Time to start looking at a second property...where to start and am I in position to?

[pipsal]

I think its time to start seriously looking at purchasing my second property....or at least aiming for it in the near future - I'm not sure that I am really in the best position to do it yet though, according to the online bank calculators, I have no chance at all of borrowing enough ($200ish K) - which may well be the case at this point in time, but I thought I'd put it out there and see if someone with more knowledge on how to get second loans/use equity etc may have some ideas on how they would proceed (now or in the coming year/s).

Situation so far:
Income is $85K approx (not including current rental income $20K+)
Existing Home loan $350K remaining - repayments $1300/fn (could be reduced because interest rates came down). Don't have much in extra repayments in the account at the moment (took some time off and went on a huge trip last year...)

Equity - this is all I would have for deposit, which is also going to limit me. I purchased at the market peak and had no deposit back then, so my loan was for almost full amount. Encouragingly, and what has me a little hopeful is that comparable properties around my area have been selling for over the $400K mark - some as high as $430K and mine is in much better renovated condition.

Technically Property 1 is my PPOR and I was living in it for a while - but I am not living in it now, have been renting it out to try and work towards getting second property - but am no good at saving money! Lucky enough to be able to live in my parents place rent free while I do this...and while I will do it to help get me where I want to be, I also don't want to be doing this forever! My plan is to get a smaller/cheaper property as next investment - hopefully one that is as close to CF neutral/+ as possible. Was considering Defence housing (one that is part way through a lease as oppposed to brand new and a bit overpriced for the area) or NRAS...I know they have their pros/cons, but at least defence have the guaranteed rent which might help with borrowing?

So I guess my questions are:

1. Getting a valuation on current property to see if there is any equity - get the bank to do it? Or an independent valuer (who?)?

2. Are there lenders that will lend up to 95% for investment? I'm with Commonwealth for everything at the moment...stay with them, shop around and change both loans - recommendations (don't want to do too many credit checks if I shop around!)?? If using Property 1 for equity, do I have to have both loans with the same lender?

3. Does my financial situation seem a bit too dicey? My family is very conservative, and I would never have bought the first place if I'd listened to them because I didn't have the money/enough deposit etc....I don't want to rush into it, and I don't think I am (5yrs since first place), but I also don't want to be so cautious that I never make the move because it looks too impossible - I am realistic and know that I am not great at saving money, but I am really good at making loan payments and keeping committments...have never had a problem and normally make extra payments, but when trying to save I either spend it, or as soon as I have a reasonable sum (including in re-draw!), I plan a nice big overseas trip again . I think that I am better with the 'forced saving' that a loan ensures...I never saved up my house payments before I had the house (if only I had my deposit would have been huge!!!).

4. (not finance related, but..) When you started buying investment properties, did you stick to areas you were familiar with to begin with, before branching out to other cities/states (more unknown...but possibly cheaper!)?

I'd appreciate your info/thoughts...thank you

 

[Mick C]

Hi,

1. Your borrowing capacity is very tight given the LVR your after -however its def more than $200,000 with some of the more generous lenders and lenders that's not as restrictive in terms of borrowing capacity.

2. Im presuming you don't have a lot of cash savings//so you will be relying on your equity for this loan - equity wide you have probably around $37,000 or less in usable equity at 90% LVR based on a $430,000 possible valuation

I suggest you carry out a upfront valuation before placing any credit files/pre-approval. The valuation can be ordered via the banks or via a broker; but let them know your after an upfront without a credit checks.

If the valuation is less than $430,000 you pretty much won't do anything as you don't have enough equity.

3. What is your desired purchase price for the next property?

4. There's are lenders that allow 95% for investment, but what your after really is 95% + some for the LMI for investment ( the LMI will cost around 3% of the purchase price) which is slightly more harder and restrictive in terms of lenders choice.

5. You really want to limit the amount of credit hits since your after a very high LVR loan.

6. if your releasing equity from loan 1...the new loan doesn't need to be with CBA.

 

[Aaron_C]

You should be able to release equity quite easily although given it's over 80% you will need to tread carefully with CBA.

 

[pipsal]

Thanks for your reply. Yeah, I thought it might be tight. I will look at getting the valuation done through the bank first then.

I don't have any set price in mind for the next property, preferably mid 200-mid 300's I think. The first place I bought was a bit too extravagant for a first buy, if I'd bought smaller/cheaper I may have been able to borrow to get another one sooner so I want to try and keep the next one a bit lower - but ultimately it will depend on what I can borrow and what I can find that suits.

 

[pipsal]

You should be able to release equity quite easily although given it's over 80% you will need to tread carefully with CBA.

I am intrigued as to your 'tread carefully' with CBA comment...can you elaborate?

 

[D.T.]

85k income + 20k rent with 350k loan. Serviceability looks easy peasy. If the property is rented out, whats your living arrangements? Do you have a partner or kids? Do have any other credit/loans?

Its the deposit thats the hard bit. At 430k x 90% you wouldnt be able to get much out. If you swapped to interest only you'd be able to save faster and perhaps use a combined cash / equity deposit?

 

[Aaron_C]

I am intrigued as to your 'tread carefully' with CBA comment...can you elaborate?

Their cash out policy for anything above 80% is pretty restrictive.

 

[Corey Batt]

Their cash out policy for anything above 80% is pretty restrictive.

They certainly aren't the best, but aren't the worst either.

Assess how much accessible equity is available through an upfront val. On tight serviceability, it most likely will be best to put this one with a more lenient lender that you don't have exposure to, depending on security/LVR.

 

[nathperth]

I personally wouldn't recommend you making an additional purchase at this point in time as your equity is already so tight, trying to get a deposit + stamp duty costs is going to be an uphill battle.
The good thing is property has been growing in most parts of the country, so by doing a few of the steps below you might well be able to do a purchase in the coming months.

In terms of your existing property- there's a few things you should look into to make sure you're getting the most out of it.

1.) If it's a rental property and the home is relatively new, have you obtained a depreciation report? This can literally puts $1000's in your pocket come tax time. (google depreciation schedule for more information)

2.) Swap the loan over to interest only (i'm guessing you're on P and I at the moment). Link the account with an offset and transfer the $1300 p/f into it (google tax ruling on offset accounts for more info). Your actual loan repayment will be $1450-$1500 pm so you'll accumulate a surplus of funds each month - also if you take your new purchase to a lender that assesses actual repayments on other loans in their servicing calculators, you've just massively increased your borrowing capacity!

3.) Look at any cheap capital improvements that you can make to add value to the home. If it's a kerbside valuation just the appearance of the front can make a difference of $1000's. Is there anything you can do at relatively low cost that can improve the front of the house?

Hope this helps!

 

[pipsal]

Thanks for the suggestions! I agree probably not quite ready yet, depends what the valuation comes in at too - bank gave me $40K variation in their 'rough' guide for RPData vals and said that they'd happily lend me enough for what I want if I got about middle of that, Onthehouse website has a 50K variation - but 90K above RPData's lowest, so it will be interesting to see. Should be able to move sometime this year though!

1.) If it's a rental property and the home is relatively new, have you obtained a depreciation report? This can literally puts $1000's in your pocket come tax time. (google depreciation schedule for more information)
Yes, have used one of these for a few years - done by Depriciator. Property is nearly 40yrs old, but has had full renovation so some but not a lot 1000's of depriciation...

2.) Swap the loan over to interest only (i'm guessing you're on P and I at the moment). Link the account with an offset and transfer the $1300 p/f into it (google tax ruling on offset accounts for more info). Your actual loan repayment will be $1450-$1500 pm so you'll accumulate a surplus of funds each month - also if you take your new purchase to a lender that assesses actual repayments on other loans in their servicing calculators, you've just massively increased your borrowing capacity!
I am PI at the moment, and am paying more than I need to - think min payment PI is about $2200/mth, I'm about $2600. As this place will probably be PPOR one day, I was wondering if I should try and stay PI for this one though?

3.) Look at any cheap capital improvements that you can make to add value to the home. If it's a kerbside valuation just the appearance of the front can make a difference of $1000's. Is there anything you can do at relatively low cost that can improve the front of the house?
I've attached some pics....it has been rendered and the garden is a few years older now (I have a gardener that maintains it because it is cnr block and goes around the other side too - included in rent)....happy to hear any recommendations for what I could do to spruce it up a bit inside and out though (cheap!).

 

[pipsal]

Valuation came back...$430K

Got the valuation back @$430K....fairly happy with that all things considered, the upper end of what I had predicted.

Do you use the information in valuation reports for anything other than the $ value? It's an interesting report to read, first time I've had a good look at one so I'm not sure how reliable/informative I should consider it, other than the $ amount (because I imagine I might organise some on prospective properties at some point if the information is useful..)?

I'm not sure how/why they chose the local properties to compare it to though, there was a comparable one in the next street that went in March that wasn't on the list at all, yet they used surrounding suburbs from December? Said street appeal is 'above average for the locality', so I guess I don't need to worry about outside improvements...maybe inside? Says condition is 'average' but then describes kitchen as 'modern style of good presentation', and bathroom as 'semi-modern style of good condition'.