All Topics / Help Needed! / Using Equity In Your PPOR As A Deposit

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  • Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29

    Hello All,

    I am really eager to get into the investment property game and purchase an investment property while interest rates are still low, but saving up for a deposit seems to be taking forever (I know Steve McKnight recommends saving 20% as a deposit to avoid LMI etc) so I was just wondering if there was anybody out there who would recommend purchasing an IP using equity from their PPOR as a deposit. Is there anybody who has done this before? Is it a good idea or a bad idea? Could anybody please let me know the pros and cons? I'm reading a lot of books that keep saying "get into the game" but how can you when it seems to be a struggle to save the funds for a deposit?

    Any advice would be greatly appreciated.

    Cheers

    Profile photo of L.A AussieL.A Aussie
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    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488
    gezzy wrote:
    Hello All,

    I am really eager to get into the investment property game and purchase an investment property while interest rates are still low, but saving up for a deposit seems to be taking forever (I know Steve McKnight recommends saving 20% as a deposit to avoid LMI etc) so I was just wondering if there was anybody out there who would recommend purchasing an IP using equity from their PPOR as a deposit. Is there anybody who has done this before? Is it a good idea or a bad idea? Could anybody please let me know the pros and cons? I'm reading a lot of books that keep saying "get into the game" but how can you when it seems to be a struggle to save the funds for a deposit?

    Any advice would be greatly appreciated.

    Cheers

    This is the only way we've ever done it with our IP's.

    It'll get you into IP sooner than saving for a cash deposit, but the only problem with it is you will be using 100% or more borrowings to fund the purchase.

    This will probably make the cashflow negative, and moreso than if you injected cash for the deposit.

    If you can support the neg cashflow this is ok, but the neg cashflow will have a drain on your servicability for the next one. In other words, you may need to wait longer to buy the next one than if you had injected cash as a deposit, and created a pos cashflow with which to decrease debt and improve both the equity and the cashflow/servicability.

    The other "con" is that you have no equity with 100% loans, and if somethinbg goes wrong at the start and you need to sell, you may have to sell at a significant loss.

    So, do it – but make sure you are in a position to be able to minimise debt quickly and get the LVR down to increase your safety margin.

    Profile photo of JamesyJamesy
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    @jamesy
    Join Date: 2009
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    Gezzy if you have equity in your home,in my opinion,its wasted,by all means use it to get into IP

    Profile photo of RedRoofRedRoof
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    @redroof
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    Post Count: 5

    Hi Gezzy

    You can absolutely use equity in your PPOR to buy an IP. The main benefit of doing this is that you get to enter the market sooner (and cheaper, if the market is rising). Experienced investors will tell you that you make your money when you buy an invesment property, rather than when you sell. That means it is imperative to buy wisely and get the best possible property for your budget. To ensure you make the most of your money and buy quality property, its worth considering using a licensed buyers agent. Check out websites of buyers agents in your area.

    Yvette Goulter
    Principal, RedRoof – Licensed Buyers Agents, Brisbane.
    http://www.redroof.com.au

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

    of course!

    Most people use the equity in their home. It wouldn't be a good idea to save up a separate deposit for an IP if you still have a loan on your home as you would be losing tax deductions.

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of gezzygezzy
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    @gezzy
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    L.A Aussie wrote:
    The other "con" is that you have no equity with 100% loans, and if somethinbg goes wrong at the start and you need to sell, you may have to sell at a significant loss.

    This wouldn't be the case though if you were lucky enough to purchase a property at a bargain price, well below market value, would it?

    Thanks for your reply, L.A Aussie

    Profile photo of gezzygezzy
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    @gezzy
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    Terryw wrote:
    of course!

    Most people use the equity in their home. It wouldn't be a good idea to save up a separate deposit for an IP if you still have a loan on your home as you would be losing tax deductions.

    Hi Terryw,

    Could you please explain how you would be losing tax deductions? I've read many of your posts and value your advice and opinions. Thanks for the reply.

    Profile photo of gezzygezzy
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    @gezzy
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    Thank you Jamesy and RedRoof for your replies.

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

    Hi, I used my PPOR equity [paid cash when I bought it] to buy a 2nd, 3rd, 4th, 5th, 6th and 7th and 8th and 9th property. 5th and
    6th are commercial and 7th and 9th are devt properties. 8th was PPOR 2  and supposed to be a devt but it was too hard and I sold.

    I'd always X collaterised because I'm in the category of 'hard to get funding' Whenever someone said they'll give me a loan, I always said 'Where do I sign?'

    Be careful though if you're buying your 1st IP now. Many areas have peaked and prices may stagnate or even go backwards.

    Good luck,
    KY

    Profile photo of L.A AussieL.A Aussie
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    Post Count: 1,488
    gezzy wrote:
    L.A Aussie wrote:
    The other "con" is that you have no equity with 100% loans, and if something goes wrong at the start and you need to sell, you may have to sell at a significant loss.

    This wouldn't be the case though if you were lucky enough to purchase a property at a bargain price, well below market value, would it?

    Thanks for your reply, L.A Aussie

    It doesn't matter what the price of the IP is, it is either bought with cash and borrowings, or just borrowings, or just cash if you have enough.

    If it was valued at $200k and you could buy it for 80% of it's value, then yes, you would have some equity.

    Profile photo of L.A AussieL.A Aussie
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    @l.a-aussie
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    L.A Aussie wrote:
    gezzy wrote:
    L.A Aussie wrote:
    The other "con" is that you have no equity with 100% loans, and if something goes wrong at the start and you need to sell, you may have to sell at a significant loss.

    This wouldn't be the case though if you were lucky enough to purchase a property at a bargain price, well below market value, would it?

    Thanks for your reply, L.A Aussie

    It doesn't matter what the price of the IP is, it is either bought with cash and borrowings, or just borrowings, or just cash if you have enough.

    If it was valued at $200k and you could buy it for 80% of it's value, then yes, you would have some equity.

    Profile photo of TerrywTerryw
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    Post Count: 16,213
    gezzy wrote:
    Terryw wrote:
    of course!

    Most people use the equity in their home. It wouldn't be a good idea to save up a separate deposit for an IP if you still have a loan on your home as you would be losing tax deductions.

    Hi Terryw,

    Could you please explain how you would be losing tax deductions? I've read many of your posts and value your advice and opinions. Thanks for the reply.

    Hi Gezzy

    Best to explain with an example.

    you have a $100,000 home loan
    $20,000 cash
    and wish to buy a $100,000 IP.

    what would you do?

    most would use the $20,000 for the IP as deposit, so end result is
    $100,000 home loan = non deductible interest
    $80,000 IP loan = deductible interest

    But I would do this
    $20,000 deposited into the home loan
    $20,000 borrowed from the home loan
    $80,000 borrowed for the IP
    =
    $80,000 home loan
    $20,000 + $80,000 investment loan = $100,000 IP loan

    You would have the same net loans, but increased your deductible interest.

    Of course you will need to set the loans up properly, best to have a split on the home loan so the $20,000 is separate. Also best to have all loans IO with a 100% offset account.

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Investors ZorbaInvestors Zorba
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    @investors-zorba
    Join Date: 2009
    Post Count: 58
    gezzy wrote:
    Hello All,

    I am really eager to get into the investment property game and purchase an investment property while interest rates are still low, but saving up for a deposit seems to be taking forever (I know Steve McKnight recommends saving 20% as a deposit to avoid LMI etc) so I was just wondering if there was anybody out there who would recommend purchasing an IP using equity from their PPOR as a deposit. Is there anybody who has done this before? Is it a good idea or a bad idea? Could anybody please let me know the pros and cons? I'm reading a lot of books that keep saying "get into the game" but how can you when it seems to be a struggle to save the funds for a deposit?

    Any advice would be greatly appreciated.

    Cheers

    That's what equity is for to leverage into another property provided you have done your research. look for well located property.

    Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29
    kum yin lau wrote:
    Hi, I used my PPOR equity [paid cash when I bought it] to buy a 2nd, 3rd, 4th, 5th, 6th and 7th and 8th and 9th property. 5th and
    6th are commercial and 7th and 9th are devt properties. 8th was PPOR 2  and supposed to be a devt but it was too hard and I sold.

    I'd always X collaterised because I'm in the category of 'hard to get funding' Whenever someone said they'll give me a loan, I always said 'Where do I sign?'

    Be careful though if you're buying your 1st IP now. Many areas have peaked and prices may stagnate or even go backwards.

    Good luck,
    KY

    Hi KY,

    Thanks for your feedback and well wishes. If you wish to go into more detail as to how you achieved what you did, I would be more than happy to read it.

    Cheers

    Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29
    L.A Aussie wrote:

    It doesn't matter what the price of the IP is, it is either bought with cash and borrowings, or just borrowings, or just cash if you have enough.

    If it was valued at $200k and you could buy it for 80% of it's value, then yes, you would have some equity.

    Thanks again, Marc.

    Cheers

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Whilst i appreciate X collateralising may work for some people for most it is more trouble than it is worth for most investors.

    I guess like anything it is never a problem until it is a problem and then it is a real issue going forward.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29
    Terryw wrote:
    Hi Gezzy

    Best to explain with an example.

    you have a $100,000 home loan
    $20,000 cash
    and wish to buy a $100,000 IP.

    what would you do?

    most would use the $20,000 for the IP as deposit, so end result is
    $100,000 home loan = non deductible interest
    $80,000 IP loan = deductible interest

    But I would do this
    $20,000 deposited into the home loan
    $20,000 borrowed from the home loan
    $80,000 borrowed for the IP
    =
    $80,000 home loan
    $20,000 + $80,000 investment loan = $100,000 IP loan

    You would have the same net loans, but increased your deductible interest.

    Of course you will need to set the loans up properly, best to have a split on the home loan so the $20,000 is separate. Also best to have all loans IO with a 100% offset account.

    Hi Terryw,

    Thanks for taking the time to post the easy to follow example – it helps make sense of something I was not familiar with until you mentioned it.

    Cheers

    Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29

    Thanks also to Investors Zorba and Qlds007 for your input.

    I really appreciate everything that everyone has to contribute.

    Cheers
    Gez

    Profile photo of gezzygezzy
    Member
    @gezzy
    Join Date: 2003
    Post Count: 29

    Hi All,

    Another question – as stated in my first post, Steve McKnight recommends saving a 20% deposit to purchase an IP as opposed to 10% to avoid paying LMI. I just wanted to know what your thoughts were on this? With the positive responses I received in regards to using equity as a deposit, I'm now wondering how much should be used as a deposit for an IP – 10% or 20%?

    Your advice would be greatly appreciated. Thanks in advance.

    Cheers
    Gez

    Profile photo of gibbo1gibbo1
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    @gibbo1
    Join Date: 2008
    Post Count: 152

    There are many different strategies used by different people.  One of the advantages of 20% deposit is reduced lending costs.  One of Steve's main aim's is finding CF+ properties, this is easier when borrowing smaller amounts. 

    Another strategy is to borrow the maximum amounts possible (nowadays still a cpl of lenders around the 93-95% LVR) borrowing the maximum amounts is giving you a larger potential for capital growth.  This then enables accessing equity to fund future purchases.  As the process continues your maximum borrowing in individual properties is reduced.  If you have a PPOR and an IP its possible to get a 95%LVR on both depending on the security of the property, income, etc.  Down the track lenders wont like you having 30 properties all streched out to 95% LVR.  Here they acknowledge the additional cost of LMI but this is weighed up against the capital growth potential and future buying power of that additional capital growth.

    This is why it is important to read up on many different strategies used by different people and then finding one that you are comfortable with.  Borrowing larger amounts carries higher risks, you must judge if this will be balanced out by higher gains.  Also some strategies work better in different climates.  Some strategies are harder to finance in the current climate.

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