Preparing for IP#2

[ol mate]

Hi Everyone,

I have taken upon myself to straighten out my finances rather than blow it on grog, cars and other shiny stuff and enter an aggressive acquisition phase if you like of IP over the next few years and have thought of a number of scenarios to best set myself up.

I currently have an IP of around 270k with which was my PPOR until I relocated for reasons of work 6 months after purchase. Due to not having the required deposit for LMI reasons my parents went as a security Guarantor. So I have two objectives this year and that is to aquire a second IP <$500k (perhaphs build in SE QLD) and remove my parents as Guarantor.

I am paying down $500 a week on the IP and have $700 a week discretionary income which currently goes into a savings account as does the $280pw rent (after PM Fees). IP loan is paid down to 250k with 5k redraw avail and 15k cash.

Given the above hypothetical situation.

Scenario 1: Continue with existing repayments and sink cash, discretionary income and rent into IP loan until loan LVR is below 80-85% as required by bank remove guarantors (refinance?) and use the resulting equity for a LOC? for a partial deposit on the IP#2.

Scenario 2: Turn IP into interest only, Sink spare cash, Rent, Discretionary income and Principal repayment into the savings account build until acceptable deposit present for IP2, Get IP1 revalued and take out LMI against the resulting LMI (refinance?) and purchase IP2.

Scenario 3: ???suggestions???

In terms of deposits for additional properties is it preferable to have cash deposit or equity.

I rather not pay LMI as i see it as wasted money. But on the other hand is it simply just another addition to the cost base of the house and to acquire properties as the opportunities present themselves?

I am yet to see a financial planner but educating myself as much as I can beforehand whilst I am in the middle of nowhere.

Would like to hear the input from those in the know.

cheers

 

[Rolf Latham]

I rather not pay LMI as i see it as wasted money. But on the other hand is it simply just another addition to the cost base of the house and to acquire properties as the opportunities present themselves?

Well, you know the answer to this.

There is a reason why your subconcious has placed the doubt re the waste of money for LMI

do a proper, and in depth RISK and financial analysis and you will maybe agree that LMI isnt a bad thing per se.

im not againstfamily guarantees, but often what happens here is that the default risk is passed to a family member rather than an lmi provider for saving what is in reality " a few bucks"

ta
rolf

 

[ol mate]

Well, you know the answer to this.

There is a reason why your subconcious has placed the doubt re the waste of money for LMI

do a proper, and in depth RISK and financial analysis and you will maybe agree that LMI isnt a bad thing per se.

im not againstfamily guarantees, but often what happens here is that the default risk is passed to a family member rather than an lmi provider for saving what is in reality " a few bucks"

ta
rolf

rolf

not too savvy on the in depth financial analysis but am working on it. Bought the property at the ripe ol age of 22 whilst completing my apprenticeship and was given the benefit of guarantor to make it happen. However moving forward it is essential to remove the risk from them should my endeavours fail.

Is 10-15 weeks and a missed opportunity worth the sake of 5 to 10k LMI?

I guess not.

Cheers

 

[Aaron_C]

How much is owing against the IP#1?

 

[ol mate]

Approx 250k is owe

 

[Rolf Latham]

Is 10-15 weeks and a missed opportunity worth the sake of 5 to 10k LMI?

I guess not.

Cheers

I guess with such a close to "now" focus that wasthe right solution

Further analysis and goal planning might show that such a short focus to too short.

If one is looking to build a big portfolio over time, LMI is almost always your friend and will allow you to transfer risk to a mortgage insurer OR allow you to build a portfolio more quickly,rather than transfer risk to a relative.

LMI on a sub 300 k place with 90 % lend is usually under 4500, not 10k BTW

The cost and benefit of LMI is known, the cost of a missed opportunity often isnt.

Pouring pst tax paid dollars into anything but your final PPOR is usually not great

ta
rolf

 

[nhg]

Consider setting up a trust at this stage.

I started a year ago, yet managed to overeshoot the mark during my aquisition period. Now the only way to shift property into my trust without paying land tax is to die (?).

 

[ol mate]

rolf:

Further analysis and goal planning might show that such a short focus to too short.

If one is looking to build a big portfolio over time, LMI is almost always your friend and will allow you to transfer risk to a mortgage insurer OR allow you to build a portfolio more quickly,rather than transfer risk to a relative.

This i am coming to realise, however is it benificial to me to focus on building a cash deposit to achieve say 85-90% LVR on IP2 of say 450k and take LMI out on existing property say @ 90% LVR or whatever the property is valued at the time of restrucuring.

OR

Pour all cash and savings into IP1 reduce it below the LMI threshold. Buy IP2 on the resulting Equity and LMI and pocket the ~4k LMI i would have paid otherwise on IP1. In doing this i would have to take steps to avoid x collateralising ie loan against equity. No?

I guess to simplify the question in my mind, Cash VS Equity. LMI where neccesary.

Forgive me if i am naive as i feel its best to get the bigger picture before proceeding. I havent been to see a broker or lender to see what they will give me based on my personal circumstance so i may have it all wrong.

LMI on a sub 300 k place with 90 % lend is usually under 4500, not 10k BTW

At the time of purchase being a PPOR it seemed money better spent elsewhere. As an IP it appears to be a false sense of economy.

Consider setting up a trust at this stage.

nhg:
A trust is an issue i have with some people.... I will look into setting up one.

I started a year ago, yet managed to overeshoot the mark during my aquisition period. Now the only way to shift property into my trust without paying land tax is to die (?).

Are you able to elaborate?

Cheers

 

[Aaron_C]

At this stage the LVR is a bit high to consider a refi to an LMI loan. Once it reached 90% then it can be done and it will cost about 4-5k in LMI. I find people who shrug off LMI because it is 'expensive' are either those with a lot of money to begin with or who tend to miss out due to lost opportunity. I think family guarantees are fine particularly if the child has a lot of savings and is able to remove the guarantee at any time through cash/equity as this lowers the risk to parents significantly. Once you are in a better position perhaps consider doing this.

 

[ol mate]

Aaron:

At this stage the LVR is a bit high to consider a refi to an LMI loan. Once it reached 90% then it can be done and it will cost about 4-5k in LMI.... Once you are in a better position perhaps consider doing this.

Say house is valued what i bought it for at 270k i can quite easily bring outstanding balance to below 245k (<90% lvr) for LMI reasons. Where to go from there that will maximize my leverage Build Cash....Or pay down loan further for IP2..

Cheers

 

[ol mate]

Perhaps refinance to a loan that has an offset acc now.. or keep existing no fee loan and restructure on purchase of ip2..

 

[Rolf Latham]

Perhaps refinance to a loan that has an offset acc now.. or keep existing no fee loan and restructure on purchase of ip2..

why wait ?

If the LVR fits do that ASAP, unless you can see good reason not to, example, the market in your area is say quite warm with lots of good sales.

3 mths wait for the comps to come through might get you 10 %, conversly, if the market is flat or on the slide, jump now.

ta
rolf

 

[Aaron_C]

Aaron:



Say house is valued what i bought it for at 270k i can quite easily bring outstanding balance to below 245k (<90% lvr) for LMI reasons. Where to go from there that will maximize my leverage Build Cash....Or pay down loan further for IP2..

Cheers

Refinance to a loan with offset account to release your parents would be a top priority if I was in your situation. Not really fair to leave them there imo.

 

[ol mate]

Rolf:

why wait ?

If the LVR fits do that ASAP, unless you can see good reason not to, example, the market in your area is say quite warm with lots of good sales.

3 mths wait for the comps to come through might get you 10 %, conversly, if the market is flat or on the slide, jump now.

ta
rolf

Not too sure on sales figures but i believe market is flat due to poor economics alot of businesses/industries closing down causing low new home approval figures. Although the rental availability in my suburb has dropped below 2%, two mines coming online later this year are sourcing half their FIFO workforce from here, major road upgrade near suburb and building approvals have been low for the last 2 years may mean price is on an uptrend however i am not too keen to wait and see.

Obviously the best way forward would be to develop a stratergy and find products that will align with that.

Refinance to a loan with offset account to release your parents would be a top priority if I was in your situation. Not really fair to leave them there imo.

Thats the plan. Looking at the best way of doing so.

Cheers

 

[ol mate]

Will be having a chat to a broker and lender next time I'm home to discuss refinance.

Is a LOC able to be established as a primary loan or is it only a product that is secured by the equity of another loan?

 

[Shahin_Afarin]

It can be set up at time even if its the only loan linked to the security.

Regards

Shahin

 

[ol mate]

So if I go for a LOC pay down the LOC until i achieve say 50k, redraw that as deposit for IP2 and continue like this letting say IP2's interest capitalise with all payments going into IP1 for IP3 servicing IP2 where neccessary.. is this scenario doable or have major flaws?

 

[Shahin_Afarin]

You have an IP that is worth $270k w/ $250k owing on it. You have $20k in cash/deposit and you want to purchase a second IP for approx $500k. Is that correct?

BTW - I would be looking at ordering an upfront val on the IP to determine the value.

Regards

Shahin

 

[ol mate]

You have an IP that is worth $270k w/ $250k owing on it. You have $20k in cash/deposit and you want to purchase a second IP for approx $500k. Is that correct?

BTW - I would be looking at ordering an upfront val on the IP to determine the value.

Regards

Shahin

Correct its the direction i want to head though nothing is set in stone.

Valuation will be done once repairs on house are completed before new tenant moves in. Is this best to organise through the banks or a 3rd party.

 

[Shahin_Afarin]

It has to be done via the bank as banks will not accept 3rd party valuations. A lot of the lenders now offer free upfront vals.

Where are you going to come up with the extra $30k needed for a $500k purchase?

Regards

Shahin