Did you overextend yourself buying 1st IP - Importance of Buffer

[Alex P Keaton]

It can be a bit overwhelming at times packing. Just feels like so much to do. But I'll just take it step by step. 1 area at a time. First step is to make the place less cluttered so it will look presentable for the marketing photos. Photos will be taken beginning of next week.

 

[Dazz]

Hi Kim,


The most impressive thing by far is your shedding of the 30kgs.


Have you popped 30kgs of sand in a backpack and popped it on for a while and lugged it around...just to relive exactly where you don't want to go back to.


Great stuff.

 

[Alex P Keaton]

Hi Kim,


The most impressive thing by far is your shedding of the 30kgs.


Have you popped 30kgs of sand in a backpack and popped it on for a while and lugged it around...just to relive exactly where you don't want to go back to.


Great stuff.

Thanks!

It has been tough work! It has been like a 2nd part time job for me.


haha come to think of it, i did kind of. Twas approx a 20 kg weight though. I was giving my niece a piggy back ride from the park cos she was too tired and I ran part of the way. haha. I should've carried the 7 year old. She told me she weighs 28. I turned her down cos I thought she might be a bit too heavy for me. lol Next time I'll have a try.

I also had great fun running amok on the play equipment at the beachouse. its great being able to move well again and have the flexibility and energy to play with my neices and nephew! It totally has transformed my life. Wow what can I say!

 

[Alex P Keaton]

I now have $7 K in savings. I have had unexpected regular health bills that I've been paying as well so havent been able to save anything.


Ok so goal is at least $20 K savings this year.

Well it is now Jan 1st 2013 and this time last year I had 7 K in savings.

I now have approx $20 K in savings. I'm pretty happy with the amount I've saved. I still have a $2600 roof bill I have to pay but oh well. I think I'll try to stick it out for another year with mum and dad and not move out until I have at least $30 K in the bank. I really do miss living by myself but I think it'll be worth it to last here a bit longer to build my buffer up a bit more.

On the topic of my IP. Its still negatively geared and will be so for a couple more years I think. I thought I'd have bought property number 3 by this stage but my 1st ip set me back a bit. Oh well you live and learn dontcha! Next one I buy i'll make sure I get right.

 

[westminster]

Good to hear you made your goal of having a good buffer - the buffer is what the roof bill is all about. Big bills like that can wreck all your plans if you don't have that buffer.

So in the next year will you save for IP #3?

Did you end up looking at sorting out the xcoll and getting a better rate on your loans? Is your buffer in an offset to use it to it's best advantage?

 

[china]

Did you end up looking at sorting out the xcoll and getting a better rate on your loans? Is your buffer in an offset to use it to it's best advantage?

Just a quick question for my own education. Is there any role for putting cash in offset if you don't have any debt on PPOR and just have fully tax deductible interest only loans for cash flow positive IP?

 

[Aaron_C]

Just a quick question for my own education. Is there any role for putting cash in offset if you don't have any debt on PPOR and just have fully tax deductible interest only loans for cash flow positive IP?

Yes of course. Saving on interest is the best - deductible or otherwise.

 

[china]

Yes of course. Saving on interest is the best - deductible or otherwise.

So if I take out a line of credit loan for 500k secured with unencumbered PPOR and use that 500k as deposit on 1 mil IP, are you suggesting that I should take 500k from my savings account and place it into offset for this loan?

And then what about the second loan of 500k secured by the Ip? Should I have cash in offset for this second loan as well?

I suspect that both these loans will require redraw facilities in case I need my cash back.

My intention is to pay interest only for both these loans as these loans are purely for investing and tax deductible.

 

[westminster]

So if I take out a line of credit loan for 500k secured with unencumbered PPOR and use that 500k as deposit on 1 mil IP, are you suggesting that I should take 500k from my savings account and place it into offset for this loan?

And then what about the second loan of 500k secured by the Ip? Should I have cash in offset for this second loan as well?

I suspect that both these loans will require redraw facilities in case I need my cash back.

My intention is to pay interest only for both these loans as these loans are purely for investing and tax deductible.

China - money in your offset it yours to use whenever you need.

I am using offset to reduce the amount of interest I need to pay - yes that interest is tax deductible but it's more financial sense to reduce your mortgage payments than claim it against tax.

 

[Aaron_C]

China - I suggest you ask your CBA banker about the specifics of it but in a general sense it works like it.

 

[savoys]

Alex, well done on your efforts during the past year, you were determined to hold on to the two properties, and you have done it, so that's great. How have the values been over the past 12 months?

 

[china]

China - I suggest you ask your CBA banker about the specifics of it but in a general sense it works like it.

Thank you Aaron and Westminster. It is making much more sense now as to what to do.

I take out two loans, line of credit, interest only repayments. Hopefully, loan interest about 5.2% or less, variable. I find IP gross yielding 7%. Then I take cash from savings account and hold it all in offset with redraw facilities. That way, I get to control an IP with none of my money and have essentially "repaid" the entire loan at the same time. So instead of cash in savings account earning 4% and interest being taxed at 46%, I get to control an IP generating 7%, also taxed at 46% but with the chance of capital growth. So the cash in offset has diminished the holding cost of the IP.

 

[westminster]

Thank you Aaron and Westminster. It is making much more sense now as to what to do.

I take out two loans, line of credit, interest only repayments. Hopefully, loan interest about 5.2% or less, variable. I find IP gross yielding 7%. Then I take cash from savings account and hold it all in offset with redraw facilities. That way, I get to control an IP with none of my money and have essentially "repaid" the entire loan at the same time. So instead of cash in savings account earning 4% and interest being taxed at 46%, I get to control an IP generating 7%, also taxed at 46% but with the chance of capital growth. So the cash in offset has diminished the holding cost of the IP.

Or you could offset let's say 50% so you try and reduce that 46% tax somewhat. Sit on the fence - you can increase the offset at any time if you choose you don't want to pay interest.

With your beautiful cash savings you need to do lots of modelling to work out what suits your risk profile and your income needs.

Your other bonus is depreciation. If you were to build or buy relatively new then you get depreciation which really is money for jam

If you were to release via LOC $500k from your PPOR I would perhaps build a duplex or a triplex costing 1-1.2 mill

 

[china]

Or you could offset let's say 50% so you try and reduce that 46% tax somewhat. Sit on the fence - you can increase the offset at any time if you choose you don't want to pay interest.

With your beautiful cash savings you need to do lots of modelling to work out what suits your risk profile and your income needs.

Your other bonus is depreciation. If you were to build or buy relatively new then you get depreciation which really is money for jam

If you were to release via LOC $500k from your PPOR I would perhaps build a duplex or a triplex costing 1-1.2 mill

Many thanks for your input.

Lets say I have a 200k tax bill per year. On a 1 mil loan on 5% rate, it means that that I would be able to deduct the entire interest bill on tax. (50k) So it may make no sense to 100% offset and just leave the cash earning interest in savings account?

I suspect that I will not find a new or newish IP in sydney gross yielding in rent 7%. If they existed, I suspect that they would be in these large thousand unit developments that carry no capital growth. To get depreciation, I understand that the IP needs to be under 7 years old.

At this stage, this is all new to me so I think that building is far beyond my capabilities.

I am trying to get into property investing with the minimal impact on my life and cash savings.

 

[Alex P Keaton]

Good to hear you made your goal of having a good buffer - the buffer is what the roof bill is all about. Big bills like that can wreck all your plans if you don't have that buffer.

So in the next year will you save for IP #3?

Did you end up looking at sorting out the xcoll and getting a better rate on your loans? Is your buffer in an offset to use it to it's best advantage?

Thanks yeah and a $30 K buffer will definately be needed when I buy the next one and have 3 properites. There are all kinds of expenses that pop up. Not sure when I'll buy # 3 yet. I want to be neutrally geared first I think. Maybe a couple of years away I'm thinking.

Nah didn't unxcol. I'll stick with it till I buy number 3 and then see what I'll do then. Yes buffer is in my offset

 

[Alex P Keaton]

Alex, well done on your efforts during the past year, you were determined to hold on to the two properties, and you have done it, so that's great. How have the values been over the past 12 months?

Hi Savoys, thanks.

My highgate ppor property that I bought in 2008 for around $250K would most likely be valued at anywhere between $300 - $330 k ish. Another unit sold for $330 K about 6 months ago and it was fully renovated. Mine is renovated apart from the bathroom. I might get low $300's but i'm not sure.

The dianella ip that I bought for $210 hasn't increased in value much. Not sure but maybe I could get $10 or $20 k more for it but I dunno.

I dont really have the equity atm to buy another one plus i'm still negatively geared so in the next couple of years whilst my ip becomes more neutral I'll continue to save more money and by then hopefully i'll also have more equity in my properties and increased rental return. I should be able to move forward then.

 

[westminster]

I've just realised that you are most likely a Perth gal.

Love to see you at the next SS Perth Catch up.

 

[wobbycarly]

Many thanks for your input.

Lets say I have a 200k tax bill per year. On a 1 mil loan on 5% rate, it means that that I would be able to deduct the entire interest bill on tax. (50k) So it may make no sense to 100% offset and just leave the cash earning interest in savings account?

Keep in mind you will pay tax on the 4% (?) that you earn on the interest.

I suspect that I will not find a new or newish IP in sydney gross yielding in rent 7%. If they existed, I suspect that they would be in these large thousand unit developments that carry no capital growth. To get depreciation, I understand that the IP needs to be under 7 years old.

You can "get" depreciation on property of any age. It depends on a lot of factors. But the 2.5% building depreciation will only apply to properties < 40 yrs old. However, even 100+ yo properties can have some depreciation. eg. new AC 2 years ago? Hot water system recently? Renovations?

At this stage, this is all new to me so I think that building is far beyond my capabilities.

I am trying to get into property investing with the minimal impact on my life and cash savings.

 

[Alex P Keaton]

$30 K in cash savings now!!!

Well it is now Jan 1st 2013 and this time last year I had 7 K in savings.

I now have approx $20 K in savings. I'm pretty happy with the amount I've saved. I still have a $2600 roof bill I have to pay but oh well. I think I'll try to stick it out for another year with mum and dad and not move out until I have at least $30 K in the bank. I really do miss living by myself but I think it'll be worth it to last here a bit longer to build my buffer up a bit more.

An update December 2013:

I hit $30 K in savings !!!!! I have $30,400 in savings now woohoo. It took me 2 years to get there and its really starting to snowball now as rents have increased. The next $10 k will be saved even faster. I would have saved a few thousand more if not for that $2600 roof bill.

Even though I would like to move back to my place (and doesnt everyone!) I'm tempted to stay on for longer here. I resigned the tenant for another 6 months until July. I'm thinking of aiming for $50 K in savings before leaving. This could well and truly set me up for the future. I think if I focus extra hard I can have $50 K in my bank in 18 months time! and move back to my place mid 2015.

I really want to invest mid - late 2015 but I dont know if I am financially ready for it. All I know is I would have to buy something with positive cashflow as I dont want something negatively geared again. This time I will be using OPM and none of my cash savings. I will either fix the loan or make sure I can afford IR at 10% IR. I will also have my large cash buffer to allow for unexpected expenses. This time I will see a mb and then go to my accountant to do the calculations for me so I know exactly what Im getting into and I will need to be able to afford it whilst living at my place and not just whilst living at mum and dads.


PPOR loan $175 K - * Valued at minimum $360 K - Rented out for $330 per week
IP loan $200 K - * Valued at minimum $250 K - Rented out for $290 per week
Both loans are cross collat with ANZ

* I havent had my properties valued, these are just guesses

What would you do in my situation? Would you invest sooner rather than later? and how would you go about it if you were me?

Positive cash flow property for my next ip purchase in 2015 or would you wait a few more years until rents have increased more??

My ip is negatively geared by around $1,500 after tax per year.

edited to say: My payg is $60 K as a permanent substantive government employee

thanks for your help!

 

[Alex P Keaton]

My highgate ppor property that I bought in 2008 for around $250K would most likely be valued at anywhere between $300 - $330 k ish. Another unit sold for $330 K about 6 months ago and it was fully renovated. Mine is renovated apart from the bathroom. I might get low $300's but i'm not sure.

Wow, the renovated unit in my highgate complex mentioned above sold for $330,000 18 months ago. Today i'm sure it would sell for a lot more than that.

I'm thinking my ppor would be valued at at least $360 K now with the way Perth has moved over the past 12 months!!