60k to fund the deposit and costs (stamp duty) to purchase another property and borrow the rest from another lender. For a $300k property, you may need a minimum of $45k to do this (depending on which state and the stamp duty costs). You then borrow $270k at a 90% lend (ignoring lenders mortgage costs).
As long as you have sufficient available equity and able to qualify to borrow (based on income and debt levels) you could buy a 3rd property, again using a third lender.
My view is as a general rule, you need about $120k available equity for each median priced investment property you purchase. This allows for about $80k to $90k deposit and costs and leaves a $30k safety net and the ability to debt recycle.
If you sell the first property, you need to pay back the loans secured against that property, in your case, the $100k originally and whatever is owing from the second loan you established.
If you sell the second property, all you need to pay is the loan secured against that property, presuming from the second lender.
I hope this helps.
Good luck
GregFor a $380k loan, most lenders will only offer a 0.7% discount off standard variable.
As to the future, the lenders will move in and out of the market as their available funds, pricing, management bonus decisions etc vary. Look at Westpac, 12 months ago they were competitive and growing, then they lifted their standard rate well above the other 3.Some lenders are starting to price risk, so the lower the LVR, the better the rate, < 65% you can get 6.49% without it being a 12 month intro rate.
In my view as long as the rate is competitive without necessarily being cutting edge and the fees charged are in line with the service required, I tend to stick with the same lender. If they are not providing the service or fees are higher than they should be, look around.
Good luck
GregI have clients in Melbourne who previously had taken advice by C&N and it has not worked to their advantage. Both are PAYG salaried and little risk of being sued, they now have 3 hybrid trusts with one IP in each.
It just looks to me selling a product and fitting the advice to suit the sale.
It does not help their portfolio development.
I am sure there are better out there.
Good luck
Greg
Josh,
An interesting starting position.
I think Jan Somers books provide both an easy reading style and covers a lot of the topics needed for an investor. INteresting about being out of date, her first book was written of her experiences in the early 80's of high interest rates, maximum 80% loans, limited lenders etc. Sounds familiar?I am not a big advocate of trusts unless you have a specific need for them for asset protection or unless you have minimised the tax benefits of owning in your own name or you are running into land tax costs.
I would go and meet and talk to people. There are many accountants out there who have not even the basic knowledge to assist a property investor or who want to sell you services like trusts when you have no real need for them. Some of the books and magazines list questions to ask professionals to get a view if they know what they are talking about or are just hot air. Similarly with mortgage brokers, many can get you one loan, but do they have the knowledge and reasoning about how to finance a multiple property portfolio, which lenders to use first, which to use next, why certain lenders and not others, etc. If a professional cannot explain why in simple terms that you understand, go to someone who can.
It is also about finding someone on your wave length.
Good luck
GregYou have made it a little more complicated by the way you have done it.
Signing at auction and/or nominee is fine as the nomination into your name would have happened before settlement and your name is on title, so the property is yours as your PPOR. Did you claim FHOG as well and PPR stamp duty concession?
The funds to purchase it were supplied by your parents who used the own equity in their PPOR. They need to pay interest to the bank for this loan. You said you are currently paying this debt back.
If your parents want some surety over this property, they can register a mortgage against it and pay stamp duty on the mortgage registration itself, which is minimal cost. It is not the same as stamp duty on the sale transaction which may have been $40k or so.
If your parents were paying interest back to the bank, they could claim interest as an expense if they received an income from you. As the property is in your name, it cannot be rent but it could be interest income to them if you decided to pay them and they paid the lender. As Terry said, if what they received as interest income matched the interest expense, why bother as no net effect. If you are paying the debt directly, it is just regarded as a normal home loan with your parents as intermediaries.
GregWoodie,
My view from a finance perspective, I would generally not recommend that strategy to anyone unless they had significant funds of their own so they would not need to borrow much to purchase a PPOR. Interest cost on non-deductible debt is to be minimised as quick as possible. From an emotional view, there are good reasons for some folk to live in their own home but it is a different decision and reasoning.If you had significant funds, you could purchase your PPOR with minimal debt, then refinance to extract equity to be used to purchase an IP. If you do not have these funds, it is a better cash after tax decision to buy an IP and continue to rent, presuming you are not renting at $800 a week or so. If your goal is to eventually buy your own PPOR, build a property portfolio over the next 5 years or so, then look at selling one of these, obviously incur CGT, but the free equity then funds your PPOR with minimal debt. Buying your own home with borrowed funds, you are paying for everything.
A $450k property with 80% loan, presuming the rent you pay is what you receive, at a 38% MTR, you are about $5k + better off pa purchasing an IP and continuing to rent yourself than buying an PPOR instead. Do the numbers and decide which works for you.
An alternative is to go down the renovation and sell path but most folk after the first renovation never want to do another.
You need to work out your long term goals then put a plan in place to achieve these
Good luck
Greg.
James,
I have many clients using equity normally via a LOC secured on their PPOR, to use to fund the deposit of an IP and also fund the cash shortfall. My view is you need about $120k per median priced IP ($450k mark) in a LOC facility to be comfortable, with $80 to $90k used for the deposit and costs and the remaining $30 to $40k as the safety net and to use for debt recycling.You need to be able to demonstrate income for servicing purposes to obtain a loan but I presume you have sufficient income, just not necessarily have surplus disposable cash after lifestyle expenses.
I am not sure on Richard's comment post 1 July, I doubt ASIC has the man power to police this and I doubt the lenders give much of a damn anyway, if they have funds to lend, they will find a way to lend.
Terryw, I do some work with seniors and the reverse mortgage is a very useful product for many. To borrow $20 or $30k on a RM is a whole lot more cost effective than downsizing even with the recent NSW government stamp duty concessions. No other state has these. I think the lenders already go too far with their sign off requirements from financial planners and lawyers. I haven't found any comeback from clients having to get legal sign off but I have had with financial sign off. People don't want to pay $500 + to a bloke who wants them to put their borrowed funds into a managed fund for them.
We shall see if the government takes a sledge hammer approach as they do with most things resulting in making the product impractical and the end result being seniors who best option is to take a RM, have to continue struggling or sell and downsize at a far greater cost.
Greg
I think too many investors focus too much on areas or locations for that next big thing or growth suburb, rather than considering what type of property they need to buy in order to be able to obtain finance to buy the next one after that to build their portfolio.
Is it capital growth you need, is it income or rent yield, will higher depreciation benefit you, do you need to find a property that the entry costs are lower (meaning deposit required), is land tax an issue, will buying interstate benefit you because of lower stamp duties, is a lower priced property required, are you planning to do a renovation or sub division?
Determine the type of property and price, then work out the location. The normal considerations still apply after that, transport, schools and facilities, infrastructure and development, tenant demand and type of tenants, vacancy rates etc.
Whether Bacchus Marsh will work for you will be determined by what you need the property to achieve.
Good luck
GregIf you already own your home, it makes it more difficult and can be costly to try to do something after the event.
Asset protection can fall in a number of categories, a legal structure like a trust or even transferring it all into a spouse's name depending on who is at risk of being sued, alternatively you can gear it so little equity is available making it uneconomical for a creditor to pursue you individually. Then there is insurance itself which may help cover some risks depending on your profession/industry.
Sometimes accountants and solicitors are myopic about looking for solutions and only see what they sell.
Good luck
GregThe new NCC seems like a lot of Rudd government programs, rushed through without proper thought about consequences. I doubt it was intended to include non business lending like this otherwise one mate lending another mate $100 over a weekend gets caught if we take it to extremes.
Why not look at another structure, perhaps a trust purchasing the property with you and your parents as beneficiaries? It could be a unit trust even.Good luck
GregI'd Google NRAS WA.
I would also contact some of the approved tenancy managers in WA – see below link
http://www.fahcsia.gov.au/sa/housing/progserv/affordability/nras/tenancy_managers/Pages/tm_wa.aspxGood luck
GregCarolyn,
I too have been looking at the financial aspects of NRAS housing to see whether they make sense for my clients. It is still early days for NRAS but the basis of investing in property is primarily location. If the properties are being built in areas where there is some or good capital growth and rent demand is high, it should be considered. Because the government intended these to be only available for big developers, they seem to be often built in outlying areas where there is land aplenty.The 80% or for some promoters, 75% of market rent will mean a considerable shortfall you need to fund each week/month.
Using a defined property manager (at least for the first 10 years) where they seem to be charging 10% fees needs to be factored in.
Make sure they are legally bound to pass the federal and state government tax incentives to you and that your purchasing entity can utilise them. I am unsure a trust can pass these down to beneficiaries if you purchased using a trust as the purchasor.
It is unclear whether you can use an ITV form to factor in the federal government tax incentives. You cannot for the state component and presumably only receive these after you complete your tax return.New properties suit higher income earners able to better utilise depreciation benefits and for some, lower stamp duty on off the plan properties. The finance are construction loans, normal 5 payments on stage completions.
I expect the marketing companies selling these for the developers get paid by the developers, so be aware of comparable prices that you are not paying more than you should be. Look at land price per m2 and build cost per m2 and compare. Like anything else, sales people make money selling and the good ones give the impression they are helping you and it is a sure-fire way to invest.
Perhaps it is if you can fund the shortfall. The tax rebate/incentive is irrespective of the value of the property, so it may make more sense looking at properties at the lower end of the scale.
Good luck
GregAs a general rule, it is cheaper from a cash flow perspective to rent yourself than live in your own home, assuming similar rents paid.
The reason is the tax breaks that you receive on the basis of a negative geared property. You put in a ITV form and receive the benefits of the lower PAYG deducted from each pay. However with an income of $53k, we are talking about a 30% marginal tax rate. Do some numbers to see the difference and make your own decision. Wealth is not just about financial goals, it is also personal happiness and fulfilment.Most people would not declare boarder rental, they just regard it as offsetting the expenses. That is unless you run a business providing accommodation.
Good luck
GregAndy,
If the numbers make sense then perhaps refinance the IP and payout your relative. The answer will depend on what capital growth is expected over the next 5 to 10 years and what the rent yield is. If the numbers show that you can can get better returns elsewhere, then consider selling. It will depend on CGT as well.As to long term investing, inner suburb capital cities generally perform better than the average market. I would look at the three East Coast cities of Melbourne, Sydney and Brisbane. However the type of property is sometimes more critical, what do you need to buy now to be able to fund and finance the next purchase. Too many investors ignore this and get caught in a mentality of negative gearing, inner suburb etc and then cannot move for some years when markets change, especially the finance markets.
Do you need better cash flow or income or tax benefits or lower funding amount to settle?
I don't know from your post what your particulars are to be able to suggest a better path. I am happy to look of you want to PM me.
Good luck
GregPeter,
The views Richard expressed are similar to what I would have said as well but perhaps I would not be as aggressive with LVR. Lenders are more comfortable with 85% than 90% and not many lenders are going to 95% without it being a very strong deal. It may also take longer for a revalue and refinance strategy to be effective, having to increase that extra 5 to 10%.In answer to your question, you use lenders that use different mortgage insurers for each to minimise the risk of a mortgage insurer saying 'enough is enough' or our exposure is high enough for you.Some lenders are pricing risk and the lower the LVR, some lenders have dropped their rates, conversely some have increased for the high end LVR's. However most lenders are still volume based, loans > $250k or $300k attract the discounts from standard variable.
Good luck
GregAman,
The best course of action will depend on what you want to achieve longer term. If you just want to purchase 1 IP and no more, you could do it all through CBA. If you want to build a property portfolio, there are more appropriate options to consider.There are 2 ways to purchase another property (assuming you are just using existing equity), the first is to get the existing property revalued and refinance it to the extent you can or need to to set up another loan facility. Most go for a LOC due to flexibility but if you know the $ you need to settle the next purchase, you could go for a IO loan with offset. You then use those funds (or some of them, 10% +) to settle the purchase of the IP and obtain the bulk of the money (80% +) from another lender. This is the preferred course to build a portfolio. It can also allow you a safety net and the ability to debt recycle.
The second option if you just want to purchase 1 IP only is to go with one lender who uses the security of your PPOR to lend you 105% of the value for the purchase of the IP. They cross securitise the two properties. The lenders do not normally allow you to borrow more than just what is needed to purchase the IP. You often 'give' away equity unnecessarily.
As to tax deductibility, the purpose of the funds is the critical component, using a separate LOC secured on your PPOR to help purchase an IP makes the interest cost of that LOC deductible against the rental income of the IP. Effectively you are fully funding the purchase of the IP by debt, just with 2 different lenders.
Good luck
GregJohn,
If you are swapping lenders from AB anyway, look around for the best offer for you. While NAB is competitive, they are not the best around, their internal valuation policies are very conservative and hit and miss and you get into the cross-collateralised or at best, 'all monies guarantee'. You would probably be better served going to another lender rather than NAB for your first IPYou should be able to revalue and refinance with AB at 6.74% but check the fees involved. You will only need a simple IO loan, no pro pack, just internet access and no bells or whistles.
Keep the offset with NAB but I would be cautious with the redraw down the track. You may be better served having a separate transaction account for your day to day banking and keeping the offset account specifically to reduce the interest on the loan (sounds like a DHOAS loan) by putting surplus funds into the offset rather than the loan itself.
Good luck
GregJohn,
You are in a good position now, well done.
The real question is what are your goals and timetable? Once you have that, you can better put a strategy and plan into place to achieve it.On the basis you want to continue to purchase IP's I would refinance your 1st IP probably to 80% if you can (that will depend on your borrowing capacity for this as well as your borrowing capacity for the next IP) and set up a separate LOC just for investment purposes. I don't have a problem continuing with NAB if you are already with them and they will give you the funds you want at a reasonable price. You may need to go higher to 85% and incur some LMI to give yourself flexibility in the future. As an IP, they should be IO loans. As you no longer have a PPOR, have an offset a/c set up against one of the IP's. I would not consider paying P&I on any of these, just use your offset instead. Wealth after all is assets less liabilities so your goal is to increase one and decrease the other but the timing to do so is often separate, so you concentrate on one at a time.
I consider you generally need about $120k facility to safety purchase another median priced IP, using about $90k as deposit and costs and having about $30k as safety net and debt recycling strategy. Then go to another lender to borrow the rest and in your case, again perhaps going to near an 85% lend. The reason for the 85% is that lenders are still comfortable, mortgage insurers are comfortable and it preserves your own funds. The LMI is included with the loan and tax deductible over 5 years anyway.
Again it gets back to your goals and timetable.
Redraw can be a problem so be careful of it. Go to another lender for the 3rd IP, lots of reasons including lender risk, ability to revalue and refinance separately etc.
Good luck
GregLenders and mortgage insurers generally have post code restrictions in high density postcodes. Melbourne has these as 3000-3001 and 3004-3009. It is where a security is in a development of 30 to 35 units or more or greater than 4 or 5 stories.
It is about perceived risk and if they need to sell because you default, will they be able to readily recover their money.
They will drop there lending down to as low as 60% but it will depend on the lender. If you combine that with small size, you are not ticking the boxes.As I said, it doesn't mean it won't work for you, just be aware of the potential risks.
The positive gearing of about 8% sounds very strange, do the numbers to make sure they add up. I am not even sure I understand what that means in dollar terms. Perhaps he is including projected capital growth but that is not a direct contributor to what I understand gearing to be, it is income less expenses being either positive or negative.
An 8% rent yield equates to $538 a week in rent.
I would be interested in seeing the numbers. Did they do a financial projection for you? Many use PIA to do that but I don't see a positive gearing number from that software.
GregIt's a debate no-one will win.
For investor clients, I only use a fixed fee for service model and rebate back the upfront commission I receive (net of GST).I provide a long term strategy plan, documentation and folder that outlines what they need to do to achieve their goals based on building a property portfolio, that is what they pay for and if they use me as a mortgage broker, I rebate that upfront commission back. Trail is just too messy.
The reason I moved to that model was two fold, it is a unique selling proposition and it takes away the perception of bias, either lender or loan size. Not all clients decide to use my service, most do as there is an real dollar after tax benefit for them in what I provide in most instances, ignoring the benefit of the strategy plan.
It will be a long road before most brokers go down the upfront fee model as unless they can demonstrate their service offering outweighs the additional cost to a customer, customers will simply go to a branch to get the same loan (presuming they know what the product/s should be and how it should be structured) at no cost. I cannot see banks differentiating interest rates in favour of brokers to make it easier for brokers to offer that upfront fee instead.
Greg
