Buying our first IP with OPM



From: Anonymous

Hi All -
I'm really excited to discover this forum! I've been reading up on IP, but it makes a big difference to actually hear other people's opinions, especially at this early stage. I'm just a bit nervous about sharing intimate financial info, hence the anonymous post.
I'd appreciate some feedback on our situation:
We bought our unit in Sandringham (Melbourne) in December last year for $251,000. We had a 20% deposit, so borrowed $200,800. We have only actually paid off about $5000, the rest of our money sits in an offset account linked to the mortgage. We have $150,000 in this account. My partner is on $55K, and I'm on $85K, but our work history has been a bit patchy - we've just had a six month honeymoon, and before that were both working on contract for a few years (but our current jobs are permanent).
Our next step is to buy an IP, but I don't think we have enough equity to be able to borrow 100% for an IP without having to use up our cash. We will look for a similar property here in Sandringham, so another unit worth around $250K.
Any thoughts?

Mr & Mrs F.
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Reply: 1
From: Rolf Latham

Hi Anon

You could likely put something together based on the equity of your exisitng property.

Your main problem will be our friends tha Mortgage Insurers. They dont like it if you have an "unusual" work history.

Having said that I feel that a (and there goes that cut and paste line again - find a good independent mortgage broker and befried her/him). They can help you present your case in such a way that the mortgage insurers may wear a 90 % refinance of your exisitng plac and a 95 % lend on the new one.


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Reply: 1.1
From: Anonymous

Thanks for your feedback Rolf.
What about this as a plan:
1. Take 100K of our cash and buy a property in Ballarat, which will then earn us rental income to feed back into the loan for our own home.
2. Use the equity in the Ballarat property to get a loan for a property here in Melbourne, negative geared. I figure that with 100K equity, we can get (100K*80%)*5=400K. Because as contractors we worked through our own company, we were never "unemployed", and can still show a decent amount earned over the whole year. Also, we work in IT - an area where a large proportion of staff are contractors. For what it's worth, we both stayed at the same place (a bank and a stockbroker) for two years full-time on rolling contracts before taking our break to get married. If we can't get a 100% loan, we'll just have to use up more cash, but that would be OK.
We then have a) a reduced tax bill, b) extra income from the Ballarat property, and c) we still haven't touched the equity in our home, which we can use for another property in the future.
As far as I can see, the only real drawback is that we are taking cash out of our offset, so increasing the interest payments on our own home. I think the value of buying IP sooner rather than later offsets this, and that we can still pay off our home within 5 years.
What do you think? Also any comments on capital growth or yield in Ballarat? I read somewhere that capital growth is often less in country towns but yield is higher, but I believe Ballarat's growth is on a par with Melbourne. Also, with the expansion of suburbia to the west, the impending fast rail link, and improved road links the growth could be even greater. It's also an area I know well, and the growth I've seen there since my school days (15 years ago!) appears solid.

Mr & Mrs F.
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Reply: 1.1.1
From: Sergey Golovin

How much do you get on $150K as offset account? Would be about 5-6%? Would be about $8-9K? Which is about what $170-180 per week?

Maybe you can buy 3 properties in country for $140-150K each with $50K deposit towards each of'm. You probably will get after all expenses 50-60 dollars positive cash flow, which is 150-180 dollars per week total (just rough guess).

May be capital growth is not as spectacular as in the city, but you have got 3 properties and hips tax deductions and offset against you and your partner salary.

Or have look from another point of view.
It was mentioned here on the forum just recently - how much can you get out rental property right now in the city 5% perhaps and in country well, 6%? You can have same amount of money out term deposit. Only question is why would you do it.
To avoid any uncertainty -
May be you can keep your money where they are.
Waite till market settles down and buy then.
Capital grows will slow down by then but the rent will go up.

But then again if you after capital grows now you would be better to buy property now and wait for the rent go up later.
May be you would be better of to talk to good mortgage broker (sure it is few of’m in Melbourne) and tell’m the whole story. Ask them what are the options. Is it possible to buy it in the country, will they lend you money you need? Or maybe you can borrow money locally – in the country, if it is easier that way.

Anyway let us know what was the outcome please if you do not mind.

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Reply: 1.2
From: Dale Gatherum-Goss

Hi Rolf!

I enjoy your posts and often pick up some good ideas from them, but, this one amused me on many different levels. . . .

Having said that I feel that a (and there goes that cut and paste line again - find a good independent mortgage broker and befried her/him).

Is that a little like deep fried. I'm not that keen on all that oil, but, the visuals are wonderful!!


PS I'm just teasing, so please don't anyone take offence, I respect Rolf's advice.
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Reply: 1.2.1
From: The Wife


not into deep fried brokers...

but how about a BBQ with a couple of deep fried bankers!MMmmm theres a tasty treat!

deep fried gazumpers for dessert!

~Life is a daring adventure, or nothing at all~
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Reply: 1.2.2
From: Rolf Latham

Hi Dale

Make mine stir fried - Dont like all that grease ! Gee should make better use of the spell cewhc shouldnt I.


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From: W W

Just an observation

'As far as I can see, the only real drawback is that we are taking cash out of our offset, so increasing the interest payments on our own home.'

If you had a LOC on your own home and took this money out it would be tax deductible if used for investment purposes. But not with an offset account.
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From: Anonymous

Thanks all for the feedback. Yes, you're right, and we've revised our plans slightly - we have paid 100K of that cash into our mortgage, so we can now borrow against it to buy another property instead of buying it outright. This gives us the tax credits, as it is a loan for investment purposes. It also means that the property we buy is in the clear, so we can borrow against that equity when we're ready for the next one.
Another question - the properties we're looking at buying are only around 120K (in Ballarat), and our equity is 150K. I know the banks will try and get their hands on everything they can, but I believe I only need to use about 30K of that equity to get a 130K loan. What experience have others had in only using part of the available equity? Won't the bank try to grab as much collateral as they can, and what's the best strategy for stopping that?

Mr & Mrs F.
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From: Michael G


It doesn't hurt to talk to a good mortgage broker to discuss your options.

Speak to a couple if need be.

Their product is finance, get them to do the leg work, and ask lots of questions.

Michael G.
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