Interest Only Loan

[WebBoard]

From: Mike .


P&I v IO Loans for 1st Property (Attn: Les)
From: Glenn
Date: 4/5/00
Time: 11:52:43 AM

Les,

You posted an article on 10/3/99 "re: Buying to Live In Or Buying To Rent Out". I'm very interested in your philosophy here. It appears that your son may have used this method (based on another article that you wrote).

I am 26, currently living at home, but want to move out in the next few months. I have about $30,000 saved up and have found a place in the outer West of Sydney for around $170,000.

I am thinking about purchasing this as an IP and renting elsewhere with some friends.

You talk about IO loans, which leave greater cash flow for other IPs. However if I haven't built up any equity in the first property, I doubt that the bank will lend the entire amount for a second property, hence they will require a cash deposit. Therefore, would I be better off taking out a P&I loan and paying this off as quickly as possible to quickly build equity. Jan's books say that you should pay off your first home as quickly as possible.

I'd love to here from anyone else who may have some ideas, as well.

Thanks, Glenn

 

[WebBoard]

Bob

Reply: 1
From: Mike .


Re: P&I v IO Loans for 1st Property (Attn: Les)
From: Bob
Date: 4/5/00
Time: 1:16:36 PM

Glenn,

Although I'll defer to others, I'd say you have two major good options, both of which owning the property:

1. Rent with your friends, buy the investment property and pay it off to use it as equity in the future.

2. Live in the house with your friends, sublet to them and declare everything for tax. This can work a treat as well.

You should do a financial analysis and see which offers the better returns (ie your rent savings as against the tax benefits.) That's something that your personal circumstances will determine.

If you get a P&I loan with redraw, you'll be able to access any advance payments on your house loan for future investments while waiting for the house to appreciate sufficiently to use in its own right. Or you can be a little bit more patient, use a mortgage buster and own the place outright quickly, then apply for an equity facility.

Good on you, whatever you decide.

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: P&I v IO Loans for 1st Property
From: Les
Date: 4/6/00
Time: 1:08:09 AM

G'day Glenn (and Bob),

Glenn you are definitely on the right track. And both options that Bob suggests can work - as he says, check out the cashflow both ways. If you bought "your own home" (then sublet it to friends) rather than an IP and rent elsewhere, you do get the benefit of being able to borrow up to 95% instead of 90% - and (after July 1) you should have an extra $7000 from "First Home Buyers" (can you wait till July 1?). And the less YOU put in to a deal, the better your return on investment - BUT highly geared is more dangerous if Interest Rates rise, so take it carefully. It all comes down to cashflow!!

A few other thoughts:-

1. If you can stand living with Mum and Dad just a bit longer, you can REALLY set yourself up - I guess you pay some board, but probably not what you'll be up for when you move out.

2. Sounds like the $170k property would fit with your current situation (your savings would likely be sufficient to "make this happen").

3. Don't forget "You make your profit when you BUY, not when you sell" so check out ANY property thoroughly e.g. vacancy rate, value for price (is it discounted?), amenities, percentage of other rentals around, rental income, is it positively geared, the area, etc. etc. How long has this $170k property been on the market? Is it new or 2nd-hand? What price will you offer? Are you prepared to "walk away" from the deal?

As you have probably gleaned by reading thru the forum, there are a thousand nuances to Property Investment. Having thought out ahead just what you want will lead you to the kind of deal you want.

Re P&I vs IO, I would tend to suggest IO for Investment, maybe with an Offset account or Redraw. If that can't be done, then maybe a Cocktail loan with most of it IO, and (say) $20,000 as P&I with Offset. This allows to put extra money into your home loan, AND get it back again (deposit for IP #2?).

I have proved to myself that rentals first up are a VERY viable way to go. With the assistance you get in buying them (tenant and Taxman) vs buying your own home, I can pretty much prove to anyone that they would be (monetarily) better off to buy an IP and rent a place, than to buy a place for themselves. But this kind of decision is a very personal one - and money is NOT everything, but it sure eases a lot of situations.


Re my son - his RE history might be beneficial to you:-

He bought his first home approx. 4 years ago, gained some Tax relief by doing what Bob mentioned (i.e. having others paying him to live with him). About 2 years back, HE went out renting, and rented the whole house (income $150/week, his rent $70) so gained $80 in cashflow AND had 100% of the Tax benefits as the WHOLE property was rented this time. He sold this property to me last year, and found a "mortgagee in possession" property to buy for himself. Bought at approx. 10% discount, then spent the last 6 months tidying it up - it revalued last week at 16% above what he paid - so is refinancing it, and has tenants now in there (he's renting again) paying $190 per week.

NOW, he has found a second property in a higher Capital Growth area of Brisbane and this becomes his 2nd IP (halves with me). This one, too, should re-value at 15% higher within a few months - meantime, he rents. More Tax deductions and working only 4 days a week, because he likes the extra day (to go out looking for more properties - and I could do with 1 more) - and all because he started reading a few good books, got interested, and went to seminars, etc. And I've never seen him so excited!! He knows where he is going, and how he wants to get there. And good for him!!

Let me also say "Good for you" for taking your first steps into this fascinating field. Keep reading, learning, listening, probing, questioning, etc. to maximise your potential.

And welcome to the forum - come back with more questions whenever you need to.

Les