IP Advice for Beginners

[Mrs.Knightley]

Hi everyone,

I was directed to this forum by a friend who is a keen property investor, and I was interested in seeking some advice for purchasing my first IP with my current financial situation. A little bit about me:

Age: 27

Marital Status: Due to be married in November 2014.

Employment: I am a newly graduated doctor, and will begin work in January 2015. I am not currently employed.

Income: None at present, but my contract for 2015 states $62K, but due to the amount of overtime I will be expected to work, I have been told by my seniors that the amount will really be $80K for my first year out. Thereafter, for the next 6 years, my income will increase by approximately $12.5K per year. After that, depending on my success in getting into a specialty training program, my income will be difficult to predict, based on both how long it takes me to get into a training program, and which training program I get into, but should range in the $200-$400K mark.

Savings: 200K (currently in the share market, but easy to liquidate). My parents have also told me they will lend me another 600K at the RBA cash rate (currently 2.5%).

Aims: I have been interested in the property market since the age of 23 and was hoping to purchase property then, but after starting post-graduate medical school, I was concerned I wouldn't be able to work the whole time to pay off my loans due to the pressures of medical school. I would really like to purchase my first property soon, and would like to have enough income generated by my property portfolio by the age of 40, so that I can work in medicine because I love to, and not because I have to.

Other: My fianc? is a funds manager, who is earning 110K per year. I am not sure about his projected income but will perhaps increase to 150K and plateau (this is his guestimate).
After marriage, we will be living in his townhouse in the lower north shore which he is still paying off as it is close to where I will be working. He still owes $420K on his property, and it is a principal and interest loan. He does not have any other investment properties, and only has 100K worth of shares, and after the wedding costs, possibly only 10K in savings.

I was wondering what your thoughts were on the best way to use the 800K I will have access to, and if you could provide any advice on a strategy to use to achieve these goals. We have been thinking about purchasing a property each, and leaving the remainder in his offset account to reduce the amount of total interest payable for the townhouse we will be living in (as he is still paying it off).

Any advice would be much appreciated!
Thanks

 

[Shahin_Afarin]

Couple of points:

1. You will be eligible for 90% LMI waiver with a couple of lenders once you start working so use it if you can. Difference in deposit between 80% and 90% LVR is huge.

2. Recommend hubby changes P&I and reverts to IO (as long as you are both disciplined with your money). Accelerates your deposit saving and allows you to maximise your tax deductibility once/if you convert the existing townhouse into and IP down the track.

3. Borrow as much as you can and park excess funds in an offset.

4. Talk to an accountant about negative gearing, CGT and LT implications.

5. Its good that you are considering purchasing in single names - don't do the 99/1, 80/20, 50/50 thing. Affects servicing long term and has LT implications

You guys are young, dual income (and good income), good deposit base - I would consider being more aggressive at this stage of your portfolio instead of later on.

 

[Rixter]

What is it that you are wanting to achieve by purchasing property?

What time frame do you plan to achieve it in?

The answers to these 2 questions determines what property investment strategies are best for you to utilise.

You see, property investing is not about property. It's about taking you where you want to be in X years ahead. Property is merely the vehicle to that higher purpose.

I hope this provides you some food for thought.

 

[Blacky]

You could also consider doing a bit of a debt recycle.

You have $300k of shares which I am assuming was purchased with cash.
Sell these, repay some of the $420k PPOR loan, and re-borrow $300k to purchase back the shares.
Net result remains the same, however, you now have $300k deductible debt.

This may have tax implications in terms of CGT on the share sale.
You would also need to consider the long term plan for the current PPOR.

Talk to an accountant and a broker.

Blacky

 

[Mrs.Knightley]

Hello,

Thanks so much for all of your prompt responses! I really appreciate it. And thanks for the advice.

In response to each:

Shahin_Afarin:

I have heard of the 90% LMI waiver for doctors, and am starting to look into that as my time frees up with medical school being complete.

In regards to my fianc? changing his P&I to an IO, if we are planning to live in this property for only 1-2 years (hoping to move overseas for a year), and will not be getting tax deductions as it will be PPOR rather than an IP, is it better to wait until we move out and make it an IP to change the loan over? I was thinking of using the leftover money from the funds I have (800K) to park it in his offset loan (say 415K, leaving 5K to accumulate interest whilst we live there, to minimise interest repayments as we are not claiming tax deductions whilst using it as our PPOR.

In regards to being aggressive with the portfolio now, I wondered if it would be better to be more aggressive in property purchase later, as my income rises, in order to make the most of negative gearing? As I start on a lower income and it will increase slowly for the first 6 years, but I expect it to increase at a faster rate after 6 years, when I have finished training and am specialising/opening up a business.

Rixter:

My purpose is to diversify my investment portfolio (as I have had shares since the age of 18, but never yet a property) so that my investments will work hard enough for me, so that by the age of 40, I will no longer need to work for an income, but rather work because I am passionate about what I do. I want to get to this point, because I really want to work for the passion, rather than the necessity. I think for me personally, this is the best way to continue loving what I do, and that's very important to me. It's all too easy for people to get jaded in the profession.

Blacky:
Yes, will definitely look for a good accountant and broker! The long term plan for the current PPOR will be turning into an IP, possibly within the next 1-2 years so that we can move overseas for a year. When we return, we will probably look to purchase our long-term home that we will want to eventually raise children in. So, I think, for negative gearing purposes, we are not wanting to pay off too much of the loan now, but rather parking excess funds into my fianc?'s offset account to minimise interest repayments that we won't be getting a tax deduction for as it is not our IP.


Also, any recommendations for where to start investing? I'm from Sydney, and as it is my first IP, am unsure about looking somewhere interstate like Brisbane for my first place, however, I'm also concerned that the Sydney market is a sellers market right now? (Please correct me if I'm mistaken)


Thanks!

Cheers

 

[Shahin_Afarin]

I have heard of the 90% LMI waiver for doctors, and am starting to look into that as my time frees up with medical school being complete.

In regards to my fianc? changing his P&I to an IO, if we are planning to live in this property for only 1-2 years (hoping to move overseas for a year), and will not be getting tax deductions as it will be PPOR rather than an IP, is it better to wait until we move out and make it an IP to change the loan over? I was thinking of using the leftover money from the funds I have (800K) to park it in his offset loan (say 415K, leaving 5K to accumulate interest whilst we live there, to minimise interest repayments as we are not claiming tax deductions whilst using it as our PPOR.

In regards to being aggressive with the portfolio now, I wondered if it would be better to be more aggressive in property purchase later, as my income rises, in order to make the most of negative gearing? As I start on a lower income and it will increase slowly for the first 6 years, but I expect it to increase at a faster rate after 6 years, when I have finished training and am specialising/opening up a business.

Yes better to change to IO immediately so when you do convert the property into an IP you can claim the higher amount. By bringing the principle down now you are only minimising the amount you can claim for negative gearing when you convert the property to an IP.

Dont invest purely for negative gearing - NG is only the icing on the cake. Focus on creating capital growth.

 

[Jamie M]

In regards to my fianc? changing his P&I to an IO, if we are planning to live in this property for only 1-2 years (hoping to move overseas for a year), and will not be getting tax deductions as it will be PPOR rather than an IP, is it better to wait until we move out and make it an IP to change the loan over?

Hiya

Best to make the switch sooner rather than later.

Here's a recent thread that looks at a similar example and explains why it's important to have IO set up from the start http://somersoft.com/forums/showthread.php?t=103006

Cheers

Jamie

 

[cadence]

Do you want to buy in your own name or joint names with your partner?

Either way go see a few banks or brokers to see how much bank will lend you.

If you buy solo, Your parents' loan to you will be factored into your serviceability and the banks might not lend you too much more based on your current income level. I suggest you consider buying the best your money afford. I would consider looking for a house in the best area you can find. You dont need cashflow now (which units can be good for) as you have a high income partner. You want to set up your assetbase so that in 5 years time when your income is exponentially higher you can use the equity (growth in value) in the house to fund your next purchases.

Dont over analyse. Whatever you buy you will end up in a good position with the jobs and monies you two are making.

 

[cadence]

Dont know why theres a funny face on top of my last msg
first time posting on ss using my android. Must have accidentally clicked something


All the best to you! Im sure whatever you do you will end up in a good position!

 

[beachgurl]

I think you should invest aggressively now rather than waiting til you earn more. By the time you are earning more, your portfolio will have increased in value and you wil have more equity to pull out for more deposits.

Do you plan to have children? I know this is a personal question and you don't have to answer, but if it is on your agenda, all the more reason to invest now. You don't know what how things may change down the track.

My husband and I invested aggressively just after we married. We each earned around what you will be earning. We got 95 pc loans and bought quickly. Our intention was to keep buying but then I was encouraged to leave my job due to pregnancy difficulties. This threw all of our plans out if the window. 7 years down the track and those properties are doing well for us and our portfolio is looking ok, even tho we did very little investing since then.

At this point my husband earns more than our combined incomes back them. I'm in the fortunate position that I don't have to work and have chosen to work on property and use his income to pull out equity and buy more.

4-5 years can be a long time in real estate. Don't hold off on buying. You are in such a fortunate position that your parents are helping you on your journey. Maybe buy a block of land big enough to put a duplex on it and have a project builder do all the work. Or buy a property in a good area with room to build a granny flat. While you are not worried about negative gearing, buying properties that are neutral or positive will get you closer to your goal of working cos you want to.

 

[Mrs.Knightley]

Do you want to buy in your own name or joint names with your partner?

Either way go see a few banks or brokers to see how much bank will lend you.

If you buy solo, Your parents' loan to you will be factored into your serviceability and the banks might not lend you too much more based on your current income level. I suggest you consider buying the best your money afford. I would consider looking for a house in the best area you can find. You dont need cashflow now (which units can be good for) as you have a high income partner. You want to set up your assetbase so that in 5 years time when your income is exponentially higher you can use the equity (growth in value) in the house to fund your next purchases.

Thanks cadence. I'm thinking of buying things in separate names, purely because it is almost certain my income will supersede my fianc?'s income in the near future. If this is the case, I am wanting of thinking of ways to minimise the tax I have to pay, and I thought by having several IP's that are negatively geared, this would help reduce my taxable income. But of course, the issue now, is that he earns more than I do, and would have greater borrowing power. I haven't yet thought about the ramifications about owning property in joint names, and am unsure of the advantages/disadvantages, so will have to look into it.

 

[Mrs.Knightley]

Do you plan to have children? I know this is a personal question and you don't have to answer, but if it is on your agenda, all the more reason to invest now. You don't know what how things may change down the track.

Thanks for your reply beachgurl. Yes I forgot to mention that as it will factor heavily into the equation won't it? I'm 27 now and so would like to have 2 kids, probably around the ages of 32 and 33/34. I realised because I hadn't factored that into my original spiel, if I take time off for maternity leave it will take me longer to become a specialist, which will mean my income will not rise exponentially until this point. So I guess I would be earning specialist-levels of money at age 35 or 36, i.e. 8 or 9 years from now.

But in terms of being able to pay off my repayments whilst on maternity leave, all my work for the next 8-9 years prior to becoming a specialist will be at a public hospital, as a government employee, and so I will be entitled to paid maternity leave. I'm not sure exactly how that works, but at this point in time, I should be earning ~130K for the first child at 32 and 142.5K for the second child at 33/34, so this should cover me for this time, hopefully.

 

[Deltaberry]

You are young, have access to a decent amount of equity ($800k) at releatively cheap funding (2.5-3.5% probably).

Few options

If you know your market well, and presumably your parents would, leverage 85% and buy well in the $1-2m mark. You can probably pick up 2-3 of these. You'd be surprised how quickly they grow when the market moves. Probababy the most capital growth out of all the options, but also a negative cashflow drain most likely (ie negative gearing).

Alternatively, go after commercial and leverage 60%. Again if you buy well, easy $1m in your pocket in 12 months. If you don't buy well but bought in a good location, you should have no problems tenanting it out and won't have to worry for the next 4-5 years. Easy to achieve neutral cashflow position, with no concerns about repairs etc, but you may have to deal with incentives and watch out for GST if it's not tenanted.

Or you could choose high yield industrial sites at say 8-10% net yields. Lock in 60% leverage at 5% borrowing rates. Metropolitan petro stations, regional warehouses etc. Problem with such properties is you need to check the lease very carefully because it could be a useless site if the tenant leaves - almost a bit risky for a first timer but could pay off cashflow wise. Potentially not as much capital growth depending on what it is and where.

Location wise again so many options. You can buy a very nice house in top parts of Brisbane for $1.5m quite comfortably. You'd get a little house in Redfern for those prices.

Agree with being aggressive early on. You're young, start of working life, have good income. You can probably get bailed out by folks if GFC happens (?)

 

[JDM]

Couple of points:

1. You will be eligible for 90% LMI waiver with a couple of lenders once you start working so use it if you can. Difference in deposit between 80% and 90% LVR is huge.

Do you know if there are any limitations on when this LMI waiver can apply? I have been advised that the comparable LMI waiver for Lawyers is only applicable if income is $150k or greater.

Obviously different lenders may have different criteria and I would be interested to know this.

 

[Shahin_Afarin]

Do you know if there are any limitations on when this LMI waiver can apply? I have been advised that the comparable LMI waiver for Lawyers is only applicable if income is $150k or greater.

Obviously different lenders may have different criteria and I would be interested to know this.

You need to show your legal practice certificate (it must be an Australian one) and also your total income (salary plus you can use rental income) must be $150k plus. So if your base salary is $120,000 and you get $30k in rental income per year then you are eligible.

A bunch of other professions get this which include but not limited to, Accountants, Politicians, Celebrities, Athletics, Engineers, etc.