My situation...

From: Andrew G


Hi all,

Here is my current position, and was curious to get some opinions on whether I've done the right thing, and what to do from here :

1. PPOR Value 180,000, Owe 31,000
2. IP #1 Value 82,000, Owe 70,000 (rent = 130/wk), Loan: P&I
3. IP #2 Value 82,000, Owe 70,000 (rent = 130/wk), Loan: P&I

At the current rate, I will have paid the PPOR off in about 2 years. Both my wife and I are 31 yrs old, and most of our combined income is going into the home at the moment to get rid of the mortgage.

Q: Does what you see above look 'ok' so far? I've only owned the IPs for one year now..
Q: Is it still best for me to pay most of our income into our own mortgage to get rid of it altogether?
Q: I like the idea of eventually owning the properties (P&I IP Loans). Our combined wages total $62,000 with us planning to start a family within 12-18 months. As I don't earn a whole lot, and I'll be buying cheaper properties which I can't claim any depreciation anyway, is it OK to continue purchasing properties P&I rather than I/O?
Q: I can save a STACK of interest by increasing my IP loan repayments by as little as $100/fortnight. Is it a good idea to add a 'little' bit extra to your IP loans just so you own them faster? (I'm looking to retire BEFORE 50, so I've got a 20 year plan).

I know there's quite a few questions there - thanks for anyone who takes the time to respond. I've been pretty open about my details, but I'd rather be honest from the start and get honest responses....

Also, last question. Current plan is to get more properties under 100K or just a bit over, so the rent return is higher. Not too bothered about capital growth as I'm in Adelaide and would prefer to stick to this state. I'm figuring that eventually I will own a higher % of the IP properties, so the combined loan repayments will snowball assisting me to pay them all off sooner. Is this a logical way of going?

Thanks,
Andrew.
 
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Reply: 1
From: Mike .


Hi Andrew,

Any home mortgage should be paid off as quick as possible which is why my IPs are IO. I'm using the extra cashflow to get rid of the home mortgage. The only exception is if you're in the boom part of the cycle and want to get some more capital gain, then I would buy another IP before paying the home mortgage out.

After the home mortgage is paid out, if interest rates are low I may buy another IP, however, if interest rates are high I'm more likely to pay down some of the principal on the IP's to improve my cashflow situation and reduce the pain of vacancies.

Regards, Mike
 
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Reply: 2
From: Ian Findlay


Well done Andrew,

You have achieved a lot for just 31 yrs of age.

Most folks have their IPs as interest only and plough as much money into
paying off their PPOR which they have as a LOC. When they have paid off
sufficient equity for deposit and costs for another IP (as you have) they
withdraw it and purchase another IP. They get all rental income paid into
their LOC and so more properties pay off their PPOR even faster.

Specifically:
1. You've done much better than OK. You have plans for the future unlike 90%
plus of Australians.
2. Pay most of your income into reducing your PPOR but don't get rid of it
completely. Convert it to a LOC if it isn't one already. Get property
revalued each year and increase the credit limit. For example current value
is $180k and you owe 31. You could withdraw 80% of value i.e. $144k minus
$31 you already owe = $113 which you use to purchase 3 or 4 IPs. You now
have 2 separate loans ($31k for PPOR and a tax deductible $113 for IPs)
totalling the $144k.
Next year lets assume you save $10k from your PPOR and the property
revaluation comes in at $200,000. so max borrowing is $160k (you now owe $21
PPOR and $113k for IP totalling $134k) you now have another $24k for IPs.
3. Better to have then as IO. This maximises your interest tax deductions.
It will probably be too expensive to change your current IP loans from P&I
to IO so leave them as they are but use IO for future IPs
4. No. Better to pay into your PPOR first and reduce your non-tax deductible
debt. Then you can either keep buying more IPs or start to pay off the IPs
when you think you have enough of them. Try to get cash-flow positive IPs
which means that income (rent) is more than costs (rates and interest) as
this will pay them all off faster. You could also decide on one IP (say a
LOC), reduce this down ASAP by putting all additional rental income in and
then eventually withdraw the equity to buy more IPs.
5. Snowballing the rent is ideal but pay off the PPOR first. Its a bigger
psychological trick to chose one IP to pay off first rather than paying them
all off slowly - it looks as if your making more progress!

Ian


> From: "Andrew G" <andy@aandr.com.au>
>
> Hi all,
>
> Here is my current position, and was curious to get some opinions on
whether I've done the right thing, and what to do from here :
>
> 1. PPOR Value 180,000, Owe 31,000
> 2. IP #1 Value 82,000, Owe 70,000 (rent = 130/wk), Loan: P&I
> 3. IP #2 Value 82,000, Owe 70,000 (rent = 130/wk), Loan: P&I
>
> At the current rate, I will have paid the PPOR off in about 2 years. Both
my wife and I are 31 yrs old, and most of our combined income is going into
the home at the moment to get rid of the mortgage.
>
> Q: Does what you see above look 'ok' so far? I've only owned the IPs for
one year now..
> Q: Is it still best for me to pay most of our income into our own mortgage
to get rid of it altogether?
> Q: I like the idea of eventually owning the properties (P&I IP Loans). Our
combined wages total $62,000 with us planning to start a family within 12-18
months. As I don't earn a whole lot, and I'll be buying cheaper properties
which I can't claim any depreciation anyway, is it OK to continue purchasing
properties P&I rather than I/O?
> Q: I can save a STACK of interest by increasing my IP loan repayments by
as little as $100/fortnight. Is it a good idea to add a 'little' bit extra
to your IP loans just so you own them faster? (I'm looking to retire BEFORE
50, so I've got a 20 year plan).
>
> I know there's quite a few questions there - thanks for anyone who takes
the time to respond. I've been pretty open about my details, but I'd rather
be honest from the start and get honest responses....
>
> Also, last question. Current plan is to get more properties under 100K or
just a bit over, so the rent return is higher. Not too bothered about
capital growth as I'm in Adelaide and would prefer to stick to this state.
I'm figuring that eventually I will own a higher % of the IP properties, so
the combined loan repayments will snowball assisting me to pay them all off
sooner. Is this a logical way of going?
>
> Thanks,
> Andrew.
>
>
>
> To reply: mailto:propertyforum.35139@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
 
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Reply: 1.1
From: GoAnna !


Dear Andrew

Congratulations on taking off on such a flying start! Way to go!!

Q: I like the idea of eventually owning the properties (P&I IP Loans). Our combined wages total $62,000 with us planning to start a family within 12-18 months. ... is it OK to continue purchasing properties P&I rather than I/O?

I think that the advantages of IO loans are not immediately obvious. They do allow you to pay down your non tax deductible first and decrease your monthly repayments. Their key advantage however is that they lower your commitment to the bank. They do not prevent you from paying the loans off sooner. Most products will allow you to make extra repayments at any time. The thing is you can do it when it suits your budget. You may wish to further increase your flexibility by paying any extra payments into a 100% offset account rather than directly into the loan itself. This will allow you to withdraw the money at any time for any purpose.

You may find that your new family commitments combined with a reduction in household income will put a strain on your budget. You may choose at this time to convert P&I loans to interest only. Of course if you do this sooner it will allow you to pay your non tax deductible loans off at a faster rate.

So in short i think your goal of owning your ips outright is not inconsistent with IO loans and in the medium term may help you achieve your other dreams.


GoAnna !
"Obstacles are those frightful things you see when you take your eyes off your goal."
-Henry Ford
 
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Reply: 2.1
From: Les .



G'day Andrew,

It is inspiring to read of your progress so far. Mind you, you have a monicker that takes a bit of "living up to" ;^) I'm referring there to "Andrew G" who posted to the forum about 2 years back - also a young bloke, about your age, and Boy! was he an inspiration. It sounds like you are on the way to being the same kind of inspiration for other people.

On to your questions:-

"Here is my current position, and was curious to get some opinions on whether I've done the right thing"

Les>> Are you kidding? 94% never own 1 IP - let alone two.... And you're building a solid foundation for you wife and (potential) family. Welcome to the "2% group" that own more than 1 IP.


"At the current rate, I will have paid the PPOR off in about 2 years. Both my wife and I are 31 yrs old, and most of our combined income is going into the home at the moment to get rid of the mortgage."

Q: Does what you see above look 'ok' so far? I've only owned the IPs for one year now..
/Les puts gold star on AG's hand

Q: Is it still best for me to pay most of our income into our own mortgage to get rid of it altogether?

Les>> Yep. But don't lose sight of the fact that you are already at the place where you can take advantage of any "bargains" that come your way - as others have already said, paying down PPOR is usually #1 - but your position seems strong enough to add another "bargain" IP any time you like.
Some (when starting out) think they have to pay the home right out before investing - it's just not so!!

Q: I like the idea of eventually owning the properties (P&I IP Loans). Our combined wages total $62,000 with us planning to start a family within 12-18 months. As I don't earn a whole lot, and I'll be buying cheaper properties which I can't claim any depreciation anyway, is it OK to continue purchasing properties P&I rather than I/O?

Les>> If it helps you sleep at night, sure!! But I go along with the previous answers that mention IO and Offset accounts. With them, you can "pay down", but still have access to your money if required. And, meantime, you are providing MORE cashflow to cream your PPOR mortgage (by not "paying off" the principal on the IP's). Of course, if "own home" was mortgaged to provide deposits for IP's, then it's Tax deductible anyway - so which you pay down is not so cut and dried.


Q: I can save a STACK of interest by increasing my IP loan repayments by as little as $100/fortnight. Is it a good idea to add a 'little' bit extra to your IP loans just so you own them faster? (I'm looking to retire BEFORE 50, so I've got a 20 year plan).

Les>> A stack of Interest saved - yeah, but they are tomorrow's dollars you're saving by using today's dollars. But, if you wish to do this, set up Offset account and pay the extra into that - then you can "redraw" at ANY TIME rather than tying your own hands behind your back by giving it to the Bank early.

What if - you're able to buy a "bargain" IP (asking $100k, but will take $90k for quick settlement) simply because you had another deposit in your Offset Account - you've just bought $10k of Equity (that's 4 years of $100 a fortnight....)

In short, be flexible with your assets - don't "lock it in" by paying down the mortgage. Set up Offset, LOC, whatever... and be pre-approved for another - then jump on the next bargain that's offered.

"Also, last question. Current plan is to get more properties under 100K or just a bit over, so the rent return is higher. Not too bothered about capital growth as I'm in Adelaide and would prefer to stick to this state. I'm figuring that eventually I will own a higher % of the IP properties, so the combined loan repayments will snowball assisting me to pay them all off sooner. Is this a logical way of going?"

Les>> Andrew, you are obviously happy in the area, and buying positive cashflow IP's - that's tremendous. BUY your Capital Growth (bargains!!) and keep on running. You are in great shape. IO for future IP's will accelerate your growth - and make you more flexible, while retaining the benefits of "paying down" your loans.

Go for it!! Then come back and share your successes, and help to inspire others.

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1
From: Andrew G


Hi Anna,

>I think that the advantages of IO loans are not immediately obvious. They do allow you
>to pay down your non tax deductible first and decrease your monthly repayments. Their
>key advantage however is that they lower your commitment to the bank. They do not
>prevent you from paying the loans off sooner. Most products will allow you to
>make extra repayments at any time. The thing is you can do it when it suits your budget.

Thanks for that info, it certainly makes a lot of sense now. Until your post, I was unaware you could make additional payments to an I/O loan! That's why I was so curious about everyone wanting I/O loans thinking to myself "they're never going to own them!!".

Thanks,
Andrew.
 
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Reply: 2.1.1
From: Andrew G


Hi Les,

>It is inspiring to read of your progress so far. Mind you, you have a monicker that
>takes a bit of "living up to" ;^) I'm referring there to "Andrew G" who posted to
>the forum about 2 years back - also a young bloke, about your age, and Boy! was he an
>inspiration. It sounds like you are on the way to being the same kind of inspiration
>for other people.

Thanks for your kind words - I'm a fairly disciplined sort of bloke so hopefully my grand plan to retire early will work :) I've only been a member of these forums since starting on Jan's latest book a couple of weeks ago, so I don't really know anyone at this stage .... fancy that tho, another Andrew G! :)

>Are you kidding? 94% never own 1 IP - let alone two.... And you're building a solid
>foundation for you wife and (potential) family. Welcome to the "2% group" that own
>more than 1 IP.

Speaking of percentages, does anyone actually have factual figures of how many Australians own 1, 2, 3, etc. IPs ???

>A stack of Interest saved - yeah, but they are tomorrow's dollars you're saving by
>using today's dollars. But, if you wish to do this, set up Offset account and pay the
>extra into that - then you can "redraw" at ANY TIME rather than tying your own hands
>behind your back by giving it to the Bank early.

Is an offset similarly arranged as an LOC which everyone seems to like??

>In short, be flexible with your assets - don't "lock it in" by paying down the
>mortgage. Set up Offset, LOC, whatever... and be pre-approved for another - then jump
>on the next bargain that's offered.

Sounds like good advice to me - I've already planned to see my bank to see what my situation "from their point of view" is :)

>Go for it!! Then come back and share your successes, and help to inspire others.

I find it great to read what other people have done. Those who have been around for a few years (or longer) and have many IPs and share their stories are GREAT for people like myself to read. So if any of you experienced people are out there reading this, don't consider it boasting - post your stories for us all to read and learn.

Andrew.
 
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Reply: 1.1.1.1
From: Rolf Latham


Hi Andrew

Most I/O Facilities allow you to oay what you like over the minimum interest BUT...

Take care with some Interest Only Loans because some lenders will not allow you to pay extra without a conversion fee or penalty. This applies even to many variable rate loans.


Ta

Rolf
 
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Reply: 2.1.1.1
From: Rachel Freedman


Hi Andrew

I have been very motivated by your post and everyone's answers - I am continually inspired by this forum! I am 29 (God - nearly 30!) and we have so far accumulated 3 IP's which are all slightly cash negative although with some reno which is due on a couple of them they would soon become positive. We are also investing in shares at the moment and are primed to buy some more IP's when we see a bargain. We have spent a bit of time trying to sort out our financial situation - set up LOC etc so that we are ready to buy when we want to.


My husband and I both work part-time so as to spend time with our 18 month old and having made a start along the road of IP investing has given us a feeling of longterm security and confidence to keep pushing the boundaries of what we think we can do and what is possible.

That is the great thing about this forum and Freestylers (see www.freestylers.net.au) - just when you think you are doing OK you meet someone or read something that makes you get back on out there and keep moving forward!

Networking is fabulous! Congrats and keep going ahead!

Rachel
Canberra Freestyler Coordinator
 
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