Advice / first IP

[AJ_]

Hello,
At a friends place and they were discussing IPs which my wife and I had not really considered before. So doing some basic research to see if it is currently feasible.

Investing goals would be to hold long term with the view to eventually build a cashflow +ve portfolio. ie) not very interested in the negative gearing aspect.

Financial background:
We both earn between 60-70k (2 of us) so total income would be $125k / annum

Bought PPOR in May 2012 for 500k
We currently owe 135k on this PPOR money is sitting in offset account for this loan

currently 80% of my salary goes into the home loan but we don't think this is sustainable for the long term. Although we are not high income earners, I think we are paying off our PPOR reasonably well due to the fact that we live a pretty simple lifestyle.

My first question - is the money better utilised by continuing to pay off our PPOR to $0, or are there more benefits in purchasing an IP - would be looking at something in VIC, as close to cashflow neutral as possible (not sure if this is feasible)

Hope that makes sense.

 

[Jamie M]

Hiya AJ

Nothing wrong with smashing the home loan if you intend on living in the place forever....but that rarely happens.

A good option for people disciplined with money is to set up the loan as interest only with a linked offset. Instead of paying down the principle, you make additional repayments into the offset instead. This preserves the principle balance so if the property ever turns into an IP you can still claim a decent amount of interest - but it also reduces your interest repayments whilst those funds are sitting in the account.

I haven't crunched the numbers but your borrowing capacity and equity position look ok. It's just a matter of setting up your loan structures correctly. I'd start by tapping into the equity in your current property - set up a seperate IO loan to cover the deposit/costs on your IP(s).

You'd then set up seperate stand alone loans for each IP.

Lender selection is important here - you don't want to burn the "generous" lenders (in terms of how much their willing to lend to you) first up. You also want to use lenders that aren't going to be too much of a hassle when it comes to releasing equity.

There's also the whole LVR thing to consider too. Depending on your longer term plans - you might look at leveraging LMI and using smaller deposit to purchase more.

These are all questions you can address with any decent finance person.

Cheers

Jamie

 

[Spades]

Hi AJ,

Well done,you've been smashing that ppor mortgage.

Anyhow,i'd vote buy ip/ip's rather than reducing your ppor to zilch.

Cheers Spades.

 

[alexlee]

Investing goals would be to hold long term with the view to eventually build a cashflow +ve portfolio. ie) not very interested in the negative gearing aspect.

Keyword is EVENTUALLY. There's nothing wrong with having some negative gearing now, when you're still working, as long as there is capital gains to compensate for it.

 

[Terry_w]

Hello,
At a friends place and they were discussing IPs which my wife and I had not really considered before. So doing some basic research to see if it is currently feasible.

Investing goals would be to hold long term with the view to eventually build a cashflow +ve portfolio. ie) not very interested in the negative gearing aspect.

Financial background:
We both earn between 60-70k (2 of us) so total income would be $125k / annum

Bought PPOR in May 2012 for 500k
We currently owe 135k on this PPOR money is sitting in offset account for this loan

currently 80% of my salary goes into the home loan but we don't think this is sustainable for the long term. Although we are not high income earners, I think we are paying off our PPOR reasonably well due to the fact that we live a pretty simple lifestyle.

My first question - is the money better utilised by continuing to pay off our PPOR to $0, or are there more benefits in purchasing an IP - would be looking at something in VIC, as close to cashflow neutral as possible (not sure if this is feasible)

Hope that makes sense.

80% of $70k is $56k. If you could keep this up the PPOR would be paid off in 3 years. No need to sustain it in the long term, just in the short term

If you were going to buy an investment you would not want to use any of your cash, but to borrow. It would virtually not make a difference to paying off your home loan, except you may need to fund the small short fall until it becomes positve geared.

 

[AJ_]

It's just a matter of setting up your loan structures correctly. I'd start by tapping into the equity in your current property - set up a seperate IO loan to cover the deposit/costs on your IP(s).

Not quite sure I follow. Are you saying that if we were to buy an IP, we should:
- keep our current P&I loan
- get an IO loan for the IP (not sure what you mean by 'cover the dsposit/costs'

If you were going to buy an investment you would not want to use any of your cash, but to borrow. It would virtually not make a difference to paying off your home loan, except you may need to fund the small short fall until it becomes positve geared.

I take it this is to maxmise tax deductions ? I read somewhere that it's best to maximise tax deductible debt and decrease no-tax deductible debt.

 

[Terry_w]

I take it this is to maxmise tax deductions ? I read somewhere that it's best to maximise tax deductible debt and decrease no-tax deductible debt.

If you used your cash you would be diverting funds from the PPOR home loan. The interest on this loan isn't deductible whereas an investment loan is. So it is better to pay off the non deductible loan first and maximise your tax deductions - which in turn can release funds to pay down the PPOR loan quicker.

 

[Jamie M]

Not quite sure I follow. Are you saying that if we were to buy an IP, we should:
- keep our current P&I loan
- get an IO loan for the IP (not sure what you mean by 'cover the dsposit/costs'

Hi AJ

Yep, set up a second IO loan for the IP.

This loan will cover the deposit/costs on your IP.

So if you were to purchase one IP, the loan structure would look like this.

PPOR
Loan 1: Current loan
Loan 2: Equity release to cover the deposit/costs on your IP

Investment Property
Loan 3: Loan against IP (with deposit coming from loan 2 above).

Does that help?

Cheers

Jamie

 

[AJ_]

Jamie - thanks for explaining.

Had never heard of an equity release before.

Thanks Terry for your reply as well.

I guess I'll need to talk to a financial person to discuss options including LOC

 

[srini]

Great start AJ. If I were you, I'd begin by talking to a good mortgage broker who invests in property as well.

There are plenty of reputable ones on the forum that help out regularly. Hopefully one of them will pitch in.

 

[chindonly]

You are in a great position to get going on your investment path.

Good luck with it all!

 

[Cherry Pro]

Jamie - thanks for explaining.

Had never heard of an equity release before.

Thanks Terry for your reply as well.

I guess I'll need to talk to a financial person to discuss options including LOC

Don't think you could go past Jamie M and Terry_W who have already provided their inputs to get the ball rolling on this. You are in a good position to buy a couple this year, imho.