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From: Melissa London




Hi All,

Another newbie & very inexperienced!!!!

Love this forum & all of the input. Just what I've been looking for. No jargon, just real life experience in property investment.

Can anyone help with some advice

I've have done this back to front. ie bought an investment property 1st & now buying my own home!!!!

The IP was a positive investment. Property value $185K; amount borrowed $104K; Rent $240pw; loan repayments $179pw.

I have a letter of offer for a line of credit on the same property to purchase my own home without refinancing the ANZ loan for $182,000 @ 7.75%. The IP was a positive investment but now that I've borrowed against it again will it become a negative investment? Will I then own my own home (where i reside) outright & can I then borrow against that to purchase another investment property?

Also I am not working, so have no income that I can gear the IP against. The other big issue for me to get my head around; Is how do I build a property portfolio whilst still having a disposable income from it? It seems to me that i need to be ploughing all rent received back into the mortgage & whilst that would pay the properties off quickly, I would be very short of spending money.

All views & opinions humbly sought

Regards
Mel
 
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Sim

Administrator
Reply: 1
From: Sim' Hampel


On 4/28/01 5:20:00 PM, Melissa London wrote:
>
>I've have done this back to
>front. ie bought an investment
>property 1st & now buying my
>own home!!!!

That's not a problem... many people recommend getting into investment property first, as the tenant helps pay the expenses, and most expenses are tax deductible, so the government helps out a bit too.

>The IP was a positive
>investment. Property value
>$185K; amount borrowed $104K;
>Rent $240pw; loan repayments
>$179pw.
>
>I have a letter of offer for a
>line of credit on the same
>property to purchase my own
>home without refinancing the
>ANZ loan for $182,000 @ 7.75%.

Hmm... if I understand you correctly, you have:

1. IP worth $185K
2. Loan against IP for $104K (is this the current outstanding balance ?)
3. Own home about to be purchased, value up to 182K ??
4. Offer of a LOC cross-collateralised over the two properties for $182K
5. The LOC is separate to the original loan for the IP.
6. The intention is to use the $182K from the LOC to fund the entire purchase amount for your own home thus allowing you to purchase your own home without any cash outlay up front.

>The IP was a positive
>investment but now that I've
>borrowed against it again will
>it become a negative
>investment?

The very first thing you have to understand is that it is the purpose of the loan, not the collateral that determines the tax deductibility. In this case, your original investment loan ($104K) was used to purchase in investment property, and as such the interest is tax deductible.

Now, the LOC which will be used to purchase your new home is used for non-investment purposes and so the interest is NOT tax deductible, regardless of the fact that the LOC is partly secured by the investment property.

So by my books, strictly speaking, in answer to your question of "...will it become a negative investment?", I would answer that your investment does not change... it is still a positive investment - (I assume) the original loan is still in place and the rent received more than covers the repayments.

The issue arises that you now have another non-investment loan that adds $182000*7.75% = $14105pa in interest to your repayments. This is about $271pw. Of course there is no principal repayment considered here either.

Now you indicate that at the moment you get rent of about $240pw and have loan repayments (original loan) of $179pw. So that leaves you with $61pw clear. Now even ignoring expenses, the $271 per week from the LOC is no where near covered by your rent income, so you will need to find a lot of extra income from somewhere to pay this thing off.

>Also I am not working, so have
>no income that I can gear the
>IP against.

Hmm... so how are you intending to fund the shortfall ? In my books it looks like you are going to be very overcommitted if you purchase this house for you to live in and unless you have alternative sources of income that you haven't mentioned, you will not be able to finance the debt.

This is curious, as I am wondering why the bank agreed to the LOC when your DSR is so bad ? Either you didn't tell the bank the entire story, or you haven't told us everything ?

>Will I then own my
>own home (where i reside)
>outright & can I then borrow
>against that to purchase
>another investment property?

No, your own home will be (I assume) encumbered by the LOC. The only way I can see the bank lending you the 182K from an LVR point of view (ignoring the DSR for now), is that they have cross-collateralised. In other words, while the original loan is secured against the IP only, the LOC would most likely be secured by a second mortgage on the IP plus a first mortgage on the house you purhcase for yourself. The mechanics of this may be slightly different, and a mortgage broker would be able to explain it in more detail and more accurately. So, no... you will not own your own home outright.

>The other big
>issue for me to get my head
>around; Is how do I build a
>property portfolio whilst
>still having a disposable
>income from it? It seems to me
>that i need to be ploughing
>all rent received back into
>the mortgage & whilst that
>would pay the properties off
>quickly, I would be very short
>of spending money.

Yes, you are correct. If you have no external income to fund the repayments of the IPs, you must plough the rent received back into the mortgage.

Now, if you have sufficient excess cash available from rent received, you could make the minimum P&I repayments on the mortgage, and then anything left over is yours to spend (once the tax man has taken his bit - including his bit of the principal repayment component - ask an accountant or tax advisor if you don't understand this). Then as the property increases in value, you could access the equity in that property to fund further purchases without further cash outlay.

Of course, if you have no external income this method will most likely take quite some time to get you a significant income stream to live off of. Take Jan Somers' strategy. She indicates that you would be looking at 7-10 years minimum, and possibly 20 years or more to achieve the goal of having enough income to retire on. This depends on a lot of factors though, so is only a guide.

Mel, unless I am totally misunderstanding your situation, it seems as though you are getting yourself into more debt than you can actually service. This is bad.

I am not qualified to give advice on anything I have said in the posting. Everything I have written so far is my non-professional opinion only (and is not to be taken as advice).

I will give one piece of advice though... if you have not already done so, I highly recommend that you speak to a suitably qualified accountant or similarly qualified person to go over your financial situation and help you work out whether you can actually afford to do what you intend and to help you work out a financial plan for increasing your income as you seem to want to do.

 
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