The IP buying process.

[wagnman]

So...

For a first time investor can I get some advice on how things work please?

I have been reading up on this forum heaps of greta info and I think I am starting to piece the steps you have to go through to buy an IP together.

So far this is what I think I have to do. Any help you guy s can give me is very apreciated.

1: Get PPOR valued.

2: Get a pre aproval from a lender on how much they will lend me on an IO loan.

3: Go and look for a property I think will rent for a good price and try to buy it for as much under the asking price as possible.

4:Buy the property and get a PM to rent it out for me.

6: Sit back and wait till my PPOR and the first IP have grown enough equity to repeat the whole process agian.

Am I right in these steps?



Some questions I have are.

1: How do I get my PPOR valued? Who do I talk to for this?

2: What is LVR, how is it calculated and how much LVR do I need to be able to invest?

3: If I owe $280000 on the mortgae on my PPOR and I want to buy a IP for say $350000 to rent out would the bank just want me to get one mortgage for $630000 to pay out the one on my PPOR and cover the purchase of the IP? I want to buy the IP on an IO loan but dont they need to take the PPOR as security? I would like to pay the PPOR off asap because I dont want bad debt so I dont want to have to redraw all the hard earned money I have piled into the PPOR mortgage just to buy an IP.

Cheers all.

 

[Ausprop]

i would start with modellign your complete financial affairs, cashflkows, budgets, balance sheets etc.

then do an anlysis of a typical property. remodel your budget as if it included the new property... best to see what your cashflow looks like before you get into these waters.

 

[alexlee]

1: How do I get my PPOR valued? Who do I talk to for this?

You're not just getting your PPOR valued, you're actually refinancing the PPOR. i.e. get a new loan to pay off the old one. The bank will value your PPOR as part of the financing process. Talk to a mortgage broker.

2: What is LVR, how is it calculated and how much LVR do I need to be able to invest?

Loan Value Ratio. Basically your loans divided by the value of the property. So if you have a $350k house and owe $280k, then your LVR is 80%. It's not a matter of how much LVR you need. Depending on your income and so on, you can get loans for 100% LVR, but the higher the LVR, the higher the lenders mortgage insurance.

A mortgage broker can explain this to you.

3: If I owe $280000 on the mortgae on my PPOR and I want to buy a IP for say $350000 to rent out would the bank just want me to get one mortgage for $630000 to pay out the one on my PPOR and cover the purchase of the IP?

You're talking about cross collateralisation (one loan, more than one property as security). Generally not advised, especially if you're mixing PPOR and IP.

I want to buy the IP on an IO loan but dont they need to take the PPOR as security? I would like to pay the PPOR off asap because I dont want bad debt so I dont want to have to redraw all the hard earned money I have piled into the PPOR mortgage just to buy an IP.

You do realise that any money you redraw from the PPOR to buy an IP is all deductible? The test is PURPOSE and use of the redrawn funds, not what the loan is secured against.

Wagnman, you're missing a few basic concepts. May I suggest reading a few books or more of the forum? Also, go talk to a good mortgage broker first.
Alex

 

[imonmyway]

As alexlee pointed out the bank does the revaluation as part of the loan process

You really need to talk to a couple of Mortgage brokers use some of the ones that post on here, at least they have an idea about property investment.

I just bought my first IP and made a few mistakes as I hadn't found this forum at the time nothing major but I wish I had secured a LOC before I started and got more then an informal approval from the bank before paying a deposit, the outgoings left me pennyless during the settlement period

 

[Qinau]

I just bought my first IP and made a few mistakes as I hadn't found this forum at the time nothing major but I wish I had secured a LOC before I started and got more then an informal approval from the bank before paying a deposit, the outgoings left me pennyless during the settlement period

Would you be able to expand on this a little. I understand about LOC's (well sort of but it won't relate to me) but more specifically about the outgoings during settlement you refer to. What other outgoings besides everyday stuff?

I have the informal nod from the bank and currently looking for my first IP.

Cheers

 

[imonmyway]

Would you be able to expand on this a little. I understand about LOC's (well sort of but it won't relate to me) but more specifically about the outgoings during settlement you refer to. What other outgoings besides everyday stuff?

I have the informal nod from the bank and currently looking for my first IP.

Cheers

I originally intended to buy 1st quarter 2008 so I had spent all last year paying down other debt so that I only had my PPOR debt this totaled about 25k in extra payments as well as an overseas holiday in the middle of the year and 2 weeks on the coast at Christmas time so we had a lot of outgoings last year. It proved to us we have plenty of cash when we put our minds to it.

Anyway by the end of the year my PPOR in Altona had increased by about 40% over the year giving me a fair bit of equity I started looking seriously in late November.

I had to pay the building and pest inspector $600 X 2, deposit bond $360, $1000 holding deposit, all in the last week before Christmas break on top of all my other costs for the year

It wasnt that I couldnt wear the costs for the period but I feel that if I had set up a LOC I would be in a better position to buy another place in the future and cover any shortfalls that might come up along the way also I wouldnt have crossed loans

Im borrowing 103% of the cost to cover stamp duty and other charges I didnt have to pay LMI and have a LVR of 80%

Im definetly no expert on all this but make sure the banks informal approval has gone past the part were you have sent in payslips and got a credit check done not just the "oh yes we will lend you $1m based on what you have told us" They like to make a big fuss about the smallest indiscretion once you are into the process.

 

[Qinau]

Thanks a lot for the reply.

I had to pay the building and pest inspector $600 X 2, deposit bond $360, $1000 holding deposit, all in the last week before Christmas break on top of all my other costs for the year

Oh ok, I've factored in for those. When I read your post thought I had overlooked something.

Im definetly no expert on all this but make sure the banks informal approval has gone past the part were you have sent in payslips and got a credit check done not just the "oh yes we will lend you $1m based on what you have told us" They like to make a big fuss about the smallest indiscretion once you are into the process.

Yeah they've done the credit check, income info plus I bank with them and have agreed to lend me money, although I'm dreading the actual full process. Cross fingers they don't pull the plug

Cheers

 

[alexlee]

Yeah they've done the credit check, income info plus I bank with them and have agreed to lend me money, although I'm dreading the actual full process. Cross fingers they don't pull the plug

None of this means anything until they've issued a conditional approval, and even then it's still subject to a valuation.

I usually just assume 6% costs and stamp.
Alex

 

[Qinau]

None of this means anything until they've issued a conditional approval, and even then it's still subject to a valuation.

I usually just assume 6% costs and stamp.
Alex

Actually I'll have to follow up what type of approval they have given, it was all done by phone initially then I sent in paperwork. Rang me a few days later and said yes, lasts for 12mths.

I haven't found a property yet so I've got some time to look at what other lenders can offer me too, the bank was just the first one I approached.

Cheers

 

[alexlee]

Actually I'll have to follow up what type of approval they have given, it was all done by phone initially then I sent in paperwork. Rang me a few days later and said yes, lasts for 12mths.

I haven't found a property yet so I've got some time to look at what other lenders can offer me too, the bank was just the first one I approached.

Sounds like a conditional approval. Still conditional on the valuation, and no material changes in your finances. Just make sure your offers are subject to satisfactory finance, and get everything in writing.
Alex

 

[shail]

So...
3: If I owe $280000 on the mortgae on my PPOR and I want to buy a IP for say $350000 to rent out would the bank just want me to get one mortgage for $630000 to pay out the one on my PPOR and cover the purchase of the IP? I want to buy the IP on an IO loan but dont they need to take the PPOR as security? I would like to pay the PPOR off asap because I dont want bad debt so I dont want to have to redraw all the hard earned money I have piled into the PPOR mortgage just to buy an IP.

Cheers all.

I just did my first IP loan. This is what my MB told me to do:
PPOR valuation - 320k, loan outstanding 240k
IP +stamp+other - 420k(405k property value)
I got 3 different loans setup
1 - PPOR 240k (existing loan planning to payoff asap)
2 - 15k (PPOR as Security)
3 - IP - 405k (100% loan)

S

 

[wagnman]

So I still dont understand how youcan use the equity from your PPOR as a deposit to buy an IP without making it a situation where you are ruining all the hard work you put into paying the mortgage on the PPOR off as fast as you can.

What I mean is that I understand that I need to pay the debt on the PPOR off as fast as possible and that is what we are doing at the moment. We have been paying $1000 a week on the mortgage which is way above the required payments and the mortgage is set up $80K variable $200K fixed (I did this before the last two rate rises fixed for 2 years).

SO

We are going hell for leather trying to pay the mortgage on the PPOR off asap and creating more equity over the already good growth the property has got any way.

If I was to try and redraw these extra payments to use as a deposit wouldnt I just be increasing the mortgage again on my PPOR?

Ahhh.

Im confused!

Im not sure but I think I need an LOC which I then draw against to use as deposit on an IP but that just seems odd for some reason.

What the hell am I supposed to be doing?

 

[alexlee]

We are going hell for leather trying to pay the mortgage on the PPOR off asap and creating more equity over the already good growth the property has got any way.

If I was to try and redraw these extra payments to use as a deposit wouldnt I just be increasing the mortgage again on my PPOR?

Yes, you would, but if you redraw to buy an IP, then that loan is deductible. You're not looking to decrease debt overall, but changing the debt from non-deductible to deductible.

You think the point of paying down the PPOR loan is only to decrease your borrowings and create equity. To invest in property, you have to think one step further: how do you use this equity that you've created? You could sell your PPOR and get the equtiy in cash, and use that cash as a deposit to buy another property. Or, you can borrow against the equity (interest all deductible for this), use that as a deposit on an IP, and get the growth on TWO properties instead of one.

You're not 'ruining the hard work'. The 'hard work' means you are now paying a lot less interest, because you get to 'use' the equity to build your assets as well as maximise the amount of debt that's deductible. Putting as much money into your PPOR loan as you can is NOT to become debt free. As investors we have a LOT of debt. Even a lot of debt against our PPORs. It doesn't bother us because we believe that future appreciation of the properties justifies the interest we're paying now.

What are you supposed to be doing? Quite simply: decrease the non-deductible debt as quickly as you can. Increase your gross assets as quickly as you can. Note the third, unspoken thing: you're also increasing the amount of total debt. Your aim is to use debt in the most effective way, NOT pay it off.
Alex

 

[steveadl]

Wagnman, a simple version would be like this:

Current PPOR mortgage $200k with a $350k value (I haven't looked back at what your actual figures are).

Buy an IP using borrowed funds to cover 100% + costs. New IP loan is $212k ($200k + costs)

Original non-deductible mortgage is still $200k.

New IP loan that is deductible is $212k

Total debt of $412k on property worth $550k = 75% LVR over portfolio.

Note, you haven't increased you're non-deductible PPOR mortgage 1 cent.

 

[shail]

If I was to try and redraw these extra payments to use as a deposit wouldnt I just be increasing the mortgage again on my PPOR?

Ahhh.

Im confused!

There are two ways you can buy an IP. pay from your pocket or borrow from lender

If you pay from your pocket, you will not get any tax benifits.

If you decide to borrow, you have few options, one is you can borrow part amount from one lender and part from your pocket( you will not get any tax benifits for the money you put from your pocket).

Another options is you borrow whole amount from lender.
Now when you will go to lender, lender will assess your income and equity and will decide on how much you can borrow.
Now its upto you if you want to use your equity to borrow loan. if you can and want to borrow whole amount without using your equity there is no reason why you cannot borrow without using equity.

The reason i think people use their equity to borrow loan is because it increases their borrowing power and hence they can borrow more and so buy more IPs.

It may not be a problem if you decide to buy only one IP and stop there. but if you decide to buy multiple IPs then you will want to use your equity to increase your borrowing power.

 

[wagnman]

Great stuff guys I think the penny just dropped.

I need to go to a broker (I know 3 personally already and one of them works for me) and get them to go right through the process of seeing what the maximum amount of money I will be able to borrow on an IO loan is based on our current assets V liabilities and income is and then decide whether I want to use the equity in our PPOR to make it so that we are borrowing less to fund the first IP or if we just try to fund 100%+ through the bank making the whole debt on the IP deductable.

If we the banks / lenders will fund 100%+ on an IO loan for the IP will we be effecting out PPOR mortgage at all or will that not change from our current set up?

If we borrow against the equity in our property (say to create a LOC) we will obviously have to re-finance the PPOR to get this $value to use as a deposit on the IP. Would we be best to refinance the PPOR on an IO loan with an ofset account as well? or would we be best to leave it as a P&I loan?


It makes sense to me to borrow against the equity in the PPOR as this borrowing for investment means rest on that borrowing becomes deductable and it presents the bank with a more attractive deal in their eyes because we are coming to the table with something to offer and it means we are borrowing less to buy our first IP.

What would affect our future borrowing potential more? Having borrowed more now and kept the equity in our PPOR to use as leverage for later borrowings?

Or borrowing less now but useing all our available equity to get the first IP?

Cheers guys sorry for all the newbe questions.

 

[Psyk]

We basically financed our loan for our 2nd IP by using the equity in our PPOR. Basically the process was:

1) MB valued the property - and we had enough equity (our first IP didn't have enough equity being only 1 year old at this stage).

2) Redraw from existing offset account on the PPOR to fund deposit

3) loan for IP-2 is completely separate and is 100% (+ costs)

4) We will get a refund on the deposit after settlement.

This was very simple for us and as you can imagine we are with the one lender across all our properties which made the process quite simple.

I'm still not clear whether we are X-coll'd, but each property has it's own separate loan.

I'm also interested on how we can fund the 3rd property without having to keep supplementing the interest short-falls across 3 IP's plus the PPOR??