Considering first IP - and it's rural.

[Candy]

PPOR is small acres (40acres). The plan is to acquire a second, larger rural block for us to farm, making the interest on both properties a primary producer tax write off amongst other benefits (for us - I get that this isn't for everyone, but it's our goal)

We are confident and comfortable approaching the business and farming side of running the property. My question here is more about that 'sleep a night' factor of the amount of debt and risk this would require. Having spoken to a mortgage broker about a block we like it seems that we would need to refinance our PPOR back up to between 90-95%, and hold a mortgage of 80% over the second property.

Now I know it's 'good' debt but in truth rural is a different beast - it doesn't increase in equity as quickly (where we are anyway) and as soon as we touch the block and change it from 'lifestyle' to 'productive' the banks won't allow us to refinance it again until it drops below 50-60% LVR. Rural sales aren't terribly quick either - if we run into trouble it will be a slow painful process to get back out of it again if we're relying on the sale of a rural block. Reality is our PPOR is much more saleable, so we're keenly aware of the risk to that.

Like a rental IP we expect to get money out of the property to contribute to the repayments abd the running of the property (our figures for that are actually pretty good after the first 12 months) but we could service both mortgages on our incomes (just).

I'm fairly risk adverse so even just writing this out has helped my thought process. I'm interested in other's thoughts - in your experience(s) how risky does this sound, given the necessary LVRs and the circumstances of rural property?

Also I've been having trouble finding qualified views on the outlook of the rural property market, would buying now be buying the top or bottom of the market?

Thankyou.

 

[Aaron_C]

For acreage used for income producing purposes you will have to go down the commercial finance route. LVRs are quite low here (~50%) and interest rates are also quite high too. 80% is a pipedream unfortunately...

 

[Candy]

80% is quite realistic for the specific block we've found, and no commercial finance required. It's a unique window of opportunity and the reason we're considering this now rather than waiting till our current property builds more equity.

 

[Player]

Herron Todd White

...................... Also I've been having trouble finding qualified views on the outlook of the rural property market, would buying now be buying the top or bottom of the market?

Thankyou.

Hey Candy, can't help you on any finance advice or LVR opinion nor on the state of the rural outlook, however if you subscribe to "The Month in Review" from Herron Todd White, there is a section on rural markets. Comes out every month. Here's a link to current Dec 2012 edition:

http://www.htw.com.au/Month_in_Review/Month-In-Review-December-2011.pdf

Subscribing is free and may be a start for your own research.

Good luck

 

[Rolf Latham]

I'm fairly risk adverse

On that basis, what others think that arent emotionally or financially connected to the outcome would not influence your decision.

There is more to risk than just LVR per se.

if you have busloads of serviceability and dont need either the income or tax benefits generated, then its a much lower risk than if you need regular income to get by

ta
rolf

 

[Candy]

Thanks Player - I'll look into that.

On that basis, what others think that arent emotionally or financially connected to the outcome would not influence your decision.

There is more to risk than just LVR per se.

if you have busloads of serviceability and dont need either the income or tax benefits generated, then its a much lower risk than if you need regular income to get by

ta
rolf

Thanks Rolf, your last point there is particularly helpful. Re the other, I'm not looking for someone to change my mind or tell me what I want to do is not risky, I'm after experienced opinions on whether that would constitute a particularly high LVR. If I had my way there'd be no debt, but that's not realistic I'm trying to develop a feel for what's 'acceptable' risk to people who have done it successfully.

"Learn from others mistakes, because you'll never live long enough to make them all yourself"



Cheers,
Rach

 

[Aaron_C]

80% is quite realistic for the specific block we've found, and no commercial finance required. It's a unique window of opportunity and the reason we're considering this now rather than waiting till our current property builds more equity.

I'm not really sure what you mean by that...even normal acreage that can be used for residential purposes (and can therefore get a normal residential loan) has limitations of up to 70% LVR only, and most lenders won't even lend you money at all. If you then change it to an income producing asset you are in breach of your loan agreement and will have to go down the commercial finance route. You can't have it both ways - surely your broker has explained that to you.

 

[Reality Cheque]

PPOR is small acres (40acres). The plan is to acquire a second, larger rural block for us to farm, making the interest on both properties a primary producer tax write off amongst other benefits (for us - I get that this isn't for everyone, but it's our goal)

We are confident and comfortable approaching the business and farming side of running the property. My question here is more about that 'sleep a night' factor of the amount of debt and risk this would require. Having spoken to a mortgage broker about a block we like it seems that we would need to refinance our PPOR back up to between 90-95%, and hold a mortgage of 80% over the second property.

Now I know it's 'good' debt but in truth rural is a different beast - it doesn't increase in equity as quickly (where we are anyway) and as soon as we touch the block and change it from 'lifestyle' to 'productive' the banks won't allow us to refinance it again until it drops below 50-60% LVR. Rural sales aren't terribly quick either - if we run into trouble it will be a slow painful process to get back out of it again if we're relying on the sale of a rural block. Reality is our PPOR is much more saleable, so we're keenly aware of the risk to that.

Like a rental IP we expect to get money out of the property to contribute to the repayments abd the running of the property (our figures for that are actually pretty good after the first 12 months) but we could service both mortgages on our incomes (just).

I'm fairly risk adverse so even just writing this out has helped my thought process. I'm interested in other's thoughts - in your experience(s) how risky does this sound, given the necessary LVRs and the circumstances of rural property?

Also I've been having trouble finding qualified views on the outlook of the rural property market, would buying now be buying the top or bottom of the market?

Thankyou.

If you can service both mortgages on your other incomes then that helps to remove the main risk associated with farming and that is variability of income.

The rural property market basically followed the trajectory of the residential property boom so it could be argued that rural is at or around it's peak.
Personally I'm not so sure. I'm actually very bearish about residential / commercial property at the moment but fundamentally I can't see rural land coming down much. Tighter lending conditions may have a dampening effect but food security is going to be a massive issue going forward and as much as I hate the term "it's different this time", I think it may just be different this time for the rural property market. There is already an immerging trend of companies putting together properties to gain the scale necessary to attract overseas investors. And there is no shortage of them. A rural agent mate told me of some inspections he done recently. Three cashed up Indians looking to invest in agricultural land here with 800 million to spend between them. Somehow I don't think these blokes are going to be affected by tighter lending conditions!

Yields on grazing land have also gone up dramatically with record commodity prices and the good seasonal conditions as you would well know. At least now you can go close to justifying the price of land.

You're right in that rural land can be hard to move quickly if you run into trouble. I manage this by buying rural land that has the potential to be subdivided. It not only turbo charges your returns when you go to sell but can be a valuable insurance policy if things go wrong .

RC

 

[Candy]

If you can service both mortgages on your other incomes then that helps to remove the main risk associated with farming and that is variability of income.

The rural property market basically followed the trajectory of the residential property boom so it could be argued that rural is at or around it's peak.
Personally I'm not so sure. I'm actually very bearish about residential / commercial property at the moment but fundamentally I can't see rural land coming down much. Tighter lending conditions may have a dampening effect but food security is going to be a massive issue going forward and as much as I hate the term "it's different this time", I think it may just be different this time for the rural property market. There is already an immerging trend of companies putting together properties to gain the scale necessary to attract overseas investors. And there is no shortage of them. A rural agent mate told me of some inspections he done recently. Three cashed up Indians looking to invest in agricultural land here with 800 million to spend between them. Somehow I don't think these blokes are going to be affected by tighter lending conditions!

Yields on grazing land have also gone up dramatically with record commodity prices and the good seasonal conditions as you would well know. At least now you can go close to justifying the price of land.

You're right in that rural land can be hard to move quickly if you run into trouble. I manage this by buying rural land that has the potential to be subdivided. It not only turbo charges your returns when you go to sell but can be a valuable insurance policy if things go wrong .

RC

Thanks RC. that's some really helpful insights. Appreciate you taking the time

 

[locko24]

Hi Candy
Sounds as if you're in a similar position to me. My mid term goal is to spend around a mill on some acres around where I currently am. Cattle and crops would ne ideal. What bank was going to give you an 80% lend? Best i've seen is Suncorp with 70%, though I havent looked in depth, as its still a little way off, and likely to change!

 

[Aaron_C]

You can't get acreage for income producing purposes at an LVR of 80%...she is mistaken unless she is talking about a cross collateralisation.

 

[locko24]

You can't get acreage for income producing purposes at an LVR of 80%...she is mistaken unless she is talking about a cross collateralisation.

So I'd need 50%?
Bugger.

 

[Aaron_C]

So I'd need 50%?
Bugger.

Pretty much And lenders get fussy too about the type of soil etc in the ground so it's not so straight-forward.

 

[locko24]

Pretty much And lenders get fussy too about the type of soil etc in the ground so it's not so straight-forward.

The type of soil? Fussy b@stards!!!

 

[Candy]

Hi Candy
Sounds as if you're in a similar position to me. My mid term goal is to spend around a mill on some acres around where I currently am. Cattle and crops would ne ideal. What bank was going to give you an 80% lend? Best i've seen is Suncorp with 70%, though I havent looked in depth, as its still a little way off, and likely to change!

Hi Locko24,
If you are looking for a ready made commercial property then yes, you will need the much higher deposit. If you are willing to be a bit flexible in the land/improvments/location and other factors, you can get up to 80% pending case-by-case evaluation.