advice please for newbie

W

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From: Kevin Fielding


Hi all,
Some advice please if you can.
I am just learning about investing in residential property and was wondering if I can do it.
My gross income is approx $45,000 per annum.
My wife earns about $6,000 part time.
I have a mortgage of $40,000.
I have $70,000 saved in the bank which I would like to use for an extension to my house which is valued at approx $350,000.
We have two children 14 and 12 who as we all know eat constantly.
What would be my options for investing in residential property as we still need to live and put the kids through school etc etc.
I am not sure if I should pay out my mortgage and borrow for my extension as well as for an IP or not.
Any help would be very much appreciated.

Regards
 
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Sim

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Reply: 1
From: Sim' Hampel


Not sure whether you can invest in IPs ? haha ! Of course you can ! You've certainly come to the right place ;-)

I suggest you run out and buy yourself a copy of Jan Somers books: "More Wealth from Residential Property" and "Building Wealth Story by Story" (oh, and then read them too !)

These will tell you all you need to know to get started... and you can learn more advanced techniques from reading stuff on this forum.

You might also want to check out Freestylers (www.freestyler.net.au) for a networking and information group that can help you on your investing path.

Good luck !

sim.gif
 
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Reply: 1.1
From: J Parker


You appear to have about $248K of equity in you own house, plus $70K in the bank. Of course you can afford to purchase an IP! In fact, you have enough for 10% deposits on about 9 houses that would average c $270K each. Well done! Start doing your research and due diligence and good luck! Sim has mentioned some terrific starting points.

Start looking on real estate sites to see where and what you would like to buy. The biggest ones include:

www.domain.com.au
www.realestate.com.au

Also read as much as you can. Do a search on books (in fact Jas just recently posted a whole stack of the most mentioned ones- good on you Jas!) and happy reading!

Cheers,Jacque :)
 
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Reply: 2
From: Owen .


At the very least I would ensure that your $70k in savings is in an offset account against your mortgage. Then at least you won't be paying any interest on it while you sort your ideas out.

You have ample equity in your home and your cash and income will be OK for serviceability (don't mention a renovation of your home). So I would get a valuation from your bank and set up a LOC for up to 80% ($240k) to use as deposits. You may wish to split it so that some of it could be used for personal use if the need arises and you don't have to go all the way to 80% LVR if you want to play conservatively. Then use this LOC for your 20% deposits and costs with the balance being in it's own 80% I/O loan. All the usual strategies apply depending on your goals as to what kind of property you buy.

If it's self funding then your income is left to pay your mortgage out interest free over time and your $70k can be used for your home renovations. Then revalue again and your LVR will be nice and low.

Something like that anyway.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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W

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Reply: 2.1.1.1
From: W W


Kevin

You have approx $340,000 in equity/cash which you could use as deposits on property. Just using low doc loans at 75% LVR would mean you could purchase more than $1 mil worth of property.

Assume your properties grow at a conservative 5% per year, or $55,000 in year 1.

The you could withdraw 80% of the growth, tax free, to use as you please. ie $44,000, tax free to live on in the first year!

You could almost retire with proper advice.

Passive
 
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Reply: 2.1.1.1.1
From: Gail H


But nobody is mentioning debt serviceability. He couldn't possibly buy 1 million dollars worth of property. In fact at his income, the bank probably won't lend him 80% value of his home property, let alone advance him more funds for his IPs. The banks will only take into account 70 or 80% of potential rental income, and will only allow you to devote some ridiculously low percentage of your income to debt servicing.

I earn an extremely good wage,
have stacks of equity in my house, and the banks are already shutting doors in my face (I only have 2 IPs). I'm confident I'll get to number 3 this year, but I can't see how I can get past this in the forseeable future (though I am certainly planning a visit to uncle steve very soon)

Its great to be positive, but you all must have discovered a different bank with very different rules from the ones I'm playing with!

Nevertheless, good luck to newbie and everyone else, because its certainly fun, exciting, and I never stop learning from you folk.

Gail
 
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Reply: 2.1.1.1.1.1
From: Rolf Latham


Hi Gail

While I agree service issues are a problem for many seasoned investors, there is more than one way to solve that problem in this instance.

Comes back to the old equation of equity is king. I do remember somebody disputing that opinion a few weeks back.

The reality is if you have a quality asset with good equity and a clean credit file you can rustle up a couple of mill at the rate of 500 to 700 a year at not unreasonable rates of 6.3 variable or 6.94 reducing to 5.94 with two years good payment history.

Another method if you have truckloads of equity you can use Uncle Steve's leveraging methods to convert a bedroom into cashflow

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.1
From: Gail H


Thanks Rolf. I guess I'll have to start thinking outside the square and getting more aggressive with my strategy. I wouldn't mind chatting about it one day. This time the pizza and wine are definitely on me.

G
 
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W

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Reply: 2.1.1.1.1.1.1.1
From: Kevin Fielding


Hi Rolf,
I am confused.
I have worked out that I can only borrow $118,000 with my salary of $45,000 and my current mortgage of $40,000.
This doesn't seem much for an i.p. compared to the enormous figures I have been advised I could actually borrow.
Please help! am I on the wrong track?

Regards,
Kevin
 
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Reply: 2.1.1.1.1.1.1.1.1
From: Rolf Latham


Hiya Kevin

On the inside track I suspect. Im not surprised you are confused because there is so much conflicting advice out there and to some extent even here.

In your case your maximum borrow capacity as cited here is NOT through a traditional lender OR traditional lending model.

Trying though to explain the conversion of equity to cashflow using annuities etc is not the job of a post. Go to www.navrainvest.com.au and look for cashbonds.

No/Lo docs lending is easy to understand. Using the model the lender does not CARE what you earn. The rates are little higher and the deposits are also higher.

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.1.1.1.1
From: Gail H


Hi Kevin,
As one of the people who helped add to the confusion, let me apologise. I just get worried when newbies are told to run out and buy a million dollars worth of property.

As Rolf has explained, there are certainly ways that you can increase your borrowing potential - low doc loans and cash bonds (a cash bond is where you purchase a stream of income by the bank, so it costs you money, but it increases your ability to service debt and as long as the property shows good capital growth, you come out ahead).

Take your time, learn what you can and think carefully about your own risk profile. A more aggressive approach will get you ahead faster, but you have to be able to sleep at night. The interest rates on low doc loans aren't too bad as Rolf points out. We often freak out about higher interest rates, when the difference may only be $700 or $800 a year. On the other hand, interest rates are rising, and for a person on a modest income, any extra outlay can hurt.

I'm not sure where you are, but don't feel you have to invest in Sydney or Melbourne. I recently bought a lovely little house near the beach on the sunshine coast for $125,000.

I have a few books on real estate investing if you would like to borrow them. One is called "Realistic Real Estate Investment" and its a book I made myself read after reading Rolf de Roos, (who is over the top about IP). I still love property investment, but I try and remember that its not entirely risk free.

Good luck and leave me your email if you would like to borrow anything.

Gail
 
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Reply: 2.1.1.1.1.1.1.1.1.1.1
From: W W


One more point on serviceability.

You would find it hard to service, $1 mil worth of property if it was all negatively geared. But you could buy all positively geared property, or a mixture of positively geared and high growth negative geared property so that they balance each other out.

eg. 5 $100,000 properties giving you $2000 each after all expenses = $10,000 pa.
plus one $500,000 high growth negatively geared property which may cost you $10,000 per year (shouldn't really be that much to hold??).

Just some thoughts

Passive
 
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Reply: 2.1.2
From: Owen .


Thanks for the offer Rolf but as you know, the goal is no job, not a replacement for the one I've got.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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