Is this financing situation possible???

[Property Meister]

Just letting everyone know, I LUV THIS FORUM.
I have just found it and have spent about 4 hours just reading... and posting.

now being a newbie I have this question,

a nice person I know not too well though, this is their rough situation,

they have 3 kids, 8-22 years, wife works part time, I assume about $300 per week, hubby works quite a good job, say $75k-$115k pa (just a guess)

currently live in a home, say worth $500-$600k, haven't paid it off, seems like they aren't too close to doing it though.

they got approved approx $300k-$325k for an investment loan, they are even borrowing the deposit amount, which means they have little or no upfront cash, so they ahve purchased an unit as a interest only loan..

everything is sweet until here, there financial planner who obviously knows their financial situation has recommended that in 12 months time they buy another property and keep on doing this every 12 months,

unforutnately, she doesn't know (nor do I) how this is possible and I don't know them well enough to ask..

my question is, how can a family with no/little cash, no other assets, who have only been approved a max of $300k or so, of which all of it is going to be used for one property be able to purchase again in 12 months....

is this a new type of strategy or financing option that has come abouts that I don't know about...

comments apprecaited!!

 

[Rolf Latham]

Hiya

the plan might be to do one every 12 mths, but the situation at the time may or may not allow it.

ta
Rolf

 

[Les]

G'day Akum,

And, welcome aboard. Since you don't know me, let's just say these following comments are my opinion, and are NOT advice in any way.

they have 3 kids, 8-22 years, wife works part time, I assume about $300 per week, hubby works quite a good job, say $75k-$115k pa (just a guess)

Not too shabby as far as income goes.

currently live in a home, say worth $500-$600k, haven't paid it off, seems like they aren't too close to doing it though.

Fair enough - depends on WHEN they bought this place. How long have they owned it? Could it be they bought when it was worth $200k?

they got approved approx $300k-$325k for an investment loan, they are even borrowing the deposit amount, which means they have little or no upfront cash, so they ahve purchased an unit as a interest only loan..

Yep, I can understand this

everything is sweet until here, there financial planner who obviously knows their financial situation has recommended that in 12 months time they buy another property and keep on doing this every 12 months,

unforutnately, she doesn't know (nor do I) how this is possible and I don't know them well enough to ask..

Two thoughts:-
1. The FP is dreaming or
2. This really IS a possibility

my question is, how can a family with no/little cash, no other assets, who have only been approved a max of $300k or so, of which all of it is going to be used for one property be able to purchase again in 12 months....

It COULD come down to Equity. Since I don't know (and, it seems, neither do you) we are playing guessing games - but, let's get back to this comment

currently live in a home, say worth $500-$600k, haven't paid it off, seems like they aren't too close to doing it though.

Let me paint a possible scenario here
They bought 10 years ago when property was less than half what it costs today - thus, they may have bought for $250k. Their mortgage was for $200k, and, 10 years later, they still owe $150k.

Now, if this is so, they have equity of $500k less $150k = $350k right there. In short, they could buy the Unit OUTRIGHT. But, perhaps a better path is to "start with one, on an 80% loan" and move from there. The FP could be quite right.


Re the comment

seems like they aren't too close to doing it though

do you know HOW LONG it takes to pay off a property? If my "possible scenario" is even close, $150k takes A LOT of paying off. Could be another 10 years, even on their wages. That doesn't mean squat though (fortunately) as they still have $350k of equity that could perhaps be used to cement their future. And they don't need to spend 10 years "paying it off" before making use of it.

Akum, do come back with any more specific info you can glean - but, if that's hard to do, at least consider that "people DON'T need to pay off a home loan before investing". There's lots more to it than that.

An interesting post - thank you,

Regards,

 

[Property Meister]

Les + Rolf,

thanks for your responses..... I see exactly what you are referring to, and I agree...

I was very curious about their FP saying to buying one every 12 months...

anyway, let me say that although I am a novice/newbie now,
I have set my goals in doing property investment/development either full time or close to it !!! so you will unfortuantely, see me a lot on here!!!

 

[Able]

akumaslair,
When borrowing for investment the lender will look for ability to service the loan, and LVR (loan to value ratio).

Using Les' "possible scenario" above, your friend could possibly borrow to an 80% LVR against their PPOR. That is borrow $400k against the value of $500k. If they already owe $150k then there is an extra $250k available. This can be used for deposits with the remainder of each IP being finance by a loan (say 80-80% LVR) against the IP itself. This could allow them to purchase properties, subject to serviceability, for the next few years. However, once they have used up the $250k, they would need to either inject some savings or revalue some the properties to enable them to borrow more within an acceptable LVR. I would suspect though, that serviceability would be the biggest obstacle as if the properties were just average from the metro area, each would be quite cashflow negative (especially when borrowing 100%).

 

[mortgageman]

Hi Akumaslair,

I concur with what Able said regarding raising the money for deposits. From what you have described, if your friends have a significant amount of equity in their PPOR, they certainly have the means of servicing quite a lot of investment debt. Remember as they purchase investment property their income also goes up and the debt is tax deductible, so they could probably manage 1 property a year for a at least 2 or 3 years.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[Spectre]

Interesting how a FP is advising on property...
Thats not a rarity....... but it is a rarity at the same time.

 

[alexlee]

If the yield is good enough...... when I got my first one ANZ lent me $150k. Which supposedly was my limit (being on $35k at the time). 8 months later they lend me another $150k for my second one.

The first IP yielded 6.5% so that might have something to do with it.
Alex

 

[Big Al]

Using Les' "possible scenario" above, your friend could possibly borrow to an 80% LVR against their PPOR. That is borrow $400k against the value of $500k. If they already owe $150k then there is an extra $250k available. This can be used for deposits with the remainder of each IP being finance by a loan (say 80-80% LVR) against the IP itself. This could allow them to purchase properties, subject to serviceability, for the next few years. However, once they have used up the $250k, they would need to either inject some savings or revalue some the properties to enable them to borrow more within an acceptable LVR. I would suspect though, that serviceability would be the biggest obstacle as if the properties were just average from the metro area, each would be quite cashflow negative (especially when borrowing 100%).

Able, Couldn't agree with you more.
The above scenario sounds spot on. I have a very similar setup to the case stated, however my wife not working at all still at home looking after the little ones. Banks are tightening up on serviceability requirements & what can be contributed to serviceability. I recently got first IP but will be limited in the selection of the second by how much $$$ the bank will provide.
We have gone with 80% LVR on the IP & used equity for the remainder.

Would anyone suggest the 2ND IP be something with higher yield & potentially lower CG?? Will this help with bank??

 

[Big Aussie]

At the risk of insulting all the FPs here, they often come out with gems like “buy a new IP every year,” “it’s time IN the market, not TIMING,” etc. This is usually just after they trot out the “investment clock” or something similar. I once had a couple come to me, having almost been given a heart attack at the hands of their FP. They were retired, but owned their own home in a decent suburb. The Home and Land, having been owned for around 40 years was now worth over a $1M. The FP suggested they borrow $1M against their house and invest it in the share market!!??
(This was a couple who’d never borrowed in their lives.)

Back to your proposition, if you have the equity for a lowdoc, you can keep on borrowing, and reach the point where your annual increase in equity is enough to finance an additional IP. However with IPs I reckon timing IS critical, and you also need to keep an I on your cashflow, and taxable income. In my years in PP I came across many people who were so negatively geared that they were losing any tax advantage.

 

[ermen]

At the risk of insulting all the FPs here, they often come out with gems like “buy a new IP every year,” “it’s time IN the market, not TIMING,” etc. This is usually just after they trot out the “investment clock” or something similar. I once had a couple come to me, having almost been given a heart attack at the hands of their FP. They were retired, but owned their own home in a decent suburb. The Home and Land, having been owned for around 40 years was now worth over a $1M. The FP suggested they borrow $1M against their house and invest it in the share market!!??
(This was a couple who’d never borrowed in their lives.)

Back to your proposition, if you have the equity for a lowdoc, you can keep on borrowing, and reach the point where your annual increase in equity is enough to finance an additional IP. However with IPs I reckon timing IS critical, and you also need to keep an I on your cashflow, and taxable income. In my years in PP I came across many people who were so negatively geared that they were losing any tax advantage.

that is very bad advice.... very very bad...

 

[Lia Hayes]

Interesting how a FP is advising on property...
Thats not a rarity....... but it is a rarity at the same time.

Why yes...yes it is a rarity... and a very smart financial planner!

 

[Big Aussie]

However with IPs I reckon timing IS critical, and you also need to keep an I on your cashflow, and taxable income.

that is very bad advice.... very very bad...

How is that bad advice, and what is your basis for saying that?

 

[The Y-man]

How is that bad advice, and what is your basis for saying that?

Maybe ermen was talking about the FP that nearly gave that couple a heart attack?

Cheers,

The Y-man

 

[ermen]

yes i was talking about the FP who asked the couple to mortgage their house to invest in shares! didn't realise that i lumped your quote together with it!

 

[alexlee]

yes i was talking about the FP who asked the couple to mortgage their house to invest in shares! didn't realise that i lumped your quote together with it!

By itself that's not necessarily a bad thing, but you have to ease people into this sort of thing.
Alex

 

[timmyboy]

my years in PP I came across many people who were so negatively geared that they were losing any tax advantage.

Is this because their deductions reduced their income so much that they effectively lowered themselves into a much lower tax bracket and thus reduced the amount of their tax return or something?
Could you explain the reasoning?
As I am reasonably negatively geared with my property I would like to understand how I may be able to go too far and avoid it.

Tim

 

[Francesco]

Is this because their deductions reduced their income so much that they effectively lowered themselves into a much lower tax bracket and thus reduced the amount of their tax return or something?
Tim

By itself negative gearing is half the story. Even to the extent of tax losses they can be carried forward to offset future income. The other consideration is CG. Does the IP give enough CG for the negative gearing?

F

 

[Big Aussie]

yes i was talking about the FP who asked the couple to mortgage their house to invest in shares! didn't realise that i lumped your quote together with it!

Ok, that’s cool.
Yes, it was pretty extreme advice. Whilst “the numbers” may have looked good, it was a frightening prospect for this couple.
Unless you really know what you’re doing and can pick the right time to invest in each security, borrowing heavily to take a massive plunge into the share market is risky.

 

[Big Aussie]

Is this because their deductions reduced their income so much that they effectively lowered themselves into a much lower tax bracket and thus reduced the amount of their tax return or something?
Could you explain the reasoning?
As I am reasonably negatively geared with my property I would like to understand how I may be able to go too far and avoid it.

Tim

I’m probably not telling you anything you don’t already know, but the basic concept of negative gearing is that you sacrifice short-term profit for long term capital gains, and that your taxable losses are effectively subsidised at your marginal tax rate. I had one poor bloke who had been shown an example of how the “taxman funded almost 50% of his losses.” He took this and continued to buy more properties, believing that in each case the taxman would give him back half his losses. He continued this into semi-retirement, where he in fact ended up with negative taxable income. Worse still, because most of the tax deductions are also cash outflows, he was also taking a beating on cashflow.