- littleguybigworldMember@littleguybigworldJoin Date: 2009Post Count: 6
Hi guys. I have been sitting on my hands for a few years, and have been madly reading mags, books, and asking around for advice. I stumbled across these forums and have been reading through many topics. I'd appreciate any advice on how I'm going or any tips.
My story: July 2007 I bought a house for $270,000 in Narangba, north of Brisbane, while I was 20. Now, almost two years later, the loan is down to $240k, and my own personal value would place it at $320-$330k in comparison to others on the market nearby. Conservatively I'd be able to sell tomorrow for $300k.
Talking to my broker recently, he believes my borrowing capacity is not large enough for a second property due to my single income and my current wage. I have been living in this house with a few boarders here and there helping the repayments. The advice I keep hearing is 'never live in your own house' which is ringing true when I crunch the numbers. The golden ratio I also keep hearing is 50/50 or even 60/40 on the primary house before moving forward. It looks like I'll have to bite my lip for a few more years, paying it off as best as I can, while working towards a higher wage.
I can't help but think sitting around waiting is not the best thing to do. Any tips guys?
littleguybigworldShellymapleMember@shellymapleJoin Date: 2009Post Count: 15
I feel you should the property a bit longer and it will fetsh you something handsome.TjDLiFeMember@tjdlifeJoin Date: 2009Post Count: 1
Hey Champ…I'm only flying through this site as I'm on a chopper in an hour…sounds like some good friends of mine may be able to help work out what you can do. Try "JDL Strategies" they will have a seminar some time soon in Bris so get you arse along to save yourself from too much bad advice and lost investment time. All the best mate… TimEdvico_kvnMember@edvico_kvnJoin Date: 2008Post Count: 46
Since your Broker advised that you don't have enough borrowing capacity to purchases another IP, you should perhaps consider renting out your current property and then yourself live an another rental property.
That way you can claim tax deduction on the interest on the mortgage you are servicing (in addition to the other running costs plus depreciation if applicable). To help reduce the rent you will have to pay your new landlord, perhaps share a place with a mate or 2. Of course there are lifestyle issues to consider such as the pitfalls of being a tenant and the potentially high rent that landlords are charging these days. That's something you have to weigh up against the financial/tax benefits of moving out.
This will enable you to repay your home loan faster and build up equity in a few more years (ideally you should dump all your salary, rent etc into an offset account and pay off interest only on the home loan using proceeds from the offset account).
Another benefit of this strategy is that you will not have to pay capital gains tax when you eventually sell your current property for a profit (provided that you sell it within the first 6 years of renting it out). The key thing is that you lived in the property first, as opposed to renting it out straight after you bought it. You've established it as your PPOR – I presume you needed to do that to not get disqualified from the FHOG.
You've done the right thing so far by buying a property a couple years back and manage to knock down some of the home loan balance. You can accelerate that process by converting your property to an investment one.ducksterParticipant@ducksterJoin Date: 2004Post Count: 1,674
If you are able to live with your parents you could pay off the loan big time by renting the whole house out and using the rent and your income to pay off the loan.
It seems like you are getting no where but the $270,000 loan at 20 years at 7% costs $202,000 in interest where as from the loan going down to $240,000 at the same repayment level of $965 a fortnight costs $154,000 in interest over 20 years at 7% p/a.
Each time you make an extra repayment you are biting into the principal amount and you will get to a point where the interest cost becomes less than the repayment amount and the repayment of the loan accelerates.
You might wish to get the loan amount to a point where the interest amount equals the rental income minus expenses
When you get to this point you have a property that costs you nothing to hold if you are renting it out.
Also you noticed the property value increased in two years.
if you worked it out it would be about 7% a year compounding
so based on a figure of a 7% p /a average compounding rate your property could be worth
$531,000 in ten years time
$370,000 in 5 years time.
Your loan would be $185,000 in 5 years time . So your net worth would be $370,000 – $185,000 = $185,000
Your loan would be $100,000 in 10 years time . So your net worth would be $531,000 – $100,000 = $431,000
based on a repayment of $965 a fortnight without any extra repayments at 7%
Your loan in twenty years time would be zero and the value of the house might be $1,000,000
What I am trying to highlight is how money is made over time with a consistent investment savings plan.
It is hard at twenty to see ten years down the path.
If you sell the house you miss out on any future capital growth.
On way of increasing the value is through improvement on the property.littleguybigworldMember@littleguybigworldJoin Date: 2009Post Count: 6
Thanks for the help guys. Unfortunately I can't move back in with the parents, they are out bush. I'm the only family member for hours. I think it'd be best to move out and rent this place, as I'd be saving thousands a year.
I've been working on the basis that I need to chip away at the principal amount, and over time as duckster says, the interest will be less than the rent return. I'm confused regarding the 'paying interest only' option. What is the benefit of this other than having less repayments and capital gains tax?
My current contributions are $1923 per month on a fixed rate, expiring this July. Should I be upping the repayment to my breaking point for the next while to get it as low as possible. That way in maybe another 6 months or a year I can re-assess my borrowing capacity. For the record, my broker didn't say I didn't have enough borrowing capacity, but this was my impression after asking him.
I imagine I'd be getting $300 p/w rent return which would leave me $700 short p/m. Is this too early to look at a 2nd IP?
I guess what my question is, should I sit tight until at least July when I can reassess my current loan, in order to see my borrowing capacity for another IP? Or should I press now, or in another years time, or two?