Buying First Property, am I doing the right thing?

M

mckennal

I am about to purchase my first property. After reading through these forums a lot, and reading Jan Somers/Craig Turnbull's etc books, going to seminars etc, here is what I have come up with.

This is my current situation:

23 years old. Earning an average wage (40-50k / yr). Live in Perth.
Renting a house with a friend (cost per week for me: $100).

I have a fair amount of cash (savings) in the bank now (about $40k).

Basically my medium term goal (5-7 years) is to have a PPOR and 1-2 IPs. Long term goal is to retire young (45ish). I am trying to work out the best way to achieve this. This is how I plan to do it, just want to make sure Im not making any mistakes (taxation(ATO)/FHOG/borrowing etc):

1. Get an IO loan for 95% of the purchase price of my first property (initially a PPOR - getting the FHOG - cost around $180-200k), capitalising my mortgage insurance, with a 100% offset account attached - to park my remaining cash in to cut down on interest costs. (My mortgage broker has found a bank that will do this for me.)
2. Live in this first place for 6-12 months.
3. Move out, rent it, start deducting everything from this point on.
4. Place I will be moving to is probably another rental property (not owned by me) and live in this place for a period of time, probably paying around $80-100/wk rent.
5. Buy another property to move into (PPOR) when I have enough money/equity. Being sure to take my cash out of my offset account of the IP loan and put it into the loan attached to my new (PPOR) property. From here I hopefully go through the process again of living in the property for a while, then make it into an IP.

I was reading one of Jan Somers book's the other day (Building Wealth in Changing Times) and it stated her ideal timeline of how to get started with IP's and her steps were something like; buy a PPOR, wait a few years to build equity, borrow against this to buy IP number 1, save a bit more, borrow more for IP number 2 etc etc. Now, I dont know if my situation is any different, but it seems better for me to follow the above steps that I am planning?

If anyone has any things to be wary of, or any glaring oversights on my behalf, then please reply in this thread. Do I need to speak to (and pay) an accountant?

Hmm... this is a big post. Sorry about that. Just wanted to introduce myself :)

Luke
Perth
 
Sounds good to me. Be aware that plans can be changed and probably will change as you progress in life ... wife, kids ....

It is good to get the loan on your first PPOR right first off otherwise things get complicated. 100% offset accounts are a good way to sort this out.

I am not a fan of LMI but if it helps you acheve your goals then go for it. I like to have 20% equity in allo f my properties (PPOR & IPS's) this gives me a level of comfort and eliminiates the need for LMI.

Good luck,
Will
 
Hi & welcome

I would think about the number of moves you are planing to make. IMHO stay in your new PPOR and use your CG for the next buy and consider having your friend move with you to help cover your costs.

bundy
 
Will: wouldnt putting in a 20% deposit just mean I end up with a higher loan on my next (PPOR) house that is not a tax deduction? Or am I missing something...

Bundy: I would do that, except my friend (about the only one I want to live with) wants to buy a house too, so he doesnt want to stay renting for too long.

Thanks for the helpful replies.

Luke
 
mckennal,

Leaving 20% in the properties gives you a margin for tough times.

Also after you've bought around $1M of property you have to start shifting down to 80% and lower anyway as the LMI is not usually available.

It doesn't mean you have to have a higher loan on the next place - that's up to your finances when you next buy....you might be able to pull equity out of the first place.

Cheers,

Aceyducey
 
Hi Luke,

Firstly, congratulations for saving 40K by the age of 23! Took me longer than that to save for my first!
I agree with points 1,2,3,4 but 5 is not necessary as you won't get FHOG. The only reason to live in your second purchase would be to get the capital gains tax deduction on sale as it would be your PPOR.
If you plan to buy and hold (not sell) so avoid capital gains tax forever, there is no reason to move into your second purchase. You don't get the tax deductions while living in your own property. You will enjoy better cashflow and fast track your wealth if all of your mortgages are being paid by the tenants and the taxman. You could continue to rent without the burden of non tax deductible debt.
This is just my opinion and my own method, hope it helps.

Good Luck,
Crystal
 
Go the max LVR you can get.

20 % cash locked up in the property when you hit tough times wont help you, whereas having 15 % sitting in the offset acct will

ANZ and/or Bankwest are likely to do this for you at quite nice rates too with 100 % offset on Interest only even IF its an IP

ta

rolf
 
Hi Luke,

>Will: wouldnt putting in a 20% deposit just mean I end up with >a higher loan on my next (PPOR) house that is not a tax >deduction? Or am I missing something...

I understand you are using mortgage insurance as a tool to give you flexibility and maximise your tax deductions when you turn your PPORs into IP's.

How much will the mortgage insurance cost ?. Do you have more detailed numbers for your first PPOR ?. Do you intend on borrowing the Stamp Duty as well ?

Cheers,
Will
 
Thanks for all the help, here are some more detailed numbers:

Property purchase price: approx $190k
LMI: around $3.5k
5% deposit -> loan of $184k (96.8%)

I wasnt intending on borrowing the stamp duty as well. I thought there was some exemption from tax deductions for stamp duty?

Rolf: Im with you on that :)

Crystal: good point, I will probably try and do that if I have a (cheap'ish) place to rent at the time.

Aceyducey: If I decide to live in the next place though, the purpose of the loan becomes my PPOR and hence no tax deduction, so doing a redraw would mean less tax deductions if thats the case. Is that right?
 
Originally posted by mckennal
If I decide to live in the next place though, the purpose of the loan becomes my PPOR and hence no tax deduction, so doing a redraw would mean less tax deductions if thats the case. Is that right?
Click to expand...

Yes - but you are saving money & positively gearing your IP right?

Use that for the PPOR deposit, not equity in an IP.

BTW, I wasn't recommending you keep 20% in your IP, just responding to your concern that 20% would mean less for your PPOR & explaining why people choose this position.

Frankly, in your situation Crystal's suggestion is probably a good one.

And personally I'm not a fan of negative gearing - who needs tax breaks when you can earn more income :) - I want the hospitals & roads to be there when I need them.

What's a bankrupt? Someone with too many tax deductions :D

Cheers,

Aceyducey
 
Hi Luke.

Congratulations - you are in a great position for your age. I like your plan. I agree with Rolf - small deposit and the rest in an offset account for greater flexibilty. You have obviously done your research.

Don't forget that you can only have one PPOR at a time - and this can last up to six years once you shift out and make your PPOR an IP. So there is probably no point in shifting in and out of houses often. Yes make the first one PPOR - you then get the Grant, move out and it will remain free of capital gains (for tax if you happen to sell) for 6 years. Because you can rent so cheaply, I would be inclined to keep doing that and buy next IP's without shifting into them first. Then just before the six years is up on house no 1, either shift back into it, or shift into another to nominate it as your PPOR.

I think you may find your life could be quite different in 6 years time:)

Good Luck
Lily
 
Thanks for all the replys. I like your idea Crystal and Lily. I think I will try not to move into my second property, with any luck I will be able to continue renting fairly cheaply, and then Ill have two IPs to start racking up the deductions on.

Now I just need to find a place. Been trying for a couple of months now, its hard to find a place!

Luke
 
LMI good in the early days

Hello,

I'm a fan of LMI!!!!!!!

but firstly let me qualify that. I'm a fan of LMI in the early days when you are starting out.

The reason is this. Assume you were buying a property that cost $100K, but you only have a deposit of $5K, which represents a 95% lend, you'd have to pay say $3K.

So effectively you have to earn $7,500 to put away $5,000.
If you were to save the $20K, you'd need to earn $30K.

It costs you $1.50 to put away each $ of savings.

With LMI added you'd pay $500 ($7,500 + $3000) more to be in a home at a 95% lend.........but you'd be in one _now_ as opposed to later, enjoying 5% cap growth today. LMI is also deductable over 5 years.

Once you have 1 or 2 places, you should have substantial equity behind you and can go again at an 80% lend.

It's all in the leverage
 
For what it is worth, Yesterday, like the_captain, we had a very neat strategy laid out in front of us by Steve Navra.
I would suggest that you consider attending such an event, so that you have the right structure from the start. It could only get easier the longer you stay at it.
 
Definately GeeVee.......nice to meet you on the weekend by the way.

Getting a good structure in place is definate.ly key.........as too is havinga plan.
 
I have another question, this one is about claiming a deduction for the LMI.

If I capitalise the LMI (add it on top of my loan), can I deduct the entire amount (about $3.5k) over 5 years still (even though I havnt actually *paid* up front for it)?

Given my marginal tax rate is about 30%, that would mean that over the next five years I would be able to receive about $1000 as a tax refund (0.3*$3.5k), and I will have paid approximately $1000 (0.06*5*$3.5k) in interest. Is that right? Can I claim the interest payments on the LMI as a tax deduction as well? (meaning I would actually come out ahead over the next 5 years using LMI?)

Ta, so much to learn!

Luke

PS: GV and the_captain, I have heard of those seminars, I will look out for when the next one in Perth is.
 
Your way of explaining the LMI is very good The Captain.

I am also with you on being in the market as opposed to buy later.

I don't pay LMI now but paid for my PPOR and ist IP, simply because I a was impatient. But I am glad now I was .

Congrats to mckennal for looking to but at 23. not many I know at that age is interested in IPs. And yes interest and cost is tax deductible
 
Originally posted by dtraeger2k




The 2nd weekend in August actually. A few of us from the forum are going, more info is available on his website. Check this at http://www.navra.com.au/courses.html
Click to expand...

Hi Dave,

Well . . . Perth is half asleep ZZZZZZZZZZZZZZZZZZZ

Only 11 people booked in . . . is it worth doing when Sydney and Melbourne are booked out months in advance . . . 100's on a waiting list for the next course???

I'm thinking of converting Perth into a single evening event and doing another Melbourne course instead.

Watch Meeting Place for more details . . . unless Perth suddenly wakes up ... :D

Regards,

Steve
 
Steve,
I would love to go to the Perth event. Only problem is the weekend it is being held on I am almost definately going to be away :( A single evening course might even suit me better :)

Luke
 
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