IPs with LOCs, pay off our PPOR. Feedback please

We would appreciate feedback regards our current setup (pros cons do's and don'ts) and how to set up for the next step. We have taken advice from Property focused accountant, most happy with that but we have no way to "compare/share" with others in the same situation to ally our actions.

Goal:
Keep IPs and add in 6 to 12 months
Pay off PPOR one day, currently under construction.
Have a decent life, at least 1 toy in shed, wine on shelf and kids educated!
dual income and 3 kid family.

IP1: LVR 65%
IO loan for purchase price with LOC to pay IO and costs
LOC should last 3 years
Rent to PPOR LOC

IP2: LVR 60%
IO loan for purchase price with LOC to pay IO and costs
LOC should last 3 years
Will put rent into PPOR when we move out and into new home (Dec 10)

PPOR
LOC for build, LVR should be 40% on completion.
To receive our salaries and rent from IPs
Pay interest on IP LOCs, lfe costs etc.

LVR across all 3 props 77% at the mo.

Expect CG on IPs to be no less than 10% pa.
I hope to renegotiate LOCs against IPs after they "run dry" and add another say 3 years worth to them given the expected LVRs after the last 3 years allowing me to do that.
One question is the banks calculations on serviceability as LOCs grow AND we seek to add another IP to the portfolio in 2011.
How doe we convince we can service, as it were. Do the banks welcome this type of set up?

Constructive feedback would be welcome on current strategies to see us thru the next few years and beyond.
Anything we should look at, change, consider etc etc.
cheers
 
a) I suggest you get a private ruling from the ATO for this set up.

b) its hard to say what any individual bank will say sometime in the future, but, if I were an assessor/LMI provider and you showed me statements with a LOC without any payments, I'd knock the deal on the head there and then. If it were submitted with an explanation, a private ruling form the ATO and showing you were making the normal P&I payments to your P&I loan instead (as well as the normal PPOR payments), over and above the rental, then I might consider it, but in the current environment, without significant mitigiating factors it might still get knocked.

Interestingly, I got a letter from our bank over our LOC that we capitalise the shortfall between rental and outgoings to alerting us to the fact it hasnt had a payment made. I rang the number on the letter and tried to see if this was somehow against policy (the letter just inferred we had somehow forgotten or something). The guy I called did try to tell me it was against policy, and he also had some opinions as an accountant as well, which I disregarded.
It didnt wash with him that we were making that payment and more to our PPOR mortgage....
he isnt an assessor, but I think that is the sort of thinking you may get when you apply for your next loan.
 
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We would appreciate feedback regards our current setup (pros cons do's and don'ts) and how to set up for the next step. We have taken advice from Property focused accountant, most happy with that but we have no way to "compare/share" with others in the same situation to ally our actions.

Goal:
Keep IPs and add in 6 to 12 months
Pay off PPOR one day, currently under construction.
Have a decent life, at least 1 toy in shed, wine on shelf and kids educated!
dual income and 3 kid family.

IP1: LVR 65%
IO loan for purchase price with LOC to pay IO and costs
LOC should last 3 years
Rent to PPOR LOC

IP2: LVR 60%
IO loan for purchase price with LOC to pay IO and costs
LOC should last 3 years
Will put rent into PPOR when we move out and into new home (Dec 10)

PPOR
LOC for build, LVR should be 40% on completion.
To receive our salaries and rent from IPs
Pay interest on IP LOCs, lfe costs etc.

LVR across all 3 props 77% at the mo.

Expect CG on IPs to be no less than 10% pa.
I hope to renegotiate LOCs against IPs after they "run dry" and add another say 3 years worth to them given the expected LVRs after the last 3 years allowing me to do that.
One question is the banks calculations on serviceability as LOCs grow AND we seek to add another IP to the portfolio in 2011.
How doe we convince we can service, as it were. Do the banks welcome this type of set up?

Constructive feedback would be welcome on current strategies to see us thru the next few years and beyond.
Anything we should look at, change, consider etc etc.
cheers

Your strategy appears to rely on two assumptions:

  • Strong, consistent CG across your portfolio for the next three years
  • The willingness of a lender or lenders to advance further funds on that CG in spite of the fact you have been servicing existing loans from debt.

I would suggest each is optimistic and both occurring to be unlikely based on current trends.
 
cheers

Thanks for the replies.

I will be paying the interest on the IP LOCs no probs.
I will be putting all extra monies into paying down the PPOR, but "I won't have to" as teh rent from IP 1 and 2 will cover the interest on its own.
In effect, I am paying as much down as I would across the loans, but choose to pay the PPOR "first"
All accounts with one lender, all approved.
Last 12 months growth on IP2 was 18%, so I am being conservative with that.
IP 1 and 2 just shy of cost neutral with rents.
I could have put together 1 LOC across all properties, but as well written across the forum, I have separated each property with their own loans.
Yes, I do expect growth in all properties, and even with less than 10% growth pa over the 3 years, I should still have enough equity to access more $$ in 2013.

Any recommendations for a Property focussed accountant Perth based.
thanks
 
You do not have to worry about the growth of property, if it happens your strategy is good, if not, you wait and apply your strategy further down the track. A plan is never concrete in this game, but is always necessary. Well done! In terms of gettting a loan, as long as you can show your PPOR is being reduced further than the increase in IP's loans, the banks will have the paper trail to see what is happening- hence the next loan is achievable. Great planning / thinking and goal setting. I would be happy to drink the wine with you.
 
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