Advice/tips on Property Investment

[akust0m]

Hi, I'd like to introduce myself, my name is Chris and am currently in my final year of Uni . I've been on these forums before, however have recently started to read a lot more.

I have saved small amounts, however once Uni finishes my savings should substantially increase. I have been thinking about property a lot and attempting to work out plans for my first couple of investment properties. I'm thinking of attempting to obtain a few IP's before buying my own home (PPOR), any opinions on this?

Say if in two years time I have $40,000 in savings on say $45k pa. I decide to purchase my first IP for $350,000 on an IO loan. I'll use $20k as a deposit and use the rest for fees/stamp duty and as a small buffer (Loan stands at $330,000). As an example I'll treat the interest rate at 7.5% with a 5% rental yield. So in this case, interest = $476 p/w , rent = $336. I would experience a shortfall of $140 p/w.

How much of this $140 p/w would be deductible? And also what other aspects of IP1 is deductible?

At the same I'll set up an offset account linked to this loan, and anything I can possibly put into this account will go in.

In several years time, assume this property is worth $450,000. Can I utilise a LOC on this loan of say $30,000 to use as a deposit onto IP2 valued at $400,000?
If so, is 100% of the interest on the LOC deductable as it is used for investment purposes?
Is it correct in saying that it is better to use a LOC so that you don't cross-collateralize with the previous loan.
Or am I going down the wrong track here, and can LOC's only be used on PPOR's?

Sorry if much of what I've said doesn't make sense, I have only been reading this stuff over the last week and haven't been able to stop thinking about. It would be really helpful if i could be given any advice tips, or if I'm looking too far ahead .

For those that read all this, thank you

-Chris

 

[jaycee]

Hi, I'd like to introduce myself, my name is Chris and am currently in my final year of Uni . I've been on these forums before, however have recently started to read a lot more.

I have saved small amounts, however once Uni finishes my savings should substantially increase. I have been thinking about property a lot and attempting to work out plans for my first couple of investment properties. I'm thinking of attempting to obtain a few IP's before buying my own home (PPOR), any opinions on this?

Say if in two years time I have $40,000 in savings on say $45k pa. I decide to purchase my first IP for $350,000 on an IO loan. I'll use $20k as a deposit and use the rest for fees/stamp duty and as a small buffer (Loan stands at $330,000). As an example I'll treat the interest rate at 7.5% with a 5% rental yield. So in this case, interest = $476 p/w , rent = $336. I would experience a shortfall of $140 p/w.

How much of this $140 p/w would be deductible? And also what other aspects of IP1 is deductible?
What you do is add all your deductable expenses: Interest / Council rates / water rates / building insurance / landlord's insurance / any repair costs / property management charges / bank fees / travelling to the property/ depreciation (get a quantity surveyor to do a schedule of how much you can depreciate the property each year without actually spending this money). Take this amount from your rent received, and this is your shortfall for the property 100% claimable, you include all these expenses in ful lin your tax return, as you do your rent received
At the same I'll set up an offset account linked to this loan, and anything I can possibly put into this account will go in.
YES
In several years time, assume this property is worth $450,000. Can I utilise a LOC on this loan of say $30,000 to use as a deposit onto IP2 valued at $400,000?YES
If so, is 100% of the interest on the LOC deductable as it is used for investment purposes?YES
Is it correct in saying that it is better to use a LOC so that you don't cross-collateralize with the previous loan.YES, basically I believe
Or am I going down the wrong track here, and can LOC's only be used on PPOR's?NO

Sorry if much of what I've said doesn't make sense, I have only been reading this stuff over the last week and haven't been able to stop thinking about. It would be really helpful if i could be given any advice tips, or if I'm looking too far ahead .

For those that read all this, thank you

-Chris

Hi Chris, I think you've worked it out mate ....

 

[jingo]

I have only been reading this stuff over the last week and haven't been able to stop thinking about. It would be really helpful if i could be given any advice tips, or if I'm looking too far ahead .

For those that read all this, thank you

-Chris

Hi Chris,

I wish I knew as much about property investment when I was in my final year of uni as you do!

There are ways to speed up the process too - eg buy properties with development potential and built units/townhouses on the land further down the track when you have equity.

Many people have bought IP's before their PPOR and it is a great strategy.

Looking forward to reading more of your posts.

Regards Jason.

 

[Perp]

Is it correct in saying that it is better to use a LOC so that you don't cross-collateralize with the previous loan.
Or am I going down the wrong track here, and can LOC's only be used on PPOR's?

OK, you're way ahead of 99% of people your age, I'm sure, but hopefully I can clarify a little confusion you have here.

LOC and cross-collateralise don't really have anything to do with each other. One is a type of loan product, and the other is a security arrangement.

Types of loan product

Principal and interest loan - eg You borrow $400K now, make payments for 25 years, and at the end, own the property with no debt.

Interest only loan - You borrow $400K now, make payments equivalent only to the interest, and at the end, still owe $400K.

Line Of Credit - Is more like a big credit card. You set up a facility with a $400K limit, and can make big payments, small payments, possibly even no payments, provided you don't exceed the $400K limit.

An I/O loan with an offset can effectively be operated like a LOC, but usually attracts less bank fees, and simplifies the tax deductible status of the debt. For example, suppose you have a $400K limit, fully drawn. You get $200K from, say, an inheritance, which you're not sure what to do with, but put into the LOC to reduce your interest in the meanwhile. Then you withdraw the $200K a year later to use to partly pay for a PPOR. Guess what? $200K of the $400K has now lost it's tax deductible status. If, however, you'd put the $200K into an offset account linked to an I/O loan, you would have achieved exactly the same result, but without contaminating the purpose of the loan; the full $400K would still be deductible if you'd kept the $200K in an offset, instead of "mixing it" in with your LOC funds.

Securitisation

This thread says it all.

 

[DavidMc]

My advice - don't get addicted to the higher cost lifestyle possible once you enter the workforce. Drive that bomb of a car and keep eating the Maggi noodles for just 1 extra year and save save save. Makes a hell of a difference in 10 years.

 

[Rixter]

It would be really helpful if i could be given any advice tips

Chris, my best advice to you is dont let analysis paralysis take hold. It's the starting that stops most people because of it.

Success is 80% Mindset x 20% Strategy. In other other words your mindset is 4 TIMES as important than what ever strategy you decide to deploy.

Just remember- You dont have to get it right you just have to get it going!

By actively applying the above you will set yourself ahead of 95% of the population.

Hope this helps.

 

[sash]

Chris,

You are well on your way......

Just a couple of pointers I learnt along the way....

1. Go for the low end properties i.e - under 250K ....they are still available. Sometime a quick paint and carpet in a unit does wonders.

2. Put very little into the deal....pay the lenders insurance as it costs little for stuff under 300K and you will get back 30-40% back via tax deductions over 5 years. Also, where possible capitalise into your loan.

3. Look for 6% plus returns in areas with good infrastructure. Don't let anyone tell you that stuff other than bludechip areas are bad. You make the most money in these areas.

4. Repeat the process over an over....this is the secret to overall success.

All the best ...

Hi, I'd like to introduce myself, my name is Chris and am currently in my final year of Uni . I've been on these forums before, however have recently started to read a lot more.

I have saved small amounts, however once Uni finishes my savings should substantially increase. I have been thinking about property a lot and attempting to work out plans for my first couple of investment properties. I'm thinking of attempting to obtain a few IP's before buying my own home (PPOR), any opinions on this?

Say if in two years time I have $40,000 in savings on say $45k pa. I decide to purchase my first IP for $350,000 on an IO loan. I'll use $20k as a deposit and use the rest for fees/stamp duty and as a small buffer (Loan stands at $330,000). As an example I'll treat the interest rate at 7.5% with a 5% rental yield. So in this case, interest = $476 p/w , rent = $336. I would experience a shortfall of $140 p/w.

How much of this $140 p/w would be deductible? And also what other aspects of IP1 is deductible?

At the same I'll set up an offset account linked to this loan, and anything I can possibly put into this account will go in.

In several years time, assume this property is worth $450,000. Can I utilise a LOC on this loan of say $30,000 to use as a deposit onto IP2 valued at $400,000?
If so, is 100% of the interest on the LOC deductable as it is used for investment purposes?
Is it correct in saying that it is better to use a LOC so that you don't cross-collateralize with the previous loan.
Or am I going down the wrong track here, and can LOC's only be used on PPOR's?

Sorry if much of what I've said doesn't make sense, I have only been reading this stuff over the last week and haven't been able to stop thinking about. It would be really helpful if i could be given any advice tips, or if I'm looking too far ahead .

For those that read all this, thank you

-Chris

 

[silversands]

Just be aware that if you only save 40k (good effort by the way) toward a $350k i.p - you won't likely have 20k left for your buffer after deposit and all associated fees costs. You may need a little more if you want that buffer in place.
All the best with your planning.

 

[eggnog]

your shortfall is not quite complete. you have to factor in quite a few expences to achieve a more realistic weekly shortfall. just to name a few with example figures per annum to give you an idea:

Council rates (house on land) - 2,000
Strata fees (units/townhouses) - 1,500
Insurance (home and contents) - 500
Insurance (landlords) - 250
Property management fees - 11% of rental
Rental vacancy - 2-4 weeks of rental income
Mortgage professional package fee - 400
Maintenance - 1,500
Accountants fee at end of year for tax prep. - how long is a piece of string

With these hypothetical (but realistic) figures your weekly shortfall would pretty much double.

 

[Jonathon]

And land tax as well, about $500-$1,000 per year on a $400k house.

 

[bigdreamer]

2. Put very little into the deal....pay the lenders insurance as it costs little for stuff under 300K and you will get back 30-40% back via tax deductions over 5 years. Also, where possible capitalise into your loan.

Hi sash, can you elaborate with this point to another beginner please?
Hope you don't mind, Chris, in a similar boat!

 

[jaycee]

Hi sash, can you elaborate with this point to another beginner please?
Hope you don't mind, Chris, in a similar boat!

He's saying to borrow as much as you can, even iover 80% of the property value for which the banks will charge lenders mortgage insurance.

Capitalising into the loan means including your purchasing costs in your loan amount also.

Ozperp, Think he already understands LOC & cross collateralising. He asked if a strategy one could deploy is to use an LOC for a deposit on another IP to eliminate need to cross collateralise properties to qualify for the loan. Is he right or wrong ?

 

[13910]

Chris, my best advice to you is dont let analysis paralysis take hold. It's the starting that stops most people because of it.

As someone Chris' age, in a similar situation, I can say Rixter's advice is very, very valuable. I'm hoping to snap out of the paralysis any day now...maybe.

My advice is spend a lot of time reading about everything property (particularly strategies) to help with defining what you're comfortable with. Knowing your boundaries is very important - spot your flaws (we all have them) and surround yourself with people that poses those missing qualities. If you're not comfortable carrying huge debt, don't. Not difficult, there's no right or wrong, you just need to take a moment to define what your approach is and ensure you don't go beyond those guidelines.

That's not to say, however, that your boundaries can't be redefined as you learn more (they should!), just that you need to recognize what your position is so you can call time out if you ever find yourself in a situation that doesn't fit within your boundaries.

Cheers
Greg

 

[13910]

He's saying to borrow as much as you can, even iover 80% of the property value for which the banks will charge lenders mortgage insurance.

For instance, I bought my temporary PPOR last year with a 100% loan (two weeks before they stopped being offered) and my tax return. So my up front costs were less than my tax return - $2800 from memory.

Comes back to what I said above - if you're comfortable operating above the 80% Loan-Valuation-Ratio, and make sure you have a good, hard think about it, then do it. Less than 12 months on, after a $7000 renovation, my LVR is 79.2% - but I'm more than happy to run a high LVR at this point in my life, and am about to blow it out for property number two.

Cheers
Greg

 

[Perp]

Ozperp, Think he already understands LOC & cross collateralising.

The question suggests otherwise to me, but OK...

He asked if a strategy one could deploy is to use an LOC for a deposit on another IP to eliminate need to cross collateralise properties to qualify for the loan. Is he right or wrong ?

I still think this question betrays a confusion between a loan product and a strategy. Using a LOC neither requires nor eliminates cross-collateralisation. Whether you have to cross-collateralise or not is about what equity you have in each property and what security the lender will accept, not about whether you use a LOC, P&I loan, or I/O loan.

I think perhaps you're both asking "Can you pull equity out of IP1 to fund the deposit on IP2 without having to cross-collateralise?"

Yes, you can.

So if you have IP1, purchased for $300K, now worth $450K, for example, you can have it refinanced to a new limit of 80% of value, or $360K. You keep your existing debt on IP1 at $300K, and take out a new loan (usually with the same lender) for $60K, which you use as a deposit for IP2. Let's say that $60K represents a 10% deposit on a further $400K property ($40K), plus $20K stamp duty, legals, LMI, etc.

You end up with:

IP1: Worth $450K, loan 1 (for IP1) $300K, loan 2 (for IP2 deposit) $60K
IP2: Worth $400K, loan 3 (for balance of IP1) $360K

The three loans could be LOCs, P&I loans, I/O loans, or a combination of all three.

Loans 1 and 2 would usually be with the same lender, because otherwise the lender for loan 2 is a second mortgage, and I don't think many (any?) lenders would find that acceptable (though I'm open to being corrected on that). Loan 3 can be with a different lender than loans 1 and 2, though, that's not a problem. You have to weigh up the benefits of splitting business between lenders (protection from the all monies clause, less exposure to lender policy changes etc), and the potential advantages of keeping a larger bundle of business with one lender (potentially larger rate discounts and the lender feeling more confident to lend to you, thus possibly higher LVRs).

And I didn't answer last time, Chris: you can use any of these three loan types for either an IP or a PPOR (in principle). In terms of taxation and flexibility, an I/O loan plus a fully offset account is, IMHO, the ideal set-up.

 

[devo76]

And land tax as well, about $500-$1,000 per year on a $400k house.

Do you have to pay land tax on your first property in vic. No threshold !!!

 

[akust0m]

Thanks everyone for all their input, it has been of great benefit and has opened my eyes a little more. I do plan to dive into property investing within a few years from now, however my current goals are to finish Uni (November ) and to find a decent job; I've actually begun to consider a career in real estate. After then I just need to save as much as possible to begin my property investing future
Again, thanks everyone for their input. If anyone has any questions in regards to anything stated in this thread, please feel free to keep posting.

-Chris

 

[jaycee]

I think perhaps you're both asking "Can you pull equity out of IP1 to fund the deposit on IP2 without having to cross-collateralise?"

Yes, you can.

yeah exactly what I thought he was double checking.. I wasnt asking myself this time, you're thikning of months ago when you and other explined a lot of this stuff to me, Im hopefully about to do it very soon