How the Mindset Changes

[Queen Bee]

It's quite amazing how the mindset changes in a short amount of time. A year ago I didn't even know what an investment property was. I thought people that had rentals were really really rich, because I didn't know about equity either. I thought that rich people, were people that had huge incomes and saved all their money. I had no idea that there was good debt and bad debt.

Six months ago, if someone said to me "If you won Lotto, what would you do with the money. I would have said, pay the mortgage off, pay the credit card off, buy a really really expensive car, go on an expensive holiday and buys lots of things so that I would look and feel rich.

Now that "I've seen the light" someone said to me other day, "What would you do with the money, if you won Lotto. I immediately said, "buy more properties". They just looked at me blankly - really "why". I said, so I can make more money. I said, "do you realise how many properties you could buy if you won $1k. They still looked blank, so I didn't bother explaining.

I feel like I now know this huge secret, that I'm willing to tell, but generally people don't want to know about.

Oh well, the carrot chasers can have their flash cars, I'm now keeping mine till it falls apart.

And I don't even buy Lotto anymore.

 

[Tyson]

Dear Queen bee,


i am only new to this forum... so i hope you dong mind if i ask ... how much was your fist IP and then how long before you bought your second & so on? i have just bought my first IP in Nov last year....in maitland NSW for 157,500 i currently owe about 130,000 and it returns 185 pw rent ...basically comming out square. it is now valued at about 170 to 180 and i would like to get another property... what should i look for and how should i finance the loan.... ? i realise that there is propbably no set formular .... but i am itching to get another but not sure when or how...?

 

[Les]

G'day Tyson,

First off, congratulations for joining the 6% that own one IP !! Sounds like you are seriously looking to take another step. Your first one sounds like it has already done you well, but WHEN do you do it again?? Fair question !!

Have you met up with the folks on this forum who meet regularly in Newcastle?? You are "sort of" up that way..... Or, are you closer to Sydney??? If the latter, come on down this weekend (Sunday) and meet up with a bunch of us at the Rocks (see "Meeting Point" forum for details).


Re your question what should i look for and how should i finance the loan.... ? I guess we would need a bit more info about you and your situation to answer it successfully. But, in general terms, you could do well by contacting a Mortgage Broker (there are a few on this forum) to see just what can be done in the way of financing.

Re WHAT to buy, a lot of this would depend on where you want to be in what period of time. Your current income, your marginal Tax rate, and your goals are all important re "what do I buy next". Also, what can you afford at this time??

In short, I guess we need to know a bit more about you before we can suggest ways for you to go. Post some more information about yourself, or come and meet up with us to discuss things - whichever suits. I know we can help you, but we need more input from you.

Have a great weekend - come and see us at the Rocks if you can,

Regards,

 

[Queen Bee]

Originally posted by Tyson
Dear Queen bee,


i am only new to this forum... so i hope you dong mind if i ask ... how much was your fist IP and then how long before you bought your second & so on? i have just bought my first IP in Nov last year....in maitland NSW for 157,500 i currently owe about 130,000 and it returns 185 pw rent ...basically comming out square. it is now valued at about 170 to 180 and i would like to get another property... what should i look for and how should i finance the loan.... ? i realise that there is propbably no set formular .... but i am itching to get another but not sure when or how...?

Hi Tyson

I'm only new to this too, so I'm glad Les was there, he's helped me heaps, especially getting my head around cross-collateralisation and Line Of Credits. Which I didn't even know existed till recently.

Bought my first one April 2003 - Originally selling for $95k, reduced to $87k, I offered $78k and bought for $81k. 2 bedrooms, no fencing, no garage - rental $170 pw. Borrowed 100% secured against my PPOR.

Bought my second one in May 2003 - Originally selling for $115k, I offered $90k and bought for $92.5k. 3 bedrooms, fully fenced, single garage - rental $200 pw. Borrowed 100% secured against my PPOR. Estimated new value about $120k after cosmetic renovation.

At the moment I'm looking for 2 & 3 bedroom houses, driveon or with garages because there is a shortgage in our area. Especially 2 bedroom ones. Tired looking properties appeal to me because it's easier to talk the price down. I don't particularly like the negotiating part so I always talk to the RE agents like everything I say is coming from my partner (but it's actually me). It just makes me feel like freaking out less. And if I'm being particularly stubborn, then I can just say "no - he won't move, I'm sorry". hehe. Makes me feel better.

Have now gone to a mortgage broker who said I can look for another property, doesn't want my leverage to be over 90%. For my next house, he's going to get IP 1 & 2 security taken off my PPOR and he reckons he'll be able to get the bank to contribute around $1500 towards legals and valuations.

Les,

When I find another house (put an offer on one on Thurs) what in your opinion is the best structure that I shd be looking for. He's going to re-finance and put them all together as one loan. I said what about if I wanted to sell one and he said that won't be a problem. Will it? He thinks he'll probably stay with the bank I'm with now (Westpac).

Cheers QB

 

[Tyson]

thanks heaps for your help guys....... les i am interested in that meeting at the rocks......

 

[Jas]

It sounds very much like your mortgage broker is going xcoll your properties. If you have one loan, the dollar value must be secured.

If the one loan calls for more than one security (house) you are xcolled.

If you want to sell one place, you have to break the whole loan. You might be able to switch securities, but you must have another property free to switch in.

Diffifult to co-ordinate.

I'd smile at your mortgage broker and head for the door.

I have a mortgage broker contact in NZ (haven't used him myself, but none of the people I've recommended have come back with negative stories), do you want me to send you the details?

Jas

 

[Queen Bee]

Originally posted by Jas
It sounds very much like your mortgage broker is going xcoll your properties. If you have one loan, the dollar value must be secured.

If the one loan calls for more than one security (house) you are xcolled.

If you want to sell one place, you have to break the whole loan. You might be able to switch securities, but you must have another property free to switch in.

Diffifult to co-ordinate.

I'd smile at your mortgage broker and head for the door.

I have a mortgage broker contact in NZ (haven't used him myself, but none of the people I've recommended have come back with negative stories), do you want me to send you the details?

Jas

Hi Jas

Yes I think I need to speak to someone else about this. I'm in Wellington though, where's yr guy?

Everyone I have spoken to about the term x-coll doesn't have a clue what I'm talking about. I've mentioned it to two mortgage lenders at the bank (one of them an investor herself), a valuer, a RE agent, nobody knows what I'm talking about. I said to this guy, the Mortgage Broker, was I x-coll with my PPOR, he changed the subject, simply because I think he didn't know what it was. I said "do they hold the title to my property", would I have to go through a lawyer to get them un-x'colled? Yes he said. No said the bank. I said if we put all three IP's together, what happens if I decide to sell a house. He said you just pay the money back to the Bank. But you can't if you're fixed IO for 5 yrs - can u?

These people are just starting to piss me off!! I would really really like to talk to someone that knows what they're talking about!!!

 

[Les]

G'day QB,

When I find another house (put an offer on one on Thurs) what in your opinion is the best structure that I shd be looking for.

First, it depends what you are planning to do with the IP's. Some buy/reno/sell - others buy/hold - some buy then sell with vendor finance (wrap).......

Now, I am not a full bottle on all the possibilities, or solutions, but I've heard Trusts are best if you are planning on buy/hold. But well done for asking - it is a very important point before you get "too big"!!!! (For trading (buy/sell) a Company might be better ..... LAQC??? You tell me .....)

Let us know what YOU are planning for your IP's......

He's going to re-finance and put them all together as one loan. I said what about if I wanted to sell one and he said that won't be a problem. Will it? He thinks he'll probably stay with the bank I'm with now (Westpac).

Gotta say, I'm with Jas from the sound of that.... It really DOES sound like he is planning on x-colling them. It's probably a good idea to spend a bit of time checking all of the above out before buying too many more. It also sounds like it would be GREAT for him (redo the loans, and more commission....)

BTW, we use "x-coll" as a shorthand way of saying "cross-collateralisation" - could it be that you are using our "shorthand" when asking about them?? (They might not know our shorthand )

Another word they might use in NZ is "cross-securitisation" - because collateral and security are almost inter-changeable. To break it down, when you go for a mortgage, a lender takes the title of a property you have as "collateral" or "security" for their loan. i.e. if you don't pay, they take the property!!!!

So, CROSS- collateral (or "cross-secured" perhaps??) is to have the value of TWO properties involved in ONE mortgage (one mortgage refers ACROSS to the other mortgage - and vice versa) - and, as Jas has said, if you want to sell one, you need to "break" the x-coll. (Read, more costs for you!!! )

What if I wanted to sell a house? You can't if you're fixed IO for 5 yrs - can u?

Well, it's more difficult, and costly - but not impossible. First off, DON'T fix ANY mortgage if :-

(a) You plan to sell within the term of the Fixed loan
(b) You are unsure if you MIGHT need to sell, or not...
(c) You are planning on changing the loan structure within the term of the loan. e.g. Wanting to re-finance to create separate loans - say, one LOC, and one Fixed


Now, DO keep in mind, QB, that things might be QUITE DIFFERENT in NZ - but over here, breaking Fixed Loans can cost HEAPS !!! And it is NOT just the amount that the Bank loses out on by having you STOP paying 7% and go to variable at 5.5% !!!! It seems to be 2 to 3 times that amount ......

Also, does NZ have a Stamp Duty that has to be paid whenever ownership changes?? If so, THIS will impact you when you want to "move" your current properties into (say) a Trust...... So, all the more reason for checking out now about the best structure for you. That way, any NEW IP's can go straight into the new structure.

I'd be very surprised if NZ doesn't have Trusts - but how they work, I don't know....... You will need to find a good Accountant over there from the sound of things.

Hopefully, other forumites from NZ might be better equipped to advise you.

And keep asking those questions, QB - you are probably helping many others as well as yourself !!!

Regards,

 

[Queen Bee]

Hi Les

I'm going to buy and hold. I'm not going to buy any that aren't cashflow postive.

Both of my IP's have been bought under my LAQC Company. But myself and partner are guarantors for the LAQC (because that's the way it works) I intend putting my PPOR into a Family Trust at some stage as well. When I can bare to part with $2.5 to set it up and ongoing costs over the years to get forgiven - until I'm all forgiven!

My accountants back from holiday tomorrow, so I'll make an appointment to see her and sort all this out.

No I haven't been using the shorthand for x-coll, but I'll try the other one on them!

I know that if I don't sort all this out now, this x-coll is going to come back and bite me in the bum later on. I've been having this big discussion with my partner about x-coll, and he can't seem to see the problem. I keep saying because if something happens the bank can get everything. And he keeps saying, I can't see that anything would happen, so what's the big deal.

Cheers and thanks for the advice

 

[Les]

G'day QB,

Following on from your hubby's words, I thought I'd post this link - which shows others DO x-coll, and seem to be happy with it, as well as successful.

http://www.somersoft.com/forums/showthread.php?postid=61014#post61014

Re whether to x-coll, or not, I leave it to you and hubby to read up on the different scenarios, then make your choice. A search using "x-coll" should be successful I would think (but haven't tried it b4 posting this.....

Good luck,

Regards,

 

[lissie]

Originally posted by Queen Bee
I'm going to buy and hold. I'm not going to buy any that aren't cashflow postive.

Both of my IP's have been bought under my LAQC Company. But myself and partner are guarantors for the LAQC (because that's the way it works) I intend putting my PPOR into a Family Trust at some stage as well. When I can bare to part with $2.5 to set it up and ongoing costs over the years to get forgiven - until I'm all forgiven!

Hi fellow Wellingtonian,
We have done the same thing this year - bought 2 IP's 100% financed. We own our on PPOR (CV $345k). IP #1 was $95.5K which security for $60k fixed IO and a LOC (in the LAQC name) of$186k with only IP#1 named as security . BUT (and its a big one) we personally (as directors) had to give an "all obligations guarantee" in favour of the LAQC My understandign of the gurarantee is that the bank can call on any current or future property or other assets. It even cuts accross assets which are not relationshjip property. The guarantee does not expire automatically when you repay the mortgage either! All very scary - BUT the up side is only 1 property per a mortgage so if we do sell (which we dont intend) we can do it easily. That was Feb 03. In Mar 03 we bought IP#2 ($82k) -cash from LOC and then in May fixed $82k IO again with a single mortgage over IP#2 and all existing & future securities statement. (ie the guarantee again). We have just settled IP#3 $77k again using the LOC. I will fix this one as well - just waiting to see if the interest rates go down again Again I expect no problem from the bank - its National Bank btw and mortgage broker is very good if you want his name - he works from Lower Hutt but visits up the coasrt if that is where you are ?

So in short there is no way the Bank should want > 1 IP per a mortgage give the guarantee which you have already given.

I too havent done the trust thing yet = I'm not sure if the trust owns (eventually) the PPOR whether the bank's gurantee can still come after it. Also if the LAQC is profit making then the trust can own the shares (wouldnt want to otherwise because the losses would not be available to the directors) , and then the trust can arbitrary distribute the income between beneficaries (ie not in a properition of shareholding) - this is handy if one of you stop working for a period of time. Chasing this one up with a solictor..

BTW breaking fixed loans in NZ costs heaps too! Unless of course the rates go up & then they wont care!