Another q on investment - xcollateral etc :)

[boosta88]

Hi there

I have been a forum troll and decided to post today.

My story:
Wife and I have been putting in every extra dollar into the home loan, sold previous home 2-storey townhouse (strata) 2 years ago that enable us to buy into a house with the value per council at $430K. Friends gave me grief for selling the townhouse, should have kept it blah blah – done and dusted, I wasn’t comfortable with a $600K loan at that time.

Now I think we are in a better position (though plans for kids end of 09 – 1 income) hence researching in real estate again and looking for an IP mainly in units low to mid $200Kish– thanks Rob Williams for advice, also had the ‘pleasure’ of being Presiding officer for 5 years!

30K owing to bank (fixed rate expires in Sep 09 – 7.4% with offset account)
80K owing to family – can take my time but not going to abuse

Example:
Price $260K ($240k property + $20K stamp duty, transfer, extra reno etc etc)
Strata – 300 / qtr = 1200 / yr
Water – 120 / qtr = 480 / yr
Council – 650 / yr
SA Level – 150 / yr

We did some quick calculation based on sole income (gross) of $53k, rent of $200/wk:
$2000 / month (P & I) – interest, council rates, water, property mgt fees etc included
$1800 / month (I) – interest, council rates, water, property mgt fees etc included
so I will be out of pocket ~ $1000 to $1200/month

Have spoken to my mortgage broker who suggested:
1) I do cross-collateralisation to use the equity of my house to buy the IP, the money that I have to raise as deposit (have saved $10K, with take at least 1 more year, end Dec to hit $40K) to pay off the bank when it expires next Sep (non deductible) and slowly to my family.

2) That I do P & I on my IP – I was a bit surprised when he suggested this as I thought interest only will be to go but he mentioned that I have no other debts beside the $80k I should just aim to own the IP unless I wish to purchase another IP or shares further down the track.

My questions:
Is cross-collateralisation the way to go without me raising the deposit?

Should I just park all $$ into the “newly created offset account” for IP – (no tax) or set up high interest savings account to put aside some cash for payment to the family (tax).

The units are probably built in 1960-70s so I don’t think depreciation can be used. I have not spoken to an Accountant yet as I never had one before, any recommendations in Adelaide?

I hope I have not confused anyone and I look forward to hearing your views.

Cheers
boosta88

 

[Rob Williams]

Maybe next time, you could give a bit more detail in your post
Whoever told you to go P&I for your IP with a view to paying it down over time hasn't got on board with Bill Zheng's view that a mortgage is an asset as, over time, inflation erodes the value of the mortgage and the money that is used to pay the interest. For example, you borrow $250k to buy a property worth $250k (just to keep it simple). Let's say in 10 years time the property is worth $500k. You still owe the bank $250k. However, it's not the same value as the $250k you borrowed 10 years ago. Over time, inflation has eroded it's buying power. Why would you want to pay it down? It gets smaller while the asset increases in value. The "spread" represents an increase in your wealth.
Some people say cross coll like it's a dirty word. I don't agree. I have bought 2 properties that would not have been possible without cross coll'ing a freehold unit that I had always regarded as my "Black Chip", my fallback position. I was able to fund these 2 units using my Black Chip to keep the LVR at 80%. My choice was 1) Don't X Coll, like a lot of people suggest and not grow the portfolio or 2) X Coll for these 2 properties and build the asset base so I control more property that will grow over time. To me it was a no brainer. All my other loans are stand alone, so my SANF works for me.
Of course, you could always just get a LOC or loan extension on your existing property, then take that to another lender and slap it on the counter as yoru deposit. That would leave both loans stand alone.
You won't get building depreciation, but there are still lots of other depreciable items in such a property - hot water, window treatments, floor coverings, A/C etc etc. They still add up and help you at tax time.
Yo haven't confused me. I'm confused most of the time, anyway

 

[Twitch]

You need a new mortgage broker. Don't do any deal with this one, they have no idea about structuring investment loans.

 

[BayView]

Use some equity from the PPoR for the deposit and purchase costs using a LOC, or similar with an offset account.

The balance of the funds for purchase using a separate loan - interest only. Can be with same lender or other lender.

You can still pay down the principal if you wish, but you have the choice not to as per what Rob Williams said. Contrary to what others may say, I recommend paying down (investment) debt when you get the chance.

Some people like to fix the rates as well, but this limits you to how much principal you can pay.

One of our excellent MB's on this site will help you with the correct structure.

 

[Gools]

You can still pay down the principal if you wish, but you have the choice not to as per what Rob Williams said. Contrary to what others may say, I recommend paying down (investment) debt when you get the chance.

Only once your PPOR mortgage is payed off though.

You still should be able to find some 2 bedroom units selling for <$260k that will be able to get more than $200/week rent as well in Adelaide. I suggest if you are using real figures then you should look a bit harder for a better deal.

The rest of the advice all sounds good.

 

[Rolf Latham]

Hiya

Smells like you have an ABL fixed rate loan on the PPOR.

In general, many people would prefer to raise the deposit and costs on the PPOR as a separate small loan, and then do an 80 % loan on the new IP>

Thus the 2 securities are separate and can be placed with 2 diff lenders if required.

As to PI for the IP, nah, look to save some money in the offset to pay out the 30 k in the PPOR loan and then to pay out the family loan.

If you are ok with savig money, PI is rarely the most flexible option.


ta
rolf

 

[SupaRex]

Some people say cross coll like it's a dirty word. I don't agree. I have bought 2 properties that would not have been possible without cross coll'ing a freehold unit that I had always regarded as my "Black Chip", my fallback position. I was able to fund these 2 units using my Black Chip to keep the LVR at 80%.

Hi Rob,

I've x-colled all three of my properties eek, but the thing that caught my eye was that you seem to have done so to keep your LVR at 80%.

I was happy to pay LMI for a number of reasons: It allowed me to borrow more money and the LMI is tax deductible.

As someone who was happy to x-coll, I'm wondering what your thoughts are on "using the power" of LMI to allow you to borrow more?

 

[Rob Williams]

As someone who was happy to x-coll, I'm wondering what your thoughts are on "using the power" of LMI to allow you to borrow more?

If I had to pay LMI, I would gladly do so if it meant the ability to buy another property. In fact, my daughter has just bought her first IP and she will be paying LMI as it's better to do that than delay buying in order to save a greater deposit.
However, I'm not being too agressive with my strategy, hence "festina lente" - hasten slowly.
I'm trying to strike a balance between building a portfolio of blue chip properties as quickly as possible, while stretching myself financially yet in such a way as to walk away with a decent quid in my pocket if the strategy comes unstuck.
My next purchase will likely be a 90% lend and I'll be up for LMI. I'll regard it as a cost of doing business and the price I pay for growing the portfolio.
My LVR is currently just under 70% overall and will go to just under 75% with another purchase.
One investor will say I'm being aggressive while another will say I'm a wimp and being too conservative. That's fine by me. I know my circumstances, objectives, risk profile and lifestyle
Those are my thoughts for what they are worth.