Equity towards an IP

Discussion in 'Property Finance' started by Sirius, 8th Sep, 2009.

  1. Sirius

    Sirius Member

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    Hi everyone,

    I'm sure this subject has been dealt with over and over, but my topic has more than one aspect to it.

    Let me first describe my situation.

    In January of this year, I bought my first home for $415,000 and borrowed 80% of that from NAB, while having a deposit of $83,000.

    Now I'm looking into purchasing an investment property and hopefully start building a portfolio. I have been told by my real estate agent that my house has risen in value since a similar house in my street has been sold for $450,000. I still owe $325,000 on my mortgage.

    1. Does this mean I've got $125,000 in equity?

    Now I'm looking into buying a low rise flat. I've looked around and found that Lakemba seems to be a good investment suburb. The average price of a two-bedroom unit is $200,000 with rental returns of about $300/week. I've already read it has very low vacancy rates.

    2. Is my line of thought financially sound from an investment point of view?

    If I take out $100,000 in equity and place it as a 50% deposit on a $200,000 unit, the mortgage of $100,000 (remaining) on the unit adds up to about $200-$250/week in repayments, which is less than the rental yield. Then, I could increase my repayments to finish off the small mortgage and expand my investment properties.

    3. Does this sound like a good strategy?

    4. If so, how long should I wait before I take the first step?

    5. If not, how else would you go about this and how would you make the best of the equity on the house?

    I am a newbie so any advice/tips would be greatly appreciated.

    Thanks in advance,

    Sirius
     
  2. HomeBuyAU

    HomeBuyAU *

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    Hi, I'm sorry I can't answer your questions and if I did it would be unqualified guessing. I hope some of the experienced members here will give you some feedback. I know what it is like waiting, I have been waiting for someone in the know to offer some more feedback on my thread here too as I'm also looking at buying my first IP.

    As for Lakemba, I know the area as I had to drive through there a few years ago when I lived in a nearby suburb in Sydney. Put it this way I wouldn't want to live there, lots of young hoons & bogans with fast cars and it looks like many people are in poverty there. I think you would be fine if you can get good tenants otherwise be careful.
     
    Last edited: 9th Sep, 2009
  3. Propertunity

    Propertunity Real Estate Buyers Agent

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    Hi Sirius. If a NAB bank valuer agrees with your real estate agent friend about your place being worth $450K, then yes, you have $125K of equity. But you will not be able to get at all of it.:(
    The maths works like this:
    NAB will lend on 80% of the new val of $450K = $360K
    Pay out old loan of $325K
    Available equity therefore = $360K - $325K = $35K
    * If you were able to get 90% LVR loan instead of 80% I've used here in the calcs, then you would be able to access equity of:
    $450K x 90% - $325K = $80K not including any MI that NAB may want

    Lakemba does have a low vacancy rate at present of around 2% - but then again, so do most places in Sydney ;) And the yields on units are high at around 8% - so your rental figures look to be supported by hard data :)

    Apart from your available equity draw down figures - yes.

    You need to include costs like MI & stamp duty in your purchase costs. Your LVR of 50% is low for an IP - but OK (although not achievable with your lower deposit figure). The strategy is basically fine.

    What? You want to wait until the $200K unit is worth $250K before you implement the strategy? :p
    Just buy when you can afford it & the numbers work. If that is now - do it now. If it is in 12 months time, do it then. You'll probably want to repeat this strategy over and over a few more times, but using the equity growth in the new purchases as well - so it snowballs after 4 or 5+ :D

    Best bet now is to get NAB to do a val on your house and make sure the equity that you think is there, is actually there. One comparable sale in the street via your REA is not enough evidence - a valuer will need to find 4 - 6 such sales to support your scenario.

    But it sounds good - go to it. (I'll not make comments on Lakemba as I have not done any DD on it - apart from yields & vacancy rates)
     
  4. luvvit

    luvvit Member

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    Monsoon, Prop....

    Sleep dudes... its 3.30 in the morning...:eek:


    Oh, Im up for work....... dont usually read or post this early....
     
    Last edited: 9th Sep, 2009
  5. Propertunity

    Propertunity Real Estate Buyers Agent

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    Sleep is for the weak. I have real estate searches to do :)
    I slept last week.
     
  6. Edmond Dantes

    Edmond Dantes Member

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    :D

    Prop, you didn't mention your feedback in regards to Lakemba. Any opinion?

    cheers
     
  7. Qlds007

    Qlds007 Broker,full time investor

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    Andrew Shhhh it is morning and Propertunity is sleeping !!!!
     
  8. Propertunity

    Propertunity Real Estate Buyers Agent

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    Yawns - good morning all. OMG is that the time? :eek: it's afternoon already :p
     
  9. josko

    josko BluePlanet-Green Shackles

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    Hi there Sirius,

    Sorry, I don't quite agree with all of your strategy. I think it is great that you are open to suggestions and hope that you seek your own independant financial advice.

    I would leave as much equity in your PPOR as possible and only withdraw what you need as a deposit for your new IP.

    If the unit is 200k I would apply for an increase to 85% LVR on your PPOR for your deposit. You will need to pay Lenders Mortgage Insurance. You need no more than 57k for the new purchase at 80% LVR. Why pay more LMI than you have to?

    You also need to have an Offset account with the increase of funds in a seperate account for tax purposes. Remember to keep your PPOR funds/personal funds and Investment Funds seperate. This is extremely important. Make sure your NAB banker knows what your intentions are.

    The interest will all be deductable but finance your IP up as much as possible without LMI and only use what you have to from your PPOR.

    Ideally, you want to pay down your PPOR NOT your IP. Again, the interest payments from your IP are Tax Deductable. Your interest payments on your PPOR are not. Please speak to an accountant about this.

    Don't forget to do the numbers on the amount you are withdrawing from your PPOR as well. While your Positively geared property looks good, you will still be paying interest on the 100k or so you take from your PPOR.:)

    Wait for the equity to grow in both properties...and off you go again. :D

    Regards JO
     
  10. Sirius

    Sirius Member

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    Thanks monsoon. I'll be looking for properties that already have long-term tennants in them.

    Thanks Propertunity and josko. I guess the first step I'll take is have NAB value my property and see where I stand. If my real estate agent is right and my property is worth $450,000, I'll take out 80% LVR loan instead of 90%, which is anywhere between $35k and $40k, which should be 20% of a $200k IP. I'll try to leave as much equity in my PPOR as possible. I'll also want to avoid any LMI on the IP, thus securing at least 20% deposit on the IP. I've updated my calculations. On a $160K ($200K - $40K deposit) loan at 8% interest over 30 years, the fortnightly repayments add up to $540, which should still be less than the rental returns (~$600/fortnight).

    Any comments regarding this would be greatly appreciated.

    Thank you all for your time and patience.

    Cheers,
    Sirius
     
  11. josko

    josko BluePlanet-Green Shackles

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    Hi Sirius,

    Sounds great!

    Make sure you split your PPOR loan with the new funds (deposit for investment) in a seperate account.

    Keep your deposit/ or investment funds seperate from your PPOR. This will enable your accountant and ATO to distinguish clearly what the funds are being used for.:):)

    Were you thinking of fixing at 8% or is it a hyperthetical percentage for insurance?

    Regards JO
     
  12. Sirius

    Sirius Member

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    Thanks josko, I'll keep that in mind. :)
     
  13. josko

    josko BluePlanet-Green Shackles

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    You are very welcome!

    You are very quick on the keyboard too!;):D

    Regards JO
     
  14. Sirius

    Sirius Member

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    Hey all,

    Just an update:

    I had an appointment with my bank on Wednesday in regards to my home equity. Before the meeting, I bought an RP data report on my suburb and highlighted all the properties of similar features that were sold in the last 6 months or so. It clearly showed that properties in my suburb (Prestons) have appreciated anywhere between 40K and 60K.

    At the meeting, I showcased what I intended to do. I presented the report to the banking advisor. I explained to her that I understood that a valuation is needed anyway. She ran a few calculations on her computer and assured me that I've got no problems in terms of affordability. That was a big relief.

    The last valuation on my house was in November last year. Since I'm within the one-year period, she said I might want to wait until November, which is only a month away.

    I also informed her that I do not intend on taking up any LMI. So for me to go forward and purchase an investment property, my property would have needed to appreciate the equivalent of 20% of the IP.

    Finally, she advised me to start looking for units. As soon as I find one I like, I can come in and tell her about it. I can somehow squeeze them into agreeing to my terms. In other words, they would accept to value my house a bit higher than what they would normally do just to ensure I go on and purchase an IP and take up a new loan with them.

    What do you guys think? Advice is well appreciated :D.

    Cheers,
    Sirius
     
  15. Rolf Latham

    Rolf Latham Member

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    Dont expect many favours on the valuation side.

    While one can get an extra 10 or 15 k on a val

    WHy so much against LMI ?

    ta
    rolf
     
  16. HomeBuyAU

    HomeBuyAU *

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    Hi Sirius, I remember this thread from a few weeks ago. You seem to be in a similar situation as I was. I think you seriously need a mortgage broker. I hired one from this forum, Jody (Josko) and she has been very good, I would thoroughly recommend her. It won't cost you anything extra to hire a broker. There are many good brokers on this forum, Rolf also looks to know a lot so check some out. They will get you the best rate, plan for your circumstances and negotiate everything for you with the bank.
     
    Last edited: 8th Oct, 2009
  17. sanjayag

    sanjayag Member

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    LMI not bad if put with the loan on IP

    Hi Sirius,

    I think i read in some other threads that if you can take 95% loan with paying an LMI of say $3k (this will be included in the loan), that would be better than using equity in your PPOR. The benefit from this strategy depends on your income tax bracket.
     
  18. Sirius

    Sirius Member

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    Hi all,

    It's been 18 months since I first opened this thread and there are quite a few updates.

    1. I am moving to Roxby Downs in SA on Sunday and will be living in a rent-free property with a mate of mine.

    2. My house here in Prestons NSW will be occupied by my mother who is also has a share in the house.

    3. I have finally had a house valuation last week. The house was valued at 500K meaning an equity of 80K, which is great news especially within 2 years of purchase.

    4. I have also been approved for an IP up to 300K.

    Now we reach the question of where and what to buy.

    One option would be a 2 bedroom unit in the Canterbury-Auburn-Granville-Parramatta areas where units range between 200K and 300K with potential rent of up to $350 p/w.

    Another option would be two single bedroom units in Roxby Downs. Units like that are going for 130K each with rents of up to $250 p/w each.

    The Sydney option is alot less risky however I'll be in negative gearing when you add council, water, agent and strata rates. Roxby Downs is still a mining town, however with the Olympic Dam expansion project it is not going anywhere anytime soon. Rates are heaps lower, rent is higher and I'll be in positive gear.

    I would greatly appreciate your thoughts, advice and opinions on where to go from here and what would be the most tax efficient way about it.

    Cheers,
    Sirius
     
  19. tobe

    tobe Mortgage Broker

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    buy your mum out of her share of the house and rent it for the market rent, either to her or someone else. Without having the rental added, your borrowing capacity is lower. Even if you are living rent free, most lenders will charge a nominal rent in their calculations.

    Buy a property that will add the most value to your portfolio and long term goals. If you were older, and had a medium income, and were already exposed to growth assets, it might mean a positively geared property. If you were younger, had a higher, or variable income, it might mean a negatively geared property with more capital growth potential.
     
  20. Anta

    Anta Member

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    Roxby Downs

    Hi Sirius,

    I have lived in Roxby for the last couple of years. There are quite a few people that live here into property investing, last year we started an investment club. We get together every now and then to catch up for a chat, ideas and advice and other investment types.

    Once your up here, if your interested in catching up send me a private message.

    Anthony