All Topics / Creative Investing / Large loan or Small loan

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  • Profile photo of dDream27dDream27
    Participant
    @ddream27
    Join Date: 2022
    Post Count: 0

    Hi all, I am pretty new here. And I have a little knowledge of investing in property.

    I have a question. Currently, have a loan of $350 k with a bought property two years ago. And this will return equity of $85k for today ( as the broker told me).

    I am targeting to refinance and use the equity to purchase another property. As I am a full-time employee. My question is here either buy a property worth $450k above ( which my borrowing capacity allows me ) off the plan house or buy an existing house worth up to $220k. Is there any advantage to buying a house with $450k- 600k off the plan or staying with a small existing  $220k which might be rented for $260 per ( no other cost calculated ) .

    Off the plan or existing house. Which one do you think is a better option in today’s market?

     

    I thank you for your answer, I am sorry for my less wisdom in this.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi dDream,

      Currently, have a loan of $350 k with a bought property two years ago. And this will return equity of $85k for today ( as the broker told me).

    I presume from the above that the house value is now about $550k (i.e. your equity is approx $200k).  i.e. the borrowable extra amount is $85k if refinancing to 80% LVR.   About right?   (If you only had equity of $85k, you COULDN’T borrow it all).

    Assuming that is correct, the next part of your question is whether to buy an OTP house, or an existing one at around half the price.   I can’t advise you, but for me, it has been existing houses all the way.   Here’s a few ideas why I chose that path:-

    1.  You can likely buy two for the same investment amount, allowing more equity increases, more rent, and (if one tenant leaves) you only lose half your extra income while you find another tenant.

    2.  OTP houses are often highly priced (being new, and “desirable”) and in a new estate that lacks a lot of the usual niceties of a community (schools, shops, transport, etc).  Capital growth is often held back because of the initial high price – the new suburb will be competing for value increases with all the other new homes being built as the estate expands.

    3.  With an existing home, various situations with current owners may allow you to “buy at a discount” where a developer may not.

    4.  An existing home often comes with manicured lawns, garages, fences, etc all complete and be in a fully functioning (settled) community.   This alone lifts values over time as many families want to rent in a settled area.

    5.  Your two can be in different areas – i.e. if one suburb suffers from some unplanned event that devalues its houses, you would be unlucky to have BOTH properties affected if you have “diversified” via buying in different suburbs.

    6.  Most times, higher value properties return LESS yield than low value ones.  e.g. a $600k house might return 3.5% where a $300k house may be 5%.   That helps with investing further down the track.

    7.  Just as “you can’t sell one bedroom” if you are bit short, if you only own one house and you need some extra cash, you can’t choose “which one to sell” while you keep on with the other.  In a word, having two cheaper allows diversification in many ways.

    8.  Those OTP houses can be sold by marketeers who are looking to fleece you – not all OTPs, of course, but if any group offers a “free flight” anywhere, remember free lunches really aren’t.   There are plenty of posts around re these particular OTP traps, so beware.

    I’m sure there are more benefits too.  Don’t fall for the old chestnut re “you save on tax, as an OTP can have you claim more deductions”, as the aim of investing is to make money.  Any saving you might make on tax pales into insignificance compared to the very real benefits of buying two cheaper homes (in my opinion, of course).

    Well, now that I’ve got up to dance, hopefully others will join in and we’ll get this party swinging !!  :p

    Benny

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