Advice for a newbie!

[surfingtiger80]

Hi guys and girls,

I have read all the books and have a keen interest in property investing but right now am at a cross roads as to what do next and subsequently procrastination has set in. I am confused as to what will be the best strategy to maximise the equity I have gained thus far.

I am 31 and own a 2BR renovated flat (no courtyard) in Essendon. I am thinking of a few options at the moment. Do I upgrade and buy a Villa for 500K in the area. Or do I keep mine and rent it out and then a buy 1 or 2BR unit around my area, or Geelong where I have been doing a lot of homework. Another option is investing with my Mum and then look at houses rather than units, but obviously any profits or growth would be split 50/50.

If I did rent mine out I would then plan on renting a place myself. I did hear somewhere to "Buy your assets and rent your lifestyle", is this something you guys do as well?

The block is currently getting painted and refurbed as well as having a new Rising Damp course installed and I have recently had it valued by a local agent for around the 390K mark. Also another renovated 2BR has recently rented for 320 per week.

Here are the financials:

Currently earn 62K PA
Mortgage 160K payed down to 143K
Equity - 247K
Savings - 23K
No other debt to speak of

Holding costs if rented out
Body Corp - 1200 PA
Rates - 800 PA
Water - 800 PA
Repairs - 1000 PA (Estimated)
Property management fees - 5% of Rent
Potential Rent 320 per week


So the conundrum is; is it better to buy a 500K place with a view to renting it out or keeping mine and renting it out. I am just worried that if I do upgrade, which I would really love to do, would limit my borrowing capacity for further investments. But in the same vein think a brand new 500K Villa will have better capital growth prospects than what I currently have

Also, for all the Finance guys out there. How am I positioned financially at present to keep buying properties. If I borrow another 250K for a PPOR, will I be able to invest or have I hit a brick wall? On the other hand if I rent mine out how do I fair? Can I buy 1 unit or 2 or 3 or none? Sorry guys I have no idea.....

Furthermore would it be better to refinance down to the 143K figure or leave it at 160K and should I leave it as PI or change it to IO if the even I do rent it out.

Apologies for the long winded post, really appreciate your comments.

ST80

 

[Rolf Latham]

Hi ST80

Welcome

Few things

it looks like you have the capacity to save ok, which means that I believe you should make your current loan IO, regardless if you rent the place or not.

Your biggest challenge in keeping this property as an IP and buying a new PPOR is the low level of effective ( deductible) debt you have on the current ppor. Its very tax ineffective.

You may be able to increase the debt over time with a debt recycle strategy, AND it does look like you have enough equity to make it qokr.

Income wise you will be well served by finding something that produces

Investing with someone else should only be considered if you have run out of resources yourself.

before we talk about borrow capacity, how much can you out toward new property(ies) per week ?

ta
rolf

 

[surfingtiger80]

Hi Rolf,

I am reasonably good at saving, something my late father taught me at an early age. I am a little confused at to what you mean by making it IO even if I don't rent my place. What advantage will this give me? I currently pay $250 per week. It's currently locked in at 7.25% until June this year.

"Your biggest challenge in keeping this property as an IP and buying a new PPOR is the low level of effective ( deductible) debt you have on the current ppor. Its very tax ineffective."

How do you think I could tackle this scenario? Should I be topping up the mortgage on this and using the equity to buy another place? My rough calcs show me that if I do rent it out and pop it on an IO loan it should be thereabouts costing me nothing to hold. But if I top it up, it will eradicate this and make it CF neg.

"Income wise you will be well served by finding something that produces "

Do you mean finding CF+ deals?

I am not entirely sure how much I could pay per week to service properties as it all depends on which stratergy I adopt. I can tell you though, currently I pay another 50 per week on top of my mortgage and save another 250 per week.

But if I do rent mine, buy a 1bedder for example to rent, I will still need to live somewhere and pay rent.

 

[Aaron_C]

Hi surfingtiger,

Basically if you turn your current home into an investment property, you can start claiming deductions on the interest you pay. Since your loan balance is now only $143k, you can only claim interest deductions on the payments from this loan amount. If you lease the place out at $320 pw that means that you will be CF neutral/positive.

The benefits of Interest-Only for all your loans (including your own home) is that it costs you less per week, and it means that you are able to keep your home-loan balance higher. This is good because when you do rent out your current place, your loan is higher so your tax deductions from that loan will also be higher. In conjunction with an offset account, this can translate to better cashflow and significant tax savings.

I personally wouldn't sell unless there was a need to do so. On your income you can afford to purchase more properties but you would be near the serviceability wall after the next purchase.

 

[surfingtiger80]

Hi Aaron,

Very interesting concept. I think it suck in Having your PPOR as IO is something I have never even thought of entertaining.

With regards to my savings, should I be using the 20K as part of the deposit on the 2nd place or just park that in the Offset account and borrow the 100% ?

Also, if I do see something that I like, can I put an offer in subject to finance without having pre - approval. Or is that really foolish and I should only start making offers once I am pre - approved? Just thought I would ask, just in case I see something great, which has happened in the past and I have not been financially ready.

Thanks mate.

ST80

 

[Aaron_C]

No worries glad to help.

Re the next purchase, there's a few ways that it can be done. One way could be to refinance your current home to get some equity out of it (so you don't have to use all your current cash). Just be wary of '100% finance' - this usually means a cross collateralisation that is not for your benefit.

As for pre-approval, it doesn't really mean all that much since it's subject to 1000s of conditions. Best thing to do is speak to your broker and gauge how much you can actually borrow given your financial situation. Then you can make offers etc knowing that you can actually afford it if your offer is accepted.

 

[surfingtiger80]

What are the downfalls of cross collaterisation?

I will to get everything formalised. At a rough guesstimate looking at the above financials, pending renting my place out, how much do you think I would be able to borrow for a 2nd IP? I know there are a lot of things to consider but a ball park figure would be great.

Cheers

ST80

 

[Belu]

ST80,

Sorry but just a quick question - what is your goal from investing in property?

Cheers

Ben

 

[Rolf Latham]

What are the downfalls of cross collaterisation?

I will to get everything formalised. At a rough guesstimate looking at the above financials, pending renting my place out, how much do you think I would be able to borrow for a 2nd IP? I know there are a lot of things to consider but a ball park figure would be great.

Cheers

ST80

with ur existing debt, and a new 250 k lend of a PPOR, based on your basic numbers you should be able to get to a 450 k IP or so without much drama.

More is possible with the correct structuring and mortgage planning

If you structure your finances correctly you will get ahead much faster due to saving more in income tax, but also being able to borrow more $ in total ( assuming that leverage is what will make you wealthy long term)

ta
rolf

 

[surfingtiger80]

Hi Ben,

Don't be sorry, not a problem at all mate. I think like most of the people on here my goal is to build up enough assets over time to be able to no longer have to work. I would also love the opportunity to pass on my knowledge to others when I become more seasoned, I love talking property with anyone that shows an interest.

Recently I had the opportunity to help a mate out with the purchase of his 1 Bedder in Kingsvillle. It was fun helping him target a suburb, negotiating the price and minimising his risk in the purchase through the mistakes I learnt when buying my place. EG: getting the body corp minutes, arranging the sale subject to a building inspection etc etc. I got a real buzz out of it!

Furthermore, I would love to learn to do developments, it's something that I have had an interest in for a fair while. But for now it's going to be a buy and hold strategy whilst wetting my feet.

Cheers

PL80

 

[surfingtiger80]

with ur existing debt, and a new 250 k lend of a PPOR, based on your basic numbers you should be able to get to a 450 k IP or so without much drama.

More is possible with the correct structuring and mortgage planning

If you structure your finances correctly you will get ahead much faster due to saving more in income tax, but also being able to borrow more $ in total ( assuming that leverage is what will make you wealthy long term)

ta
rolf

WOW Rolf! So let me get this right in my head.......I will be borrowing an extra 110K on my place in Essendon with 340K being available on the second IP?

I was not expecting that, I was thinking a 250K would be my max.

 

[Rolf Latham]

WOW Rolf! So let me get this right in my head.......I will be borrowing an extra 110K on my place in Essendon with 340K being available on the second IP?

I was not expecting that, I was thinking a 250K would be my max.

can yes, and possible more depending on the structure etc.

Should ?

I dunno...................id want to do a cashflow analysis and make sure I hpld back a nice chunky buffer

I have a number of clients on incomes like yours that have portfolios worth well over 2 mil.............a lot of time in the market, some good planning, buying well, luck and a bit of sacrifice.

ta

rolf

 

[surfingtiger80]

can yes, and possible more depending on the structure etc.

Should ?

I dunno...................id want to do a cashflow analysis and make sure I hpld back a nice chunky buffer

I have a number of clients on incomes like yours that have portfolios worth well over 2 mil.............a lot of time in the market, some good planning, buying well, luck and a bit of sacrifice.

ta

rolf

Cool, thanks at least now I have an idea of the bigger picture. Well over two million in assets on a similar wage is staggering, in a good way