HI,
i am new to property investing. I will be purchasing my first property for renting out within 2 weeks. It’s going to be a positive rental return. I bought it for $83,000, and the weekly rent is $120. I am able to get a 90% ($74700)loan at 6% (if Principle and interest loan).
If Interest Only Loan, its 6.11%.So which loan should i go for? If you were me, which will you go for? (i am hoping to buy more proiperties within 1 year.)
Why do i hear so many people say get a Interest Only Loan if its for a investment property, ESPECIALLY IF IT IS POSITIVE CASHFLOW PROP. Why is that?
(My finance broker told me to go for P&i to build equity so i can get more homeloans in future)The way i understood it is, with the positive cashflow, we can collect that cashflow to buy more properties.. is that right? One author Anita Bell says she always go for P&i loan and pay extra per month back to reduce the interest and debt. BUt Jan Somers and Brad Sugars says Interest Only is king!
PLs explain to me in terms of the effect on tax return, cashflow and my ability to get more properties.
THANKS!fullout
Hi Fullout,
A little birdy told me that Interest Only loans are illegal. Perhaps check it out as I could have misunderstood.
Cheers
Sooshie [
]
p.s. Good luck with your investments, it’s good to see your doing something. [^]There are no problems, only solutions
Hey Soosh,
What do you mean that IO is illegal. I find that very hard to believe as nearly all lenders offer IO loans. IO being illegal would really shake up the market. Could you explain ??Thanks
Enjoy
AD [:0)]
(Andrew)“”Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”
Albert EinsteinSeems to me that the choice between IO and P&I all depends on if you’re after cashflow (where IO would reduce payments, boosting returns) or equity (which will be boosted by having payments reduce your LVR). The real question may be whether cashflow or equity suit your strategy better…
Quasimodo [^]
PS IO being illegal does sound *very* odd… let’s hear where that little birdy heard it from…
__________________________________________________
It seems to me that action has a most magic way of answering all the questions our fearful mind tries to throw before us…
__________________________________________________Hi Fullout
The property you decribe doesn’t sound positively geared to me. Please check the numbers below and insert the your own figures to suit. This property is going to cost you approxamatley $114.00 per month out of your own pocket just to pay the intrest on the loan and the costs associated with owning the property.
With an intrest only loan you dont repay any prinicple so the amount you ow the bank always remains the same and doesn’t reduce. The intrest that you pay the bank is 100% tax deductable and helps reduce your tax liability (if you have one).
With a Principle and intrest loan you still pay the intrest to the bank as above but you also repay some principle off the loan amount. The amount you ow the bank reduces and so does the intrest charged.The amount you are paying off the principle is not tax deductable.
If you want to buy more property this year it would be best to go intrest only as this frees up extra cash to invest in the next property.
Purchase Price $83,000.00
Stamp Duty $2,450.00
Conveyancing $495.00
Searches $230.00
Loan App fees $600.00
Valuations $250.00
Mortgage $250.00
Total Cost $87,275.00Intrest rate 6.11%
Total Intrest Per Month $444.00
Rates per month $100.00
Insurance per month $40.00
Repairs per month $50.00Total Monthly cost $634.00
Weekly rental $120.00
Monthly rental $520.00MONTHLY SURPLUS/LOSS -$114.00
Hi there,
What I was referring to was when wrapping a property, you offer a product to client and you have IO loan. As I said, I wasn’t 100% sure if this was for certain as I also couldn’t understand why if institutions offered IO loans why it would be illegal??? Definitely for further research.
Cheers
Sooshie []There are no problems, only solutions
Hi all,
Thank you Michael for clearing that up. I should have been more clear from the outset [
].My forte is finding the houses, doing basic sums etc.. The finance side is hubby’s job. I don’t have much patience for this side of the work. To bland [
]Cheers
Sooshie [
]There are no problems, only solutions
And remember that legislation varies from state to state!
As a rule of thumb, you should always ensure that your loan is less than your wrap buyer’s. That way no matter when their contract is completed, you can always pay off your loan.
Personally I use IO loans at the moment because I want to maximise my cashflow to continue doing more deals. Certainly, however, when the IO periods start to expire, I will more than likely switch to P&I to maintain the gap between my loan and my buyer’s.Keep smiling
FelicityDerynaka,
hi thanks.
Well, the loan application only cost me $400, and there’s no valuation fee nor monthly fee for it. Also, the stamp duty was only about $1000+ from what my finance broker calculated for me.So you still think its better for me to get a Interest Only loan huh?
What about when i get positive rental income, is that taxable? How do i reduce that? By getting a paper loss is it?also Derynaka,
why does a IO loan frees up more cashflow?
ALthough we dont pay principle on it, we still pay about the same amount dont we? And usually the interest loan is higher in % than PI loan.
give me an example based on my property figure pls.
THank youMichael,
i will be loaning 74700. I can get the P&I loan for 6% for 30 yrs, (monthly repayment = $447.86).
<how do i know how much interest or principle i pay per year?>If i use a Interest Only loan, then it will be 6.11% at 30 years. ( i dont know how to calculate how much repayment is for IO loan).
Details:
Purchase Price : 83,000
Loan : 74,700
Rental: 120 p/w or 520 p/mUpfront:
Stamp Duty – purchase $1792
Stamp Duty – motgage $ 263
Registration of Transfer $292
Redistration of Mortgage $59
Loan application fee: $400
Motgage Insurance : $929Hey Fullout,
IO as requested. Using your figures.$74700 x 6.11% / 12 = $380.35 per month.
Enjoy
AD [:0)]
(Andrew)“”Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”
Albert EinsteinHi Fullout,
I was just doing some calculations based on your numbers and wanted to share my figures with you.
Based on that and the purchase figures you mentioned, my calculations are as follows:
Property – $83,000
Deposit – $8,300
Loan – $74,700
I/O rate – 6.11%
Payment – $380/month
P&I rate – 6%
Payment – $447/month
Upfront Costs – 3,735Total cash invested – $12,035
Rent – $520/monthRates – $100/month approx
insurance – $40/month approx
5% vacancy allowance – $52/month
5% maintenance allowance – $52/month
Total – $244/month
P&I costs – $691/month
I/O costs – $624/monthFrom these figures a P&I loan would see you with a $171/month loss and I/O loan would see you with a $104/month loss.
These figures do not take into account any depreciation or other tax benefits, this is purely based on the income and expense of the property.
Now these figures may not be 100% accurate but would probably be very close. At the end of the day you need to ask yourself does purchasing this property get me closer to my goal. Only you can answer that question.
Hope this helps.
Cheers,
Mathew.
How does one calculate the monthly repayment for a IO loan? I have a mortgage calculator but dont know how to use it for IO.
When i am using a IO loan, isnt it considered “wasted” as those interest paid over the years didnt reduce the loan at all? I know it gives us more cashflow on one hand, but we have to calculate the interest paid to the bank dont we?
Hi Fullout
The Intrest only calulation is
$74700.00 x 6.11% = $4464.00 divided by 12 months
which equals $380.00 per month.You are still paying intrest to the bank regardless of which loan you have, IO or P&I .
You will pay a little more intrest with the IO loan because:
A – the intrest rate is 0.11% higher and
B – you are not reduceing the amount owing to the bank, because you are not paying any principal off the original loan amount.The benefits of using an intrest only loan are
A – The intrest componant is 100% tax deductable.
B – The tenant should be paying enough to cover the intrest anyway.
C – You have extra money available to invest somewere else.When you dont reduce the amount of money owed to the bank you are relying on the property going up in value (capital gain). So in five years time you still ow $74700.00 but your property is worth
about $108000.00So if the property is positivly geared EG paying its own way including intrest, rates, maintenance etc etc etc and after all these costs it returns you a small income you can then use this income to pay off some prinicpal.
If it is negitevly geared EG costing you $100.00 per month to own, you will have to use more of your own money to pay off the principal.
If you buy negative geared property you will need good capital gains to offset your losses.
Hope this helps.
Regards
so what do you think i should do based on my figures? IO or P&I?
Basically i work on a job with quite low pay, and it takes a long time for me to save up a deposit. But i would like to buy more properties either WRAP, QUICK CASH (Recnovation) or POSITIVE CASHFLOW within 1 year.
Get an I.O loan.
“so what do you think i should do based on my figures? IO or P&I?”
As many have said before me, get an I.O loan.
Have a look at Derynaka’s post right before your last post where you asked the question “so what do you think i should do based on my figures? IO or P&I?”
S/he has summed it up beautifully and has answered all your questions plus given you extra information!I repeat, get an I.O loan.
This is especially so if you “work on a job with quite low pay, and it takes a long time to save up a deposit, and you would like to buy more properties either WRAP, QUICK CASH (Renovation) or POSITIVE CASHFLOW within 1 year.”
Get an I.O loan.
Your cashflow will be greater with an I.O loan which means you can use that extra money for other investments.
Get an I.O loan.
If you want to make any payments off the principal, go to the bank with some money and say “please pay this off the principal on my I.O loan”.
Get an I.O loan.
If you don’t understand any of this, repeat your question again, and somebody may be able to answer your question again.
Get an I.O loan.
Hi Fullout, and everyone, I am totally new to this but could you please tell me where on earth you can buy a property of $83,000???
I am in Melbourne and keep being told to buy around 10km from the CBD but $250,000 is the starting price for small 1-2 bed units. They will of course be neg geared at about -$100pw. Please help.
Spocky
Hi Fullout,I was just doing some calculations based on your numbers and wanted to share my figures with you.
Based on that and the purchase figures you mentioned, my calculations are as follows:
Property – $83,000
Deposit – $8,300
Loan – $74,700
I/O rate – 6.11%
Payment – $380/month
P&I rate – 6%
Payment – $447/month
Upfront Costs – 3,735Total cash invested – $12,035
Rent – $520/monthRates – $100/month approx
insurance – $40/month approx
5% vacancy allowance – $52/month
5% maintenance allowance – $52/month
Total – $244/month
P&I costs – $691/month
I/O costs – $624/monthFrom these figures a P&I loan would see you with a $171/month loss and I/O loan would see you with a $104/month loss.
These figures do not take into account any depreciation or other tax benefits, this is purely based on the income and expense of the property.
Now these figures may not be 100% accurate but would probably be very close. At the end of the day you need to ask yourself does purchasing this property get me closer to my goal. Only you can answer that question.
Hope this helps.
Cheers,
Mathew.
Hi spocky
Within 10km of the CBD you cant find a positive cashflow property. If you try the outer suburbs, you can get some areas (50-80km) with really high rents which will pay for itself and if u are lucky, just a little positive cashflow in $50-$100 a month.
TO really find a postivie one, you need to go to the countryside, about 100-200km away from the cbd. Those are what some people will call ‘dead towns’ where nobody walks in the street even oin weekends!What are the capital gains like if that’s not a dirty word?
Spocky
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