LMI vs Cash for next property purchase (with a twist!)?

Hey everyone,

Newbie here so please allow me some leniency if I happen to sound a bit fresh!

So I've just started to dabble in property investing not long ago; bought my first investment property about 6 months ago using 20% deposit which is made up of half equity from family home and half savings to avoid LMI. Family home was purchased April 2013 also with 20% deposit cash and is under my mother's name. I'm in the process of looking to purchase my next IP (most likely in Brisbane) and have 2 options:

1) Increase the LVR of either or both properties from 80% -> 90%: this will give me approximately $120K in extra equity to play around with, however, this will incur LMI costs on both properties totaling $20k or so which brings the final figure down to just over $100k. Furthermore, at current interest rates, I will also be paying an additional $6k in interest per year for both properties. This will also have the knock-on effect of turning my investment property from a neutrally geared position to a negatively geared one.

2) I am currently awaiting a pay-out from my business partner in my last business venture which did not work out. The pay-out amount is approximately $100k and I expect it to come through early next year, however, this is no guarantee and could take longer to complete (I stand to gain 12% interest p.a. until the money hits my account however). The upside of using this source of funds to fund my next property purchase vs option 1 is obviously the $20k LMI savings right off the bat as well as the additional $6k per year in interest. However, as mentioned above, this MAY drag out a bit longer which means I will not have access to the funds as easily or timely as I do from option 1. I do want to acquire the next property in Brisbane asap to capitalize as much as possible on the upswing which is quickly coming and this option can potentially delay me and cause a loss of opportunity (in the instance that it drags out for another 6 months or so instead of just 2 months).

Another consideration to add to the mix: I am looking for a new business venture to get stuck into at the moment (likely a franchise and will be going 50/50 with a new business partner) and will need the funds to invest in setting up once I do. I am considering taking a business loan secured against the properties acquired if I do not have enough cash or if I have used the pay-out for other purposes i.e. to purchase another investment property. However, this will probably be more challenging as I will have to come up with a solid business plan and forecasts good enough to convince the banks to lend me the money and there's always a chance that they will turn me down as I have so little equity in the properties...

At this point, I'm leaning towards option 1 but the $20K in LMI really stings and is acting as a major deterrence. I need a couple votes of confidence to give me the push I need to go down this path if it is indeed the more financially sound one?

What are your thoughts? Please feel free to be a frank and honest as possible! I'm here to learn as much as possible in as little time as possible

Cheers!
 
Business loans and LMI................... tough one

without knowing the ins and outs Id go real hard early, and pull any equity you may need for business while you still can.

20 k to save going bust isnt a lot of dough :), assuming thats the right strategy

ta
rolf
 
Business loans and LMI................... tough one

without knowing the ins and outs Id go real hard early, and pull any equity you may need for business while you still can.

20 k to save going bust isnt a lot of dough :), assuming thats the right strategy

ta
rolf

Hi Rolf,

Sorry a bit confused by what you mean with "going bust" bit? Would you mind elaborating?

$20k is a decent chunk! I could avoid this if I go with option 2 -> wait for the cash payment to use that as deposit towards the next purchase (or 2! if I borrow 90%) and take out a business loan for my next business venture against my property portfolio which by that time should have at least 3 properties.

The interest rate for the business should be a few points higher than the home loan rate but I save the $20K on LMI so it still puts me in a superior financial position. It's actually perfect timing to seek business lending whilst the rate is still as low as it it! We applied for a business overdraft last year with ANZ and guess what they hit us with: 14% secured and 16% unsecured! We needed the cash urgently so had to grind our teeth and accepted it.

HOWEVER, as mentioned above, the pay-out is NOT guaranteed to come in a month or two and could drag out further. This is another risk I must consider!

Hmmm tough one indeed
 
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