10% deposit with LMI vs 20% deposit and waiting longer

[zepth]

Hi all,

Been lurking for awhile now trying to absorb as much info as I can while getting ready to get my feet wet in property investment.

Currently the wife and I are saving around 2k a month towards a deposit, we don't have much saved yet as we just spent a good chunk of our savings removing all our bad debt so the only debt we have now is a single credit card with a small limit for emergency quick access to cash if we need it.

Short term our plan is to aim for IP1 to be as close to cf neutral as possible or even cf+ if possible to assist with cashflow while we work towards IP2 and beyond. The 2k/month we are currently saving would be put into an offset account on the property as a method of reducing interest payments while we save for the next property.

What I am weighing up at the moment is which option will be better.

1) to try and buy asap with about 10% deposit so we at least get ourselves into the market and accept the added cost of LMI. Main issues I can think of is that the property ends up costing more this way and due to the higher leverage it becomes harder for yield to cover interest so we either need to find a better yielding property or wait longer before it becomes cf+

2) wait another 6-12months to save the extra needed for a 20% deposit. Obviously this saves us some money on the purchase price and improves our prospects of getting cf+ but the disadvantage is that we are not in the market for that time and potentially house prices keep going up meaning our extra deposit is lost anyway.

Also one other thing I have heard of is people using the equity from their parent's house instead of a portion of their deposit to avoid paying LMI. How viable is this as an option if our parents are willing? We still have the disadvantage of needing a higher rental return to be cf+ but at least we dont get stung with extra mortgage costs.

 

[tobe]

Pay LMI for the right property. There are a couple of variables which factor in determining an investments yeild. Rental income, expences (made up of loan amount, interest rate, I/o or P&I etc). Likely capital growth is another factor. My advise is to always work your calculations on a 100% plus costs loan (even if you later decide/are forced to borrow less, or sit some further cash in your offset account). This way you are forced only to look at the investments pro's and con's, rather than your own variables. You will most likely find the less deposit you have, the higher your ROI, and the less likely to have CF+ in the first few years, however putting in a larger deposit begs the opportunity cost of these extra funds, whihc is better accounted for if you do your sums on the full purchase price plus costs.

Good luck.

 

[josko]

Welcome zepth,

You need to buy when YOU are comfortable buying. The choice on whether to save more or buy is completely in your court. Noone REALLY can advise you on this, only give you their opinion. Saving means you POSSIBLY lose out on Capital Growth. Saving also means you are a more attractive client in the eyes of the bank!

It is commendable that you are also widdling down your bad debt.

Using your parents house as equity will only work if your parents have an unemcumbered property or are willing to refinance their existing mortgage.

I like your strategy and think your decision to get as neutrally geared or as positive as possible is excellent!

Regards JO

 

[Rolf Latham]

LMI every day if you can get it , AND you thnk that property values will keep rising.

id keep the family out of it, if at all possible

ta
rolf

 

[StuartW]

Here's my answer: http://bit.ly/aSIBcC

 

[steveadl]

Waiting to get in later with a bigger deposit to make it CF+ will be just that - a function of the cash you're putting into the deal, not the properties figures.

Whether you fund a bigger shortfall now with a higher loan, or keep saving longer and use that same cash for a bigger deposit - it's the same cash out of your pocket. Buying now however will give you access to the capital growth of the property sooner.

ie. Route A you can put $2k per month into a savings account and accumulate a deposit so the property will be CF+ from day one.
Route B you can use that same $2k per month into the offset of the property today (of which a portion is now to cover negative cashflow)

Either way the property is still renting for $XXXpw. Route B will give you capital growth and therefore equity to get your next property sooner.

 

[zepth]

Thanks all for the replies. I think that pretty much confirms where I was heading anyway but it is good to know that others think the same.

 

[PeterC]

if you find the perfect property go LMI. but dont go LMI and buy a place just because property investors (or your parents/siblings/cat) tell you prices will keep going up. dont buy now just for the sake of it.

i really wouldnt bring the whole 'prices will rise' (or any other opinions...be it busts or plateaus) into the equation at all, as its one that causes a lot of unnecessary trouble for people. keep an eye out for a good place at a good price and go from there.

not having the money all available for 20% can often be a hidden bonus - it gives you more time to keep looking for that bargain property, compared to if you have the money and you just buy the first 'half decent' place that comes up due to being scared prices will double overnight. but thats so long as you do keep an eye out etc now and dont wait till you have the money to do some good looking around

 

[zepth]

Well that's just it, if we were of the mindset that we must save 20% deposit first then we wouldn't really start looking yet.

Once we make the decision that paying LMI is acceptable we can start looking at properties today so that if the right one does come up we can make our move.

Still a few things to get out of the way first, like getting our tax returns done from last year and sitting down with the accountant to figure out exactly what financial position we are in vs the financial position we believe we are in. Then we can start approaching lenders to figure out how much they would be comfortable with lending us, then we can start looking for the magic IP #1

 

[CG++]

Good one, Zepth, sounds like you are on your way.
I don't mind LMI myself if it gets me what I want. It's an expense your accountant can write off if he's any good.
A very long time ago I had an accountant that asked me - "what would you want to buy property for?" Watch out for those ones.