Hi All,
My partner and I have two separate units (both around the $320k mark) that we have each lived in separately for just over 2 years. We are looking to move into a larger place together to be our PPOR – and are thinking about using the equity in the two units + some cash to buy the new home, and then rent the two investment properties on an interest only loan(s), and pay principal + interest on the new home. I believe we only have around $60k equity in the units combined – and my calculations show after we collect the projected rent and before tax breaks we will be losing around $8k per year on each property – but should be making that up and then some on the cost savings of sharing the mortgage cost on our now shared PPOR.
I have no experience in property investing, so if you could offer any advice on this situation that would be great.
Some points I'm interested in:
– How much of the $60,000 in equity will a bank let me access in lieu of a deposit?
– What is the capital gains implications now we have lived in each house separately for 2 years when we go to sell them later?
– Is having the two investment properties on IO and the home on P+I the way to go?
– Does my logic here make sense, and is losing $8k per year too much?
Cheers all
G'Day Goatus,
How are you calculating the equity?
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Hi Goatus
Fantastic name!
Anyways, back to the property stuff.
If the two properties that are to become IPs aren't already set-up as interest only, then get onto that asap.
When you release equity in the properties, ensure that the equity releases are set-up as separate loans so you can determine which debt is deductbile and which isn't.
Will the new PPOR ever become an IP?
Apart from that, it's hard to provide a better response without knowing more.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
goatus wrote:What is the capital gains implications now we have lived in each house separately for 2 years when we go to sell them later?Hi Goatus,
Your two previously owned residences will be CGT free for each of you from time of purchase and up until you declare the new place as PPOR. Each of the two properties will start incurring CG liabilities from the day you declare your new place as your PPOR. It would be in your interest to have a valuer establish the value of each property when you move out.
That comment assumes you each moved into the original properties from day of settlement.
goatus wrote:Does my logic here make sense, and is losing $8k per year too much?Is that $8k for each property or $8K across both of them.
The bottom line is only your can answer the question of affordability. Property investors who are 'losing' cashflow (as per your projections) would be wanting, as a minimum, for their properties to be increasing in value by more than the amount they are putting – which, in your case, is $8K
Thanks all, some great info here.
@thefinanceshop: Im calculating the equity:
Property 1 – Worth ~$300k, owe $260k on it = $40k
Property 2 – Worth about $320k, owe $300k on it. = $20k
= $60k equity correct?
From what i have read banks will let me use 90% of that? So is that a straight $54k I can knock off a required deposit for the new home?
@jamie – we expect to live in the new house long term, i dont think it would be an IP at any point.
So the best bet would be to get a separate IO loan on the two current properties (can that be on the same loan, or do I get two seperate ones?) Then get a separate $500k loan for example to buy the new place on P+I?
@derek – I estimated $8k each… but i was overestimating all my costs to be safe. So prices on average (we expect this to be long term -I realise it might move the wrong way in the short term) would have to go up around 2.5% a year to break even. Is that reasonable from your experience?
Thanks all for your help
Hi Goatus,
Unfortunately you don't have much usable equity. While you do have $60K total equity, maximum loan lenders will allow is 90% of property value, not the equity itself.
Loan 1: $300K x 0.9 = $270K – $260K = $10K usable equity
Loan 2: $320K x 0.9 = $288K, already owe $300K, can't access.
Therefore only $10K is usable equity.
Cheers
Tom
Thanks Tom, that totally makes more sense to me now
Just so i make sure I now understand the concept, if I were required to put a $50k deposit down for the new home, I could effectively put $40k down in cash, and the additional $10k from the equity?
goatus wrote:@derek – I estimated $8k each… but i was overestimating all my costs to be safe. So prices on average (we expect this to be long term -I realise it might move the wrong way in the short term) would have to go up around 2.5% a year to break even. Is that reasonable from your experience?
Hi Goatus,
No-one can predict the future.
You may like to look at the growth rates of the suburb (s) over 10, 20 yr period. While this is not a predictor of future rates it will give you a reasonable idea of what you can expect in the long term going forward.
Note: if the properties are located in regional/country centres then you will need to be aware of the possible impact of any minor changes to the economy.
Capital city localities have typically seen median prices grow by something like 7% – 9% /annum over a ~25yr period. Some capitals have exceeded this figure. N.B. It's been a while since I had all of these figures down pat and I don't have these stats at my finger tips so take that comment with a grain of salt.
So in answer to your question if the $16K is affordable and you are comfortable you can achieve growth rates exceeding 2.5% it is probably OK to hang on. In making that decision you will also need to consider such things as career changes, kids, loss of income, your lifestyle and so on.
Hope this helps
Hi Goatus
Yes you could but you would put it down as equity rather use a sub loan otherwise the loans will be cross collateralised.
Sounds like you need a little nuturing on this one going forward to make sure you structure it correctly.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Im glad I asked the question about how you have calculated equity!
Don't assume that you can automatically borrow the $10k. Make sure you get the Formal Approval on the amount and at the same time get the pre approval for the new IP purchase. Its better to do both with the same lender so they can see that the cash out relates to the pre approval. Also make sure that the Pre Approval is a credit assessed approval rather than a system pre approval.
Bottom line – get your approvals in order before doing anything futher.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
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