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From: Melissa D


Hi there. I have just finished reading Jan's book and am about to reread again.

Our fixed rate on our P & I loan finishes next week or rolls over again. We have made an appt for this friday to discuss other options. We thought we would look at a credit line loan to prepare for our first investment property. I would like some advice.

1, We have been in our house 10 years now and only have just paid slightly above the rq'd amount. We paid $76,000 and still owe 49,000. As it is a basic house we have outgrown it. How do we start our portfolio and move into a slightly larger house? We can stay here a bit longer but more than another year could be pushing it.
Jan mentioned something in her book about eventually moving into one of your investment properties is this right?

2. Between us we earn approx 55,000 - 65,000. I only earn about 20,00 of that. About 18 months ago we got a valuation and we were a bit depressed to find out it was less than what we paid (we bought in peak season). We are keen to get on the right track but are not anxious to jump into anything.

3. Also one more question I couldnt quite get my head around (sorry beginner). Having an interest only loan at the end of your term are you refinancing with the bank (I am so used to the P & I loans) this is the first I have heard of interest only loans. What you do at the end of a term sounds a bit
hard to get my brain around.

Looking forward to getting started
 
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Reply: 1
From: Jeremy Laws


I explain I/O loans like this.
My Mum and Dad bought the family home they still live in in 1970. The land and house and pool cost $32,000. In 2000 the property was worth at least $750,000. You can barely buy a car for $32,000! If you were the bank, and my my parents had not paid a single cent off that property - would you care? a $32,000 loan on an asset worth $750,000? If you would, then read Jan's book again!
 
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Reply: 2
From: Jas


On 6/12/02 8:59:00 PM, Melissa D wrote:

Hey Melissa,

>Our fixed rate on our P & I
>loan finishes next week or
>rolls over again. We have
>made an appt for this friday
>to discuss other options. We
>thought we would look at a
>credit line loan to prepare
>for our first investment
>property. I would like some
>advice.

You’ve come to the right place, there are a lot of opinions here!

>
>1, We have been in our house
>10 years now and only have
>just paid slightly above the
>rq'd amount. We paid $76,000
>and still owe 49,000. As it
>is a basic house we have
>outgrown it. How do we start
>our portfolio and move into a
>slightly larger house? We can
>stay here a bit longer but
>more than another year could
>be pushing it.

If you paid in peak season for it, and now its valued at less, you might want to stay there for a while longer. As we’re at the end of another boom, anything you buy now will put you in the same boat.

>Jan mentioned something in her
>book about eventually moving
>into one of your investment
>properties is this right?

Yep, Jan mentions that. You need to decide a game plan before you start thou. Is buying an IP now, hanging out in your place for a few years and then moving part of it?

>We are keen to get on
>the right track but are not
>anxious to jump into anything.

Well, make it part of your game plan. “I am going to research my chosen area for six months, and then jump in”

>
>3. Also one more question I
>couldnt quite get my head
>around (sorry beginner).
>Having an interest only loan
>at the end of your term are
>you refinancing with the bank
>(I am so used to the P & I
>loans) this is the first I
>have heard of interest only
>loans. What you do at the end
>of a term sounds a bit
>hard to get my brain around.

At the end of the term, you can start paying of principle. The bank’s idea is that rents will have caught up enough for you to be happy paying it off.

Many investors have the view that the amount of capital gain you get over the years will turn the amount of debt insignificant. The payments you could put towards principle, you can instead use to fund another deposit.

Here’s a simple example.
You buy a place (I/O mortgage) for $100,000. After 5 years at 10% growth, you haven’t paid off a cent. The place is now worth $161051. You have made a gain of 61,051 without doing anything really.
Instead of owing 100% to the bank, you now owe roughly 66%.

Say you have $20,000 from somewhere saved up. You could put that money towards paying off the first place, or you could buy another. Then you’d have two places getting capital growth and so on. If you just pay off the principle, you are reducing your tax deductions (you can only claim the interest portion), and won’t be getting the lovely exponential curve. BUT, if you’re not comfortable with the level of debt, you should think about repaying… and researching more.



Jas

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When facing a difficult task, act as though it's impossible to fail. If you're going after moby dick, take the tartar sauce
 
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