Understanding the risks...

[Magyck]

Hi guys,

I'm very new to this and I was hoping someone could point me in the right direction to find some more information on utilizing assets and the risk involved.

Pretty much, I'm 23 years old at the moment, and am very interested in property investment. I am still living at home, but I actually co-own our house with my sister. We estimate the place to now be worth around $250K - $280K, so I have about $125K in the house (no debts, its ours).

At the moment I earn roughly $35K- $40K PA, and have saved $15K for a deposit, which should be $30K by this time next year, when I'm looking at getting an IP.

The problem is, I don't fully understand how equity works, and my sister is worried that if I borrow against the equity our place, I'll be putting the family home at risk...

Thanks in advance for any help!

I'm just hoping that you guys can point me in the right direction of some reading material, or someone in the Brisbane area I can talk to get a better understanding of the risks associated with IP's.

 

[alexlee]

Right now, you don't know what you don't know. So you need to read the basics. Read Jan Somers, Robert Kiyosaki (the first three, anyway), the Richest Man in Babylon and Peter Spann.

That'll give you the basics. Right now even if we explained it to you, you will just come back with a million more questions. Much better if you get some grounding at your own speed first.
Alex

 

[quoll]

Risk can be mitigated with a trust structure.

Risk can be mitigated by having a buffer of cash to pay interest.

Risk can be mitigated by using different lenders.

Risk can be mitigated by not xcol.

Risk can be mitigated by buying in an area which has high rental demand.

Risk can be mitigated by having a large deposit.

You borrow money from bank, they have your property as security. You miss a payment, they phone you ask why, you pay, doesn't matter how many you miss as long as you pay when you say you will pay. If you don't pay, they bank can sell all property that they have as security to cover the debt. Even if only selling one prop would pay out loan they can still sell both.

In my opinion average property for an area is a very safe bet, work on middle class areas.

Check out the books Alex has listed.

Cheers
quoll

 

[HiredGoon]

The problem is, I don't fully understand how equity works, and my sister is worried that if I borrow against the equity our place, I'll be putting the family home at risk...

Ah, those clever marketing departments at the banks! "taking out equity" sounds so much nicer than "debt secured against your family home" or "a second mortgage" doesn't it?

House is worth X, debt is Y, equity = X-Y. Equity can range from -Y to X

 

[Bandita]

Hi guys,

I'm very new to this and I was hoping someone could point me in the right direction to find some more information on utilizing assets and the risk involved.

Pretty much, I'm 23 years old at the moment, and am very interested in property investment. I am still living at home, but I actually co-own our house with my sister. We estimate the place to now be worth around $250K - $280K, so I have about $125K in the house (no debts, its ours).

At the moment I earn roughly $35K- $40K PA, and have saved $15K for a deposit, which should be $30K by this time next year, when I'm looking at getting an IP.

The problem is, I don't fully understand how equity works, and my sister is worried that if I borrow against the equity our place, I'll be putting the family home at risk...

Thanks in advance for any help!

I'm just hoping that you guys can point me in the right direction of some reading material, or someone in the Brisbane area I can talk to get a better understanding of the risks associated with IP's.

Hi Magyck, welcome!!

Equity works like this - if you have equity (equity = value of asset less loan on asset) in your home or any other asset - you can "redraw" (through refinancing, line of credit, etc) to access this equity to invest or use for whatever you like.

Firstly - if you use the loan for an investment, the interest on the loan is tax deductible ( = good debt ) - if you use it for anything else - car, tv,bills, etc - the loan is not deductible ( = bad debt )

Yes, there will ALWAYS be a risk in taking equity out of your home to invest. If you're planning on investing in property, some will tell you there's no risk as property always goes up in value - but that's in the long term (and of course not guaranteed - same as any investment), and most importantly - you must be able to service the loan in the meantime - and property fluctuates like any other market (luckily not so volatile!!)

I personally love most aspects of property investment - but do not kid yourself, it is a risk, and you can lose. If you are worried about using your home as security, you can lessen your risk by leveraging less against your home (like 50% of value rather than 80% for example).

Having equity in your own home is a great start - many people start with nothing but a deposit - so you're well on your way.

If you are comfortable in the risks and decide to invest in property - research your areas - ask questions (this forum will be a tremendous resource) - find a great mortgage broker, accoutant, and the rest of you team (this forum again is priceless in the respect!!) and then go for it!

Cheers,
Jen

 

[yieldmatters]

Hi guys,

I'm very new to this and I was hoping someone could point me in the right direction to find some more information on utilizing assets and the risk involved.

Pretty much, I'm 23 years old at the moment, and am very interested in property investment. I am still living at home, but I actually co-own our house with my sister. We estimate the place to now be worth around $250K - $280K, so I have about $125K in the house (no debts, its ours).

At the moment I earn roughly $35K- $40K PA, and have saved $15K for a deposit, which should be $30K by this time next year, when I'm looking at getting an IP.

The problem is, I don't fully understand how equity works, and my sister is worried that if I borrow against the equity our place, I'll be putting the family home at risk...

Thanks in advance for any help!

I'm just hoping that you guys can point me in the right direction of some reading material, or someone in the Brisbane area I can talk to get a better understanding of the risks associated with IP's.

You are putting the family home at risk if you borrow against it. You should be clear about this and nobody should tell you otherwise. So the question really isn't about whether you are risking the family home but about how big is the risk?

Probably the most important thing is this - can you make the repayments on both loans (your home and the IP) in both good times and bads, in times of high rent and low rent ? If you can then you should be OK. If you can't then what you are doing is rather risky - houses are not always liquid and if you get into a "must sell" position you could be damaged.

See a good financial advisor if you can (good ones are hard to find but try to find one). A solid principle of risk management is diversification. So if you have $15K and you'd like to add some debt to it (borrowed against your house) and invest then it is a good idea to investigate other investments as well. Doubling down in property means you could win big or lose big depending on what property does.

 

[Twitch]

I think a significant issue that seems to have been missed is that your sister is going to have to be on any loan secured on your PPOR, you can't go it alone on that one.

That means if you default your sister must pay the loan.

That means if your sister wants to take out a home loan in the future for another house, 100% of "your" loan is going to count against her DSR as if she was solely responsible for that loan.

I'd suggest your options for an IP puchase are
1) save a deposit and don't borrow against your ppor
2) buy your sister out
3) buy the ip with your sister