All,
Another beginner asking a question please… For negative gearing, what's the optimum level of gearing?
I have 3 IP, but have been doing so without much background knowledge / strategy, hence the notion beginner.
This is my situation, though not sure whether the info is relevant:
– All IPs are negatively geared, total LVR is 82%.
– Total outstanding balance is $1.3mil.
– Total monthly interest for 2 IPs is approx $6,500. Interest for the other IP was paid in advance for 1 year.
– Last 3 months, managed to pay principal $13k, on top of regular loan installments (all loans are interest + principal)
Is there any other info you need to know to assess my situation?My bank manager says I'm dangerously over geared. He warns me that I'd be in serious trouble if any of my IP is empty.
I'm really nervous and would like a second, third even fourth opinion please.Thanx
Cattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
well, the power of negative gearing depends at least partly on your income. Obviously someone on minimum wage would be in a world of trouble here.
I think more information is needed for this one. Annual income (both rental and otherwise) would be a good start.
If all 3 properties became empty at the same time (although unlikley, this can and does happen), how long could you cover the loan repayments before you went broke?
Or, worse; how long if even one property was vacant?
That's how you need to evaluate it.
You have no available equity or redraw to service the loans if your income won't cover the payments; there is no wiggle room there in case of a lack of cashlfow.
Thanx Bruxism and Marc,
Further info on my income is:
Monthly disposable income (net of cost of living) is 5400
Monthly IP net income (for 3 IPs) is 4800
Monthly interest for 2 IP is 6500
Monthly interest for the other property should be around 1900, but I don't have to pay this until July.
I know the numbers say my IP income covers only 57% of my interest expense. Throwing other expenses, it's closer to 45%.I have access to $50k as withdraw facility. Plus my monthly wage… if all 3 properties are vacant (touch wood), I have 9.8 months before failing my interest payments.
Well… what do you think? Do you see brim stones and fire?
Desperately nervous,
CattleyaCattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
What you need to think about ias well as having an emergency fund is a repair fund
What happens when a hot water system fails and you need to find $1500 in a hurry to fix it. Or a house gets run down and you need to spend $6000 to repair the house to get it into a rent-able state. A lot of property investors lower or aim for the LVR figure of 60% because you could re-borrow the funds to cover an unexpected repair and the less hassle with getting finance due to the lower LVR figure.
The strategy you are using works well if you have massive capital growth due to the LVR figure decreasing as each property gains in value. It sounds like you have a problem with trying to grow your property portfolio to quickly rather than waiting for capital growth to make the LVR lower. It might be a good idea to concentrate on paying the lowest debt off while waiting for the capital growth to occur to a level where the income is more than the expenses.
A good example of what can happen with high Leverage is what has happened with Centro Properties in that the bank wants the funds paid back and Centro cannot find a lender due to the credit crisis.Having had no full time job for three years has opened my eyes to the draw backs of negative gearing.
I am currently fixing up my rental property and have had no rent for the last three months as it has taken two months to fix the house up and it has been hard to find a tenant over Christmas.
Based on your last post, I wouldn't be too worried; 9 months of no tenants won't happen.
As Terry said; the emergency fund is the thing; you have the $50k and your wage, so no worries.
But I would be looking at some serious debt reduction (I reckon this is a given anyway; no matter how you are travelling).
No one ever went broke making a profit (apparently).
I would ask why are you paying PI on your loans?
I assume your loan on your own home is paid off, but it would still be an idea to keep all loans IO and pay any extra into an offset account linked to one of these. This would be better for tax reasons if you ever needed access to those funds for non-investment purposes, it would also allow you to use the funds saved in the offset to cover the repayments in an emergency and it would allow lower monthly repayments.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
All, thank you for responding.
I know I may have bitten more than I can chew, but house prices in Sydney – where we want to live in the future – is crazy. A friend of mine urged me to just jump into it and tighten the belt for a few years. He is in much the same situation. Hopefully things will get better…
Yes Marc, I'm saving and paying off religiously
Terry, I am paying PI because I did not, and still have not, the background knowledge. Besides my bank manager thinks I am precariously hanging on 3 fingers so he does not allow me to go on interest only or even fixed rate until I reach 80% LVR on my biggest loan.
Thanks a lot again… I'll keep paying off as much as possible and hopefully by this time next year I'm in much better position.
Gratefully yours,
CattleyaCattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
Cattleya wrote:All, thank you for responding.
I know I may have bitten more than I can chew, but house prices in Sydney – where we want to live in the future – is crazy. A friend of mine urged me to just jump into it and tighten the belt for a few years. He is in much the same situation. Hopefully things will get better…
Yes Marc, I'm saving and paying off religiously
Terry, I am paying PI because I did not, and still have not, the background knowledge. Besides my bank manager thinks I am precariously hanging on 3 fingers so he does not allow me to go on interest only or even fixed rate until I reach 80% LVR on my biggest loan.
Thanks a lot again… I'll keep paying off as much as possible and hopefully by this time next year I'm in much better position.
Gratefully yours,
Cattleyaerrrrr….he does not "allow you" to go interest only, or fixed rate ?….. I would be shopping around and ditching that arrogant clown (just my opinion). Dont be afraid to shop around , you will find some will cover exit fees if thats an impediment . How a bank manager can block you from fixing interest (if thats your preference) beggars belief
good luck with your plans
regards, Steve
Bank Managers often give poor advice – which they legally shouldn't.
Do you have a loan on your PPOR? ie non-deductible?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Steve,
I have not been looking at other options simply because my existing banking arrangement is already very convenient with all direct debits and credits already in place and all accounts are in the same bank…, very convenient. The loans have redraw facility which I can do myself over the net, anytime. Also I get 0.7% off standard variable loan.
Hence there is no issue re. using the funds for other needs. Besides, I'm building my equity anyway. More restrictions on using the funds are actually welcome.
Terry, all my loans are tax deductible. I don't have any non tax deductible loan.
Ok, I'll start inquiring tomorrow.
Thanx,
CattleyaCattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
Congratulations ! You have more than most people and may not have bitten off more than you can chew. I can relate to your predicament as were held back considerably by our own lack of knowledge and looking back, ultra conservative, non investing bank managers. Since acquiring the services of an experienced, investing Mortgage Broker we have been exposed to a whole new world of borrowing options that we didn't know existed. Don't be dictated to by anyone. Ask this person how many investment properties they own. We originally had ties to one particular bank because of the same discount you have but putting up with their ignorant conservatism isn't worth it. Over the previous 19 years we have dealt with 6 different banks. Sounds like you are probably maxed out/full exposure with this particular bank anyway and its time to move to another for your next investment. Good luck.
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