When to purchase your 2nd IP? How do you determine/decide this?

[mixedup]

Hi,

With my own house paid off I'm reasonably OK doing the basic maths for the 1st Investment Property scenario.

QUESTION: How does one determine however, when to make a purchase on the 2nd IP? That is, how many years after the purchase of the 1st IP? Some things that come to mind:

Option A: Assume you know want the 2nd IP value to be $XXX. In this case would you just keep looking for the first point in time that the newly calculated figures (i.e. including the 2nd IP):

• (i) the DSR (loan payments / eligible income, i.e. affordability) is less than 1. This would be a prereq for a bank offering you more $$$ from what I understand(?)
• (ii) the LVR (Loan to Value ratio) was below an acceptable level, say 90%???

Option B: Assume you did not have a required value for the 2nd IP? Ummm, in this case you would need to compare whether it's better to buy a $200k unit earlier as the 2nd IP, or wait longer and get a $400k house say no? How would you determine what's best here?

Thanks in advance

PS. The spreadsheet may start to get a bit messy...any comments on whether the PIA software is well worth it to assist here (as opposed to creating bigger and bigger spreadsheets)

 

[kaf]

Hi mixedup

What we do is have a final figure of asset base we want to reach by a certain time. You then decide your risk profile ie. what's a comfortable LVR for you, how much debt can you service, what's your buffer etc. and review that regularly. Well and then you just buy whenever you can according to your risk profile until you've reached your desired asset base.

Did this answer your question at all?

Cheers

kaf

 

[alexlee]

Mixed up, don't get TOO detailed with it. Buy when the bank will lend you the money and based on your own figures you can afford to hold it over the long term.
Alex

 

[DavidMc]

Mixed up, don't get TOO detailed with it. Buy when the bank will lend you the money and based on your own figures you can afford to hold it over the long term.

Alex has said it well.

I'd also add that to me, I determine 'you can afford' by doing the maths on a realistic 'worst case' scenario. For example, no growth for 5 years + loss of job for 3 months. If I can manage that then I proceed.

Generally speaking first tier banks won't lend to you anyway if you truly can't afford it. Don't use this as your only yardstick though... did someone say subprime?

 

[skater]

Mixed up, don't get TOO detailed with it. Buy when the bank will lend you the money and based on your own figures you can afford to hold it over the long term.
Alex

Well said! Only you know what your SANF & spending habits are. When you can afford the next one, buy it.

 

[WBG Redcliffe]

PIA software is one of the most important tools in the investment tool box. Your doing yourself a disservice by not having it.

 

[Bazza]

PIA software is one of the most important tools in the investment tool box. Your doing yourself a disservice by not having it.

I agree totally. I use my PIA software for 'what if' analysis all the time. In fact I asked Ian to put in the 'Undo' feature years ago as it helps with playing with numbers.

Cheers,

Bazza

 

[alexlee]

I've never used PIA. Personally, I just use excel.
Alex

 

[our obsession]

We built our first IP, by 12 months later we had (what I considered to be) some good equity to play with from it and I thought why not build again?

Nobody said we couldn't do it..(build)...

So we did.

It was about $30,000, so we built again, and 12 months later we had more equity (from both IP's) to play with, so nobody said no, you can't spend it; so we just bought again.

Then I got a great mortgage broker, because I thought we'd been a little lucky so far, but time to bring on board somebody that knows figures and loans and structures and just stuff.....

That helped.

So peace of mind about loans and scenarios for buying/building IP's and off we went shopping again, and again.....and again.....

I know very little about PIA, excel, spreadsheets...don't use them... I choose not to utilise software programs, it and I just don't go well together... that doesn't mean you shouldn't I hear others say they are great and a smart path to go down, I'm just happy wacking around the bushes.

You know your stuff and figures and deals, it's all different to the next investor...I'm not sure there is any due process for buying the 2nd IP...just what you and your team considers right. For you.

All the best.

 

[mixedup]

thanks for the replies so far - being able to understand the answer to this one was more about pulling together an overall retirement plan to see how things look - when I actually buy a 2nd IP will undoubtedly change as the time draws nearer.

Is the PIA software the most used software for property investment in Australia? What are it's main competitors? It obviously seems to get a good wrap here.

 

[long88]

I presume that it is wrong to use your ppor as a guarantee against your first IP (that is what the banks wants all the time right ?)

also it is harder to get a loan if it is secured only on that property only, especially for lo doc people. any suggestion to secure our ppor against any bad things that happens to the IP ?

thx

 

[WillG]

I presume that it is wrong to use your ppor as a guarantee against your first IP (that is what the banks wants all the time right ?)

also it is harder to get a loan if it is secured only on that property only, especially for lo doc people. any suggestion to secure our ppor against any bad things that happens to the IP ?

thx

It isn't technically wrong but it may tie up more equity than you need it to.

 

[mixedup]

does it really matter if you're buying your IP in your own name? i.e. would your PPOR be up-for-grabs anyway in this case if things went bad?

WillG - What did you mean by "tie up more equity than you need it to"? Just interested in understanding...

 

[Bazza]

I've never used PIA. Personally, I just use excel.
Alex

Excel is the obvious thing to use but it is pretty 'dumb' compared to PIA. I also tried Access and thought of writing my own code but there is a lot more to it than you first think:
Income tax
Stamp duty (different states)
Sales Commission
CGT
Land tax (different states)
Superannuation
Borrowing capacity
Home loan Analysis
And then there is the Wealth Builder that takes into account your entire portfolio plus PPOR with linked accounts

Why re-invent the wheel when you can buy PIA off the shelf and it does everything you want. I can analyse a property in about 2 minutes and I know exactly what it will cost to buy and hold every year for the next 20 - 30 years.

Is the PIA software the most used software for property investment in Australia? What are it's main competitors? It obviously seems to get a good wrap here.

I believe so. I think there is an application called POSH but I don't know anything about it.

Cheers,

Bazza

 

[Bazza]

does it really matter if you're buying your IP in your own name? i.e. would your PPOR be up-for-grabs anyway in this case if things went bad?

WillG - What did you mean by "tie up more equity than you need it to"? Just interested in understanding...

Hi Mixedup,

Unless you buy the IP in a Trust. The problem is cross collateralisation meaning the banks like to hold all your properties as security just in case. It is best to keep each IP separate if you can.

Cheers,

Bazza

 

[mixedup]

And then there is the Wealth Builder that takes into account your entire portfolio plus PPOR with linked accounts

Is the idea here you have individual property investments stored/saved in their own file, and then you can link them up? Does it do this task in an easy-to-understand way? For example if you have a retirement equity value in mind can you use the Wealth Builder to prove you have a plan of attack that can achieve this?

 

[mixedup]

It is best to keep each IP separate if you can

Bazza - what did you mean by this exactly (penny hasn't dropped yet). By separate did you mean to use a trust, or is there an approach in-between you're referring to where the IP is still in your own name?

 

[Bazza]

Is the idea here you have individual property investments stored/saved in their own file, and then you can link them up? Does it do this task in an easy-to-understand way? For example if you have a retirement equity value in mind can you use the Wealth Builder to prove you have a plan of attack that can achieve this?

Yes you can link and track all your equity and loans. As you purchase another IP you add that database to your portfolio.

Bazza - what did you mean by this exactly (penny hasn't dropped yet). By separate did you mean to use a trust, or is there an approach in-between you're referring to where the IP is still in your own name?

Whether it is in your name or in a Trust it is best to have each mortgage secured by the one property and not by other equity.

eg say you have $150k equity in your PPOR. Take out a LOC for max of $150K then use this for a deposit to purchase an IP for say $400k.

Purchasing cost will be about $19K so if you put in $119K from your LOC you need to borrow $300K which will give you an LVR of 75% allowing you to avoid Lenders Mortgage Insurance and since you can borrow up to 80% LVR then you can just use that property as security without cross collateralisation.

So, then the new IP isn't secured against your PPOR. You then have $31k left in your LOC to use for a buffer (difference between rent and mortgage repayments) or any unexpected bills reducing the risk.

Hope this helps.

Bazza

 

[mixedup]

ok, understood I think. Can you validly claim interest for the money you redraw from your PPOR loan (i.e. a personal loan) as an expense however? Someone once told me they had the bank write a cheque for the redraw to attempt to make it clear the redraw was going to be associated with paying towards the rental property payment....not sure if this fully satisfies the tax requirements here??? In any case I've paid off my PPOR so it is definitely something I need to consider.

 

[kaf]

Hi mixedup

I'm not an accountant but the rule as I understand is that it's always the purpose of the loan that determines if the interest is tax deductible. So it doesn't matter what the security for that loan is, if the loan is to finance an income-producing asset then the interest will be tax deductible.

Cheers

kaf