All Topics / Help Needed! / Can I afford an IP or put extra in PPOR?

Viewing 11 posts - 1 through 11 (of 11 total)
  • Profile photo of ravenhardravenhard
    Member
    @ravenhard
    Join Date: 2012
    Post Count: 4

    So I have gone and seen a broker and he has convinced me and the wife we can afford our first IP. But having a think about it I am not totally conveinced we can afford it or how we should go about getting finance and what are the tax implications. SO sorry if I seem ignorant, tried doing lots of online reading but even more confused now.

    Our situation, my income is $120k /pa and the wife is $50k /pa(part time for next 18months, $83k when FT). Very safe jobs, no issue about job security
    Current mortgage is $500k split in $100k variable, $150k variable IO and $250k IO fixed. Only got the loan 12months ago. All with CBA and have a MISA account with them with $40k saved against the $100k. The property is worth a conversative $700k. Would get the 2/3 years fixed @5.79/5.99%. No other loans or finance issues

    Looking at getting a IP in western Sydney in an area we are fimiliar with and comforable buying in. 3 bed house close to a station for $360k, currently rented at $360 but seems low for a rental in the area, might be able to get $380-$400 if we get new tenants.

    So the options we have currently are:
    1.pay off the $100k loan which we could do in 2 years, currently saving over $2k a month depending on OT I get
    2. get a loan for 95% on the value of the property $342k and use $18k cash from MISA account, this ofcourse means we pay a big LMI and with having to pay the stamp duty would leave us with about $6k in our misa after expenses 
    3. get our PPOR revalued and use the equity and go for 80% LVR on the IP

    Our goal is to keep the IP for a very long time and evenutally pay it off. Also this would be potenitally the first of many IPs if we can afford it

    So sorry if this is an easy question or has been asked many times before but I am getting conflicting advice on this and any help is appreciated

    Profile photo of Nick KirlewNick Kirlew
    Participant
    @nick-kirlew
    Join Date: 2006
    Post Count: 20

    Hello Ravenhard,

    Good question, it is what you want out of the next ten years or so that matter really.

    If you are going to be a property investor then get ready for debt. Have a reason for investing in property, see the end game.
    Our properties are with us for life, they will provide an income stream as we wind down our working life.
    The hands free path as it were.

    "But having a think about it I am not totally convinced we can afford it"
    In my opinion on the numbers you have written here you can afford it.
    Is the property new or near new and thus providing a strong depreciation?

    "how we should go about getting finance"
    I recommend a broker who owns investment property (but then I would)
    You may want to consider using a second lender.
    If not then no cross collateral.

    "what are the tax implications"
    You will have some tax deductions available to you as you are now a property investor, these are listed elsewhere, but I like new or near new for investors who have good income and want a hands free ride for a while. (I spent today trying to find a leaking water main in the tree roots).
    There will be advice that you should buy in your name based on the income differential, but things change over time and sometimes both having skin in the game is good.

    Where to buy?
    Well I like Darwin, but that could be because i am living there. It is nice to be able to see the property the first time round, but you want a good renter in location and dollar value. Capital gains history may be guide to capital gains future. No 'lemons'.
    We have properties that have been GFC'd below purchase price and we have properties that have held and risen, look for that.

    I would only pay LMI if I had to, anyway to avoid is great. Tap CBA for a loan for future investment properties equal to 25% of the value of the property you want to buy. Don't draw it down until you need it. If you home values at $700k there is $60k spare there by my calc.

    As a property investor I don't see the value in paying off my home loan until I have my fleet up and running (this is called opportunity risk), flip side to that is the home loan is the only non deductible debt you have so many will advise that you chew away at it.

    Good luck
    Nick

    Profile photo of ravenhardravenhard
    Member
    @ravenhard
    Join Date: 2012
    Post Count: 4

    Thanks for the reply Nick,

    the property Im am interested in is an older property 30+years, that has had a reno done on it 2 years ago. So new kitchen, bathroom, carpet, timber floors , roof and the rest.

    Im fairly comfortable for my first IP getting a place in Western Sydney having grown up and lived/ worked in the area. So I think know the good and bad areas. In the furture I will diversify and try somewhere different. Plus being a tradie, I would prefer to do any of my own repairs if possible.

    Just on this comment
    "I would only pay LMI if I had to, anyway to avoid is great." So getting an extension on my PPOR loan and taking $60k, am I still able to claim a tax deduction on the interest seeing as the $60K if going to the IP?

    Also I dont understand this "Tap CBA for a loan for future investment properties equal to 25% of the value of the property you want to buy." Could youy explain further please?

    Thanks
    Andrew

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Ravenhard

    Welcome to the forum.

    Your borrowing capacity based on those numbers should be quite high.

    However – you need to look at your personal budget and work out how much you can afford (and are willing) to spend on an IP. I haven't crunched the numbers on the proposed purchase but it doesn't look like it will be overly burdensome in terms of holding costs.

    For funding the purchase, I'd be inclined to take your current loan up to 80% LVR which should give you about $60k to play with – you can use that for the deposit/purchase costs and keep your savings parked in an offset attached to the variable loan against your PPOR.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Nick KirlewNick Kirlew
    Participant
    @nick-kirlew
    Join Date: 2006
    Post Count: 20

    Hello Ravenhard,

    "So getting an extension on my PPOR loan and taking $60k, am I still able to claim a tax deduction on the interest seeing as the $60K if going to the IP?"

    Yes the new loan split is for investment purposes so the interest is claimed.

    "Also I dont understand this "Tap CBA for a loan for future investment properties equal to 25% of the value of the property you want to buy." Could you explain further please?"

    Sorry I was not clear, we are talking about the additional $60k available on the PPOR, each property we purchased had 105- 110% debt against it to cover all the costs. This was done just as we are discussing here with the additional loan split from CBA.
    So if possible all costs for the investment property come from loans, none out of pocket.

    Regards
    Nick

    Profile photo of streamlineinvestingstreamlineinvesting
    Participant
    @streamlineinvesting
    Join Date: 2010
    Post Count: 171

    It sounds like there is no doubt that you can afford another IP, but with the new IP comes the extra debt and undoubtedly extra stress. Growing your debt does seem to be a way to become financially independant some time in the future, but that being said it can also lead you down a dangerous track. So I never see it as a bad thing to pay down your PPOR as much as you can, it will free up your extra cash to have a higher quality of life, or invest in other ways.

    That being said, I do like how you plan to pay off your IP, a lot of people seem to be under the impression that because it is tax deductible, it is not a bad thing to be paying interest on a property for years and years to come. I would much prefer to just be free and clear of any debt and simply sit back and collect the rent, not have to worry about banks chasing me down if things do become a bit tight. This approach may be a bit more conservative than other ways, but I believe the risk is a lot less.

    Anyway back to your decision, I would agree that you should avoid paying the LMI, hence an 80% LVR is beneficial. And yes I beleive taking 60k out of the property, allows the extra interest to be tax deductible. I believe I read this in Steve McKnight’s book, but you probably should double check with your accountant before you do this.

    Now back to affordability, looking at it a realistic way, hope this makes sense

    You have $170,000 in combined income, and assuming you can rent the place for $360 per week, that would add an extra $18,720, since they only accept 80% of rental income, reduce this to $15,000. Giving a total gross income of $185,000.

    Assume you pay an average tax rate of 35%, leaves your net income at $120,000.

    Taking away living expenses, I am not sure what yours are but assume $40,000, gives disposable income of $80,000.

    Assuming paying all debt in interest only terms, at an interest rate of 8.00% (I know you can probably get 6.00%, but I believe it is best to be conservative), paying $80,000 at this rate, gives you a total debt allowable of $1,000,000.

    Since you are looking at increasing your existing $500,000 mortgage to $860,000 (the $40k in your savings taken up in stamp duty and buying expenses) then it looks like you should be able to comfortably afford the new property. However I have made a fair few assumptions above, so you would have to look at what would suit you in your situation.

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

    Call me old fashioned but would anyone use $40K of their own cash savings to cover the acquisition costs when they could sensibily gear this and have the interest deductible.

    I am not sure ravenhard fully understands the loan structuring concept so would strongly suggest you get a Broker to work thru the numbers with you and explain what can and cannot be deducted.

    Only this way will you be able to work out the true cost of such a purchase.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of ravenhardravenhard
    Member
    @ravenhard
    Join Date: 2012
    Post Count: 4

    wow thanks for some great advice. I am getting a clearer picture of it all now. Will contact my broker for a face to face me thinks.

    There 2 statements is the ones I think I need to focus on
    "So if possible all costs for the investment property come from loans, none out of pocket."

    "Call me old fashioned but would anyone use $40K of their own cash savings to cover the acquisition costs when they could sensibily gear this and have the interest deductible."

    This is what Ill try and get out of my broker to do. How to fund the IP without touching my $40k in the offset, while not paying LMI

    only other bit of info on my situation is my monthly expenses is about $4500, so after the $2700 mortgage leaves me about $2K free a month.

    I dont have an accountant due to the last few years I have only had a very simple tax return with limited deductions and therefore use to do it my self online. Looks like I may have to get 1 this time round.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    ravenhard wrote:

    This is what Ill try and get out of my broker to do. How to fund the IP without touching my $40k in the offset, while not paying LMI

    It should be straight forward – they just need to set-up a new loan split for $60k (which will take your current loan up to 80% LVR).

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of ravenhardravenhard
    Member
    @ravenhard
    Join Date: 2012
    Post Count: 4

    Ok thanks Jamie. That sounds easy. So my plan is to hopefully get a good valuation on PPOR. Hope to get $730K (house round the corner sold $790k but up the road for $670 in past few months, so hard to judge being different condition, bedrooms and land sizes)

    Getting valued at $730K gets me $84k which would cover the 20% on $360k purchase price of IP $72K and stamp suty ~$12k

    Can you get the bank to value my house before I go for the loan on the IP. Already have a pre-approval <moderator: delete language>

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Yep, there’s customer ordered valuations with cba, so the val can come back before an application is submitted.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

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