Absolute Newbie

[melisem]

Thanks Albanga and Peter for your replies.

Both your posts have left me thinking I can hold out a bit longer and get myself into a good position financially and in the mean time, educate myself as much as I can.

As a side note, my wonderful dad has also indicated that he may be able to be a guarantor on my loan. I don't really want him tied up in my finances, I'm quite independent and feel it is too much to ask of someone anyway. It sounds like a potentially messy situation, even though as soon as I pay down a certain %, he can be taken off as guarantor. Has anyone else done this before?

Also, even though this is my "first home", both my husband and I won't ever be able to get the first home buyers grant - but I've pretty much accepted that it's not such a big deal in the long run and the hassle of having to live there for 6 months is more than what it's worth!

I'll continue to trawl these forums and educate myself while I save

Thanks all!

 

[albanga]

I'll continue to trawl these forums and educate myself while I save

Great Idea! Honestly this is the best resource I have ever found on the internet (And i work in IT). You will not find a better community anywhere where people openly offer you there advice and experience.

 

[slyty80]

As a side note, my wonderful dad has also indicated that he may be able to be a guarantor on my loan. I don't really want him tied up in my finances, I'm quite independent and feel it is too much to ask of someone anyway. It sounds like a potentially messy situation, even though as soon as I pay down a certain %, he can be taken off as guarantor. Has anyone else done this before?

Hi Melisem,

I've never posted on these forums but have been reading up a fair bit lately. I'll share my story with you. I'm also interested to know what some of the experienced investors on here think about what I've done to date and any tips for the future.

I had my mother go guarantor on my first IP in 2008. I actually borrowed approx 105% to cover the borrowing costs and also pay off some credit card debt. The purchase price was $283k and I borrowed about $300k. I had three loans. The main loan was for $220k One of the loans was secured by my mothers property for $65k and another small loan for $15k for the credit card debt. This allowed me to avoid paying Lenders Mortgage Insurance. I was still able to claim all the interest on the loan secured against my mothers property as a tax deduction. I couldn't claim the interest on the small loan for $15k as it wasn't borrowed for the IP.

My plan was to pay off both principal and interest and then a few years later have my mothers property removed as security. Interest rates had come down significantly but I continued to make the same repayments to pay off the principal. About 2 or 3 years later I asked the bank if my mothers property could be removed as security for the loan. They did a reevaluation which came back at $350k and I only owed about $250k. I didn't agree with the evaluation. I really thought the property was still worth about what I paid for it, but I wasn't going to argue with them.

Since then I purchased another IP in 2012 for $227k. At the time my plan was to use the equity in my first IP for the deposit. The bank did another evaluation which came back at $300k. This didn't surprise me, but unfortunately I didn't have enough equity without having to pay LMI on both properties because I had removed my mothers property as security. To save money on LMI I ended up leaving my existing IP alone and just used the money I had available in redraw for the deposit. I didn't quite have enough to avoid LMI on the new loan. It was a small amount, I think $1500-2000 which was tax deductible.

Not sure if I would recommend borrowing 105% to anyone. I would even wonder if the banks would do it these days? I'm happy with how things have worked out for me because I was able to get into the market and I think this more than anything changed my spending habits. I was really focused on paying down the principal on my loans which I think was important because I had so much leverage against my first IP.

If you are wondering, my first two IP's are located where I live which is in Townsville. At the time both properties felt like good value to me but it hasn't been the best market to invest in during this period and has seen little growth. Even though I haven't seen a great deal of growth I'm happy because I've got into the market, built up some equity and now have much more confidence in investing in real estate. I am now looking at purchasing my third IP outside of my local area. Possibly in the Adelaide region. I'm tossing up between the northern Adelaide suburbs or down south near Christies Beach.

Anyway, I hope this helps.

 

[LeoT]

Need to change your view on LMI.

One of the recurring themes I sense is this trying to avoid paying LMI. If you want to build a large enough portfolio before your 145 years old and achieve your financial goals, I would start viewing LMI as a business expense as it will allow you to expand your portfolio much faster - hence actually having a shot at realising your financial goals while your young enough to enjoy it.

 

[Rixter]

Not sure if I would recommend borrowing 105% to anyone. I would even wonder if the banks would do it these days?

I've always borrowed 100% of the purchase price plus an additional 5% to cover purchasing costs.

Early on in my journey I did the same as you. Borrowed the 105% secured against PPOR in my case - effectively cross colling. Contrary to popular belief cross colling is still effective in small doses where it suits your purposes, as long as its not a continual thing where it can come back to shoot yourself in the foot. As Rolf has always stated, cross colling is not a problem until it becomes one.

Then as values increase in the short term, like you, applied to the bank to release our PPOR as security.

I repeated this process for our first few IP's.

Later on as our portfolio grew significantly in numbers & equity, we still borrowed the 105% without the need to cross coll as we used LOC's secured against our IP's without incurring LMI.

We funded our 20% IP deposits plus 5% purchasing costs from our Investment LOC's & then borrowed the remaining 80% of funds required to complete settlement secured against the IP being purchased.

The use of loans with offset accounts attached to extract IP deposits, redraw facilities and the LOC structure I personally used above are all pretty much standard practice these days with experienced investors & IP savy mortgage brokers.

 

[z611143]

I've always borrowed 100% of the purchase price plus an additional 5% to cover purchasing costs.

Early on in my journey I did the same as you. Borrowed the 105% secured against PPOR in my case - effectively cross colling. Contrary to popular belief cross colling is still effective in small doses where it suits your purposes, as long as its not a continual thing where it can come back to shoot yourself in the foot. As Rolf has always stated, cross colling is not a problem until it becomes one.

Then as values increase in the short term, like you, applied to the bank to release our PPOR as security.

I repeated this process for our first few IP's.

Later on as our portfolio grew significantly in numbers & equity, we still borrowed the 105% without the need to cross coll as we used LOC's secured against our IP's without incurring LMI.

We funded our 20% IP deposits plus 5% purchasing costs from our Investment LOC's & then borrowed the remaining 80% of funds required to complete settlement secured against the IP being purchased.

The use of loans with offset accounts attached to extract IP deposits, redraw facilities and the LOC structure I personally used above are all pretty much standard practice these days with experienced investors & IP savy mortgage brokers.

LOCs? Newb question

 

[techie]

LOCs? Newb question

Life Of Credit!

Beg your pardon, it is Line of Credit

 

[Rixter]

Life Of Credit!

Not for life, rather 30 years.

 

[melisem]

Is there any value in going down the PPOR path, get the FHOG, and pay off a $300k place within 13 years (paying down extra on the mortgage), meanwhile using it as equity to build up a IP portfolio?

Bear in mind, my husband and I live in Sydney. We'd consider a 1 bed apartment if it wasn't too far out (within a 20-30 min train ride into the CBD). But is Sydney just the worst place to buy an apartment? Perhaps we're better off with my original plan - rent a place that suits our lifestyle and only own IPs. Perhaps the PPOR can wait until we can afford something we actually want to live in?

 

[LeoT]

Is there any value in going down the PPOR path, get the FHOG, and pay off a $300k place within 13 years (paying down extra on the mortgage), meanwhile using it as equity to build up a IP portfolio?

Bear in mind, my husband and I live in Sydney. We'd consider a 1 bed apartment if it wasn't too far out (within a 20-30 min train ride into the CBD). But is Sydney just the worst place to buy an apartment? Perhaps we're better off with my original plan - rent a place that suits our lifestyle and only own IPs. Perhaps the PPOR can wait until we can afford something we actually want to live in?

Hey Melisem,

I have quite a few friends that still rent, and have managed to build a multi million dollar portfolio. It just depends on your goals and how aggressive you want to be. Most of them rent because usually its cheaper to rent in a place you really want, rather than hold a mortgage in it, = less debt, more cash flow, = easier to expand portfolio faster.

So really all depends on your goals and how aggressive you want to be.

 

[Newbieatlife]

Is there any value in going down the PPOR path, get the FHOG, and pay off a $300k place within 13 years (paying down extra on the mortgage), meanwhile using it as equity to build up a IP portfolio?

Bear in mind, my husband and I live in Sydney. We'd consider a 1 bed apartment if it wasn't too far out (within a 20-30 min train ride into the CBD). But is Sydney just the worst place to buy an apartment? Perhaps we're better off with my original plan - rent a place that suits our lifestyle and only own IPs. Perhaps the PPOR can wait until we can afford something we actually want to live in?

Yes - rent a place as cheap as you are comfortable with (even potentially moving back with parents?), lower your living expenses, get rid of your credit card debt and work your butts off for that 1st deposit. Once you have your 1st IP, every subsequent purchase will be much easier and you will also fine tune your strategy.

The 1st and hardest hurdle is always getting into that mindset and having the determination to make temporary sacrifices plus hard work...with a dual income and great discipline, you could have a decent deposit in as little as 6 months.

 

[Nemo30]

An advantage of a PPOR is that you dont pay capital gains tax if you sell - might also be an opportunity to buy something run down and do it up over time.