Equity....Refinacing Question[s]

[GeeVee]

OK, we watched the reno kings and the latest crop of understudies, and I take my hat off to them.
I tried to get in on the ACA chat, submitted some questions, but like a great many, mine didn't get picked. I have D/Led the transcript and will read it entirely after.
The fact sheet on the site included 12 factors for succesful property investment. Some nice points.
My question is related to the section on equity.
They say:"When you have added extra equity, refinance, buy another and do it all again and again and again."
Could someone please explain the process of revaluation and refinancing with the aim of being able to use this equity to finance the next purchase?
We have 2 IP's and shares in another 2 with my brother. He is OK with using the equity in one of those.
Currently, we are cross-colateralized with our PPOR and the 2 IP's. One of the shared IP's stands on its own but only has aroud 23K left owing and has been kerbside valued at 130-140K.
There has been capital gains in our area with the 2 IP's gaining about 80K combined.
Who do I talk to? Your views are appreciated.
Thanks. GeeVee

 

[Rolf Latham]

Hi GV

Ballarat has done really well of late.

Pulling equity for further investments is the most common strategy used by investors that want more stock and do not have a cash deposit.

First port of call should be you lender to see where you are at.

Second should be a good independent mortgage broker that can help you to untangle the cross collateralisation which may or may not be need at this time.

If you have 80 k of accesible equity you can hold another 400 to 500 k worth if IPs if your serviceability allows and you can get mortgage insurance for 90-95 % loans.


ta

rolf

 

[dook]

Hope im not stepping on youre thread here gee vee but i have a question for Rolf.


" Pulling equity for further investments is the most common strategy used by investors that want more stock and do not have a cash deposit "

Rolf ......I have always (always meaning the last few months ) been under the assumption that to use a deposit is a last resort to invest with a +ve geared outlook as many a time ive heard it said that anyone can +ve gear with enough deposit.
Is the general opinion to use spare cash to have as a back up or can it be used as a deposit and not be considered as a little backward financialy speaking.
Maybe ive taken some opinions too seriously.


Any comment appreciated.


Thanks "Dook"

 

[Rolf Latham]

Hi Dook

Sheesh, the amount of deposit does not change how a property performs.

A property performs in a cashlow + way when the NET return exceeds running costs including 106 % finance. A bigger deposit will merely dilute the gearing, and will not amplify the return.

Generally, spare cash is tax paid money, whereas equity borrowed is pre tax money.

Soooo, yes minimise tax paid cash deposits simply because that money is best placed into your PPOR offset account. If you own your PPOR and its your final resting place then use as much cash as you want for deposits.

ta

rolf

 

[Skye_30]

See this is what I don't get......
You use the equity in your home to purchase an IP, so therefor the repayments on your loan goes up. Then you refinance your IP to purchase another and the repayments go up again.

So how can you manage to keep doing this and buid a folio?

 

[Kevmeister]

See this is what I don't get......
You use the equity in your home to purchase an IP, so therefor the repayments on your loan goes up. Then you refinance your IP to purchase another and the repayments go up again.

This is where +ve cashflow or +ve geared properties become important. You assume that because your loan payments go up-and-up-and-up that you are dipping into your pocket more. If you have the right investment, the tenant and taxman are making the payments, not you.

If you are -ve geared, this strategy runs out of stream very quickly, because your pockets are not deep enough to keep paying out.

In other words, a person can conceivably have 100's of +ve geared properties, but would be unlikely to have that number (or anywhere near it) of -ve geared ones.

 

[Sim]

Originally posted by Skye_30
So how can you manage to keep doing this and buid a folio?

You can't, unless you have enough cashflow from work income or investment income to cover increased loan payments.

Which is why cashflow positive properties help, because they help to fund the payments of other properties.

Tax deductions would also help reduce the actual amount of cashflow required to hold certain types of property.

 

[bundy1964]

Originally posted by Sim
Tax deductions would also help reduce the actual amount of cashflow required to hold certain types of property.

Hi Sim

Lenders do seem to have trouble understanding that concept though.

Bundy

 

[dook]

Thanks Rolf,
Just takes a little while to sink in i suppose. It all makes sense now. Weather you own youre own place or not obviously has a huge bearing on youre investment strategy.
Thanks everyone for youre help.

 

[Rolf Latham]

Bundy

The tax deductions are allowable in some lenders models, notably St George, Origin and Suncorp

Ta

rolf

 

[stirling]

Hi Dook,

If an investor has a number of properties, the properties held the longest may have a LVR of 40%, properties held for a couple of years may have a LVR of 60%.

To buy a new property you would refinance an existing IP to 80% for a deposit and purchase new IP (Total borrowings 106%)

(Some investors may refinance at more than 80%)

However total portfolio LVR may only be 70%.

I would always refinance at 80% as any excess can be put in an offset account against one of the loans, for a rainy day. (If a low doc loan, may be 75% maximum allowed borrowing).

Stirling

 

[bundy1964]

Originally posted by Rolf Latham
Bundy

The tax deductions are allowable in some lenders models, notably St George, Origin and Suncorp

Ta

rolf

Rolf

I never got that far with St George after they looked at my credit card limit and income from rent going further was a waste of time. Origin is a new lender to me, do they do low doc's?

bundy

 

[GeeVee]

This thread is starting to come back around to my question. (Some interesting comments though)
Stirling: To buy a new property you would refinance an existing IP to 80% for a deposit and purchase new IP (Total borrowings 106%)
Could Rolf or someone explain the process in refinancing an existing IP to a higher level than the original purchase that includes capital gain??? Is this possible?
For example, one of our IP's was purchased for $189500. We Borrowed $193000 to include purchase costs. Currently I would estimate it being valued at 245-250000. How does the comments of Stirling apply???

 

[Rolf Latham]

Hi Bundy

yes Origin do Lo docs, but thats not what Im talking about here.

The standard loans at around 6.5 var to 80 % lvr work well for many people where STG have said nay.

ta


rolf

 

[Rolf Latham]

Hi GV

Subject to serviceability what you easily do is to take all your properties and refinance them all to 80 % of the existing val, or to 90 % subject to Lenders Mortgage Insurance.

So the 250 000 place can be refinanced to 200 000 without lmi meaning that you can

1. Replace the 193 000 debt and put 7000 in your offset acct for the next deposit.
2. This also makes the property stand on its own security with no other property needed for cross collateralisation.

You can do this with all your stock subject to service and vals of course

Ta

rolf

 

[GeeVee]

Thanks Rolf. Thi sis/was the kind of info I am looking for.
As you said in the first reply, talk to Bank OR Mortgage broker....even you???

 

[Rolf Latham]

Hiya


The soft data, the stuff that really matters to making a decision on structuring is best done with someone face to face. There have been quite a few recent recommendations of Vic based brokers on this forum.

While there are many good bank managers and personal bankers etc, I partially see this as like going to the ATO for tax advice. You will get advice and it will likely be suited to the lender rather than you. Fine to go to a lender direct once you know what you want if you dont feel comfortable working through a broker.


ta

Rolf

 

[bundy1964]

Originally posted by Rolf Latham
Hiya
The soft data, the stuff that really matters to making a decision on structuring is best done with someone face to face. There have been quite a few recent recommendations of Vic based brokers on this forum.

While there are many good bank managers and personal bankers etc, I partially see this as like going to the ATO for tax advice. You will get advice and it will likely be suited to the lender rather than you. Fine to go to a lender direct once you know what you want if you dont feel comfortable working through a broker.


ta

Rolf

Hi Rolf

I have only used a broker once and they were running on youthful workers with plenty of get up and go but little idea what to do, if I had not done a property deal before and not read the fine print from the lender they would still be running around in the dark trying to sort it out.

While this might not be typical and my finances are not what the average investor would be doing loans with it is just part of what can happen. The lenders new Solicitor was *fun* to work with as well.

The lender has written to me saying deal direct with us if you want to. This will save me about 3k in broker costs they charge upfront and on drawdown. Since I had to do 75% of the work I have not much extra to do doing 100% of it.

I think a smaller broker would be a lot better to deal with and one who doesnt have to ask the boss about everything would be the way to go.

bundy

 

[Sim]

Originally posted by bundy1964
I have only used a broker once and they were running on youthful workers with plenty of get up and go but little idea what to do

No ! No ! No !

BIG MISTAKE - you went to the wrong broker (although I'm guessing you figured that one out already) !

If you want the best service, never go with a larger company who just put you with the "juniors" who don't really know what they are on about.

When you get beyond the regular PPOR type mortgage situation (like the majority of us would be) - you need a broker who actually knows what is going on and how to tread the minefield of lenders.

Juniors are fine for filling out paperwork and such, but you should really be consulting with an expert (unless you have really really simple finances).

That is why using someone like Rolf or one of Rolf's partners is the only way to go - these people are experts, they have lots of experience, and a close network of similar experts to share knowledge with.

 

[bundy1964]

Hi Sim

Didn't take long to work that one out

It does get a bit hard to find a willing broker when you have traded under 2 years, have 90% of your income IP related and have spent the last 5 years with legal niceties with an insurance company.

Be nice to know where the likes of Rolf are hiding in Adelaide they don't seem to need to advertise?

bundy