Financing Strategy and building portfolio

[blessme]

Hi All,

I'm still newbie in investing. my goal is to build my property portfolio but I'd like to keep my monthly expenses the same as the way i live at the moment

so rough idea of my current financial
PPOR : 410K Loan - Refinance and withdraw an equity of 179K (which then will bring my loan back up to 589K)

I use this 179K to buy 2 properties
Property 1:
20% deposit + Stamp duty + DDD + etc = $80.218

Property 2:
20%deposit + Stamp duty + DDD + etc = $82.785

My remaining cash is
179K - 163K (Total above) = 16K

So the strategy that I have in mind is basically to renovate property 1 with 30K (need to find the remaining 14K) and do top up/withdraw the equity and do the same thing with property 2 from the property 1 money

my questions are
1. any other alternative strategy?I thought of building granny flat but I don't think it adds much value to my portfolio beside better cashflow

2. If I withdraw the equity from my IPs, I still need to pay this extra to the equity to the bank right?which means if my IPs is neutral before withdrawing the equity then it will become negative?which then the repayment will be added to my monthly expenses?

Hope to learn more from all of you

 

[Aaron_C]

Have you considered going for LMI for the purchases to preserve your cash?

 

[Spades]

Hi blessme,

Why not go 10% on both IP's and throw the remainder in offset against ppor.
That way you'll have a buffer behind you and offsetting non-deductible debt against the ppor.

Cheers Spades.

 

[blessme]

Aaron,

I considered LMI before but I thought of avoiding it to have better LVR?If I take LMI, does it mean my loan amount will go up therefore it will make my IP becoming more negative in cash flow?

 

[Peter_Tersteeg]

Aaron,

I considered LMI before but I thought of avoiding it to have better LVR?If I take LMI, does it mean my loan amount will go up therefore it will make my IP becoming more negative in cash flow?

Yes, it does mean all this. It also means that you get slightly more tax deductions. Even better, you preserve some of your cash and pay off your PPOR sooner (which is not tax deductible).

Furthermore, you get to keep some cash if you ever need it for an emergency.

 

[Aaron_C]

The cashflow impact is the same because by borrowing more you have more funds in your offset account. Don't forget LMI is tax deductible over 5 years.

 

[blessme]

Spades,

I think I start to understand what your strategy is. to withdraw the money from the IP either equity, etc and put it against my PPOR offset so I only pay less for my PPOR and claim the most against my IP

The question is if I have the big loan against my IP then the rental will not be able to cover the interest rate which mean that I need to top it up from my monthly budget?Will I be able to claim the short amount between rental and interest rate during tax refund?Will i be able to claim it all?

 

[blessme]

Thanks Peter and Aaron for your reply. It means a lot to me for my knowledge

Ok so the question now is what is the strategy for me to build my portfolio if you guys were in my situation?Does it mean now I couldn't buy more property?can I use the same strategy?How much negative gearing can be claimed to offset the tax?for example the short amount between rental and interest is about 5K per year, can I claim it all?

 

[Peter_Tersteeg]

Yes, you claim all of the shortfall.

Basically you look at all the income coming in from the investment. They you deduct the interest expenses, as well as any other costs of ownership including property management fees, ongoing maintenance, rates, cost of inspections (some travel costs) and even depreciation.

Overall it's likely you will make a loss when you consider all of this. All of the loss is tax deductible.


The strategy suggested of taking a higher LVR against your property will technically have a small effect on your affordability for your next purchase, but this is somewhat offset by the additional tax deductions. You can also reduce your PPOR debt if necessary and actually improve your affordability.

 

[blessme]

@PT_Bear

so its better if I renovate about 30K and withdraw the equity (whereas I might need to pay the LMI because it will exceed 80%LVR) - well there is a room for improvement for my IP. and use the equity withdrawn from both properties to buy another property?

what do you think of building GF? or what do you think of buying another property with positive cashflow (100K property). Will it help?

 

[Spades]

Hi blessme,

Thanks PT_Bear for answering the tax question.

Are you financing through a bank or seeing a broker?

If your not using a broker,get one,they'll advise on the best outcome for you.

Cheers Spades.

 

[Peter_Tersteeg]

@PT_Bear

so its better if I renovate about 30K and withdraw the equity (whereas I might need to pay the LMI because it will exceed 80%LVR) - well there is a room for improvement for my IP. and use the equity withdrawn from both properties to buy another property?

what do you think of building GF? or what do you think of buying another property with positive cashflow (100K property). Will it help?

Let's take a little bit of a pause here...

In a lot of cases, a 90% loan will have a good outcome, the main downside is that you'll pay some mortgage insurance. It can leave a lot of extra cash in your pocket which can be very useful, but it comes at a cost of about 2% of the loan amount against that property. For most people, the pros outweigh the cons, but if you're flush with cash, then it can be a bit of a waste of money. There's also some bigger picture risk management issues to consider.

Building a granny flat or purchasing a cashflow positive property are both primarily cashflow strategies. Again this is a good thing, but this strategy isn't the only one around. It's hard to go broke when you're making money, but you've also got to consider if this is the best use of your money. Will it use up all of your surplus cash and limit you because your cash is a finite resource?

There's a lot of things to balance out here. It's good that you're asking lots of questions and getting ideas, but you also need to get a more detailed financial and borrowing analysis done, which is best completed through a broker.