I am kind of confused in relation to investing in CF+ or IP’s below 200K while my personal house is worth 700K + fully paid. Should I be selling this house to cash up and buy a house worth 500 K for personal living and use remainder of the cash to invest and pay for the deposits in CF+ properties. Or utilise a strategy of drawing Line of Credit against personal residence to invest in properties? Any thoughts guidance on the subject is recommended.
Why sell? You will lose your only CGT free asset and have to pay rent with after tax dollars. Not to mention pay fees on selling.
If you are employed you could obtain a loan on your home at up to 80 to 90% of its value. Then use this as deposits.
80% of $700,000 is $560,000.
If you use this as 20% deposits and allow another 5% for fees etc, you could buy up to $2,240,000 worth of property – assuming you can service the debt.
Would that be enough for starters? By the time you have used it all up, hopefully your house has increased in value and you can draw down a bit more. You then start drawing down on your investment properties as they grow.
Terryw
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Ftareen.
If it is any consolation I am wrestling with the exact same problem. I have just read Steve’s book “$1,000,000 in Property in One Year” and a couple of the “Mappers” described in the book felt the best thing was to sell their homes. I note Terryw’s comments and he makes some valid points. The crux of the matter is being able to service the level of debt if you adopt the borrowing against equity approach. I own four investment properties and have used the borrowing against equity approach so far, but I have reached the point where I just can’t service any more debt.
My advice would be to obtain a line of credit first and if you find this unsuitable then sell your house and downsize.
Argo it seems to me that your investment properties are cf-, otherwise you would not have a problem to service the debt.
The main advantage to sell the house and rent (not downsize) is that you access 100% of your equity. If you borrow against your house you will only get 80% without MI and 90-95% with MI.
Selling your house and buying a slightly cheaper one will not help you to access extra funds, as they will be swallowed and then some by agent fees, stamp duties, etc, etc. (20% of $200,000 not accessible versus about $27,500 closing cost and $17,500 agent fees)
It will make servicing easier, as you do not have to pay interest on the money ($200,000 less $45,000 costs about $11,500/annum.
I am certainly too attached to our house to consider selling. And I have about $250,000 equity in it to use for investing. Bank’s do not think I can service IP’s, but will give me the money on LoDoc loans.
It only makes it harder to find properties that comply with Steve’s three rules in his 3rd book (Especially the danger money multiplier). But I just found two properties to subdivide that will do nicely.
There are several ways to skin a cat.
Good Luck ftareen and argoThanks for all your advice, it has been very helpful to strengthen my understanding. If I redraw LOC for say 1 million from my bank, can I use this amount for 20% deposit and Bank will lend me additional 80% of the loan? or will I need to go to different banks.
Thanks for all your advice, it has been very helpful to strengthen my understanding. If I redraw LOC for say 1 million from my bank, can I use this amount for 20% deposit and Bank will lend me additional 80% of the loan? or will I need to go to different banks.
Hi Bridgebuff,
You suppose right. Three properties are cf- and one is cf+. As a matter of interest it is a commercial property, while the cf- properties are all residential.
Up till recently I have adopted the buy, hold and hope approach, but I am beginning to change my views. If I do a small sub-division ie split one block into two and then sell both I don’t need to sell my house to finance this. I have an LOC ($200k) which I can use to finance deposit and costs. I guess I see that sort of activity as trading rather than investing and at the risk of being howled down, it is not exactly my idea of a cf+ investment. If I want to trade I can do it in the stockmarket where the costs are much lower. To re-state, I am not against the sub-divison idea and one of my properties is already on two titles and will generate a handy profit by demolishing the house and selling the two blocks.
To answer ftareen’s query, you probably have do what Bridgebuff suggests and use the LOC for deposit and obtain a Lo Doc loan from another lender for the balance. Make sure you check on the lenders Lo Doc requirements, because some will require you to have an ABN for at least a year or so. Others require that your primary source of income be from self-employment (not PAYG). If on the other hand you can satisfy lender servicing requirements from your existing income then stay with your primary lender.
What I didn’t say in my original post is that I would like to semi-retire, so proceeds from selling my house can reduce debt and cut down the need to generate income from working.
Happy New Year
Argo
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