Confused and novice

[marshall-lee]

Hi there
My husband and I are attempting to get started with our first IP. We have a $650 000 home with $68 000 owing and earn 120K income, we have 3 tiny children. We read the Jan Somers book and it all made good sense and we found a highly recommended and successful mortgage broker who came to explain it all to us. She explained that by using our home capital to set up 2 lines of credit that you use 1 line for deposits and the other to fund expenses, rent goes into the latter as well as tax refunds and also the deficit comes out of here so as not to decrease one's current lifestyle or income. Once this account is depleted you then top up with capital from the increased value on the investment property.
This seems like a nice idea BUT with what pitfalls? I understand that this way ensures less capital at retirement but isn't the idea that you are generating income from rent by then? The broker suggested that the target is not just retirement but good quality of life for the whole journey, this would seem to make good sense. Several people we know have done it this way and the broker herself has 15 properties with good capital using this method?
What have others done, the whole funding issue I find difficult to get my head around?

 

[Bazza]

Sounds like you are on the right track. We borrow via a LOC on our PPR then use this as a deposit on an IP putting down 20% from the LOC and borrowing 80% from another bank.

It is best to use different banks or they will cross collateralize the loans and use all properties as security in case of default.

The biggest problem that we have had is when we came off fixed term loans to the new (+3%) interest rates which was a bit if a shock. Now we make sure we have at least $50k buffer just in case we need it.

Good Luck.

Bazza

 

[Qlds007]

It is one way to structure the loan but whilst you still have a non deductible debt on your current home i prefer to attach an offset account to that part of the loan and have the LOC separate as Bazza has mentioned.

Each IP loan is then standalone at 80% LVR being topped up from the LOC on the PPOR.

Try where possible to avoid X collateralising the securities.

Once you have completed and are comfortable with the formula repeat exercise again and again and again.

 

[Rolf Latham]

Hiya

All I can suggest is for YOU to make sure you get comfy with what you are doing.

Just because XYZ have done it and have great results in a different place and time may not mean that you may end up with the same result using the same cookie Cutter technology in todays environment.

There are a number of "groups" promoting the St George Portfolio as a cure all. While this is good product mix, Id agree with Richard that an offset for the Home split is usually better.

Once you understand your needs better, you will be more emotionally comfy with it all, and thats where you tend to make better and and faster inroads.

ta
rolf

 

[moyjos]

If you want to maybe even more confused
One of our lovely forumites has given us FREE tickets to the Property Expo

http://www.somersoft.com/forums/showthread.php?t=44690&highlight=property+expo

It is in 2 weeks in Brisbane

Cheers
Sue

 

[WillG]

She explained that by using our home capital to set up 2 lines of credit that you use 1 line for deposits and the other to fund expenses, rent goes into the latter as well as tax refunds and also the deficit comes out of here so as not to decrease one's current lifestyle or income. Once this account is depleted you then top up with capital from the increased value on the investment property......
The broker suggested that the target is not just retirement but good quality of life for the whole journey, this would seem to make good sense.

It sounds like your mortgage broker has some good ideas. You should take some time to digest and understand them. The advice sounds 'borderline' financial advice using one particular package (LOC's).

Listen to what the broker suggests your 'Target' should be but take some time to set your own 'Target' and timeframe to get there

 

[jingo]

Hi there
My husband and I are attempting to get started with our first IP. We have a $650 000 home with $68 000 owing and earn 120K income, we have 3 tiny children. We read the Jan Somers book and it all made good sense and we found a highly recommended and successful mortgage broker who came to explain it all to us. She explained that by using our home capital to set up 2 lines of credit that you use 1 line for deposits and the other to fund expenses, rent goes into the latter as well as tax refunds and also the deficit comes out of here so as not to decrease one's current lifestyle or income. Once this account is depleted you then top up with capital from the increased value on the investment property.
This seems like a nice idea BUT with what pitfalls? ?

There are some very real pitfalls with the strategy mentioned above. You will in effect be using the LOC to fund the deficit in your cashflow. I would be inclined to set up the LOC's as suggested, but use the second LOC as a safety net in case of an emergency and fund the deficit from your income.

The pitfall in capitalizing interest is that your properties may not have increased in value when the LOC has been full drawn. This can lead to financial difficulty if you don't have the income required to service your IP and the LOC.

Instead of using your existing equity to fund a deposit, you may prefer to save up a deposit and leave your PPOR unencumbered. This would be a slower way to building up a portfolio, but it would be very safe.

Regards Jason.

 

[Peter_Tersteeg]

There are some very real pitfalls with the strategy mentioned above. You will in effect be using the LOC to fund the deficit in your cashflow. I would be inclined to set up the LOC's as suggested, but use the second LOC as a safety net in case of an emergency and fund the deficit from your income.

I agree with Jingo. Using your equity to fund the cashflow shortfalls is a useful strategy, but for a first time investor I'd advise against it. If you've got a reasonable income you should be able to manage the debt without any serious issues on the first IP or two.

Get a few investments under your belt, understand where and why you've made money, then look at a more aggressive strategy.

 

[redsquash]

if you top up with capital, I hope you realise you are just increasing your debt level to a point where you may struggle to meet your interest repayments.
and expenses
of course selling the ip solves the problem provided the growth covers all expenses.Additional you need to plan for a market dive as a worst case scenario.
This topping up is a bad idea if you are a buy and hold person, but some do it.
Some do it better than others
You need to be very confident you know the pitfalls and problems in an adverse market. In a strong market you have more leeway to make mistakes

 

[Bazza]

Instead of using your existing equity to fund a deposit, you may prefer to save up a deposit and leave your PPOR unencumbered. This would be a slower way to building up a portfolio, but it would be very safe.

No one ever got rich by saving money. How do you think people buy 30 IP's - by playing it safe?

marshall-lee, you have plenty of equity and providing you factor in a buffer there is no reason why you can't do as well as the rest of us. With $120K income you should be able to fund the shortfall easily. Go for it.

Cheers,

Bazza