Some advice please..

[c9806103]

Hi guys,

My situation
Age:28
Income: 130k-160k (fluctuates) + girlfriend is paying me about $200 per week in rent and she earns about 50-60k.
Assets:
Live in a 2 year old townhouse in a nice, respectable suburb, close to the City in an exclusive development. Its valued at 470k. I currently owe 300k, therefore have about 170k of equity that's currently doing nothing.

I don't think its very achievable to eliminate a 300k loan overnight. I am surrendering to the fact that its like p155ing into the wind and that I better come up with some other kind of plan, otherwise it will be me and my big 300k mortgage when I'm 40.

I know inflation will start to make things easier over time, but still, I feel that's a long way off and you can't just rely on "things getting easier".

I got most of this equity because I bought my first house when I was 20 for 148k, just prior to the big boom, and I sold it a few years later for ~300k. So I was lucky like anyone who bought before the big boom. But since then, nothing much has changed and I am picturing myself working my *** off just to sustain this income, just to be able to service the mortgage, but there's nothing really in place for the future. The mortgage is going to tie me to having to keep bringing in the same income - but I don't want to be in this type of job forever.

However, living here is really nice and the lifestyle is great.

Am I being a narrow-minded Aussie blindly chasing the home-ownership dream by just having my big mortgage and working a stressful job to pay for it, with no other investment behind me from the equity?

Should I do something with the 170k equity, because lately I am really seeing some nice price drops around the place (my girlfriend works in real estate, so I am hearing the stories first hand).

This place can pull about $500 per week in rent. Financially am I better off renting this place out, moving out, and buying a cheap PPOR for me to live in and use this place as the investment? That sounds like it would kill my lifestyle, but at the same time, I don't want to be tied to p155ing into the wind forever, so am definitely prepared to make a sacrifice for the longer term good. Is there anyway I can remain living in this place, but use the equity for an IP somewhere else that's beneficial financially?

Any advice appreciated - WHAT WOULD YOU DO???

Thanks heaps for your time.

 

[RumpledElf]

That equity you speak of on one hand, and those nice price drops on the other hand ... if you see something cheap and nice and do decide to snap that up instead, do it before your equity disappears ...

 

[Twitch]

You're 28, earn mid $100k, have $170k in equity and a girlfriend paying you $200/wk for sex. I don't see that as treading water. Given all that, with no wife & kids, you should be shovelling $60k/yr into your mortgage and have it gone in 7 years.

 

[Stinktier]

'''You're 28, earn mid $100k, have $170k in equity and a girlfriend paying you $200/wk for sex. I don't see that as treading water. Given all that, with no wife & kids, you should be shovelling $60k/yr into your mortgage and have it gone in 7 years.'''

Agreed, theres no point changing a situation you are already very well ahead in - be happy ---> let the people with no idea do that at the moment. For most people in Australia (average) this should be a sit on the fence time and preserving cash, paying back debt, is vital--> and that goes double if your in a volatile job where 'scale backs' are not uncommon.

Unless your a crazy spender that 300K mortgage, with your income, should disappear in no time.

 

[The Y-man]

Also keep in mind that compunding works for paying down the mortgage - so as you pay it down, the interest components of the repayments fall, making the loan shrink at an ever faster rate.

Cheers,

The Y-man

 

[c9806103]

Thanks for the feedback and advice guys, greatly appreciated.

Haha the sex comment made me laugh a lot.

Some things may change:
- Kids in 2-3 years time (this would add expenses).
- Income should steadily rise / inflation (this would be a bonus, but no guarantee).
- Girlfriend becomes wife and earns more, contributing more (bonus).

I've just done a 7 year projection up in excel, assuming that my income WONT go up and that interest rates WONT go down. I should be able to do it, chipping in about 5k per month towards the loan. This will leave me with enough to go on a few weekend getaways during the year and one decent holiday per year, keep my gym membership and keep buying some protein and supplements (hobby/fiftness)

It will also mean 7 years of solid/big hours and being stuck in the same type of work for that duration, just purely for they money. That will see me being 35 though and able to then take a more enjoyable or relaxed work-from-home job. I'm kind of trying to build a side business up at the same time.

But you're dead right, paying debt back is important and it will get easier and compounded once a bit starts to get paid off. OK I'll give it a shot and push ahead with PLAN A for now.

Cheers

 

[Bill.L]

Hi,

C986031WTF?,

You need to remember that you can only gain access to 80% of your property total value, unless you want to pay LMI. That only gives you $76k to pull out.

Perhaps you could look at gaining an offset account for 80%, ie a loan of $376k. Put the $76k into it, and add to it as rapidly as you can.

Even on $130k pa, after tax of ~$40k and interest repayments of ~$33k, you should be able to save ~$35k pa. Adding the Gf $200 pw, you would still have $730 pw to live off.

You need to remember that all the cash sitting in the offset account is earning you an effective ~13% interest, therefore whatever you invest in would need to return that amount or greater. Given the current investment environment, there is no rush, over 3-4 years you could have a couple of hundred $k sitting there, until something really special comes along.

bye

 

[HiEquity]

Hi,

C986031WTF?,

Looks like an old uni student number to me - I reckon I know which uni too...

Some good advice Bill.L - I was going to post a similar thing. The offset cash is then available to act quickly when required if something irresistible comes along. In the meantime you can do some research and DD on good deals to be able to recognise one when it happens.

 

[c9806103]

Thanks Bill and HiEquity..

An offset account makes a lot of sense, in terms of having the cash there ready to go whenever something great pops up that I might be interested in investing in..

But I don't understand how it effectively earns me ~13% - Bill can you please explain?

E.g. If I owe $376k but had 76k in the offset account, don't they just go 376-76=300 and then I am charged interest on 300k. Or does it double up somehow? I would love to understand it better.

Thanks a lot

 

[Bill.L]

Hi,

Depends on the offset account. We have a P&I one that has a fixed amount being paid each fortnight.

Therefore we are paying extra off the principal each payment. If we had $0 in the offset, then the P component might be only $40 out of a $400 payment, with interest being the rest. However if we have $40,000 sitting in the account then the P component might be $200 out of the $400 payment with interest being the rest.

If we had that same money in a term deposit, then tax is payable on the interest. If you are in the top tax bracket, then that is almost half of what you make. Therefore to be as good as the tax free offset, it has to earn much more.

bye

 

[boomtown]

1. Rent your current place out. It wont be cashflow neutral but its close.

2. Rent somewhere else as cheap as you can stand.

3. Purchase a quality IP with a good yield (at least 5.5% or more gross yield) in a high capital growth / high demand area on a high LVR and negatively gear it.

4. Get a PAYG variation to cover your negatively geared property.

You will find that after all the cashflows are taken into account you will have about the same amount of money at the end of the month *but* you will now own 2 properties. The capital gains + rental income stream off 2 properties (if well selected) should well exceed your ability to save plus you have the added benefits of enjoying your current lifestyle.

Just dont do something stupid like buy off the plan

 

[BayView]

1. I don't know what your take home wage is, but if you were to bite the bullet and live off the gf's wage (a lifestyle hit, but that's the price of getting rich fast) and plow your entire wage into the PPoR, you'd knock it over by the time the kids are due.

2. You've got enough usable equity ($76k approx) to buy a cheaper IP now, but it would probably be casflow neg, so you'd need to allocate some funds to it, and some to the PPoR.

3. You could possibly find a cashflow positive after tax property - needs to be built after 1987, and a rent yield of at least 6.5% to get it over the line at a guess (depreciation tax deductions).

This way, you'll be able to hack into the PPoR loan, and have an IP that costs nothing to hold.

Either way you go is good, but I reckon option 3 is the best.