Think we've found "The One"...how to set it all up?

[Charcy]

Hello everyone!

We think we have found the property that has the potential to become our first IP.

Just thought I would pick a few of the knowledgable brains around here to find out the best way to set it all up.

Hubby is currently on salary package of around $89K including Super. Sal sacs around $15K. I am a stay at home mum of two earning lots of love (ie no money!)

We have $100K in cash ready to invest from the sale of our PPOR late last year and are currently living in a relatives property rent free (absolutely ideal!).

We have found a property interstate listed at $150K. I have been told by the agent that it has a rental potential of $160 pw, however, if floors are polished and the whole house is given a paint - the agent advises they have someone that can do this for us for around the $4K mark - the property would have a rental potential of $200+ pw.

Based on all this - a couple of questions:

1. Should we use the money we have towards purchasing the property therefore only borrowing around $50K then redraw the equity later on when needed (hopefully for the second IP)? Is accessing the equity in a property pretty straightforward?

2. Should we borrow the full amount and put the money we have in an offset account? Is this easier or more practical than the above ^^ scenario?

3. Whose name would you recommend putting the property in? Hubby's, mine or both?

Sorry if it is a bit longwinded....I am incredibly excited about the whole investing adventure we are about to undertake.

I would be deeply grateful for any advice you are able to give

 

[alexlee]

1. Should we use the money we have towards purchasing the property therefore only borrowing around $50K then redraw the equity later on when needed (hopefully for the second IP)? Is accessing the equity in a property pretty straightforward?

2. Should we borrow the full amount and put the money we have in an offset account? Is this easier or more practical than the above ^^ scenario?

Definitely borrow more and put your extra cash in the offset. Much more flexible when you want to buy your next PPOR. As to how much to borrow..... 80% will mean you don't have to pay lenders mortgage insurance.

3. Whose name would you recommend putting the property in? Hubby's, mine or both?

Given that it's still going to be negatively geared, and it's your first property, I would probably put it in the higher income earner's name only. It's not an expensive property and you can always do it differently for future properties.
Alex

 

[Modal Harmony]

Welcome to the Forum Charcy!

Congratulations for being a stay at home mother in these days of ubiquitous child care facilities! Your kids will love you for this choice (we did with 4 daughters & it's the best move my wife made!).

Some points:

1) Property for $150k with $200/week return???? That seems unbelieveable in these days!
2) Suggest get a mortgage broker to discuss your details re assets and liabilities so he/she can tailor a finacing arrangement to suit the both of you;
3) Borrow to the 80% LVR; set up line of credit for personal & IP finances;
4) Disagree with Alexlee re only in your husband's name; would set up as Tenants in Common with a 90% (him) / 10% (you) arrangement. You're both in this together and there will still be tax deduction advantages for hubby this way.
5) The 3 most important entities should be: (a) mortgage broker (b) property savvy accountant (c) property manager

Hope this helps!

 

[dean lynch]

I agree with you it is an incredibly exciting time and it is great that you have so much equity and flexibility. In my opinion you should consider the lowest variable rate you can get and make sure the loan has redraw at no charge. The beauty of this is that you can borrow to 80% of the value of the property, with no Mortgage Insurance fee, and then pay the extra amount straight back into the mortgage. The advantages are that you have one account, not two, as per offset, and you can redraw at anytime, at no cost plus your money is working at the mortgage rate to reduce the interest you have to pay. As for which name it should go in, my best advice would be to speak to your accountant, if you don’t have one you should, they are able to help you set this up for maximum tax benefit.

Cheers,
Dean Lynch
Principle Mortgage Consultant
Australian Mortgage Brokers
E: [email protected]
W: www.deanlynch.com.au

 

[GZM]

Given it's an investment property, I'd definitely go with an offset account as opposed to a redraw facility because, as Alexlee suggested, it'll be advantageous when/if you ever want to buy a PPOR.

One of the key differences, as I understand it, is that with a redraw, when you redraw money, it is deemed to be a new loan. So, if you redraw for non-investment purposes (i.e. PPOR) the amount you redraw won't be tax deductible. Whereas, with an offset account, any amounts you take out of the offset account won't be deemed to be new borrowings...it's just like taking the money out of the bank.

 

[softmonkey]

offset is the way to go. also gives you an emergency stash if the free accomodation disappears.

 

[s_t]

not to mention that I imagine banks could cancel your ability to redraw more easily than they could restrict access to an offset account (if the credit crunch gets real bad).

 

[Charcy]

Thank you all so very much!!!!

Apologies for not be able to respond to you all earlier than now.

My sincerest thanks to each of you who responded with your advice and warm welcomes!

I will research the offset account further, however at this stage, it seems a bit more advantageous than the redraw option. I think it will also put my mind at rest a bit more knowing that we will still easily be able to access our life savings if needed.

We are in the process of finding a suitable accountant so that's covered. We soon discovered, after many hours sitting in various financial planners' offices, that none of them are too keen on giving advice on property (however, we are now pretty much up to speed on SMSF, managed funds, shares, estate planning etc!)- so the accountant is the next step.

Thank you all again....I really, really appreciate it

 

[Humphrey]

Without giving too much away would you like to share where the property is? At least which state, whether it is regional or in a city? Apartment or House?

I'm curious as to whether you are investing primarily for cashflow or capital gain.

 

[Peter_Tersteeg]

An offset account gives you more insulation from potential tax issues than a redraw facility does (most accounts that have an offset also have a redraw facility anyway).

By using an offset account to put your savings in, you're isolating your savings from your investment loan, but still getting the maximum benifit on reducing your loan.

If your savings and the investment loan are combined, the ATO may look at it and say how much of this money is for personal use, and how much is for investment use. The next question they ask is, "How much interest is now tax deductable?"

By keeping the two separate, all of the interest can remain tax deductable, if they're not separate the tax deductability of the entire investment loan can come into question.

As for the fixed vs variable argument, it's not an easy question to answer. You may want to consider what will happen to your budget if rates rise another 1% or more. Many are predicting rates stabalising and dropping from here, but they were also saying that 6 months ago. It's a very tough call IMHO.

 

[Charcy]

Without giving too much away....

LOL...Ok I'll see how I go.

This particular property is in regional SA. It is a 3 bedroom, 1 bathroom, 3 carspace house. There are some major developments and upgrades in the works in this area planned over the next couple of years.

The aim, for us personally, is long term capital gain (this particular town has an average of 11.5% per year growth over the past 10 years), but if we can find something that has a decent rental return - at least until I am in a position to return to work - then that is simply an added bonus.

In saying all that, I have also found another two properties - one in regional NSW and one in regional VIC - that are around similar prices, with similar rent returns and growth, also with some developments etc on the cards...it's just a matter of picking the right one to go with. Who knows, maybe we'll be able to get two properties!

 

[kum yin lau]

Hi, check the PM's credentials please. And the population of the town.

KY

 

[Rixter]

Charcy,

Ditto, everything in Alexlee's post.

Its the starting that stops most ppl and you are well on your way.

Well done & Congratulations.

 

[skater]

Well done! Like the others said, go the offset. It will give you much more flexibility.

 

[Rolf Latham]

Hiya

Id also go the offset over redraw for the same reasons. While low rate and free redraw may work well for a ma an pa PPOR loan, even there in the long run, you may get int strife where the PPOR is turned into an IP further down the trackl

This is of course assuming that you do want a variable rate..........something not to be assumed, since the risk tolerance profile of all clients is different.

At least one major funder, the being Adelaide Bank is doing 100 % IO offset on all its fixed rates.

WHile many agree we may be near the top of the current rate cycle, forces OUTSIDE of that cycle may cause some interesting turbulence, then again we may have variable rates much lower than today in 18 mths time.


ta
rolf

 

[the_captain]

The debate rages on endlessly about Fixed vs Variable, and whilst we may have variable rates lower than those of today in 18 months time, the only thing anyone can predict with any surety is TODAY i.e. the here and now. Don't misconstrue this as an attack on Rolf, he speaks from vast and bitter experience, and is worth listening to.

So you have a few options here. 50% fixed, 50% variable, or differing percentages in between. This way you take an each way bet on what rates will do, its a good risk management strategy IMHO. I will tell you ALL my IP's are on a fixed rate, although my fixed rates are much lower than those available today.

Remember with IP's cashflow is KING. Cashflow is what lets you hold on, and you have something with a pretty decent yield. You need to do some sums and work out the maximum interest rate you are comfortable with, in terms of your cashflow. If that rate is pretty close to what you can get now, fix, if you have some tolerance, have an each way bet, if you are gung ho and want to gamble rates will drop, go variable. Personally I think we are in for a few more rises yet, due to the cost of funds, not the Reserve bank.

I will also recommend getting an IO (Interest Only) loan, with a 100% offset account. This gives you the MAXIMUM flexibility, is tax effective and you can tip in any additional monies, should you want to reduce your exposure, or get a 100% tax free return equivalent to the rate of your mortgage i.e. if your on a 9% rate, and have 100K in the offset, it is effectively earning 9% tax free.

Work with a good mortgage broker. Save time and hassle by using them. Ask to see their trailing commissions so you can be satisfied that the loan is not being recommended solely for the $$$ it will put in their pocket, over and above a product that might suit your needs more. Most good ones will happily disclose this to you.

 

[handyandy]

Hi and welcome.

I agree with the offset, the fixed / variable is really a personal issue based on your circumstances.

You mention that the RE says that you can get $200pw after a spend of $4k. I suggest that you speak to some other property managers in the area to check whether this figure is a realistic and achievable rent do not take the RE's word for it as he is trying to sell the property.

Cheers

 

[Peter_Tersteeg]

In my experience most sales agents will either lie through their teeth about the potential rental yield of a property, or they just don't have a clue. They know investors want to get the highest rental possible, they they tell them what they want to hear.

On a property I bought, the auctioneer quoted me a rental figure 30% higher than what was actually acheived (not that it was the deciding factor in my decision to buy).

If you want to know about rental yields, talk to the property managers. If you ask them what the have a high demand for, they'll tell you (it makes their job easier). If they commit something in writing, it will usually be conservative as they don't want to open themselves to potential liablity.

 

[Charcy]

Thanks All!.

Thank you all for your continued advice...you have certainly given us a lot to think about!

When doing the sums, I have worked with an interest rate of 11% (hoping this is enough) and we seem to be able to manage this quite comfortably.

Just in regards to doing our homework re: PM. There is a slight problem in that this particlar agent is the only agent in the area. I have looked at the rental properties in this area (the whole 3 of them currently listed) and what they have told me seems to pretty on par with what is already out there.

Any other suggestions on how to research the PM? Should we ask for something in writing before committing to purchase this property?

 

[skater]

I would be wary if there is only one PM servicing the area. I have some properties in a Regional that has 4 PM's. I am using the best there is (I've delt with them all) & am still not happy. Sometimes these areas have great difficulty in recruiting staff, so have to use whoever applies. Sometimes those applicants are not very good.

Even if the PM is top notch, what happens if they move, retire, get pregnant, etc.

Take care.