All Topics / Help Needed! / Drawing Down on Equity: Can Someone Explain…

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  • Profile photo of LeilahLeilah
    Member
    @leilah
    Join Date: 2007
    Post Count: 8

    Hi all

    I have a question about something I have not yet understood.

    I have two investment properties. Property one is worth $325,000 and has $47,000 worth paid off.

    Property Number two is worth $385,000 and is totally paid off.

    Thus, the LVR is 40%, give or take. The outstanding loan repayments are covered by the accumulated rents of the two properties. So they provide positive cash flow.

    I want to buy a PPOR for $750,000. So I draw down the equity on property number two for $160,000, to cover the deposit and related costs of purchasing the PPOR.

    By drawing down the equity, doesn't this create more debt and thus won't it increase my monthly repayments on the two investment properties, pushing it from positive cash flow back to negative cash flow? If you keep on drawing down the equity how do you service your loans if the repayments keep increasing each time you do so?

    Thanks in advance,

    Leilah

    Profile photo of Kiwi-FullaKiwi-Fulla
    Member
    @kiwi-fulla
    Join Date: 2002
    Post Count: 371
    Leilah wrote:

    By drawing down the equity, doesn't this create more debt and thus won't it increase my monthly repayments on the two investment properties, pushing it from positive cash flow back to negative cash flow? If you keep on drawing down the equity how do you service your loans if the repayments keep increasing each time you do so?

    Leilah

    Hi There,
    In essence yes your repayments will increase and possibly turn it around to Neg Cashflow. There are a couple of things you can do … perhaps increase the rent off the properties… or go to Interest only or refinance into a lower rate or use an ARM loan or Lesae Option or Wrap to increase yield and reduve holing costs incurred to you (tenant buyer pays expenses on maintenance+ no vacancy issues to deal with).

    Tha answer to your second question is perhaps… continue buiding your investment property portfolio with CAshFlow properties and you will not get serviability issues as they are all paying for them selves …. then perhaps when you have 25-30 Positive cashflow properties…. they will pay for your equity draw down and your PPOR without effecting your lifestyle. – So your invstments will effectively pay for your home.

    Best of luck with youre investing .
    Kiwi
    http://www.rent2ownnz.com

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Yes, drawing equity is borrowing money = bigger loans and bigger interest bills.

    But the interest for this scenario, borrowing to buy a PPOR, will not be attributable to the investment properties, but to your new home. Therefore the investment properties will remain the same in terms of tax deductions. It will be your new home that is severely cashflow negative!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of kum yin laukum yin lau
    Member
    @kum-yin-lau
    Join Date: 2006
    Post Count: 342

    Hi, you seem to be doing the reverse of what most people do i.e. draw down excess equity in PPOR to fund IPs which are tax deductible.

    Your target PPOR is high priced compared to IPs so you'd need a sizable income to pay for your cost of living.

    Can you live in House 2 and use the equity to buy target PPOR for rental for 5 years or so & then when you have paid off more of the loan, then switch to your dream home?

    There's also some merit in buying the worst house in your target suburb, knock it down & rebuild preferable 2, then live in one & sell the other or keep the other as IP.

    Unless you have very high net worth, your $750K target PPOR is going to severely drain your cashflow.

    Hope this helps & good luck,
    Kum Yin

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