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May 30, 2010 - 1:55 pm

These towns, particularly Moranbah look very appealing/tempting, e.g. $450k purchase price with $850/wk rent for example.
That’s a pretty amazing return, but then of course you carry the risk of the $450k property being worth $150k if the mining activities suddenly cease in those areas.

Obviously, the best approach is to have the intel up front to identify these towns before they get to this point. I.e. If you could have bought in Moranbah 5 years ago for say $200k then you would be absolutely laughing your head off now all the way to the bank. So the trick is to identify which town will be the next Moranbah, rather than buying into Moranbah for 450k I reckon. You would spew if you out laid the 450k and the town suddenly collapsed, even though I know that’s pretty unlikely any time in the next 20 years. It still is temping to buy there for the current returns.

NSW and the Hunter valley is another area I think where there are still some considerably cheap areas which are definitely going to kick up more over the next 3 or so years when some decent infrastructure is completed.

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February 8, 2010 - 7:56 am

Thanks again Richard..

I too am a fan of just sticking with the variable rate also. I had fixed a rate in once in the past, but it just ended up costing me more fees than the benefit I got from it (a long time ago when rates didn’t rise much after I fixed it). But for example 1 year ago was a perfect time to fix some in, but I missed that boat and just left them variable.

Thanks for the 221D tip, I had never heard of this, yet always wondered if there was a way to do this. It sounds awesome, but I read something that the ATO use it to possibly identify people to run an audit on. I have nothing to hide, but not sure if I want to end up on their “closely monitor” shortlist etc. But if all of your paperwork and receipts were well organised then I am sure it’s a top idea to do a 221D.

Also thanks for the QS report idea, I have recently noticed lots of people fully recommending that too, so it’s something I will definitely follow up.

Your tips and ideas have given me some extra knowledge that I will now keep in mind when going forward. I think what I will do is, do one property at a time. Buy the first one (PPoR to renovate first), then quickly get stuck into renovations and aim to knock that over really fast as a dedicated project. I will try to quickly get a feel for the process and how my finances are tracking, and then look to go for the second investment after the first renovation is completed. That way I am kind of going smoothly/methodically/calculated, but ultimately moving forward fast-ish and ending up securing both properties. But I think I need to just go one step at a time first to feel more comfortable and get an idea of whether I can afford a late every morning or not

Thx again, wonderful help and appreciate it.

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February 5, 2010 - 7:30 am

Thanks for clarifying Richard. I get what you are saying. So it’s fine to draw funds out of IP1’s equity, but just so long as that’s from a split/separate LOC account, so I don’t screw up the accounting etc.. Got ya – thx for the tip.

My partner is likely to become pregnant etc, but apart from that, she is happy to get a generic 50-60k office job to help with serviceability etc.

So to get both properties the requirements would be something like:

– Borrow 220k for the unit.
– Borrow 250k for the new PPoR
– Borrow 50k for renovations.

So really that’s a huge 520k borrowed (minus 30k cash I have, so say $490k being borrowed) on my single income and I’d only gain $220/wk in income from the unit. Then what if:

– Unit ends up being vacant?
– Money is needed for repairs/maintenance/insurance/rates on the unit.
– Interest rate rises etc.

I’m getting the feeling I’d be very much stretching myself to the limits here. Keen to get your thoughts Richard as I’ve read about your portfolio elsewhere and am very interested to hear how you would approach this. Thx again.

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February 5, 2010 - 7:02 am

Ah sorry Richard.

Our first priority was the new PPoR to renovate (I.e. the 250k place in ~400k suburb). Getting an IP in Branxton was the second priority, only if it appears do’able? Do you think this would be stretching my current income and equity too far? I have a feeling so..

Thanks I will make the new loan IO.

So when buying the new $250k PPoR, DONT use my LOC to access funds for the 20% deposit??? I was under the impression that NONE of the interest on the new PPoR place would be deductible because its a PPoR, not an investment.. Could you please explain this area further?

Thanks again.

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February 5, 2010 - 6:47 am

Thanks Richard, I was hoping you would reply. Me: $90k, partner: $0. Pushing it? These are worst case numbers but I’m guessing I’d be pretty stretched?

Thanks number8, I really appreciate your post and think it makes a lot of sense for me. It’s made me have a re-think and not want to be so greedy. I love my sleep at night and don’t want to go grey stressing while “hoping” for the Branxton place to go up, meanwhile flaking out having to service all the debts etc. Very good points and I love this idea of the sustainable/calculated approach.

How does this sound:
– Put down 20% deposit on the new PPoR from my existing LOC. This means I only borrow the remaining at 80% LVR and avoid mortgage insurance.
– 30k+remainder of LOC is available for renovations.
– Excess positive cashflow from IP#1 can then help pay down this new non-deductible debt?
– Get to this point and after the renovation has added some equity, then start thinking about the next property.

Many thanks.

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February 1, 2010 - 8:01 am

– Don’t blow money on cars. Been there. Sold an IP basically because I was obsessed with spending on a car – *shudder* (years ago).
– Don’t buy for the sake of buying, just because everyone else is speculating. Only buy if it’s “wow what a bargain” etc.
– Don’t buy into new suburbs. They promised us shops and local schools, but of course 5 years later nothing has been built and nothing’s changed. The suburb went downhill and is basically now an extension of a nearby dodgy area. Luckily I smelt it coming as one end of my street started to heavily go to the pack and was the first house to up and sell in our street. Sold for enough to just break even on all my landscaping/fitting costs, but made nothing, then as soon as I’d sold, 3 of my neighbours also put their signs up. Several cases of “good owners” all accidentally buying in a place that went to the pack. But of course you can’t predict that when a suburb is just brand new and off the plans. Several factors, government bought lots of the houses for Govy/Commission housing at the other end of the street, which soon made the cars parked on the front lawns appear with the overgrown grass growing over the cars kind of thing.. Luckily, we presented the house superbly (furniture, gardens, everything spotless and looked top knotch etc) then spotted a great opportunity to upgrade into a premium suburb for only $35,000 more than the sale price of the place in the new bad suburb. Best thing I ever did – always be on the look for new opportunities!!! They can exist at any time and at any point in the property cycle.
– Don’t let renovations drag out. Get in, borrow the money to do it with and knock it all over quickly with borrowed funds. Look to release the profits quickly, i.e. sell for profit of rent if then CP+. Don’t be one of those awkward houses in-progress of a renovation for 3 years that people will start to see as “that place that is never finished” etc. Get serious and knock the work over quickly. Then make your profits and move on.

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February 1, 2010 - 7:44 am

Did you end up doing anything in Branxton?? Curious, I have been eyeing the same area too.

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February 1, 2010 - 7:14 am

Yeah definitely try to replace your job quick smart first. Don’t panic and sell the property, you may get a job quicker than you think and then regret the sale later etc. Even if you have to use something undesirable such as a short term credit card in the mean time, it could help you holding onto the property etc.

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January 31, 2010 - 12:15 pm

Bob,

Are you handy with some tools and/or reckon you could borrow a bit extra to take on a renovation?

Why not buy one of the more run down-ish kinds of places (there are PLENTY of run down properties in Newcastle). Borrow a bit extra and take on your first renovation Aim to knock it over quickly and set a schedule. Add some serious value by fixing the place up – don’t overcapitalise obviously. 6 mths later (if you renovate effiiciently) you will have added significant value to the place. Then you can either rent it out asking for a decent amount of rent, OR sell it and cash in the profit CGT free because you lived in the place.

I am experienced with the Newcastle market and in my opinion only, it’s not such a great high yield market. The yields are pretty ordinary. It’s quite cheap to rent in Newcastle. Newcastle has the most potential for capital gains though at present – much more than a market like Canberra for example which is a higher yield market (fantastic rents), but has already had a long run of strong capital growth recently and is starting to slow down a tad.

So pick up a cheapy in Newcastle that you can add value to yourself. Put the hard yards in you will end up with a place that you may actually love to live in too. Plus you will have a smaller mortgage because you didn’t pay top dollar for the place to begin with. Newcastle has been circled as a place very likely to boom in terms of capital growth in coming 5 or so years.

There are also some regional towns approx 1 hr from Newcastle with some MAJOR transport infrastructure already approved and underway, due for completion in approx 3 years. If you took the path of renting somewhere, but buying somewhere as an investment, then seriously look into a couple of the regional cities, think up and coming central hubs in the hunter valley and you could be planting a very worthwhile seed.. Similarly, nothing stopping you from also renovating a place like that even if you don’t live there. You can claim some of the work and then get a higher rent for the property after the work is done.

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January 30, 2010 - 4:43 am

House values will still rise and go up between here and 2020 for one main reason also that people forget:
– Just because the median price becomes $1mil and suddenly Mr Average John Smith and his family can’t afford to pay you $1mil for your 3 bed house in Sydney any more, guess what, the population will be booming and some developer will offer you $1mil instead to knock it down and replace with a high rise apartment block.

So as has happened to every single other developed country, land will become more precious and old huge, spacious houses will also start to get replaced by more space-efficient high rises. So in a single block of land, you then split the cost between 10 residents living in the high rise. Maybe they are still only paying $300-$400k for their “unit”, but all of that added up still goes towards purchasing the old house from the buyer who owned that block before the apartment was built.

So think outside the square, it’s not just going to be the same old family with 2 kids paying $1mil, the dynamics will change more and there are still always people with the money and structures to pay the higher prices, just that the dynamics will change. For people who can’t afford that and still want a 3 bedroom house, well they will just move further and further out into regional areas where the price remains low. E.g. move to Cobar in regional NSW and you can find the cheapest houses.

As much as we think houses are expensive now, this country is booming both economically and in terms of population growth, combined with a housing shortage. This can only go one way and people and developers will work out ways to pay the prices!

Don’t be one of the whingers who sites on the sideline this time and misses out I’ve seen that happen before too.

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January 29, 2010 - 2:45 pm

Pay every cent you have towards the one with the highest rate ($6300 owing, variable @ 16.15% – Eeek!!! That’s nasty) and pay the minimum off the others until that first one is gone. Repeat this process swapping to the next highest interest rate until they are all gone. You are putting a reasonable amount of cash flow towards debt reduction, so don’t bother too much with refinancing etc, just go hell for leather and knock off one at a time.

Also can you sell/downgrade any of these cars/bikes to pay these debts off sooner..? Otherwise, no big deal, keep your toys but smash the debts.

Use 2010 as your “Debt elimination year” while reading more property books and forums to skills yourself up in preparation for 2011

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January 29, 2010 - 2:36 pm

Hi Marie, (c9806103 here – renamed myself)

I completed the REWARDS program form this morning actually (having spent all day listening to property related podcasts and reading blogs etc). But no I’ve never done the rewards program before. So yes I listened to the 16 CP+ properties in 4 days podcast. The thing that it didn’t tell you was that it was all based in New Zealand. But they still said it could all apply to Australia still etc, but the properties were super cheap over there because of the recession and economic differences etc. But there were some good points that they raised etc.

Nothing super hugely like ‘wow what a cool secret’ and no super specifics to do with areas and the like, but it was a good overview and explained how they think and the logical process they go through etc. They recommended subdivision because it was quite easy to manage remotely compared to say renovation, which would be difficult to manage remotely from overseas. Anyway overseas doesn’t apply to me much, but I would still recommend signing up to listen to the podcasts in any case. The other “5 myths of property investment” one was ok too.

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January 28, 2010 - 2:59 pm

My impression was that an IO loan will only work for you if you then go and use the increased cash flow towards another property.

If you are just sitting there spinning your wheels and change the loan to IO, but without doing something with your increased cash flow, then it’s really a trap isn’t it, because you are under the impression that you’re “paying your mortgage down”, but you’re not really, only paying interest..

So if you left your loans as IO, why couldn’t you then buy a third place by drawing upon some equity from the primary place (which has lots of equity) and then put a smidgen of your own cash towards helping that 3rd property break even just for a couple of years until it increases and looks after itself. This would be the benefit in putting your primary place to IO I would have thought.

Apart from that, just leave it as a normal mortgage and try to focus on smashing that remaining 110k down as much as possible. That kind of debt really could be knocked down in a couple of years if you wanted to work really hard and make a couple of sacrifices, even to get it down to 50k as a first goal would be mentally satisfying and you would be virtually out of debt on your primary place then which would be a nice feeling. But even if you did that, really I think all paths are pointing towards you then getting a 3rd property, because you have some great equity to draw upon.

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December 29, 2009 - 6:30 am

Ok so the general idea is that while accumulating IPs, hopefully your personal and rental incomes are both generally increasing along the way. Then you can use the excess of rental incomes via the offset account(s) to help knock down your PPoR mortgage.

Thanks once again for wrapping that up Terry.

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December 29, 2009 - 5:30 am

Many thanks again Terry. Your advice has been awesome.

Also thanks Richard, what you say re: PPoRs having a habit of becoming IPs makes good sense too, and is a path that I would be likely go down for sure.

Now a little further down the track… I get the place for $250k, renovate it and wait 3 years, then it's worth maybe $350k. I might have accummulated say $50k in the new offset account for that PPoR. All of a sudden that house may be able to pull in $350/wk in rent and the debt is down enough (virtually, because of cash in offset) so it will break even. So I look to turn it into an IP, because at the same time, my family has grown and I want to upgrade our  PPoR.

How the hell can you then keep this place as an IP, but then somehow afford to go and buy a $500k home that has the size and features that you might need? Do you essentially need to wait until the rents rise up enough from your IPs, so that they can be piling excess profit each month into the IP offset accounts, and then you use that money to help pay your new HUGE PPoR mortgage

Or can it only really work if you planned to live in cheaper houses forever that would later be suited as IPs? Because I have a longer term vision, e.g. 5-10 years of eventually being in a reasonably big place as my PPoR. But if I keep moving out of smaller PPoRs and turning them into IPs, how do I accumulate any capital that can be rolled in to purchase the big PPoR? Hope this makes sense.. Or do you basically have to "cash in" and sell investment properties to then be able to move into your dream home?

Awesome helpful thread

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December 29, 2009 - 4:50 am

Thanks once again Terry.  That was again very helpful.

The offset vs redraw tax advantages now seem very clear.

So to check my understanding, is this correct:
The essence of changing to an IO loan, is that the repayments are smaller than for a P&I loan. This means that each month, I will be left over with more spare cash from the rental income. This spare cash can then be used (via the offset account) to help reduce my new non-deductable mortgage. And that makes sense because you want to shrink any non-deductable loans ASAP where as a deductable mortgage is fine to just sit there, because it's deductable. So you are essentially diverting money that would have just been reducing an already deductable P&I loan into helping to pay down a non-deductable loan?

Meanwhile however, your investment loan just sits there forever, is that a good thing? Or because that debt is deductable, AND the place is appreciating in value, it doesn't matter.. I.e. you will make your money from the capital gains, not from paying the deductable debt down.. Am I on the right track??

Now re: the new PPoR loan. Why should that be IO? can understand not wanting to pay investment debt down, but with your PPoR, don't you want to pay it down super ASAP? Or is your approach leaving it as IO, so that you can essentially build up cash in an offset against that IO, then when you have enough cash eventually in that offset which matches the balance of the IO loan, you have essentially paid the loan off, but then LATER should that house then later become an investment, well it's still "officially" in debt, because you never really paid it off, you just saved into an offset.. I think I am starting to follow you here..

Many thanks!!

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December 29, 2009 - 3:13 am

Many thanks Terry – greatly appreciated.

Can you please just clarify a few further questions?

So the tennants' rent goes directly into the offset account. So the result is that I am being charged the same interest, yet I can claim more each tax time because the official "loan" remains higher on paper. Then also, I have better access to the cash for the next PPoR purchase because it's just sitting there in the offset? Note: as the property is only just breaking even, I guess it will be a while before that amount adds up to anything substantial.

Also: Re: changing to an I only loan, I understand this will free up more cash in the short term, because the repayments will be less, yet I continue to be able to hold onto the property. So this "extra free cash" can then go into the new PPoR property? I am a little hazy here. Oh I'm allowed to use the excess rent to pay my own mortgage off BECAUSE I would be paying the rent into an offset, INSTEAD of directly into the existing investment mortgage..? Is that the logic here? Therefore, I can now start to use any excess of rent coming in to fund my own PPoR mortgage, while leaving the investment mortgage sitting idle and just paying off the minimum repayments of the I-only loan basically…

Also, so the other loan for the new deposit, is just pulled again from the townhouse's existing $107k equity? Does it make any difference if I pull back on that equity vs getting a brand new fresh loan? And what's the reasoning behing keeping the new deposit loan to approx 25% of the new house's value?

Thanks once again Terry.