20% deposit or two properties utilising LMI?

[Taku]

Hi community,

I'm yet to purchase my first IP, however I am looking to change that towards the end of this year. Once I get going with my initial purchase I am looking to grow my portfolio at a fairly rapid rate, which means I will need good cash flow and ideally positively geared properties to start with. I'll have around $110K give or take, which I was planning to use to put down a 20% deposit on my first IP. However, should I split the deposit and purchase two IP's instead and take advantage of the LMI even though it can be quite costly? Bear in mind, I am still a rookie and have little to no experience in property investments; therefore, is it wise to leverage myself to such an extent??
Thank you in advance for your advice.

Taku

 

[D.T.]

More properties!

 

[Mick C]

Hi community,

I'm yet to purchase my first IP, however I am looking to change that towards the end of this year. Once I get going with my initial purchase I am looking to grow my portfolio at a fairly rapid rate, which means I will need good cash flow and ideally positively geared properties to start with. I'll have around $110K give or take, which I was planning to use to put down a 20% deposit on my first IP. However, should I split the deposit and purchase two IP's instead and take advantage of the LMI even though it can be quite costly? Bear in mind, I am still a rookie and have little to no experience in property investments; therefore, is it wise to leverage myself to such an extent??
Thank you in advance for your advice.

Taku

1. Yes, it could potentially work better to split your 20%deposit into 2 x 10% deposit, allowing you to purchase 2 properties in a short period of time, especially if they are positively geared properties.

However if your looking at flipping properties/ buying under the market or carrying out extensive renovations and doing a re-value within 2-6 month than it may be worthwhile sticking with a 20% deposit- it depends on your investing style and strategy.

2. The lMI is costly, but remember LMI cost can vary between lenders so it's possible to ask for a discount or even get it waived! If the loan is structured correctly and you choose the right lender with the right lVR you can save up to 10-40% on your LMI cost.

3. LMI cost is tax deductible over 5 years

4. If your trying to grow a portillo in short period of time + given this is your 1st purchase- i personally work stick with positively geared properties...the safer way of investing.

5. Most importantly choose the right structure and lender from day 1; and plan ahead based on your current and FUTURE borrowing capacity and deposits and always move one step ahead. meaning when you buy ur first IP, you should know exactly how much you can borrow for your 2nd and 3rd Ip etc and most importantly how to get there and can you service the loans, and if not why?


Regards

 

[Rolf Latham]

Welcome to the forum

I have a saying that goes like "go hard go early"

If it suits your goals AND your risk profile, the additional leverage offered by LMI can get you to your desired IP portfolio value much more quickly.

Typically we find that new entrants to the IP world have been talked out of LMI by well meaning friends and family, or by bankers and brokers that have no clue of your true goals, and thus cant map your path to "success" because they are focussing on the loan in front of their nose.

So what happens often is that new peops are scared off by the LMI yowie, yet when they get to IP x, they realise that LMI would be a great thing, however, their then current lending exposure or concentration risk or rental reliance doesnt work for LMI anymore..............

ta
rolf

 

[Aaron_C]

It really depends on what you are going for in terms of portfolio size. Given it's your first purchase you would be able to go 20% deposit for the first purchase, and then if you need to increase your loan to LMI territory at a later stage you probably can do that via an equity release so you can hedge your bets. It's a bit harder to do this if you have more properties down the track though so bear this in mind.

 

[Taku]

Thank you all for your input.
I guess I still have some more research to do and decisions to make.
If there are any more useful advice regarding this topic, please comment.

Regards,

Taku

 

[Paul@PFI]

LMI cost is tax deductible over 5 years

Not always.
- If you are flipping property it may be a capital cost. Reducing the cap gain. If you own the prop after 12 months the cap gain (hence the benefit) is halved. Its not claimed over time. If you make a loss then the CGT loss might be carried forward. (Incl the LMI cost) until a future CGT profit occurs
- If you flip and its a repetitive thing its likely to be busienss income. No CGT. But deductible over term of loan or 5 years whichever is shorter.
- If the loan is refinanced or paid out the balance is deductible in full at that time.

 

[Mick C]

Not always.
- If you are flipping property it may be a capital cost. Reducing the cap gain. If you own the prop after 12 months the cap gain (hence the benefit) is halved. Its not claimed over time. If you make a loss then the CGT loss might be carried forward. (Incl the LMI cost) until a future CGT profit occurs
- If you flip and its a repetitive thing its likely to be busienss income. No CGT. But deductible over term of loan or 5 years whichever is shorter.
- If the loan is refinanced or paid out the balance is deductible in full at that time.

^ Yes your right, i should be more clear...i was presuming a hold with the same lender over 5 years ( hold strategy) hence why i suggest a 20% deposit for flipping - thanks for clearing that up

 

[sandyfeet]

With approx 110k to play with, you could look to purchase 2 x 300k prop with 10% deposits, this may incur approx 30k in settlement costs... This is just one scenario of how you could end up with your 2 properties and a 20k buffer roughly.

 

[Taku]

^ Yes your right, i should be more clear...i was presuming a hold with the same lender over 5 years ( hold strategy) hence why i suggest a 20% deposit for flipping - thanks for clearing that up

I'm still deciding on my strategy but at the moment I feel the strategy i'm favouring is a buy and hold strategy and initially investing in positive cash flow with moderate capital growth properties.

With approx 110k to play with, you could look to purchase 2 x 300k prop with 10% deposits, this may incur approx 30k in settlement costs... This is just one scenario of how you could end up with your 2 properties and a 20k buffer roughly.

yes, that definitely looks like a viable alternative rather than a 20% deposit on a single property.

Cheers,

Taku

 

[Colin Rice]

Typically we find that new entrants to the IP world have been talked out of LMI by well meaning friends and family, or by bankers and brokers that have no clue of your true goals, and thus cant map your path to "success" because they are focusing on the loan in front of their nose.

I talked to some peeps over 12 months ago and refused to proceed with IP1 as they had to pay LMI of circa 10k.

I explained at the time that this equates to extra interest payments of $9.61 per week gross or around $6 nett give or take.

Still refused to proceed and have just done a revaluation in order to have another crack. Figures stacked up this time to access enough equity in PPOR to avoid LMI but downside is the missed out on circa 50k capital growth due to Perth prices moving 10% across the board, all to save $6 dollars a week!

I need to reiterate the leveraging power of LMI a little more in the future me thinks.

 

[flightcrank]

I need to reiterate the leveraging power of LMI a little more in the future me thinks.

Yes but that power can go in the opposite direction if prices go down. Thats the risk that can rub people the wrong way.

 

[Colin Rice]

Yes but that power can go in the opposite direction if prices go down. Thats the risk that can rub people the wrong way.

Correct, the law of leverage/gearing works both ways.

Caveat emptor is always applicable especially in property.

 

[Richard Feynman]

It's already been said, but I'll reiterate it: If it suits your strategy, utilise LMI to buy more properties, sooner.

Example:

Buy 1 x $500,000 IP with 20% deposit. See 10% growth. You're up $50,000.
Buy 2 x $500,000 IP with 10% deposits. See 10% growth. You're up $100,000.

Yep.

 

[zimby]

Welcome to the forum

I have a saying that goes like "go hard go early"

If it suits your goals AND your risk profile, the additional leverage offered by LMI can get you to your desired IP portfolio value much more quickly.

Typically we find that new entrants to the IP world have been talked out of LMI by well meaning friends and family, or by bankers and brokers that have no clue of your true goals, and thus cant map your path to "success" because they are focussing on the loan in front of their nose.

So what happens often is that new peops are scared off by the LMI yowie, yet when they get to IP x, they realise that LMI would be a great thing, however, their then current lending exposure or concentration risk or rental reliance doesnt work for LMI anymore..............

ta
rolf

Wish I had Known this, Even got advice from a good broker, just too conservative.

 

[Brady]

I talked to some peeps over 12 months ago and refused to proceed with IP1 as they had to pay LMI of circa 10k.

I explained at the time that this equates to extra interest payments of $9.61 per week gross or around $6 nett give or take.

Still refused to proceed and have just done a revaluation in order to have another crack. Figures stacked up this time to access enough equity in PPOR to avoid LMI but downside is the missed out on circa 50k capital growth due to Perth prices moving 10% across the board, all to save $6 dollars a week!

I need to reiterate the leveraging power of LMI a little more in the future me thinks.

I love breaking down the cost to yearly and weekly.

When it's an investment property need to look at it as a numbers game.

Does buying for $X more paying $Y in LMI get you a better asset which quickly outweighs the cost of the LMI.

Wish I had Known this, Even got advice from a good broker, just too conservative.

What makes them good? They should of run through with you the different deposits you could potential use and the costs that would be involved. From here you should of been able to decide on what suited YOUR risk appetite not theirs.

 

[danwatto]

If I had used more LMI when I started in 2011 I could be retiring soon. Especially in Sydney.

I regret not buying more, as it is I need to wait at least another 10 years before I have enough.

I only used LMI on my first house, and now I've learnt my lesson I'm starting to use it again.

 

[Truly Exotic]

If I had used more LMI when I started in 2011 I could be retiring soon. Especially in Sydney.

I regret not buying more, as it is I need to wait at least another 10 years before I have enough.

I only used LMI on my first house, and now I've learnt my lesson I'm starting to use it again.

Hindsight is a wonderful thing!

Imagine you had gone LMI in 08-09, bought a heap of properties and years later, were in negative equity?

you'd be slapping yourself for using LMI

Dont worry, I am slapping myself for even bothering to negotiate and not buy on those areas just 18 months ago that now have boomed

 

[Jaggannath]

Wish I had Known this, Even got advice from a good broker, just too conservative.

Yeah, but you might not have felt comfortable at the time... sometimes you need to learn the lesson the hard way, as any other way would make life less enjoyable. Or that's how I've rationalised it for myself

 

[danwatto]

Hindsight is a wonderful thing!

Imagine you had gone LMI in 08-09, bought a heap of properties and years later, were in negative equity?

you'd be slapping yourself for using LMI

Dont worry, I am slapping myself for even bothering to negotiate and not buy on those areas just 18 months ago that now have boomed

Accident, I meant to say 2001 not 2011 Bought first property in 2001..

As for 08-09, I purchased in 2008 1 house for 820k with no mortgage insurance, it's now worth 1.35m.. I still wish I had used mortgage insurance and purchased additional properties