Finance

[WebBoard]

From: Mike .


I'm hooked
From: Anthony C
Date: 3/20/00
Time: 11:08:18 AM

I have two Property Investments 12 Klicks from Melbourne, Suburb I grew up in. Very happy with these investments. Problem: I am up to 35% Dept service Ratio with a conservative bank, which bank ;-). Is it worth looking for a refinancing option, because it looks like it will be a couple of years before I can buy number three. I can't wait that long, I'm hooked. I'm on a good 6.99% IO fixed for three years, I would prefer not to lose that. Figures, Total Rent: $475/week Income: $40k/year Loan Repayment: $2050/month ($355k Morgtage)

 

[WebBoard]

Les

Reply: 1
From: Mike .


Re: I'm hooked
From: Les
Date: 3/20/00
Time: 9:33:01 PM

G'day Anthony,

From your figures, it appears to me you can easily afford another from a DSR point of view. Lenders will lend up to 30 - 35% of your gross wage - some even higher (so long as you have no Credit or other loans outstanding). Assuming this is the case, and allowing for 75% rental income coming into the equation, you are "free and clear" for another.

However, the thing that might be holding you back is the deposit. Without knowing the current valuation of your properties, there is little I can suggest. Have you owned the properties long enough to build up Equity? If so, how much? Is it enough to provide a deposit for #3? Or do you have some spare cash for that purpose?

If the answers to above are No, then your only other option is to consider the use of a credit card to "borrow" a deposit. You appear to be getting a good rental rate of return (if you are using 221D, I suspect the current properties might be approaching a positive cashflow - are they?). So a credit card loan might be quite temporary for you - you would NOT want it to drag on at credit card Interest rates....

Another option is to seek out "deals" that might include the vendor leaving some finance in the house they are selling (not common, but may be worth a try) which could minimise the need for deposit.

A "left field" option might be the "$1000 down, and purchase house with rental payments" - but this is likely to be another investor, and the purchase price may not be a "real steal".

That's about all that springs to mind - you might have to "watch grass grow" as do so many other investors.

Come back with more information to help us to advise you further.

Any other ideas, people? Anyone done what Anthony is trying to do? (I haven't).

Les

 

[WebBoard]

Sue1

Reply: 1.1
From: Mike .


Re: I'm hooked
From: Sue1
Date: 3/21/00
Time: 12:08:48 PM

Hi Anthony I know what you mean about being hooked!

We bought prop no.3 last September and already I am getting toey about purchasing no.4 I have the same problem as you. All my loans are with the same major bank and I while I am happy with the loans I have I really don't want to be in debt to them for any more. I would like to borrow with someone else, diversify my lending if you know what I mean.

But this means that to buy another prop I have to have a stand alone loan, can't use the equity in my other houses as another bank won't even look at second mortgages under the bank I'm now with. (I tried this idea for the last loan and ended up crawling back to Big Daddy!)

What to do? It seems like once you're hooked into one bank you are stuck with them if you want to use the equity build up as a deposit for the next prop.

What does anyone else think about this? Do you think it's a good idea to be so indebted to one bank?

I do have a line of credit and once this is paid off (takes too long with after-tax dollars - hear whinging tone!) I can reuse it as a dep on a prop with the balance from another bank. I can hopefully refinance it (the line of credit) for more WHEN property rises.

This is the only solution I can see to this problem. So apart from winning the lottery, or doubling my salary I guess I will have to wait.

Sigh Sue1

 

[WebBoard]

Les

Reply: 1.1.1
From: Mike .


Re: I'm hooked
From: Les
Date: 3/21/00
Time: 8:24:20 PM

G'day Sue1,

"I do have a line of credit and once this is paid off (takes too long with after-tax dollars - hear whinging tone!)... "

I'd heard these LOC's are the best thing since sliced bread, and you can pay your mortgage of in 17.3 microseconds if you put all of your income thru them ..... What's the REAL story with them?

Currently I have an Offset account, but am considering going to LOC - what would YOU recommend?


Also, what are your thoughts re GST and its likely effects? Several people I have read are looking for a slump (especially in Sydney after Olympics/GST). Is it possible that all of the building crews currently working the Olympics might move back up to Brisbane and create a mini-boom there (where prices are realistic ;^)

Seriously, what do you think?

Regards, Les

 

[WebBoard]

Sue1

Reply: 1.1.1.1
From: Mike .


L.O.C. and G.S.T. (no relation)
From: Sue1
Date: 3/26/00
Time: 1:34:41 PM

When will I learn not to press enter! Now, Hi Les You were asking about my thoughts on Lines of Credit. I have one because every one else seemed to be getting one and it seemed like a good idea at the time!

We have ours incorporating our non-tax-deductible home loan with the purpose of paying it off as soon as possible.

Some banks are charging higher interest rates on LOC's and hellish fees but ours charges neither. I have to agree with Anthony that having lots of loans to the one bank (more power!) might have helped us secure such a good deal on our LOC. I kicked up a stink about the $150 annual fee - some banks charge up to $250 - and while they wouldn't waive this they actually offered to drop the interest rate (which is the standard variable home loan rate) by .5% p/a for the term of the loan - which for an LOC is indefinately! Of course I said yes!

However, if you have other savings that you would like to keep separately from the LOC but still benefit your mortgage interest bill - it can get complicated having little sub-accounts for Christmas, Personal savings etc in your head - I think it is a good idea to have an Offset acc as well linked to the loan you want to vamoose. As long as it is a 100% offset and even this can have different meanings to different banks.

One bank we used to be with thought this meant offsetting 100% of the interest (.25%p/a if your lucky) that you earn on your little Ofset a/c, so each month they took off $2.36 etc instead of offsetting the whole amount you have in your acc against your mortgage and charging interest on what's left (the right way to do it). It pays to read the fine print.

So there is a place for both acc's because of course one is a loan (or at least access to more borrowings) and another is simply your own savings.

Personally I don't know if I will use the LOC as a deposit on the next house or not, I'm just using it as a great tool to pay off my mortgage quicker and it does seem to work as long as you are disciplined enough not to use it as a big credit card. We use our bankcard (flybuys) as much as possible and keep the money in our mortgage until the last minute when we have to pay the bankcard bill.

As for the GST, I don't know about Brisbane but we live in a large regional city in Queensland and the builders are practically run off their feet trying to complete new houses before July 1, these are for contracts and for specs. It really has gone quite mad up here. I can't help believing that after the deadline everything will come to a grinding halt and everyone will just sit back and wait and see what happens next. There is huge uncertainty out there among the general public about the after effects of the GST and not just on housing but on retail spending, petrol prices etc. And for those down south the Olympics add another big unknown quantity. I think it really is anyone's guess!

As for PI's...if property slumps, hopefully interest rates will fall again but if property rises and or retail spending goes through the roof (lower tax rates and cheaper luxuries) and interest rates rise rents will have to rise accordingly. So as long as we're not too far extended we should be buffered either way. After all hasn't that always been Jan's advice - cover yourself for every outcome and don't panic about short term fluctuations in the markets.

Cheers Sue1

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1
From: Mike .


Re: I'm hooked
From: Gee Cee
Date: 3/21/00
Time: 4:11:47 PM

Dear Sue 1

I am also sort of in the same situation as you in regards to BIG BROTHER BANKING.

About 4 years back I bought a block of 5 townhouses and also a block of 4 units. Both situated in good areas and at very much discounted prices. At the time I was dealing with a very good Business Banking Manager of a certain bank. (Not North, South, East but ----.

He sorted the whole financing deal out with out any problems and set up some very good systems for future ventures but put most of my properties in the same basket. Unfortunately he was recently moved up the ladder and I now have had 4 different Business Banking Managers over a short period. They run everything to the exact rules set in the computer and have little idea of the property investment market.

When loans come up for re-negotiating they quote higher figures to rollover the loan than I even paid to do the whole set up to start with.

The real nail in the coffin came when a separate loan taken up with this bank was recently due for rolling over. My trusty Business Banking Manager quoted $750.

Then a week later someone from the same bank at Adelaide Head Office, who I have never heard of phoned and said he would re-do the same loan with the same bank for ZERO COSTS.

Needless to say when the fixed rate expires later in the year I will be financing all my different properties through DIFFERENT financiers.

If I can help it I will not be letting one particular bank get me by the (private parts) again.

Regards

A put off Gee Cee

ANY FINANCE BROKERS OUT THERE PLEASE REPLY.

I WILL SOON BE CHASING AROUND $800k in re-financing?

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1
From: Mike .


Re: I'm hooked
From: Les
Date: 3/22/00
Time: 10:41:46 PM

G'day Anthony,

They have it THEIR way, don't they. OK - let's do the numbers. Right off, I AGREE your current commitment is showing around 36% DSR (according to their formula).

BUT (and there are a few of them!!!!!)

To get that figure, they have added around 2% to the current interest rate (they call it their "Qualifying Rate" - but your Interest is FIXED!!!!) If they ran the same numbers on the current (6.99%) rate, your current DSR is only 20%!!!

I just heard (at a seminar on the weekend) that some lenders are "looking at making some allowance for Tax Deductions". I have calculated yours at a Marginal Rate of 34.5% - if that were taken into account, then your current DSR drops to 24% (even at their Qualifying Rate) and 12% at actual current rate.

Jan's formula for DSR also "fits" with buying a third property:-

(p133) 30% salary+80% Rent = Total loan payments

I worked yours out with 75% rent, and you STILL can buy 1 more with a couple of bucks left over (anticipating you would buy another of similar price/rental return).

So, maybe by putting YOUR figures in front of the lender, showing that you have done the numbers THEIR way, but can propose a way to allow another loan - e.g. offer to have 221D excess paid straight into their account every week (that way they HAVE to take notice of the considerable Tax Deductions that you are receiving, and can justify taking one more chance with you. By the way, this is close to $4000 per year - if that amount comes off the DSR formula, then your #3 looks like this:-

Mortgage-TaxDeducs-75%Rent divided by Salary

or, 38k - 4k - 26k = 8k divided by 40k = 20%DSR

If they INSIST on the Qualifying rate, then you can INSIST on the HIGHER Tax Deducts as below:-

49k - 7k - 26k = 16k divided by 40k = 40%DSR

Jan makes the point that the MAJOR banks (back in 1991) were not as flexible as the "others" - this may still apply in some cases. I DO know that some lenders will go over 40% DSR. Also, the figures I used above are "rough", and on the HIGH side - so do your actuals and that 40%DSR will actually drop.

Produce YOUR numbers to show them how YOU can do it without hardship, and sell them on how well you have prepared your argument - make it hard for them to say "No".

What do you think - workable?

Regards, Les

 

[WebBoard]

Anthony C

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: I'm hooked
From: Anthony C
Date: 3/22/00
Time: 3:44:36 PM

Thanks heaps guys, appreciate the food for thought. Its funny you try and tell people (friends and family) what your doing and the say "yeah.... but", I am convinced Australia does suffer a bit from the tall poppie syndrome. Anyhoo....Glad to see the very positive suggestions from you people. We should organise mini "Investment Property Forum Conference" in Noosa one weekend, Tax deductable of course. <;-)

Line of Credit: I too have a LOC and I think they are pretty good, definitely great to know you got money there for emergencies, deposits, shares. And you only get charged interest on what you use. I will probably have to get rid of it before I get my next property. I heard some one once borrowed money from one bank, used that as a deposit to buy a house with finance from anthoer bank....Urban Myth?

Big Daddy Banks: Sue1, I dont think it is bad to have just one bank, less headaches, and it does give you a bit of power once you have a few dollars in loans. I'm just waiting for them to do the wrong thing and I'm out of there, Jan said in her book: try not to tie up too many properties with one loan, once you have enough equity in the house for that loan, get the other titles off the morgtage. I think I might see what a Morgtage Broker can do for me, when the time comes. Any one had any Dealings with em?

Figures: got over $50k free equity in property, around 550k in total... equity not a problem, just Dept Service Ratio. The bank said I'm around 44% DSR even without my Line of credit. LES how do you get your figures?, banks are using DSR=(Fixed Commitments-Rent Income75%)/Base Gross Income35%

Thanks Again. PS. WOW this Forum is gettin really big now!

 

[WebBoard]

Greg M

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: I'm hooked
From: Greg M
Date: 3/22/00
Time: 9:04:59 PM

Att Anthony C why get rid of LOC before next purchace I have just refinanced thru a broker to a LOC free up funds and make some inroads on my loans but as always they want to much secruity.

 

[WebBoard]

Anthony C

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: I'm hooked
From: Anthony C
Date: 3/23/00
Time: 9:36:07 AM
Remote Name: 131.172.4.44


Comments
Love it, I'm going in with my numbers guns a blazin, so they better watch out. Thanks Again.