Am I ready for Second IP?

Hi all,

I would like your opinions if you think I am ready/able to purchase my 2nd IP...

Details:
IP1 valued at ~$210000 - currently owe $95000.
Looking at IP2 for ~$250000. Have pre-approval for $300000 using 20% deposit from IP1 equity.

Monthly repayments for the 3 loans would be a total of ~$3000. After expenses the total rent would be ~$1320. So I will need to pay $420 p/week from my wage. Is this too much debt? I am 24. I am currently living at home but will have to move out at some stage :)

I am currently earning ~$55000 p/year. Can you see any other things I need to be considering?

Your comments?
 
G'day Brad,

You're doing pretty good for someone aged 24. Well done.
So I will need to pay $420 p/week from my wage. Is this too much debt?
I guess you don't see it as a big problem (and neither does your Bank, with a $300k pre-approval). So, I'd say "Go for it".

Can you see any other things I need to be considering?
Well, you may want to look at IDWV (a way to get your Tax refund paid into your weekly wage). You may find the holding costs will drop your costs to $200 - $250 a week if you employ this (see your Accountant)

Have you purchased a Depreciation Schedule for IP1? Do the same for IP2 when you get it. It all helps.

What is your future plan? e.g. are these IP's a way to grow wealth into the future, or are they going to buy you a PPOR with minimal mortgage (at which point you sell them off to buy your PPOR?)

If looking at keeping these IP's (and growing into the future) you might consider the structure you want to use (again, talk to your Accountant re the various Trusts available - and quiz him on what they can do for you).

Just a few thoughts (I'm sure that others will be adding to these).

Regards,
 
Les,

Thanks for your comments.

Yes - I will ask about a tax variation to keep the money in my pocket and make it easier to pay the loans off week by week.

Yes - I got a depreciation report completed on IP1 and have received some good cash returns from this process.

At this stage I am just focusing on buying some IP's and eventually will use some of this equity to buy my PPOR in the future. There is no pressure to leave home.

More comments welcome...

Brad.
 
Hi all,

I would like your opinions if you think I am ready/able to purchase my 2nd IP...

Details:
IP1 valued at ~$210000 - currently owe $95000.
Looking at IP2 for ~$250000. Have pre-approval for $300000 using 20% deposit from IP1 equity.

Monthly repayments for the 3 loans would be a total of ~$3000. After expenses the total rent would be ~$1320. So I will need to pay $420 p/week from my wage. Is this too much debt? I am 24. I am currently living at home but will have to move out at some stage :)

I am currently earning ~$55000 p/year. Can you see any other things I need to be considering?

Your comments?

How much are you saving at the moment from your after tax income? That will determine whether you can make up the cashflow (which is not as bad as you say because of tax benefits anyway). If you're not paying board, you should be able to save around 70%-80% of your net income (deduct board as necessary).

Well done for having done all of this by 24.

At your age, your income should go up from now on. Get used to living below your means, and I can honestly say from experience (like you I had 2 IPs by the time I was 24, and I was only making $35k when I got my first one) that now is the BEST time for you (in terms of life stage, not necessarily market cycle, but who cares if you have a 30 year time horizon) to buy property. Spare cash is only going to get more scarce from now on, especially once you have a family.
Alex
 
Alex,

Thanks for your comments.
My Fortnightly after tax income is $1500. I have been paying $500 p/week off current IP mortgage but want to slow these payments down before it becomes positively geared and use some of my $$ on another place. I have been saving a fair bit of $$$ additionally to a savings account. I pay a minimal amount of board. I have also saved the $12000 in readiness for purchase costs on a second IP.

This is my real cross-road moment...

I know it is wise to buy a second IP but don't want the feeling of being locked into big debt at this stage. My current mortage is really manageable. I guess as you said a 30 year term is not a big problem however...

More comments welcome.
Brad.
 
My Fortnightly after tax income is $1500. I have been paying $500 p/week off current IP mortgage but want to slow these payments down before it becomes positively geared and use some of my $$ on another place. I have been saving a fair bit of $$$ additionally to a savings account. I pay a minimal amount of board. I have also saved the $12000 in readiness for purchase costs on a second IP.

Personal opinion only, as always, but I don't think positive cashflow should be a priority at this point for you. You can afford it. Not saying you should go crazy on the -ve cashflow but a bit of -ve cashflow shouldn't be a problem for you right now. Your income will go up, and if you keep your savings ratio you should be ok. In your situation you really should be aiming to get as much gross assets as you can. Of course, you have to be able to comfortably afford the -ve cashflow, but I wouldn't aim for +ve cashflow as a priority. I would aim for 'manageable negative cashflow'.

Note I use '+ve/-ve cashflow' instead of '+ve/-ve gearing'. They're NOT the same, and it's important to understand the difference.

Imagine that you've started a new business, say a coffee shop. Should you aim to make profits on that one cafe, or aim to plough more money into the business and open a few more shops? The former leads to owning, eventually, the neighbourhood coffee shop. It might be very profitable but it's only one. The second might lead to becoming Starbucks. Losses in the early stages of a business is normal, and you're starting a business.

I know it is wise to buy a second IP but don't want the feeling of being locked into big debt at this stage. My current mortage is really manageable. I guess as you said a 30 year term is not a big problem however...

I disagree. This is THE best time for you to be locked into big debt. Why? Because the debt is for appreciating assets, and that lets you use your greatest asset: time. If you want to develop as a property investor, get used to big debt. I mean, would you prefer to have big debt when you're married, have a couple of kids who need to go to private school, and you are first in line to get the chop as part of bloated middle management? Or now, when you basically have no responsibilities, can do what you want with your money with years of rising income ahead of you?

Is the feeling of being locked into debt worth a couple of million extra dollars to you when you most need it? That's the choice you're facing here. I'm at an age when I'm really starting to 'need' money (marriage, buying my own place, possibly kids), and there is a HUGE difference between those who invested and those who didn't. EVERYONE I know wishes they had bought property when I did.

By the time I was 24, I was making $45k a year and had $300k in debt. As long as the cashflow works (i.e. you can afford it), it really isn't a big deal. Looking back, do I regret locking myself into such 'big debt' when I was young (I'm 30 now)? Heck no. Those 2 IPs now form the basis of my portfolio, and all the stuff I've been able to do and will do stems from that.

The younger you are, the more you have to think about the future. Ask someone 20 years older than you whether they would have preferred to buy another (or even one) IP 20 years ago. I bet they would answer 'well, if I had had the money / chance / income I would definitely have bought a / another place!'

You have the opportunity not to have those regrets when you're 45.
Alex
 
Dear Alex,

Thank for you for your most recent post.

I am currently 22, settling on my first IP next week and looking forward to purchasing another sometime next year. Your post really helped to put everything into perspective.

Regards,

J
 
Are your current savings going into a 100% offset account?

Why are you worried about your ip becoming positive?
 
Brad, your numbers look pretty ok to me. Wish I'd started at your age. Tis so much more difficult to do this when you start in your mid-40's. Having said that, I don't think tis ever too late to start. But you are in a great position to go for it.
 
Hiya

Welcome and yeah, well done !

Part of managing the debt is managing some of the manageable risks, 2 obvious ones are

1. rate risk
2. Income protection.

Both of these can make the plan come unstuck if they work against you.


ta
rolf
 
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