What to do next to acquire an IP?

[grizzly_1]

Hi all,
I am very new to the property arena and have just bought my first home. I am extremely interested in property investment and would like to know what some of my options might be regarding acquiring an IP.

My partner and I have just bought our first home for 240,000 with a loan of 210,000. We have now reduced this to 190,000 and continue to pay $500 a week off this.

In about 12-24 months time i would like to acquire a cheap 3 bed IP in my suburb for around 210,000 - 220,00.

Am i best off continue to pay my existing loan at an accelerated rate or should i put this extra amount aside for deposit for my IP? Or should i look at buying sooner? Any other ideas? I live close to the Geelong area and would definately like to slowly aquire a decent portfolio. If i should post any more info about my situation to help in answering this please let me know.

cheers Brett

 

[joeygbh]

It really does depend on the market, some people have complained that they can't save for a deposit properly because by the time they save something the price of the property has gone up and they require more whereas if they bought it in the first place using 100% loans etc it wouldn't have been so bad.
.

The general consensus is try to reduce PPOR loans as fast as possible as there are not as many tax benefits from it. You can always use the equity in the PPOR you are paying off now to leverage against any new IP purchases.

 

[steveadl]

If you are planning on keeping your current house as your PPOR, then it's a good idea to keep putting the money in that loan and decreasing your non-deductible interest as quickly as possible.

In a year when you want to buy an IP, you can use the equity you have in your PPOR to buy the property without having to contribute any extra cash.

 

[HandyAndy888]

Not sure about this area, but I would definitely think about reducing the amount required (ie. save for a deposit)....lenders are sometimes hesitant to loan over a certain LVR, lets say 80%....

Good luck...

 

[Nuzdeano]

Hey Brett,

I am with Steveadl on this one.

Paying $500 per week will obviously give you an extra $25K in 12 months and $50K in equity in 24 months.

This coupled with some capital growth in Victoria will give you a start into your first IP.

Keep up the good work.

Deano

 

[grizzly_1]

i dont think i was quite clear enough. i meant that i was only paying 500 a week including my interest payments, not an extra 500 so i would only be building about 10,000 equity per year.

If i did buy in about 2 years time with that extra equity, is the normal thing to do, wait until i obtain more equity through these properties and then used this extra equity to purchase the next IP?

ie. if i buy another IP for 210,000 wait a few years and it might be worth 250,000 so that means i have 40,000 equity in it and then use that to buy next IP?

 

[grizzly_1]

I am 25 and only an apprentice so my money situation at the moment is fairly tight in that 500 is my max. to spend on property each week but obviously my wages will increase a fair bit in the next couple of years. so should i just take IO loan on first IP and continue to pay the most off my PPOR that i can and just rely on the growth of the IP?

 

[alexlee]

I am 25 and only an apprentice so my money situation at the moment is fairly tight in that 500 is my max. to spend on property each week but obviously my wages will increase a fair bit in the next couple of years. so should i just take IO loan on first IP and continue to pay the most off my PPOR that i can and just rely on the growth of the IP?

I think the key for you is to maintain the savings RATIO. Not the amount, the ratio. As your income goes up (which it will), try to save the same % of after tax income that you are now. Don’t be content to just save $500pw.

You should go IO on an IP anyway.
Alex

 

[steveadl]

I am 25 and only an apprentice so my money situation at the moment is fairly tight in that 500 is my max. to spend on property each week but obviously my wages will increase a fair bit in the next couple of years. so should i just take IO loan on first IP and continue to pay the most off my PPOR that i can and just rely on the growth of the IP?

That's still good, pay as much as you can off the PPOR debt. And as Alex said, when you do get a pay rise, straight away try and put a decent amount of the extra into the loan before you start getting the taste of spending it. If you didn't have it before, then you should'nt miss it when it comes.

PS Although don't forget to still enjoy life

 

[MichaelW]

Am i best off continue to pay my existing loan at an accelerated rate or should i put this extra amount aside for deposit for my IP?

I agree you should wait and build a deposit, but to be clear you can do that at the same time as you are paying down your PPOR mortgage and with the same dollars.

i.e. Don't pay any "additional" payment portion above the obligatory minimum payment off the mortgage. Open a mortgage offset account and put the additional payments into that account. In that way, you can use them as part of your deposit when the time comes to purchase that IP but in the meantime they are effectively "off the mortgage" from an interest calculation perspective.

Alternatively, you could continue to actually pay it off your mortgage and redraw it at the time you want to buy your IP if your loan allows. This, however, presumes that you're set on the path of your existing home remaining your PPOR and your buying a new separate IP. If you ever wanted to convert your PPOR into the IP and buy a new PPOR then you're definately better using a mortgage offset account as this retains the deductability of your current PPOR mortgage were it to become your IP.

You'll also need an LOC to tap into your equity growth above your additional repayment amount to form part of your deposit if you keep the PPOR as your PPOR.

Cheers,
Michael.

 

[grizzly_1]

Thank you everyone for the replies.

Michael why do i need a LOC if i can just redraw $20k from my existing loan to use as the deposit for an IP or am i thinking in the wrong direction here?

I was thinking that i would only need to use LOC if after i had already bought an IP and had not payed much off it but it had gone up in value. Then i thought was the time one would use LOC to use the equity of the IP as there would be very few available $ to redraw otherwise.

Please clarify if my way of thinking is incorrect as is most likely the case.

EDIT: i think i misread your comment as you were talking in respect to if i wanted to change my PPOR to an IP.

cheers
Brett

 

[Twitch]

Michael why do i need a LOC if i can just redraw $20k from my existing loan to use as the deposit for an IP or am i thinking in the wrong direction here?

Brett, it's critical to keep investment funds and personal funds separate. Otherwise you will compromise tax deductability for funds drawn for investment purposes. Practically that means that any given loan can either be for investment or personal use.

cheers.

 

[MichaelW]

Michael why do i need a LOC if i can just redraw $20k from my existing loan to use as the deposit for an IP or am i thinking in the wrong direction here?

Hi Brett,

No, you didn't mis-read it and that point is not in the context of deductability. Let me explain by way of example why you might need an LOC as well as a redraw when it comes time to buy your IP.

Your current PPOR cost you $240K with a current loan of $190K. Your LVR (Loan to Valuation Ratio) is 80%, but you can borrow to 90% based on your original lend.

Fast forward two years. You have reduced that loan to $160K by paying $500pw off it. Some of that covers interest and some capital. Lets just assume that there was roughly $20K of interest and $30K of capital reductions meaning the loan is now $160K. Lets also assume that your mortgage terms mean you should only be at $190K by now, but you're ahead $30K on your repayments. The mortgage redraw/offset option gives you instant access to that $30K now. Cool?

OK, but wait there's more. Now your PPOR is worth $280K as its gone up 8% pa over the last two years. This means you now also have additional capital you can borrow against. So, if the $30K is insufficent deposit on that next $280K IP, then you can access more money to top up your deposit. At a 90% lend, the $30K should be sufficient but you might need a bit more. If so, the bank will now lend you up to $252K secured by your PPOR at a 90% lend. You redraw the current mortgage back up to $190K freeing $30K instant cash. But you can also go to the bank and ask for an LOC for up to another $62K being the difference between your current loan ($190K) and the maximum they will lend on this property ($252K).

So, in two years time you could have $30K cash and $62K LOC equity to play with if you need it. The fact that the LOC is secured by your PPOR does not mean its non-deductable when borrowing to buy an IP. The purpose of the loan (to buy an IP) determines its deductability.

You then buy another IP, now worth $280K because the market's moved, with $92K down and a mortgage on the IP for around $200K to cover stamp duty etc too, maybe a touch more but this is all rough. You can also instantly apply for an LOC of $52K against the IP if you want to as the $200K lend is less than the $252K maximum lend on that IP. Who knows, the $52K might be enough to go again and buy a second IP if your cash flow allows.

Or maybe the IP is stretching your cash flow a bit so you need some servicability. So, you can use the $52K spare equity as 50% down margined to $100K to buy some managed funds yielding 10% pa. That's $10K more income, less your 8% borrowing costs gives a token $2K in passive income. But if the fund does 20% then you're $12K cash flow better off.

All just thoughts. Really just wanted to help explain in a bit more detail how it all holds together. I hope I've at least demonstrated why an LOC is possible on top of your redraw in a few years time to give you even more cash should you need it. Could mean two IPs instead of one.

Cheers,
Michael.

 

[grizzly_1]

thanks heaps michael that was very in depth and excatly what i needed. very helpful!