Been following SS for awhile ... and

[arashi87]

Currently I only own one IP and recently got mortgage approval/valuation done. Turned out to be "good news" that is 15% increase in value than purchase value (off-plan). And I got loan to the market value...so i can use the excess 80% x 15% of the current value to purchase more properties...( i guess that's how everyone is purchasing more and more properties, through capital growth and gets more loans off bank...

One problem which i couldn't work out is: Each property gets re-valued when IO loan's period expires and changing institution. If the market unfortunately declines, the property value will decline in certain % as well...if that happens, IP1 will need either more loan (80%+) or payout the difference...

BUT if IP2 bought from IP1's equity...and IP3 from both IP1+2 and so on...when the market declines, how is it possible to hold onto them? How do people hold onto 5 properties through cycles with IO repayment?

Seem to me no matter what price purchase at, we all want to get more equity during boom period, eventually the cycle will reach its trough and loan is due for re-value at that period...doesnt that force people to sell one or two of their IP to keep up with other IPs?

There must be something missing that i don't know of!

 

[RPI]

I'll let the mortage brokers answer that one.

Welcome to the forum, it is an outstanding source of information

 

[A Jeremy]

Positive gearing from day dot means serviceability isn't a problem.

Inflation and growth causes your equity to increase.

Never selling maximises the effects of both. I would never suggest being so close to the edge that a decline (of the size seen in the last 25 years) in value or return puts any of your portfolio at risk.

When people employ high risk, high gain they can fly close to the sun but we all make our own decision about how aggressively we want to play the game.

 

[see_change]

The more aggressively you purchase new properties , the higher the risk but the greater the reward .

It's a balancing act between equity , serviceability from rent and income and sleep at night factor . Some people are happy to take bigger risks

IMHO you always want to have a buffer . What happens if you loose your job or have problems getting a tenant ? Do you have income protection ? Do you have relatives who can help you if you get into trouble ?

When you are younger , you can make a case for taking bigger risks .

We've never borrowed the maximum we could have except in our super fund where the borrowing limits are much more conservative . We've always had quite sizeable buffers available .

It's easy to get caught up in the hype on the forum about buying multiple properties.

When people start talking about buying multiple properties , in most situations I know personally , they have been buying cash flow positive or neutral properties or they already had equity in their PPOR ( our situation ) . A 15 % increase isn't that much , and a portfolio built on properties purchased by withdrawing the maximal equity available and using all of that equity to purchase new properties without leaving a reasonable amount available as a buffer is obviously at risk if your income from rent and job stop.

Although it's very uncommon for banks to revalue and decrease loan amounts when property values go down it has happened . The one situation I know personally know involved a multimillion dollar commercial portfolio . The owner hadn't missed a payment , but when the GFC hit, the bank came in , decrease LVR's and wanted money back . Eventually sending the investor bankrupt .

Cliff

 

[Tyla]

What is generally considered reasonable amount of buffer? 6 months salary? Is LOC appropriate for buffer?

 

[A Jeremy]

It's subjective and based on your circumstances.

All of my properties are positively geared and then a bit so $10k each is sufficient for me. Putting that money in an offset account is a neat way to slightly lower repayments while having immediate access.

 

[Jamie M]

What is generally considered reasonable amount of buffer? 6 months salary? Is LOC appropriate for buffer?

All comes down to your own risk profile and what you're comfortable with.

There was a good thread on here not long ago about this - I tried to dig it up but had no luck.

Cheers

Jamie

 

[Terry_w]

One problem which i couldn't work out is: Each property gets re-valued when IO loan's period expires and changing institution. If the market unfortunately declines, the property value will decline in certain % as well...if that happens, IP1 will need either more loan (80%+) or payout the difference...

A property won't be valued when coming off an IO loan. It would only be valued if increasing the borrowings against this property or if refinancing.

If values have dropped then increasing the loan won't be possible, but you generally will not be asked to pay the loan down or to pay LMI. They will let the loan run its natural course.