first time to buy IP,- advise please

[dita]

Hi,

Me and my husband are willing to purchase our first IP but are so confused as what to do and how to go about it.
We have paid off our house we are living in and it is worth around 1 mil.We also have currently savings of 300K.
I have spoken to our broker who thinks it would be wise to consider a loan of $1 mil and put the $300K into offset account.He was suggesting to purchase 2 units and is suggesting to look into defence units.The loan would be interest only in my husbands name 95% and me 5% -tenants in common.
My husband earns around $85K and I work p/time and earn around $25K.We also have 2 small children and therefore I am planning be working only part time in the future.
I am very hesitant to go for such a large loan and I just worry of any possible future complications with servicing the loan.Firstly the broker was mentioning to go negative gearing, then he changed based on my worries and mentioned to go positive gearing, purchasing 1 unit only for approx $700 000.He thinks to borrow full amount in my name and to put our money into offset.
What do you think?I just want to know we are doing the best for us.I know the brokers are paid % of the loan so the larger it is it would be better for him.I just need to know it is also best for us.
Any advice would be very appreciated, as you can see I have basically no idea what to do.The questions are:
what amount of loan should we consider?
should we firstly buy just 1 unit and then next or to consider to buy 2 units for negative gearing?
what is your view on negative and positive gearing based on our circumstances?
Should we consider interest only or Principle and interest loan?
Many thanks
Dita

 

[jaycee]

I think it depends I think on what you wnat to acheive, and what you are comfortable doing.

Both ways sound like "legit" ways to go.

Equity & savings wise, it does appear that you are in a postion to buy more than 1

 

[dita]

Would you consider a defence unit?I read some mixed opinions about it, saying that the rent is not so high and may not be the best option in the current rental market.Also, apparently the selling market is much smaller if we decide to do so.Is there something/somewhere we should consider to look into?

Also, how would you structure the loan?P&I or Int.only?

What about positive/negative gearing?Could you put some light into it for me given our situation?

What would you do if you are in our situation?

Any advise, opinion is welcome.

Many thanks,

Dita

 

[DaveM]

Defense housing has its pro's and con's. You have guaranteed rental income and DHA pays for all maintenance and repairs.

However due to their long leases and options, they can be very hard to sell. You essentially rule out the owner occupier market. And as rents often languish behind market value due to fixed lease terms + periodical fixed increases, the returns are often not there to make them attractive to investors.

Additionally, you have 0 control over who lives in your house. This for me is a big one. You could get a real scumbag defense force serviceperson and his/her family, and getting DHA to move them on if they cause issues with the property or neighbours can be difficult. I have also heard many reports of substandard repairs as they will only repair to how the item was at the start of lease and not new.

Ultimately it is up to you. Your broker may receive a % for referral to DHA... check his ulterior motives. Personally, there are better returns to be had in the private rental market. DHA is a lower risk but as a result lower returns.

 

[Rolf Latham]

Hi Dita

Cant comment on the DHA issues specifically, though I have many clients where they concept has worked well.

You dont indicate if you have any non deductible debt left on your home ?

The loan concept with such a chunk in the offset will work best for you if you have an interest only facility.

if you then wanted to pay extra off the debt, then simply pay it into the offset account

ta
rolf

 

[twobobsworth]

Can I ask where you found the "broker".

 

[Rolf Latham]

You dont indicate if you have any non deductible debt left on your home ?

of course you did : )

You are debt free

On this basis Id be looking to borrow 20 % plus costs secured to your home only, and the balance of 80 % secured to the investment property only.

If you are really concerned about paying some of the loan off, make the 20 % split on your home a PI loan and the big loan on the new investment IO with 100 % offset

The offset will reduce the repayments quite a lot

ta
rolf

 

[BV]

On this basis Id be looking to borrow 20 % plus costs secured to your home only, and the balance of 80 % secured to the investment property only.

What's wrong with using $150-200K from their cash as the deposit and leaving their PPOR alone?
They'll still have the remaining $ parked in the account or they can invest it eslewhere.

 

[Perp]

What's wrong with using $150-200K from their cash as the deposit and leaving their PPOR alone?

Nothing "wrong" with it, but it means that they lose their ability to have that amount of deductible debt on a permanent basis. If they never need that money for private purposes, that's not a problem, but if they decide they want to upgrade to a $1.5M PPOR, they'd be much better off using this cash for that purpose, and having the IP loan fully deductible, than having to borrow more non-deductible $ for their PPOR upgrade.

 

[Rolf Latham]

What's wrong with using $150-200K from their cash as the deposit and leaving their PPOR alone?
They'll still have the remaining $ parked in the account or they can invest it eslewhere.

That would work too of course .........................however

We dont know enough about what they want to be doing in the future.............usually I find nor do "they", soft data is almost impossible to nail so one needs flexibility in the structure used.

The financial considerations here are the same in the end picture as far as the day to day cash flow works. Their NETT borrowings are no different.

Where there are are differences.............

1. The 300 k is tax paid cash. General logic says dont use tax paid cash for investment purposes where you can use borrowings at the same cost We dont know that one day they may want to upgrade their current PPOR or buy a holiday home, motor home etc.

2. Relating back to above, Its not uncommon for parents to give their 3 kids 100 k each toward their investment of home journey.Once we have committed our cash, we then need to borrow................and we dont want to do that

3. Access to quick cash for challenge or opportunity. eg. at the moment, not a week goes by where someone isnt chasing some cash to invest in US based housing stock.




As always, there are downsides

1. The broker may get paid more upfront comission than where a largeish cash deposit is paid. Some see this as a reason not to proceed with such a structure ( odd but peoples views are their views and thats ok) Reality is many lenders apply a "utilisation clawback" where unused funds sitting in redraw or offset, they wont pay upfront on that and will actually claw that component back. Net ongoing trail comm would be the same on both scenarios.

2. The PPOR is mortgaged ( some with asset protection nous actually want their PPOR geared to 105 %). Some folks feel that having their title deed in their safe makes them safe.................. depends on whom or what you are looking to be safe from.

3. Borrowing capacity may be stretched, thus restricting further purchases. This is where some stuctured lending approach, what lender to use when and where in the portfolio will pay divs.

One can do a good case study on projects like this for various mortgage broking courses, they dont teach this stuff..............there is too much fluff


ta

rolf

 

[chilliblue]

Personally I would pay some money and speak to a financial planner rather than a broker.

I would have them go through all your financials and then work out whether property is the way to go and if so, how much and in what method.

 

[InveSTAR]

I don't have any investment properties. Only a small business just me and a house. I'm seriously concerned about getting into any kind of investment debt over the next few years. any comments?

 

[dita]

Thank you all for you replies.

Dear Rolf,

I am really not concerned about paying off the loan especially if we will be looking into purchasing 1 unit for approx $500 000.With the money in the offset we should be able to service the loan even if is't not tenanted for several months.I am on about $25000/year and was thinking the property would be in my name.My broker was thinking it may not be the best idea to have positive gearing and was more suggesting to go 2 units worth around $1mil and use neg gearing, in the name of my husband who earns about $85000(base only).Any thoughts on that?
We have no debt and most likely will not need to access any of the 300K.The house we are living in is OK for us and we have no plans to move away or renovate.We may stay here for many years, we think.Also, our children are small and will not be giving them any money for at least 15 years(except pocket money, of course
Not sure I understood you properly.You mean we should borrow 100% of the property price and put 300K into offset?And this loan would be interest only, yes?

We may decide to speak to financial advisor as our knowledge of investment is very limited as you may have noticed..but I am happy to get some information and opinion from you all before we do that.
I am very grateful you spent time to reply to me.Thank you.
Dita

 

[VYBerlinaV8]

A few things to think about:

1) Keep cash in offset accounts if you can, to keep it available for other purposes.
2) You don't need to spend all you potential borrowing capacity in one go, or just yet.
3) It doesn't need to all be property. What about buying a property for $400k-ish and a couple of hundred thousand in shares?
4) Interest only is good, but think about paying down principle over time.
5) Accumulation phase is important, but think about what happens down the track when you are ready to use your assets to support your lifestyle. How will you do that? Sell them? Borrow against them to buy other, higher yielding assets? Just receive the rent/dividend?

Have a think, let us know how you go..

Cheers.

 

[Jacque]

Hi Dita

You should only ever invest with a budget that you're comfortable with, and where the cashflow (out of pocket) costs work for your situation. In your case, it appears that the best person to speak to you about structuring your loans is a broker- I can highly recommend several good ones on here, including Rolf. He has years of experience, is an absolute professional and I can vouch for him personally, as I know others here on the forum can as well.

As for Defence Housing, there are ads and disads. The main ones have already been discussed, but I would add that there is a smaller market for such properties (investors only) and the management costs are quite high (around 16% from memory). They tend to be a conservative choice for first time investors, especially those that wish to avoid maintenance issues.

Alternatively, there is infinitely more choice on the open market. You also need to consider the type of property you wish to purchase, the likely yields, holding costs and what sort of investor you are (passive or hands-on?)
Then there's selecting the right suburb for your budget.
Best of luck with it all

 

[devank]

Regarding DHA property:
I bought one in 2008 (in Newcastle) with 6+3 years lease on it. We went for that because we knew we were going to be very busy till 2011.

Based on my experience, I think the management cost of 16-17% is well worth it. It is really 'no hassle' as the claim it.

However,
- Their properties are over priced
- They are unlikely to be well located
- Their estimated rent can be wrong

I think if you find a property where it is well located and reasonably priced then it should be okay... but are there any?

 

[BV]

Regarding DHA property:
I think if you find a property where it is well located and reasonably priced then it should be okay... but are there any?

Probably not.
I also noticed that these days their rents are lagging the market
so DHA are no longer attractive investments

 

[pennyk]

I would be looking for a second opinion from someone who knows your financial situation.
I wouldnt spend so much money initially. Start smaller and find out what works for you. Alot of people buy a fairly poorly performing IP initially, because they dont really know what they are looking for. So, start with one less expensive one, and then look to grow from there.
Maybe you'll find property investing really frustrating and would prefer shares.
So, perhaps buy some shares as well.
If you were going to spend $1m on property, I think you can get better rental returns and capital growth with non-DHA properties.
Good luck with it all

 

[jingo]

Hi,

Me and my husband are willing to purchase our first IP but are so confused as what to do and how to go about it.
We have paid off our house we are living in and it is worth around 1 mil.We also have currently savings of 300K.

Congratulations, dita, you are in a very good position.

With this amount of equity available, have you considered investing in commercial property? I'd be inclined to give residential a miss and aim to buy a commercial property with a decent yield. Remember with commercial, the tenant pays the outgoings. You could then set the loan to pay down and buy a second one when cashflow permits. (Or you could by two mid range commercial properties to start with).

I wouldn't negatively gear for the sake of it - it can be restricting if you want to stop working for a while to travel, or other things.

All the best with it.
Regards Jason.

 

[BuildingBlocks]

Work out the holding costs, because you don't want the property to be eating straight out of your savings account for several years.

Personally I am only comfortable with a negatively geared property if I can fully service it from my income, any savings account is then used as a buffer in case things go wrong.