Do I get my understanding on the process (mostly) right?

[EN710]

Hiya SS-ers,

IP#1 purchase is *almost* finalised and I want to make sure the my understanding on how the next 2 purchases are correct. All feedback, Qs and criticism welcome - better be wrong now when nothing has happened than when I'm actually in it.

There are questions on different topics here and there (aka. might be a bit long).

Goal
Replace income in 10-15 years to allow my partner and I at least go part-time (Min. 65K net per year)
CF+ (No LOE) Buy approx. 1 property per year, might sell some later on to pay off the loan.

Rough Timeline
IP1 - Settle this Feb 2013
PPOR - Settle Q1 2014 (it's an OTP apartment)
IP2 - Buy end 2014 or early 2015

Finance
IP1

• Ownership and loan under two names
• LVR 97%, nautrally geared before tax at the current loan rate
• Do renovation on IP1 (What's the best way to arrange this? Through PM? How much will it cost for them to do it in general?)
• Revalue, e.g. to increase can get from $190K to $230K
• Refinance at 90% LVR, release $25K + savings for IP2 deposit and costs (or would splitting the loan have any difference?)
• Keep the additional money on the loan until ready to buy. Fund shouldn't pass saving account or offset to keep deductability.

IP2

• Ownership under my name
• Deposit from IP1 refinance and savings
• LVR 90% - 95% (if possible)
• Loan with different bank, not cross collateralised

PPOR

• Ownership and loan under two names (is it possible for the loan to be just under partner's name?) each of us earn about $65 K before tax, after super.
• Savings, will be at least on 40% LVR ($170K ish) when we buy. Currently plan to paid it off in 6 years.
• Currently don't know whether it will be turned into IP (partner doesn't want to consider it until 'we are in the property and think about it')
• Equity probably won't be used for IP unless I can talk to partner into it....

 

[The Y-man]

[*]Do renovation on IP1 (What's the best way to arrange this? Through PM? How much will it cost for them to do it in general?)

What renovation are you thinking of?
Are you intending to have tenants oin there while renovating?

The Y-man

 

[EN710]

What renovation are you thinking of?
Are you intending to have tenants oin there while renovating?

The Y-man

Easy tidy up - Paint, Bathroom resurface (or change it straight.. as it's old and leakey), kitchen tidy up, change carpet. Property is quite below the median and comparable sales for the size, so I am hoping I can move the value and rent a bit up there.

The plan is to do it when it is vacant - current tenancy contract end in March, so if they decide to leave, then I will do it during during transition time. Otherwise, later when they leave.

Though, I am hoping some repairs can be done when they're there (cleaning gutter and roof), leaky bathroom, etc.

 

[Terry_w]

• Ownership and loan under two names (is it possible for the loan to be just under partner's name?) each of us earn about $65 K before tax, after super.
• Savings, will be at least on 40% LVR ($170K ish) when we buy. Currently plan to paid it off in 6 years.
• Currently don't know whether it will be turned into IP (partner doesn't want to consider it until 'we are in the property and think about it')
• Equity probably won't be used for IP unless I can talk to partner into it....

Loan can be under either or both names - but wouldn't affect much.

Why pay it off if it could be used as an investment? I'd suggest a IO loan with offset.

 

[EN710]

Loan can be under either or both names - but wouldn't affect much.

Why pay it off if it could be used as an investment? I'd suggest a IO loan with offset.

The PPOR loan - would it be better for my serviceability if loan under his name? If I want to accumulate more property under my name?

Partner don't like the idea/feeling of not 'owning' the home it as he feels he can get kicked out by the bank anytime - he want to stay at least 5-6 years and not moving every year (we've been renting here and there for couple of years). Note that he's not that familiar with investing (not that I am an expert either)

It took me 6 months to explain why invest in property... i expect it will take longer for to explain why offset is better if we want to move to next place in years, as this unit is 'home' (emotional value to him).

So my solution this time is... get next IP lined up from what I have now (IP1 plus savings) until I convince him ... not really confident about the timing, but well, to make a hole on the rock I can only hammer it one at a time

 

[Terry_w]

The PPOR loan - would it be better for my serviceability if loan under his name? If I want to accumulate more property under my name?

Partner don't like the idea/feeling of not 'owning' the home it as he feels he can get kicked out by the bank anytime - he want to stay at least 5-6 years and not moving every year (we've been renting here and there for couple of years). Note that he's not that familiar with investing (not that I am an expert either)

It took me 6 months to explain why invest in property... i expect it will take longer for to explain why offset is better if we want to move to next place in years, as this unit is 'home' (emotional value to him).

So my solution this time is... get next IP lined up from what I have now (IP1 plus savings) until I convince him ... not really confident about the timing, but well, to make a hole on the rock I can only hammer it one at a time

ah I see.

Well you still have plenty of time to convince him. Do it slowly step by step.

 

[EN710]

ah I see.

Well you still have plenty of time to convince him. Do it slowly step by step.

Haha.. yes, I need to change strategy and approach him on the right time. Whenever I brought up "I think we should do this because it will be better in the long run and more flexible for us", the reaction hasn't been good. Any tips on this?

 

[starter]

Haha.. yes, I need to change strategy and approach him on the right time. Whenever I brought up "I think we should do this because it will be better in the long run and more flexible for us", the reaction hasn't been good. Any tips on this?

Have you tried the Do What I say or you can sleep on the couch strategy?

 

[EN710]

Have you tried the Do What I say or you can sleep on the couch strategy?

I have no couch lol... and if I do this, he will do I am Not Going To Do The Cleaning and Will Be Grumpy All Day Until I Get Spoiled

 

[ScottyB]

Haha.. yes, I need to change strategy and approach him on the right time. Whenever I brought up "I think we should do this because it will be better in the long run and more flexible for us", the reaction hasn't been good. Any tips on this?

Show him a basic calculation of how a bank front loads mortgages so that Capital doesn't start coming off until late into the mortgage.

Then show him a simple offset calculation and he will see the massive difference.

If he isn't convinced by that he is beyond saving

 

[EN710]

Show him a basic calculation of how a bank front loads mortgages so that Capital doesn't start coming off until late into the mortgage.

Then show him a simple offset calculation and he will see the massive difference.

If he isn't convinced by that he is beyond saving

He understand the benefit of using offset to pay loan faster (as I just showed him that we will save thousands of interests), but he doesn't understand how it is beneficial at all to not pay the loan (IO) and put all money in offset if we are going to make it an IP in the future.

Not to mention if I tell him the concept of keeping the loan as high as possible, put all money in offset - pay little interest and use the offset money for next place when we move (so we can keep tax deductibility). I think smoke will come out of his head when I try to tell him this... If he gives me the chance at all

 

[EN710]

More questions..

I assume I will inherit the PM from the previous owner, which is also their selling agency.

Do you usually re-evaluate the inherited PM right away or see how they go for a while before changing to a new one if needed?

 

[Aaron_C]

I assume I will inherit the PM from the previous owner, which is also their selling agency.

That is not true. The previous PM has a contractual relationship with the previous owner. Once you take over, you don't have to continue at all. In fact, prior to taking over you have to either re-engage them yourself or ask them to kindly give you the keys to your property (or to another PM of your choice).

 

[EN710]

That is not true. The previous PM has a contractual relationship with the previous owner. Once you take over, you don't have to continue at all. In fact, prior to taking over you have to either re-engage them yourself or ask them to kindly give you the keys to your property (or to another PM of your choice).

Thanks Aaron. Will look to find one before then.

How do you differentiate someone who's bad, fair enough and great (sounds a bit like interview question..)? i.e. What is the tell tale signs? I might need to make calls to PM there if I can't get recommendations on good ones.

 

[The Y-man]

Not to mention if I tell him the concept of keeping the loan as high as possible...

Just tell him your ultimate dream is to die in debt owing billions.


The Y-man

 

[The Y-man]

Thanks Aaron. Will look to find one before then.

How do you differentiate someone who's bad, fair enough and great (sounds a bit like interview question..)? i.e. What is the tell tale signs? I might need to make calls to PM there if I can't get recommendations on good ones.

Have a look at the threads in
http://somersoft.com/forums/forumdisplay.php?f=28

The Y-man

 

[Terry_w]

Haha.. yes, I need to change strategy and approach him on the right time. Whenever I brought up "I think we should do this because it will be better in the long run and more flexible for us", the reaction hasn't been good. Any tips on this?

Give him an example.

eg.

You: Imagine if we bought a house for $500,000 and rapidly paid it off.
Him: All good.

Y: But what if the house became too small?
H: We would rent it out for $500 pw and buy a new place.

Y: $500 per week is $25,000 per year. Tax on this would be around $10,000 because we would not have many deductions.
H: oh

Y: and we would need to borrow $800,000 to buy the new home.
H: yeah probably.

Y: How much would payments be on a $800,000 loan?
H: $48,000 pa at 6% interest only.

Y: how much of that would be deductible?
N: none because we would be living in it.

Y: so we would have to pay $10,000 extra in tax and $48,000 in interest each year.
H: do you have a better idea?

Y: yes. Instead of paying off our current main residence loan we would use an offset account.
H: How does that work? We would be not paying off the loan.

Y: Assuming we saved all the money we would have paid into the loan and put this money into the offset it would save us the same interest. So we could have a $500,000 loan outstanding with $500,000 cash in the offset account and we would have no interest being charged.
H: how does that help?

Y: When we move to our new home we would take this $500,000 with us and move it to another offset account. this time linked to the new non deductible loan.
H: So when we rent the current house the loan will be still $500,000 and we will be paying $30,000 pa in interest. which we can claim. That would mean we pay much less tax. I am beginning to understand.

Y: So the tax on the investment property would be greatly reduced. Assuming we have some depreciation etc we may not have to pay much tax at all. We may save $8k pa or so just here.
H: You are amazing.

Y: but I have not finished yet. We also save $30k interest each year by taking our $500,000 with us and parking it in the new loan.
H: So all up we save about $40,000 per year for the next 30 years?

Y: Imagine the compounding effect of investing $40,000 pa at 5% for 30 years.

 

[EN710]

Wow, thank you Terry. I haven't thought of presenting scenarios to him this way... Time to get my excel out

Just tell him your ultimate dream is to die in debt owing billions.

The Y-man

... I will be sent to a psychologist

Have a look at the threads in
http://somersoft.com/forums/forumdisplay.php?f=28

The Y-man

Will do, currently in reading list:

http://somersoft.com/forums/showthread.php?t=82652
http://somersoft.com/forums/showthread.php?t=70447
http://somersoft.com/forums/showthread.php?t=76635
http://somersoft.com/forums/showthread.php?t=74072
http://www.invested.com.au/67/selecting-effective-residential-property-manager-4169/
http://somersoft.com/forums/showthread.php?t=71312

Unfortunately I can't threads that have list of PM in Maitland/ Rutherford. I will ask the question when settlement date is closer

Does the average % management fees different for every suburbs in the same postcode? I read somewhere that said it's about 5-6% in Sydney and to expect something more expensive in regional area (up to 8-10% ).

 

[EN710]

Give him an example.

eg.

You: Imagine if we bought a house for $500,000 and rapidly paid it off.
Him: All good.

Y: But what if the house became too small?
H: We would rent it out for $500 pw and buy a new place.

Y: $500 per week is $25,000 per year. Tax on this would be around $10,000 because we would not have many deductions.
H: oh

Y: and we would need to borrow $800,000 to buy the new home.
H: yeah probably.

Y: How much would payments be on a $800,000 loan?
H: $48,000 pa at 6% interest only.

Y: how much of that would be deductible?
N: none because we would be living in it.

Y: so we would have to pay $10,000 extra in tax and $48,000 in interest each year.
H: do you have a better idea?

Y: yes. Instead of paying off our current main residence loan we would use an offset account.
H: How does that work? We would be not paying off the loan.

Y: Assuming we saved all the money we would have paid into the loan and put this money into the offset it would save us the same interest. So we could have a $500,000 loan outstanding with $500,000 cash in the offset account and we would have no interest being charged.
H: how does that help?

Y: When we move to our new home we would take this $500,000 with us and move it to another offset account. this time linked to the new non deductible loan.
H: So when we rent the current house the loan will be still $500,000 and we will be paying $30,000 pa in interest. which we can claim. That would mean we pay much less tax. I am beginning to understand.

Y: So the tax on the investment property would be greatly reduced. Assuming we have some depreciation etc we may not have to pay much tax at all. We may save $8k pa or so just here.
H: You are amazing.

Y: but I have not finished yet. We also save $30k interest each year by taking our $500,000 with us and parking it in the new loan.
H: So all up we save about $40,000 per year for the next 30 years?

Y: Imagine the compounding effect of investing $40,000 pa at 5% for 30 years.

Quick updates

1. Partner now quite happy to proceed with offset. He's still wary since 'it sounds too good to be true' and 'We need professional advise later this year', but the explanation kinda of work
2. IP #1 is settling this week! BA is going to do the pre-settlement inspection, fingers crossed nothing is wrong. I have insurance in place... just not the PM yet...
3. Already thinking about when I can buy the next one... neet to be patient.

Some silly questions:

1. If i have $400K loan and $400K in the offset, technically speaking there are no interest to pay to bank, and the cost involved will the the cost to maintain the loan (e.g. $375 CBA package fees). After the course of the loan is finish (25 years), I also need to refinance it - is this correct?
2. How will my serviceability be assessed with the above? e.g.
   - IP #1 - $180K loan under both name
   - PPOR - $400K loan under both name with $400 K offset - will bank consider the offset and recognise there's no interest paid? Or will they disregard the offset and calculate serviceability based on the P&I for $400K loan?

 

[Aaron_C]

Some silly questions:

1. If i have $400K loan and $400K in the offset, technically speaking there are no interest to pay to bank, and the cost involved will the the cost to maintain the loan (e.g. $375 CBA package fees). After the course of the loan is finish (25 years), I also need to refinance it - is this correct?
2. How will my serviceability be assessed with the above? e.g.
   - IP #1 - $180K loan under both name
   - PPOR - $400K loan under both name with $400 K offset - will bank consider the offset and recognise there's no interest paid? Or will they disregard the offset and calculate serviceability based on the P&I for $400K loan?

1) After 25 years you will need to have paid the loan back or refinanced it. However, after the first 5 year of interest-only you will have reverted to P&I anyway and started that process.

2) No they will assume you owe $400,000 and the repayments from that because you could take that $400,000 out tomorrow and blow it at the casino.