IP paying itself off

Hi guys,

Do most people choose an interest only option when buying interstate property? I mean it would make sense as from what I hear in some area's you would hardly be out of packet after the rent..

Ofcourse the down side is that you will never really pay off the mortgage but I guess if you rely on capital gain it isnt so bad... what you think??

I am looking at buying an intersate property on 5% deposit and setting the loan to interst only so that the house can pay itself off.

Taking this approach I can see how some people can afford to hold onto several IP properties...

Ofcourse im sure there is more to it however this is what im setting out to learn....

Cheers all

Hi George

Like the sig - half full, Im sorta a new bottle personally, cant see the point in half full

Yes, most people would be using a minimum deposit and an IO loan.

This is especially so where they have an existing HOME loan, or do not yet own their own home. This is to maximise the tax advantages. This in combo with true 100 % IO offset acct allows you to save interest AND get max tax advantage now and in the future.

Paying itself off implies that its cash flow neutral or positive, great if you can find that !

ta
rolf

all my rental ip's are interest only. what is the point in paying off principal that is not tax deductable and takes up my cashflow that i would be better off saving in a share plan towards the next ip?

i have found that usually within a few years (1-4 depending on cycle) the capital value has grown enough to revalue and refinance, releasing equity to buy more properties. the aim is, at the end, to allow this growth to occur, not reborrow, sell off a couple of rentals, hold the other 50 or so and live off the income.

lizzie
all comments are my opinion only

Hi Georges

We only have interest only.

I'd be asking yourself one important question before you rush out and buy an IP interstate.

What did I learn from my other purchase ? Obviously you may have a different answer from me , but my answer would be , the importance of timing .

The only place that seems to have pundits pushing it with any grain of sanity is WA.

From all accounts WA has doubled in the last five years ( WA guys correct me if that's wrong ) which is generally the growth you can expect in a particular cycle. All the raving about the spectacular growth in WA sounds remarkably similar to what was being heard from various other places around Australia just as they were peaking. Of course this time it might be different but then again it might not.

See Change

George,

Like what Rolf said, if you have a mortgage on your PPOR, pay that off first and keep the investment property mortgage interest only.

HOWEVER!

If you don't have any PPOR or credit card or car debt, then paying down the mortgage on the investment property probably isn't a bad idea, since it's the equivalent to earning 7% or so after tax or 11% or so before tax. Not bad, risk free, guaranteed.

Speak up if you want that explained further.

Hiya Glebe

You did mean pay the loan down by paying any excess over the interest into a 100 % offset acct didnt you

That way your tax paid money stays your tax paid money


ta

rolf

mmm 11%???

If you don't have any PPOR or credit card or car debt, then paying down the mortgage on the investment property probably isn't a bad idea, since it's the equivalent to earning 7% or so after tax or 11% or so before tax. Not bad, risk free, guaranteed.

Click to expand...

Hey Glebe, how did you work out the 11%???

wouldnt mind a really brief breakdown if thats ok....

Rolph I think he did mean the offsett account. By the way is there any advantages of having an offsett account over a loan where you throw money directly iinto the loan however you can redraw anytime at no cost...

cheers people

Hi George

Simply Yes, an offset acct means your dollars stay your dollars

Say you have a 100 k ip loan, and pay 10 k off the Investment loan, and you now want to buy your girlfriend a nice VVS 1 2 carat ring.

That 10 k redraw is not deductible, indeed only 90 k of the previous 100 k loan is deductible.

Had you put the 10 k in a 100 % offset acct, you could have pulled it for free, and still have a 100 k deductible loan.

ta
rolf

hmmmm

For a second there i actually thought you knew me.. Untill i saw you were top 5!! I just bought my gf (fiance now) the exact ring you described....

Please excuse my lack of knowledge in the area but i dont see your reasoning:::

because::

deductible?.. but only the interest on the loan is deductible... Even with 10k in the offsett account only interest on the 90k is deductible...

same way where 10k is in the 100k investment loan i can only negatively gear the interest on 90k loan...

Ahhhhh

But George, you have spent the 10 k out of the offset acct on the ring.

So the 100 k loan is deductible, vs drawing the 10 k out of the loan, redrawing it back to 100 k, where now only 90 k is deductible because the 10 k was for personal, non deductible expenditure

ta

rolf

ahh

ahhhh yes i see now
thanks

see_change said:

The only place that seems to have pundits pushing it with any grain of sanity is WA.

From all accounts WA has doubled in the last five years ( WA guys correct me if that's wrong ) which is generally the growth you can expect in a particular cycle. All the raving about the spectacular growth in WA sounds remarkably similar to what was being heard from various other places around Australia just as they were peaking. Of course this time it might be different but then again it might not.

See Change

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Dear See-Change,

1. From your comments, are you suggesting that the WA property market is presently rising to "catch up" with its Eastern counter parts or have the WA properties reach "unaffordable" price range and/or are presently over-valued now?

2. According to the latest monthly report by Herron Todd White Valuers Report, the WA property market is still in the Rising Market trend whereas its Eastern states counterparts in Sydney and Melbourne have already peaked since 2003 and are now at the bottom of their Slump Phase in their new Property Cycle Stage.

3. I will like to hear and learn from your views and assessments on the various States property markets, including the WA property market.

4. Thank you.

regards,
Kenneth KOH

Kennethkohsg said:

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Dear See-Change,

1. From your comments, are you suggesting that the WA property market is presently rising to "catch up" with its Eastern counter parts or have the WA properties reach "unaffordable" price range and/or are presently over-valued now?

2. According to the latest monthly report by Herron Todd White Valuers Report, the WA property market is still in the Rising Market trend whereas its Eastern states counterparts in Sydney and Melbourne have already peaked since 2003 and are now at the bottom of their Slump Phase in their new Property Cycle Stage.

3. I will like to hear and learn from your views and assessments on the various States property markets, including the WA property market.

4. Thank you.

regards,
Kenneth KOH

Click to expand...

Kenneth

I don't follow the perth Market closely enough to give you a considered opinion as to where I think the market is at the moment. All I can say is that the market appears to be going through a phase where the participants are of the opinion that the market is booming and will continue to do so.

There are participants on the forum pushing this line who have vested interests in pushing this view.

Having watched other places in the current cycle , these opinions echo those I heard in August / september in 2003 in Logan where we were told by several people " Prices will reach 200K by Christmas " . They didn't and are now going backwards.

I could give similar examples for other markets.

I'm not saying the market it going to peak and turn around next week , or next month or even in the next year, but it could , and it's closer to the peak than the bottom and ( IMHO ) at some stage in the relatively near future ( in realestate investment terms ) people buying in WA will face the same dilema that Georges is now facing. People should be taking care.

See Change

Dear Sea-Change,

1. Thank you for being frank and direct with your market assessment.

2. Having personally researched and examined the past 30 years median house prices data and the past 2-3 property cycle trends for the various States, I have observed that the nature of the property cycle in the Perth property market is a bit different as compared to most of the Eastern State property cycle trends, in that it is less volatile, it has 2 x 5 years shorter cycles term within the usual 10 years long general property cycle observed in most of the Eastern State, that the price correction in the Perth property cycle during its consequent Slump Phase normally level off and at worst, experience a much smaller 5% price correction off its last market peak once before recovering up again into its next short-term 5-years long property cycle.

3. It is for these reasons, that I sold off my 2 properties in the Goldcoast/Queensland property market when the market was reaching its last peak towards the end of 2003. This is enable myself to safely stay re-invested in the Perth property market during these past few years. I did not want then, to experience roller-coaster ride down another expected price correction in the present Goldcoast property market "Slump Phase", which has begun to take place now.

4. I am also happy to share with you here that the kind of monies which I take 8-9 years to make in the Goldcoast property market in the past, I am now able to make the same kind of potential profit in the Perth property property market very quickly within a very short time of 12 months, using the "Buy-and-Build" investing strategy vis-a-vis buying a completed house package in the Goldcoast market in the past. Consequently, the 2 properties which I have acquired in 2003 have quickly doubled to its present 4 now with another further 5th IP acqusition still in progress.

5. Given the nature of the property cycle trends in the Goldcoast property market, I personally believe that if we time to enter and exit the market correctly, one is able to make a 100% profit returns again the property purchase price over a short 2-3 years period during the fast rising market booming period in the usual 10 years long property cycle trend there.

6. However, this is easier said than done as many members will argue in this forum and some will even further venture to say that one should not time the market at all but to patiently wait to use time to create wealth through property investing.

7. I will be returning to start investing into the Goldcoast property market some time around 2008-2009 period during its next rising market phase. In the mean-time, I am planning to enter the Melbourne property market much earlier probably in 2006 ( or even during end 2005 period), with some kind assistance from the Metropole Properties Group, if God be willing, after doing my due diligence and complete my own market research in the field in Melbourne.

8. For your comments and further discussion, please.

9. Thank you.


regards,
Kenneth KOH

Kennethkohsg said:

Dear See-Change,


4. I am also happy to share with you here that the kind of monies which I take 8-9 years to make in the Goldcoast property market in the past, I am now able to make the same kind of potential profit in the Perth property property market very quickly within a very short time of 12 months, using the "Buy-and-Build" investing strategy vis-a-vis buying a completed house package in the Goldcoast market in the past. Consequently, the 2 properties which I have acquired in 2003 have quickly doubled to its present 4 now with another further 5th IP acqusition still in progress.


regards,
Kenneth KOH

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Kenneth , I agree with pretty well all of what you say and certainly 2003 was a good time to buy in WA. However given that properties have now doubled , my only concern is , is now the time to be buying more in the anticipation of more good short term growth.

I do wonder whether the widespread impact of the impact of the internet on opening up the WA market more widely to interstate buyers will bring WA more into line with the rest of Australia in terms of timing of the property cycle as there seems to be a widespread involvment of Eastern Buyers in WA at the moment.

See Change

Dear Sea_Change,

1. I guess you will be surprised to know that all my present 4 properties ( including the 5th in progress) are in the same Anchorage Estate at the Rockingham Coastal suburb. I have also deliberately applied the principle of "concentration" to speed up the wealth creation process as opposed to the usual "diversification" principle of spreading out our investing risks.

2. To me, the Rockingham coastal suburb is presently performing exceptionally well and "atypically" ahead of the general property cycle trend in the Perth property market with more than 25%pa. annual capital growth reported consistently over the last 3 years and with an equally consistent 5 years average annual growth rate of more than 15.%p.a.... Yes, you are right to say that the land prices have more than doubled over the last 2 years.

3. Its coastal suburb' spectacular performance is being specificially driven by the A$1.5 billion new Perth-Rockingham-Mandurah Railway project, extension of the Kwinana Freeway down to Baldivis area as well as 5 x new (rarely approved) highrise beachfront apartment projects located directly at the waterfront Rockingham Beach Road, new Mangles Bay Marina Project, the new Rockingham Urban Village Project. This is especially so with the WA State Govt concentrating on developing its "South-Western Growth Corridor" over this decade period.

4. Having said this, I am also likely to exit out some of my properties in 2007, after the full completion of the new Perth-Mandurah Railway Line Project, as previously planned. This is to diversify my long term investing risks in the near future.

5. Why still invest in the Anchorage Estate now? With vacant land getting scarcer in supply for this Rockingham coastal suburb, and with its land prices still at its present affordable price range (as compared to similar vacant land plots selling at twice its present price in its Northern Growth Corridor area) and with its non-waterfront land selling at much higher in the resale market, I still find that there is still good investing opportunities there to "trade" in land sales/resales in the short-medium term at this point in time.

6. However, at the same time, I also recognise that adopting the same "buy-and-Build" developing strategy may not be as profitable as before, with all these recent huge land price and building costs increases over the last 2 years.

7. Yes, you are right to say that the Perth property market will soon one day be no longer so profitable for us to continue to invest in eventually... So when the time comes, I will next consider the present bottoming out Melbourne property market and as I have said before, I am likely to enter this market in 2006 and subsequently also to consider re-entering the Goldcoast property market some time in 2008-2009 period.

8. In the mean-time, I will comfortably sit back and allow my Perth properties to grow at its own steam confidently and safely in the present rising market situation as assessed by the Herron Todd White Valuers.

9. Having said all these, I will also conclude here by saying that like you, I am not so optimistic for the rest of the WA property market, especially those in the regional towns areas as I am personally confident of this same Anchorage Estate at Rockingham. I am still watching and monitoring these markets at the side-lines, for my own self-education sake.

10. For your kind update and further discussion, please.

11. Thank you.



regards,
Kenneth KOH