All Topics / Help Needed! / Investment dilemma

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  • Profile photo of jwareham1985jwareham1985
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    @jwareham1985
    Join Date: 2013
    Post Count: 13

    Hi fellow investors,

    First time poster.

    I'm 28, brought my first investment in June this year in Richmond, live in it currently as it's my first. It's a 2br, 2 bath, 1 car apartment with pool, gym, sauna access, great views right on the Yarra River, should be able to get about $550-$600p.w rent when it comes time to rent it out.

    I have a scenario for you all about my current situation that I would love to hear your feed back on as to what path you would take.

    Currently with job I'm very fortunate to be earning around the $250k a year for at least the next 2 years while I'm on this project then after that will drop back down to around the $100k a year mark. We have our first kid due in 3 months time so we are not sure what path to take, I have a few options:

    1: put as much into my current mortgage as I can to get the repayments down to equal or less than the rental income return then buy/build a family home

    2: get current mortgage down to equal or less than rental income and purchase another investment property?

    Or 3, which I have not thought about yet.

    Its a new year and I'm willing to try new things and open up to new ideas and opportunities, I'm just a tad scaired, confused etc on taking the next step but everyone has to get out of there comfort zone at some stage hey?!

    Your feed back will all be greatly appreciated.

    Cheers,

    Johnny

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Easy.

    Don't pay Principle and Interest – instead go for interest only and accumulate savings + principle repayments in the offset. Keep the principle of the loan as high as possible. Then after a period of time you can convert the unit into an IP, claim the maximum principle amount and use the funds you have accumulated in the offset to upgrade your PPOR.

    Also don't forget that you may be able to do an equity draw against the IP to bump up the deposit of the PPOR purchase.

    TheFinanceShop | Elite Property Finance
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    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
    Join Date: 2013
    Post Count: 13

    Thanks for your reply Shahin,

    Im still pretty naive with the whole interest only thing and dont really understand why i would keep the principle of the loan as high as possible. Obviously being so new to the whole real estate game i have a long way to go, but i really appreciate your feedback.

    If you care to elaborate a bit more on the topic then please do, but feel like you have to, im sure if i research hard enough the information will sink in a bit more.

    Cheers yes

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
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    Ok so let's say you pay your loan down and becomes zero. When you go to convert the property into an IP and you want to negative gear – then the amount that you can negative gear is $0. Whereas if you kept the loan as interest only as did not pay the loan down then you can obivously claim the higher amount when you convert the property to an IP.

    Instead of paying the principle down – save the money in the offset. In fact have all your salary go into this account as the bank calculates interest on a daily basis so you want as much of your money physically in the offset account as possible.

    The only negative with this strategy is that if you are not disciplined with your funds then you will spend the principle that you have saved in the offset – since the offset is a savings account (i.e can be accessed anytime). 

    TheFinanceShop | Elite Property Finance
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    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
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    Ok I understand that now, thanks for taking the time to explain that.

    But one question i have in regards to converting the IP to an interest only loan, besides using that option for negative gearing purposes, if i am wanting to hold onto this property for longer than 5-10 years wouldn't an interest only loan only benefit me if i am wanting to flip the property after the initial 5-10yr interest only period finishes instead of keeping it? Or would you not recommend holding onto the property for that long?

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
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    Can't comment on how long you should hold the property but I like to keep property and sell only when I need to money for a better project/opportunity. This is because entry and exit costs associated with property here is quite high. 

    Going interest only allows you to have the money liquid in case you get a crappy valuation and cannot access the equity. So even if you are not going to sell it – its still a good strategy to go IO.

    Are you not going to convert the unit to an investment property and upgrade within the next 1 or so years?

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    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Course it boils down to your longer term objective.

    I have all of my investment loans on a P & I basis but very rarily recommend that for my clients as they are in a difference phase of wealth creation to me.

    Interest only gives you flexibility and allows you to change your mind without disrupting the Tax Deductibility.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
    Join Date: 2013
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    Yes i am going to turn the property into an IP this year at some stage once i figure out my next move, where to buy, how much deposit i will need to save up, how much to put aside for the dreaded stamp duty, LMI etc.

    So if i change my loan to an IO once the time comes, and after say 5 years i decide that i would like to continue to keep the IP, would i then have to pay a lump sum of the principal amount i haven't paid for the time it's been IO? and would i then have to re-apply change to an IO again?

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
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    If you are going to convert the current PPOR to an IP then you definitely want to call the bank tomorrow and convert to IO and set up the offset. Also consider upfront valuations to see if you can avoid LMI for the time being. 

    And no to your last comment – you do not need to pay a lump sum. After the IO period (aim for maximum period) you will need to again extend if possible.

    TheFinanceShop | Elite Property Finance
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    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
    Join Date: 2013
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    Thanks for your help guys, I really appreciate it, sorry about the thousand questions. I'll make sure I call my bank tomorrow and organise it.

    Cheers,

    John

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

    No problems John that's what the forum is for.

    Cheers

    Yours in Finance

    Richard Taylor I Ph: 07 3720 1888 I [email protected] 

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    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Get your Broker / Banker to switch your loan to IO without delay.

    You can then take your time to decide where you want to move to but in the meantime preserve the deductibility of the interest.

    Cheers

    Yours in Finance

    Richard Taylor I Ph: 07 3720 1888 I [email protected] 

    Start your investment portfolio with our finance broking  / property service.

    Want to retire at 40 ? Email me for a copy of my API interview.

    Follow us on Facebook I Increase your monthly return with Vendor Finance

    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 TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    …..and don't forget to set up the offset.

    Which bank is it?

    TheFinanceShop | Elite Property Finance
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    Profile photo of Scott No MatesScott No Mates
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    @scott-no-mates
    Join Date: 2005
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    Johhny, why wait?

    You have been in your ppor for 6 months, go out and rent a pad where ever you like (at least the interest on your current loan will be deductible and with $250k pa you would be able to afford something and take a long term lease). Your current place will carry a cgt exemption for 6 years provided you don't get another PPOR.

    Use your income now for investment purposes rather than waiting until the baby is born.

    Although you're still young, consider whacking the maximum of $25k pa into your super fund (or set up a joint fund with the +1 and contribute $25k to each).

    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
    Join Date: 2013
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    My current home loan is with the NAB with an offset account attached to it. I had 20k in it last week but thought it would have been a good idea to dump 10k of it onto the mortgage. Probably wasn't the best thing to do now ive spoken about this a bit more.

    Scott, dont i have to live in my current PPOR for the first 6 months before i rent it out since it is my first i have brought?

    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
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    Post Count: 13

    Sorry i meant first 12 months?

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
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    If its NAB then you shouldnt have any dramas switching to an IO. 

    TheFinanceShop | Elite Property Finance
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    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
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    Is it a new dwelling and did you claim the FHOG?

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    Profile photo of jwareham1985jwareham1985
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    @jwareham1985
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    No its not new, its 5yrs old. We brought it just after the FHOG finished and changed to a new home/apartment owners grant, so we got a 40% reduction in stamp duty instead which actually benefited us as the FHOG was only 7k and the 40% duty reduction saved us about 11k.

    Also does this mean when i go to purchase my next property ill not only need to save up for the 10% deposit, but ill also have to save up to pay the full stamp duty amount?

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi John,

    Quote:
    Also does this mean when i go to purchase my next property ill not only need to save up for the 10% deposit, but ill also have to save up to pay the full stamp duty amount?

      No, you'll probably borrow 105% ( the extra being to cover such costs).   Assuming of course that your future goals include "growing your RE portfolio".  ;)

    Benny

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