Faster investing- Interest only for your first home?

[Shonnie]

Uhmmm at the moment I'm at uni so I get about $1200 a month to live off and my boy gets $2300.

We are paying 'rent' to my dad to live at his house, but he is going to give it all back to us as a deposit for our first home, so thats like $1000 a month. But we are trying to increase it to get a deposit together faster..

Uhmm, then we have train travel which is $230 a month, $400 a month for food, $200 for bills, $400 for Bali savings, $70 gym.. blah blah blah and the list continues..

I guess at the moment its not really important about the money we are spending now, its mainly after November we will be in our first home and our holiday will be over and everything.. But the reason I'm planning to leave uni next year is so we can get our first investment property, if its going to take three years of fulltime work to get my first one, then I may as well stay at uni for another two years and work full time after..

It's coz of that investment seminar I went too, and Jason said that you could get three properties in a year, so I figured I could get two (PPOR and 1st IP) within 18 months. But maybe thats when you have equity or something, coz from what I've been looking at it seems that slow and steady wins the race.

Dammit, :'( I wanted to be a millionaire next year

 

[coffee]

Shonnie,

I"m sure you (Shonnie) and your very lucky other half (being so lucky to be with an investor minded person) will achieve your PPOR & IP's within your time frame.

I personally feel that we sometimes look at the the end goal and not at the long road to achieve those goals.

BTW,
I'm sure you will get to be that millionaire faster than u think. All the best and learn from greats that hang out on this forum..

Geoff

 

[alexlee]

Shonnie, where is that $1,200 and $2,300 pm that you and your boyfriend gets coming from?

I guess at the moment its not really important about the money we are spending now, its mainly after November we will be in our first home and our holiday will be over and everything.. But the reason I'm planning to leave uni next year is so we can get our first investment property, if its going to take three years of fulltime work to get my first one, then I may as well stay at uni for another two years and work full time after..

I disagree with that. If you are not controlling your expenses now, what makes you think you’ll start controlling them after you get your own place and an IP? A property isn’t a golden egg-laying goose. It’s a seed. You plant it, water it, take care of it, and it grows. If you don't take care of it, it withers and dies and you have to pay someone to get rid of it for you!

It's coz of that investment seminar I went too, and Jason said that you could get three properties in a year, so I figured I could get two (PPOR and 1st IP) within 18 months. But maybe thats when you have equity or something, coz from what I've been looking at it seems that slow and steady wins the race.

Most seminars tell you what you want to hear, and generally try to get you to buy other stuff from them. How many properties does Jason have? I am certain you will find investors who have far more properties than he does, and those are the people you should be listening to.

According to Jason, how can you buy properties while studying, with no savings or equity? How do you intend to get the bank to lend you the money to buy the properties, and how will you service the debt (because given current yields the IP will be negatively geared and your PPOR payments hurt a lot more because you can't deduct them)?

I suggest reading a few books on property investment (and this forum) to get a balanced view. Right now you’re all fired up by a seminar (not necessarily a bad thing) from a guy whose company doesn’t have the best rep.

A lot of successful people on this forum suggest slow and steady, and the people selling $4,000 seminars are saying you should go fast and furious. Who has more credibility?

I think it's great that you are thinking about this now (I bought my first place at age 22, am now 29), but get the whole story first. Property investment is not a magic wand, but do it over time and you'll see some good results.
Alex

 

[Shonnie]

Yeah alexlee, I've just been reading through some of those inspirational young people stories and noticed yours in there - they are great to read!

Oh that money we get is coming from boyfriends full time job, and my part time job / centrelink payments..

Jason didn't say we could do it without savings and all that, they just said with very little equity and cash.. maybe using lo doc/ no doc? I'm not sure..

I've read a few books since the seminar.. Jan Somers (which is how I got to these forums), Rolf De Roos (Real Estate Riches), Anita Bell (Pay off mortgage and the investing one), Patrick Bright (In$iders guide to property & In$iders guide to Real estate), this stupid John McGrath one which I didn't like much..

It's funny because everyone has really different ways of essentially doing the same thing, I guess I just have to figure out the right way for me!

You guys are awesome though, I've gotten more information off here than any of those books combined.. except maybe the Jan Somers one, its really in depth.. hehe.. I'll just keep researching and chatting before I find my way!

 

[Smile]

Hiya ALex

What you do then is you SPLIT the ppor loan into a 180 IO non ded and a 20 k ded, pay the 20 k off the 20 k split and redraw it, and then invest the 20 k.

This is the model adopted quite succesfully by Uncle Steve and many others in a debt recycle strategy

ta
rolf

Hi Rolf

If this loan was an all IP loan only would investing this 20k be ok straight from the offset account (Am I paying with cash ?)

or should it be put back into the loan, then imediately redrawn to the offset account again which has the chq book?
.

 

[FrankGrimes]

Could you explain this from your Dad ?

"(WHERE DOES THIS MONEY COME FROM ....$40000 @5% IS NOT AS GOOD AS
$40000@ 7% )"

.

Correct me if I'm wrong, $40,000 in an offset account still saves 7% interest. An offset account directly offsets the mortgage rate, not 5% or wherever he is getting that figure from. There is absolutely no difference between paying PI or IO if the equal amount of principal is paid into the offset account.

Where is the 5% coming from? Again, I might have missed something so please clarify first.

 

[FrankGrimes]

....THIS HAS RISKS ATTACHED YOU CAN HIDE YOUR PERSONAL MORTGAGE ...BUT
DANGER FROM THE TAX MAN LURKS.... YOU ARE STILL USING THE SAME $40000.
SOUNDS LIKE A LOT OF BANK FEES AND FIDDLING........ YOU CAN ACHIEVE THE SAME
RESULT BY PAYING DOWN THE IO LOAN OVER YOUR PPOR (NOT DEDUCTIBLE INTEREST)
THEN USE THE EQUITY 40000 TO GET A 100% LOAN OVER THE INVESTMENT PROPERTY
THE LOAN OVER THE IP IS SECURED OVER BOTH PROPERTIES AND IT WOULD BE
AFFORDABLE AT THE INCOME LEVEL AS DESCRIBED.

Then you start cross collateralise which is bad news. Do a search on the forum, I recently had to go through the pain (and cost) of splitting up my loans and I would recommend getting the structure right from the start. While it might not be an issue now, it will become a problem as you want to expand your portfolio.

Regards

Luke

 

[Rolf Latham]

Hiya Smile


If this loan was an all IP loan only would investing this 20k be ok straight from the offset account (Am I paying with cash ?)

YES , you would be using cash and your non ded debt would still be 200k

or should it be put back into the loan, then imediately redrawn to the offset account again which has the chq book?
.

A separate loan split should be taken for the 20 k, to minimise tax headaches,unless it cant be done due to product or cost issues,

ta
rolf

 

[Bandita]

Hi Shonie,

I think you're Dad may be confused by what an offset account is. The funds in your offset account are directly 'offsetting' the size of your loan, and therefore has the EXACT SAME interest rate as your loan (plus you pay no tax on that 'interest' because it's not income - either that offset interest instead goes into the Principle (if P&I loan) or reduces the interest you pay if IO loan).

But either way, it is the same interest rate as the loan - so if your loan rates go up or down, so does your offset account rate.

That's my understanding at least

Cheers,
Jen

 

[FrankGrimes]

Hi Shonie,

I think you're Dad may be confused by what an offset account is. The funds in your offset account are directly 'offsetting' the size of your loan, and therefore has the EXACT SAME interest rate as your loan (plus you pay no tax on that 'interest' because it's not income - either that offset interest instead goes into the Principle (if P&I loan) or reduces the interest you pay if IO loan).

But either way, it is the same interest rate as the loan - so if your loan rates go up or down, so does your offset account rate.

That's my understanding at least

Cheers,
Jen

Yep my thoughts exactly. He must think you're talking about an ING account or something? I wouldn't be taking advice from anyone who doesn't know what an offset account is and what it does

 

[BruceW]

Shonnie,

..........ALL NON DEDUCTIBLE DEBT SHOULD BE REDUCED OR ELIMINATED
ASAP............

Pretty good advise IMO.

But as mentioned previously i think your dad is not clear about how an offset account works.

Say for instance you've reduced your principal by 2000 dollars in the first year. The same loan (IO) with the $2000 put in an offset account has the same net effect. I'd still rather have more access to it. The key for me is flexibilty.

I don't know about you, but the first house I bought (PPOR) was never going to be the house I stayed in long term. We all have dreams and aspirations. Your first purchase gets you in the game.

So think about moving from your first to your second house as you grow. As your dad seems concerned with the costs involved of complex loan structures. Compare that to the costs involved in selling a house because that may well be what you need to do to release the equity for your next purchase.

For me, and IO loan with offset gives me the flexibility to turn that PPOR into an IP without the risk of creating any undeductible debt (See the golden rule). I get to keep the equity in my IP rather than turning it into cash. I get to remove my 'principal' as needed. And again, for me, if the bank will let me, I'd set up property no 2 exactly the same (I/O with offset).

The best thing for you is that you're thinking like this already. Thats half the battle any you're already better off than much of our population in that regard.

Bruce

 

[Shonnie]

Yeah I spoke to my dad about the whole offset thing.. He used a similar loan like this about 10 years ago now when we used to live on Mitcham Road, during those days the offset accounts interest rate was 2% less than the interest rate on the loan, he assumed that nothing had changed since then..

I'm chatting to Rolf Sch.....(don't know the spelling) the mortgage broker guy from the forums within the next month, so thats great because he will be much more helpful with my plans than the stupid Aussie guy..

I'm getting more and more excited and it's making it so hard to concentrate on my exams! I'm meant to be writing a 5000 word marketing plan and instead I keep browsing the forums.. hahaha..

 

[Bandita]

Yeah I spoke to my dad about the whole offset thing.. He used a similar loan like this about 10 years ago now when we used to live on Mitcham Road, during those days the offset accounts interest rate was 2% less than the interest rate on the loan, he assumed that nothing had changed since then..

I'm chatting to Rolf Sch.....(don't know the spelling) the mortgage broker guy from the forums within the next month, so thats great because he will be much more helpful with my plans than the stupid Aussie guy..

I'm getting more and more excited and it's making it so hard to concentrate on my exams! I'm meant to be writing a 5000 word marketing plan and instead I keep browsing the forums.. hahaha..

Hi Shoonie,

We're using Rolf Schaefer right now to get a loan for an IP, he's an incredibly nice guy and extremely knowledgeable, we've learned so much from him!! Good choice!

Cheers,
Jen