How to get a second IP?

[Demoivre]

Hello everyone,

I would like some insight with regards to obtaining a second IP.
A little info about myself.

My income is 800pw. No car loan, PPoR that has been paid off 800k valued.
I have about 50k in savings and just purchased a 320k IP which rents out at 350 per week (deposit 40k with savings; the remaining is taken from PPoR at 80% LVR). My repayments would be approximately 498 a week.

My question is how do people manage to obtain another property on top their existing loan?

Am I allowed to access the equity in my PPoR for another IP?

Any advice/suggestions would be most appreciated.

 

[travelbug]

You need to speak to a broker to ensure your portfolio is structured correctly.
You would have been better off getting a stand alone loan for the IP than using your PPOR as they are now crossed.

I think you'd be better refinancing the IP so it's stand alone then use your PPOR for deposits to buy future IP's. on each IP you get an 80% stand alone loan.

Of course you need to be able to service the loans. When buying negatively geared properties you eventually reach a limit.

 

[Demoivre]

Hi travelbug,

Thanks for responding. Sorry for not clarifying better. I'm in the process of purchasing (the sellers have agreed but have yet to sign), but the idea was in the original post.

So you recommend keeping my savings and only drawing equity from my PPoR?

I forgot to mention that this would be my first IP.

 

[Jamie M]

Hiya Demoivre

If you've got an unencumbered PPOR it usually makes sense (financially anyway) to tap into that equity to fund the deposit/costs on your IP.

That way, you keep the entire IP debt (loan and purchase costs) deductible.

To do that, you'd take out a loan against your PPOR to cover the 20% deposit and costs (usually another 5%) for your IP.

You'd then set up another 80% loan against the IP.

You also get to hold onto your cash as a buffer with this method too.

Cheers

Jamie

 

[Rolf Latham]

pick up the phine and have a chat with Jamie

Your sort of scenario with great equity but skinnier income is his specialty

ta

rolf

 

[Greg Reid]

Perhaps the most effective manner to do this is to establish your loan facilities secured against your PPOR correctly in the first place. It will depend on your goals to an large extent but for most:

• If you still have a loan on your PPOR, move it to an IO with 100% offset.
• Then set up a LOC facility up to 80% of the value of the PPOR. This is the funding line for settlement of IP's and to cover any rent shortfall.
• You then borrow from another lender for each IP up to whatever LVR that makes sense and is within your overall plan. It may be from 80% or up to say 88%, any higher gets expensive for LMI. These are IO loans.

Your IP's that you purchase then have to meet the criteria that satisfies what you need to qualify to borrow for the next IP. I haven't touched on risk insurance, property age, diversification, ownership, etc but all of these need to be factored in.
Good luck with it.

 

[Demoivre]

Thanks Jamie and Greg for your input.

It seems there's a decent amount of other factors that come into play.
I somehow just don't feel comfortable with IO loans. The fact that I'm not making any progress with the debt and relying on the growth doesn't sit too well. Would it be less efficient if build up equity in my IP then use that to fund my second IP?

 

[Aaron_C]

The fact that I'm not making any progress with the debt and relying on the growth doesn't sit too well. Would it be less efficient if build up equity in my IP then use that to fund my second IP?

You have to get out of that mindset. What's the point of buying an IP if not for the growth?

Besides, all that extra cash you accumulate will be put into the offset account which WILL reduce your debt anyway - so rest assured.

 

[danwatto]

Thanks Jamie and Greg for your input.

It seems there's a decent amount of other factors that come into play.
I somehow just don't feel comfortable with IO loans. The fact that I'm not making any progress with the debt and relying on the growth doesn't sit too well. Would it be less efficient if build up equity in my IP then use that to fund my second IP?

The point of an IO loan is so that you have control when and how much principal is paid, not the bank. Who would want to give up that control, and make it a contractual obligation for no reason.

On most IO loans you can still pay principal, it's just that you're not required to. Very useful if you want to pull the money out for another IP from an offset, or for other reasons such as an emergency for example..

 

[Jamie M]

Thanks Jamie and Greg for your input.

It seems there's a decent amount of other factors that come into play.
I somehow just don't feel comfortable with IO loans. The fact that I'm not making any progress with the debt and relying on the growth doesn't sit too well. Would it be less efficient if build up equity in my IP then use that to fund my second IP?

No worries.

Becoming comfortable with IO requires a change in mindset.

However - some people that aren't disciplined with money can be better of with P&I.

A lot comes down to your goals and where you're currently at too. If you've got an unencumbered PPOR and you're fairly certain that it's your "forever" home and you won't own another PPOR in the future than P&I on investment debt might be ok.

p.s - I've replied to your PM too.

Cheers

Jamie

 

[Demoivre]

Hello Jamie,

Wouldn't it be clustered if I loan 20% deposit against my ppor and the other 80% a standalone io for future properties as well? I forgot to mention I'm not planning to live in the current ppor in the future.

 

[D.T.]

Hello Jamie,

Wouldn't it be clustered if I loan 20% deposit against my ppor and the other 80% a standalone io for future properties as well? I forgot to mention I'm not planning to live in the current ppor in the future.

No, because each of the loans only has 1 security associated with it, as opposed to multiple as Jamie was alluding to.

 

[Demoivre]

Hi DT,

Thanks for your response. I guess the main consensus is to obtain a 20-25% equity loan from my PPoR, and a separate 80% loan for the IP; both of which are IO. Then pay off my PPoR first with cash?

 

[Rolf Latham]

Hi DT,

Thanks for your response. I guess the main consensus is to obtain a 20-25% equity loan from my PPoR, and a separate 80% loan for the IP; both of which are IO. Then pay off my PPoR first with cash?

target your cash into a 100 % offset account against the Owner occupied loan.

This may give you more flexibility if you turn the current PPOR into an IP in the future.

properly constructed and managed this works the same as a PI loan in terms of interest cost

ta
rolf

 

[D.T.]

Whats the plan with the ppor? If you plan to upgrade to a better one and convert this one to a rental , you'll want to rethink that

 

[Demoivre]

Yes I'm planning to make my ppor an ip in the near future. It be safe to say that for ips you would want io with 100% offset and ppor with p and i?

So in my case I should have both io loans with 100% offset for my current ppor and ip?

I apologize again as I'm rather new to this whole investment property world!

 

[Rolf Latham]

Yes I'm planning to make my ppor an ip in the near future. It be safe to say that for ips you would want io with 100% offset and ppor with p and i?

So in my case I should have both io loans with 100% offset for my current ppor and ip?

I apologize again as I'm rather new to this whole investment property world!

no apologies needed. This is simple, but not obvious, most of us are taught that debt is bad and IO is evil.......... so dont be surprised that you are struggling with the concept


if your money habits and head space work with IO and 100 % offset, having IO loans for ALL loans is a flexible strategy

ta
rolf

 

[Demoivre]

Thanks rolf for your great insights!

This might be a little bit off topic but how would people generally go about with finding lenders. Should I seek a mortgage broker for subsequent loans ?

As with my first IP, I one of the BIG4 lenders mortgage specialists and I feel like another service would be better.

 

[Rolf Latham]

Thanks rolf for your great insights!

This might be a little bit off topic but how would people generally go about with finding lenders. Should I seek a mortgage broker for subsequent loans ?

As with my first IP, I one of the BIG4 lenders mortgage specialists and I feel like another service would be better.

if you have a good banker to work with and that works, then generally malke use of their expertise.

if you need a service that crosses various lenders, for various reasons, a broker may be a better outcome.

note though that brokers like bankers - not all are created the same

ta
rolf

 

[Jamie M]

This might be a little bit off topic but how would people generally go about with finding lenders. Should I seek a mortgage broker for subsequent loans ?

Get a decent finance person to assist. Rolf has provided excellent input - why not give him a buzz.

Cheers

Jamie