First IP or not..

Hey everyone, first post on the forum

Just after some advice and opinions on some good or not so good options in my current financial situation. At the moment I have a townhouse that i am living in and will be for the forseeable future.

Currently there is about $360k owed on the HL and the main thing I want to do is pay it off as quickly as possible so that I do not have a HL as such but can start investing with more security behind me.

I guess this brings in the big question which has always stopped me from investing till now (always wanted to get an IP or even shares) but haven't because: do you put everything in the HL and pay it off quickly which would be at least say 12 years+ away or do abit of both which to me seems like a better idea maybe? (another reason for this is that I am sorta locking myself into forced savings with an IP)...I guess I am hoping in the current property market I can buy while the market is relativly low and sell in the medium-long term 8-10 years for a decent profit to pay off my current HL sooner...

Is this strategy realistic? other options? Just pay off the HL without any investments? Thanks

airofu said:

Just pay off the HL without any investments? Thanks

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That is the last thing I'd do. In fact, I'd never pay it off.

I think the first thing you should do is to convert your loan to an Interest Only loan which is linked to a 100% Offset account to which you place your spare funds.

I'm assuming that you currently have a regular Principle and Interest loan.

Lets say for example that your current repayments are now $3000 per month; Maybe $2000 of that is interest, and $1000 is cutting down the Principal. So your new IO loan might have repayments of $2000/month, then you put the 'spare' $1000/month into the Offset account. This will have the effect of being the same cost to you per month as the normal P&I loan, however you will then have the flexibility of having an account (the offset) which you can withdraw funds from at any time without having to refinance or go for a new loan (which is what you'd have to do if you just paid off your house and then sought to invest).

Following that, once you have a decent amount in your offset account which you can use a deposit on an IP (and making sure you're capable of making all repayments, etc), I think then would be the time to take the plunge.

Certainly don't wait 10 years to start investing.

Thanks for the input, so it would be a realistic view to invest in say a $250k property or so and sell it in 8-10 years for a possible double or so in price to pay off my current HL?

I know there is alot more too it, but in general just wonder if I am on the right track or totally wrong...

Generally with an IP you need to choose capital growth OR rental returns? I know both would be ideal but this is harder to find in general? I assume if I want to definately sell for a decent profit I would be aiming for a high captial growth property?

airofu said:

Thanks for the input, so it would be a realistic view to invest in say a $250k property or so and sell it in 8-10 years for a possible double or so in price to pay off my current HL?

I know there is alot more too it, but in general just wonder if I am on the right track or totally wrong...

Generally with an IP you need to choose capital growth OR rental returns? I know both would be ideal but this is harder to find in general? I assume if I want to definately sell for a decent profit I would be aiming for a high captial growth property?

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First of all, why do you want to pay off your HL? I mean, I know it's popular, but I just wonder why you specifically want to do that.

What is your end goal here? Is it to be fabulously rich, or just looking to retire?

There's no totally wrong way to invest, however personally I would not plan to sell an IP at all, and I would not plan to ever pay off any of my loans, continually using Interest Only, so we might just wait for other forumites' opinions, which will no doubt differ greatly.

I suppose as this is my first home, the security of owning this. Then all spare money can go towards further IPs without having to worry, if anything bad happens I sell an IP etc. Just at the moment with my current HL it only leave enough room to get a smaller IP right now....

airofu said:

I suppose as this is my first home, the security of owning this.

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That's a good reason. At least you have a reason; Some people don't know why and are just paying it off because they think it's 'normal'.

Okay so let's talk about the 8-10 year scenario where your IP doubles, you sell it and pay off your HL. So what are you left with?

You have a fully paid off home, with no investments. Would you be satisfied with that situation? If not, what would you want to do from there (eg. purchase another IP)? If purchasing another IP would be how you move forward from there, then that's why I'd suggest selling the IP you just had wouldn't make sense.

good questions and I have thought about it...there are so many different ways to go about it, with no real wrong way.

I guess what I am after is:

1. Pay off current house ASAP so that it is 100% owned, for security and I suppose in having this security would be more likely to use all spare and now free funds to fully invest without having to worry as much. Currently I feel that I need to be extra careful as the funds leftover are the only funds to invest if u get what i mean...

2. Going forward invest in IPs and build a portfolio

So I guess it's just how I go about part 1...as I am relatively early into my current home loan and have abit to go...I'm guessing once i get going it'll be easier.

I see the options as:

1. put all funds into HL and pay it off as quick as possible. Safest, but longest.

2. pay HL as normal, purchase a smaller IP and sell in 8-10years for profit to pay off HL, quicker which is a big bonus, plus maybe some extra money leftover, worse case is time frame as 1.

3. Minimum payment into current HL and purchase IP with left over money and try to grow portfolio over time as funds increase....but the problem I see with this is that the original HL is a big chunk of money that will always be there as I am essentially not reducing the HL which is why I am wanting to do part 1 I feel that getting rid of the main HL will allow alot more flexibility with future IPs etc...

I think you need to do a bit more reading.

Try "More Wealth from Residential Property". I just can't remember who wrote it.

3. Minimum payment into current HL and purchase IP with left over money and try to grow portfolio over time as funds increase....but the problem I see with this is that the original HL is a big chunk of money that will always be there as I am essentially not reducing the HL which is why I am wanting to do part 1 I feel that getting rid of the main HL will allow alot more flexibility with future IPs etc...

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What did an average house cost 10 yrs ago? How about 50 yrs ago? 100yrs?

What may be a big chunk now, wont be in, say, 20 yrs time thanks to inflation.

I'd like to pay off my HL but really can't be bothered:

The payments aren't very high so I can live with that
Not much will be saved if I pay it out in 2 years so why bother busting my gut to overpay
It was so much trouble using the house as security on a second property I never, ever want to go through that again

I'll just pay it out when I sell it unless I get a windfall from somewhere else. As it is if I sold either property both loans will vanish.

I suppose the big reason I also want to pay it off as it's a bigger loan and didn't get any financial help/headstart with deposit...

If I the loan was about 50% or less owing then I probably wouldnt be so fussed with paying it off also...and would just get stuck into IPs...sorta where I am comming from

I suppose it's a diff story with pplwho have most of their income as spare funds using it with multiple IPs as opposed to somone starting out with more debt and limited outgoing funds?

But have to start sumwhere or nothing will change

But have to start sumwhere or nothing will change

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That is exactly correct, airofu.


Work out YOUR "sleep at night factor"
How much $$ can YOU comfortably afford to use to hold any IP?

Find and buy and IP that suits YOUR criteria.

Read read read and read some more. As you gain more knowledge you may feel more comfortable in choosing to not pay down you PPOR.
The passage of time will naturally give you more equity in your PPOR as it's value rises and your wages rise as well.

Meanwhile . just DO IT !! and good luck in your choices.


Cheers
Sue

Good posts made by all.

Paying off the PPOR may not make good sense especially when trying to kick start an investment portfolio that screams "start yesterday" . The missus and I have been through it time and time again, and she really wants to have the PPOR paid off. This is quite a personal thing especially with a bub and she not working - the security of having reduced levels of non-deductable debt is a huge Sleep At Night Factor bonus.

We do have 2 IP's at the moment and will start to look for a 3rd once she gets back to work...

airofu said:

I suppose as this is my first home, the security of owning this. Then all spare money can go towards further IPs without having to worry, if anything bad happens I sell an IP etc. Just at the moment with my current HL it only leave enough room to get a smaller IP right now....

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There is nothing wrong with havin the feeling of security of "owning" your own home (mind you the bills never stop regardless!!).

So a few thoughts:
1. Are you sure it's 12 years away? Take in the effects of compounding? Pay rises?
2. Investing (whether through IP's or other) can speed up the paying off process by increasing your wealth - however, keep in mind it can also dramatically slow down when you hit a road block or two.
3. Sometimes, I wonder if people should really start off with a teeny weeny PPOR out the back of whoop whoop, that can be paid off in a few years, so they get the whole "I need to own a ppor" over and done with! ... alas PPOR's are emtional things!

Cheers,

The Y-man

So what I am sorta getting is that I shouldn't look at my PPOR as that but just another IP?

So do all people just do interest only on ALL their HL for properties?

Is there a point that I would change it to Principal and Interest again if I went all interest?

Hey Airo,

Welcome to the forum, rushing at the moment but please do a search on here, regarding loan offset accounts, sure wish we had, before we paid out our home loan!

Looking forward to hearing about your decision!

See an accountant!

We're in a similar boat (HL = $347k). It'll take us about 20yrs if we were to just pay off the home loan, but having a mortgage on your home isn't good because it's not tax deductable.

Our accountant told us that we could get a private tax ruling that would allow us to put the rent money from an investment property into our PPOR, therefore reducing our HL down to just 7 years to pay off. (wont have to sell a property) We'll be taking out a line of credit against our house to then pay off the IP loan. What that does is transfers our HL into a tax deductible loan. Our HL in 7 years will be $0 non deductible and over $400k deductible.
So the loan will increase, but we'll be better off because of the deductions. Does it make sense? Maybe someone else who does this can clear it up.

The name of the game is to build your "Total Asset Base" (which includes your ppor) as big & as quickly (taking into account maximising your servicability along the way) as you possibly can, thereby "Maximising your Exposure Time" to the market place and capital growth.

You see its not what you owe that determines your net wealth, its the size of your "Gross Asset Base Holdings" you are "Controlling"!

Food for thought.

Hope this helps.

Thanks for the replies, learning alot Might go speak to my accountant about all that and see my options....as it sounds like I am in a very similar situation to yourself.

airofu,

Another good idea to see if you can afford an IP is open and ING or (other similar high imterest account) Have whatever $$you think your IP will cost and have it automattically deducted from your working account into your ING account. FORGET about it

Can you still afford it in 6 months? If not you would have struggled with an IP and be one of the doom and gloomers who say "Property doesn't work"
Double bonus.. you KNOW you can afford it AND you have a bigger deposit

NB This doesn't take into account tax deductions which will make it even MORE affrdable to have an IP.



Cheers
Sue