Hello, Thank you Josh to for directing me as to how to start my own thread.
I have been watching this forum for a few weeks now and I find it very interesting. As I have started contributing to threads or rather asking questions I though I best introduce myself.
I am 30 and have a PPOR that I have to pay off for quite sometime LVR 66%
I have signed an off the plan contract for a purchase of a block of land (paid the deposit by bank guarantee against my PPOR). I am now busy saving as when the time for settlement comes I would like to be able to pay the deposit in cash and thus set up the loan for this Investment property seperate to my homeloan.
I think this is probably not the smartest way to use my money.. perhaps I should be paying my saved funds into my PPOR and keeping the properties together to keep payments lower as well as likely some tax implications that I am yet to learn of etc? I am also thinking that I would like to pay a P&I loan on the land rather than and Interest only – again I read this would be a mistake. What I am struggling with is why?
I think I am what you would call a Buy and Hold investor (please help me with identifying what I call myself if this is incorrect). My plan is not to sell for a long time. My goal would be to own several properties (no debt) at early as possible so that I may retire with the passive income of my properties rental income, selling the properties as I age and as required to sustain my lifestyle… IS THIS SILLY? If not what kind of investor am I, whats my label?
I have followed my realestate industry very closely for the past 5 years, I have red a few books and attended seminars however all I have really learned is that you must be careful where you learn as differing teachers values can take you down differing paths. Now I have great conflict within that I need to resolve and I hope that the kind people here may help.
The primarly being the whole concept of lending to invest. For years I was taught you buy and investment property, if you are lucky and claim all tax benefits effectively the new home will only cost you approx $100pw paying a interest only loan.
Soo… I dont return any income on a weekly basis infact I pay, I dont pay off any pricipal so in 25yrs I still dont own it and I am solely relying on capital growth to return my investment of $100pw. Plus I take risk on it not been rented or decreasing in value and potentially risk my PPOR…. Why would I do this?I'll stop ranting now, thanks for reading, your thoughts are most welcomed.
Please note my writing style is not aimed to offend anyone rather me thinking out loud and asking you enlighen me by perhaps challenging my thoughts.
Intrigue wrote:Hello, Thank you Josh to for directing me as to how to start my own thread.
I have been watching this forum for a few weeks now and I find it very interesting. As I have started contributing to threads or rather asking questions I though I best introduce myself.
I am 30 and have a PPOR that I have to pay off for quite sometime LVR 66%
I have signed an off the plan contract for a purchase of a block of land (paid the deposit by bank guarantee against my PPOR). I am now busy saving as when the time for settlement comes I would like to be able to pay the deposit in cash and thus set up the loan for this Investment property seperate to my homeloan.
I think this is probably not the smartest way to use my money.. perhaps I should be paying my saved funds into my PPOR and keeping the properties together to keep payments lower as well as likely some tax implications that I am yet to learn of etc? I am also thinking that I would like to pay a P&I loan on the land rather than and Interest only – again I read this would be a mistake. What I am struggling with is why?
Have you heard of a line of credit loan (LOC) ? (do a search on the forum for heaps more info)
You can borrow up to 80% LVR against your PPOR
So take the value of ppor * 80 / 100 and then subtract from the result what you owe on it.
This final subtract result figure is what you could borrow if you can service the loan.
You may be able to borrow enough for the deposit for the land and then get another loan using the LOC funds as a deposit if you can service both loans.
Best part LOC is for investment purposes and is separate from the PPOR loan for tax return.
if not renting and claiming expenses against rent you claim expenses and interest costs as a cost base increase keep records .
So the risk to PPOR can be minimised if you pay off the LOC loan ASAP.
Intrigue wrote:I think I am what you would call a Buy and Hold investor (please help me with identifying what I call myself if this is incorrect). My plan is not to sell for a long time. My goal would be to own several properties (no debt) at early as possible so that I may retire with the passive income of my properties rental income, selling the properties as I age and as required to sustain my lifestyle… IS THIS SILLY? If not what kind of investor am I, whats my label?
You are almost on a good plan however do not bust your guts to pay off all the debt. I have thought about this type of investing and to me it makes more sense to get the investment debt down to a level where the rental income = expenses incurred.
That way you can hold the property and while it is rented out it costs you nothing to hold it. Also the rent increases over time !
Then you can borrow against it as an LOC for a deposit to buy another property if you wish to.
Label – Passive investor – buy and hold – with positive gearing as final goal !
however if you build a house on it you are also a bit of an active investor / developer
(plus if new building and you rent it out see building write off depreciation do a search on this in forum)
Intrigue wrote:I have followed my realestate industry very closely for the past 5 years, I have red a few books and attended seminars however all I have really learned is that you must be careful where you learn as differing teachers values can take you down differing paths. Now I have great conflict within that I need to resolve and I hope that the kind people here may help.
The primarly being the whole concept of lending to invest. For years I was taught you buy and investment property, if you are lucky and claim all tax benefits effectively the new home will only cost you approx $100pw paying a interest only loan.
Soo… I dont return any income on a weekly basis infact I pay, I dont pay off any pricipal so in 25yrs I still dont own it and I am solely relying on capital growth to return my investment of $100pw. Plus I take risk on it not been rented or decreasing in value and potentially risk my PPOR…. Why would I do this?I must commend you for seeing this fact most new investors do not see this main point.
If you pay for the short fall each week and negative gear you have to make a gain of a certain amount to cover the loss each year.
now with lower tax rates if you are on a marginal rate of 30% then for every
$100 you spend in expenses you get $30 back if you earn income from a job.So if you make say 7% a year in capital gain at the end you get a 50% discount after 12 mths and then get taxed 30%.
So say you spend 100 a week that is a 3640 a year loss after tax return for say 10 years 36,400 lost so you need a capital gain of $43,000 to break even before CGT tax is paid out.
What you need to consider is paying off more to get to a cash flow positive position ASAP.
By doing the pay more off it you will be able to borrow and buy another property and do the same thing again.
Intrigue wrote:I'll stop ranting now, thanks for reading, your thoughts are most welcomed.
Please note my writing style is not aimed to offend anyone rather me thinking out loud and asking you enlighen me by perhaps challenging my thoughts.
p.s capital growth in metro areas averages out to 7% p.a over 10 years. I have experienced 9% p/a but 7% is better for guessing the future value of property in 10 years time. !
Hi Intrigue,
Good decision to stick around, I think. You'll learn a lot by looking at the postings of some of the people who write on here.
Reading your post, it sounds like you're just starting the journey into investment. If I may say so, you've already made a good start by asking yourself some of the fundamental questions all investors should ask, ideally before they start the journey, namely ;
'what type of investor do I want to be'? This may be decided by the amount of time you have on your hands, being a passive investor means it doesn't take a lot of time but investments may take a long time ot have their desired effect. if you want to move things along you may want to become more active, buy older places and renovate to add value or start developing. Obviously, this depends on your comfort level i.e. would you feel OK managing or doing a renovate. The fact that you've bought land suggests that you feel OK with this.
It sounds like you've already got an idea as to where you want to get to, but you should also ask yourself how long you want to get there. Would you want to do it in 5 years, 10 years, 20 years?
You should also have to decide how you want to structure yourself i.e. will you hold all the properties in your own name, hold them in a trust, or in a company. There are advantages and disadvantages to both, find some good literature, take some good advice and work out which one is best for you.These are pretty fundamental questions, and there's no right or wrong answer. It will depend on what you want to do, how you want to do it and how comfortable you feel with the possibilities. If you make these decisions early on, it should start you off on the right foot.
Good luck
Intregue, One of the main reasons people invest in property is because it is a great way to store and create wealth, the main ingedients for this is inflation. While the value of your property is hopefully going up the value of your loan in real terms is going down. ie if inflation is 3% p/a a 300k loan after a year needs only 291k in buying power to pay off. other words inflation is paying off your loan to the tune of about $200 dollars a week. So why pay it off with earned money when it can be done for free. Any extra money can be put to use to buy another property so then inflation can pay of $400 a week of your debt, also the less you pay off the more the taxman will be paying off for you. At the same time you have 2 houses gaining value which is equity(money) you have gained which you dont have to pay tax on if you access it with a LOC but again inflation and the taxman can help to pay for this increase in wealth.
Thank you very much for your comments. I will spend sometime obsorbing this information and no-doubt be back with some questions.
Okay I am back, Thank you Duckster, Andy Kirby and Crusty for your comments. I also appreciate the compliments as I thought perhaps I was going mad seeing something that others didnt seem to be considering.
Duckster – I do know a little of LOC's. I even had my PPOR under an LOC at one stage, for reason which have now changed it was a disaster. Based on your formula (thank you) I could borrow at least $41k. As the land purchase in only $138k this would more than suffice as a deposit for a secondary loan (yes I can service both loans). At what level does mortgage insurance come in? I think I have to pay a 20% deposit to avoid MI? I think I am seeing what you are saying however as I am currently saving and plan to have a 10% deposit saved in cash ($13.8k) by the time settlement comes around I am wondering how the MI savings compare to the cost of re-financing my loan into a LOC…. thoughts?
I think you are also saying that I can claim purchase costs and interest paid via loan on this allotment in my tax return, even though it will be land only? what about rates?
The land is likely to be reconsidered later this year as it seems the developers will not mean their sunset dates, thus I will need to reconsider the purchase and choose to re sign or not. Currently the land is in my name as is the PPOR. Does this inpact your suggestions? Should the land stay in my name or be changed to include my spouse? (I am currently the main income earner and I hold the equity however over the next few years I plan to have a child and this may mean a balancing or change in the primary income earner).
Andy Kirby – thank you for your contribution, you ask good questions. I guess my basic answer is the same as most peoples, sooner rather than later would be good however I am yet to have children and I think if I were to push too hard too quickly I would put the family under great stress. My focus is doing this sensibly when I have the resources rather than extending myself and risking my home and family. Within 5 years I would like to have my PPOR loan down to a level that the repayments equal what I would achieve in income if the property was rented. I would like to have built a duplex on the land mentioned and have them rented out in a cash positive or close to cash positive arrangement. The third property that I would like to fit into this equation is a bit confusing my brain tells me it should be a cash positive basic home, but my heart and my desires are to secure a 20acre property for our future PPOR (secure now in a resonable location before prices get too far out of our reach).. thoughts?
Structure, I find this area rather confusing and have much to learn. My primary goal is to ensure that no matter what my PPOR is safe. While I hear it is not a good tax idea to pay out ones PPOR. My guts tell me this is a must do ASAP. I am happy to play the game a little and I understand there is risk for reward however i do not wish to gamble with my PPOR. I would like to set myself up so that the PPOR remains seperate and thus I would use equity from the investment properties and not PPOR.. thoughts?
Crusty – Thank you this makes sense (I think), I understand what you are saying with inflation although I hadnt looked at it that way. I think I understand what you mean with tax (you can claim the interest on loan payments thus the higher the interest paid on loan the better the claim?) I am thinking though that this is really only beneficial if you are a high income earner and thus in the high tax bracket? I am also wondering is this tax saving equals the risk. I need to find a way to put this into numbers! I would rather pay more tax than risk my PPOR
What do you mean by this …. At the same time you have 2 houses gaining value which is equity(money) you have gained which you dont have to pay tax on if you access it with a LOC but again inflation and the taxman can help to pay for this increase in wealth. Why does it matter if it is a LOC or other loan set up?
Again thank you all for taking the time to help me.. I eagerly await your replies.
Forgot to mention – I have spelled out a five year plan of investment but have not yet grown my knowledge enough to determine how or even if this is achievable- advice on how I might achieve such goals would be welcomed and or how I might create a financial plan etc.
The fact that you have a 5 year plan means that your ahead of 95% of the population and on the road to financial literacy. Congradulations the road goes up and down but you have the map and tools to arrive safely.
I am not sure a LOC is most suitable, it is both expensive and has drawbacks in relation to tax deductibility that can otherwise be rectified by a term loan with an offset account…….. Think carefully before acting on this one.
Intrigue wrote:, if you are lucky and claim all tax benefits effectively the new home will only cost you approx $100pw paying a interest only loan.
Soo… I dont return any income on a weekly basis infact I pay, I dont pay off any pricipal so in 25yrs I still dont own it and I am solely relying on capital growth to return my investment of $100pw. Plus I take risk on it not been rented or decreasing in value and potentially risk my PPOR…. Why would I do this?I am confused with what you saying on this section of your post, but if you do not understand that this is how you make many dollars, you may be missing some fundamentals to investing. I am very happy to go off-line to guide you here.
Thanks number 8, how do we go off-line as such.. Do I email you from your website?
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