Where to seek unbiased, quality advice for first timer

[First timer]

It's funny you should say that I was just whipping up a spreadsheet to show her the costs and tax deductions and things if we were to independently both purchase a rental property in the same area for around $300K each. I thought the advantages would be we could both assist each other in some renovations and share research forces when seeking out places.

I have to read up a lot more on the tax deductions though, the interest component is confusing me thought I assumed that was only tax deductible if you were negatively geared but the ATO website is saying its tax deductible regardless. Will start trawling the tax forum pages later. Otherwise my spreadsheet is looking absurdly lucrative the way the costs and income are stacking up.

 

[Aaron_C]

I have to read up a lot more on the tax deductions though, the interest component is confusing me thought I assumed that was only tax deductible if you were negatively geared but the ATO website is saying its tax deductible regardless.

That's cause you are confusing the two. Interest on investment property loans are always tax deductible against your income. Negative gearing means that you are making a net loss on the property after taking into account rental income and expenses. Negative gearing is the consequence of a loss from the expenses relating to the property.

 

[First timer]

Interesting.... I suppose I've always considered the tax deduction to only apply to the net component because the income component is taxable so nets out the interest deduction. Still, what a lovely piece of government policy when it works in your favour.

I see that lenders mortgage insurance is tax deductible, how does that work if I cap it into the loan? I can't see the ATO letting me claim the entire premium (say $5K) in year 1 if its being paid off long term, as well as the interest on that portion of the loan....

 

[matto_]

A lot of information around.

Be careful of paralysis by analysis.

In saying that - purchasing an IP is a big decision so you want to have done a reasonable amount of DD.

 

[The Y-man]

Be careful of paralysis by analysis.

In saying that - purchasing an IP is a big decision so you want to have done a reasonable amount of DD.

Agree with this.

I find many people do due diligence on the wrong thing when starting out - like tax deductions (other than a sound financing structure) and complex ownership structures.

The main thing IMHO to look at is:

• How much can you borrow (and afford!)?
• Loan structure (eg IO, LMI, LVR)
• Where to buy (close to home? far from home?)
• What to buy (apartment, unit, townhouse, house, commercial?)

A good mortgage broker will do the first two. I f you have no idea about the next two, get a good BA.

After you have bought, then find an accountant to figure out tax bonuses.

The Y-man

 

[travelbug]

A buyers agent could be from $8-10,000. Some are fixed price, some charge %.

But if you get a property that's $20K under market it's worth it.
This is feasable with your reno strategy.

 

[First timer]

I think I'm a fair way off having the start up capital to get the ball rolling on this, which I suppose gives me plenty of time to keep researching and learning, and keep an eye out for some of these meet ups.

It's hard for me not to have paralysis with analysis because my job is all about analysing numbers and being skeptical, but its good to know where to direct those urges Clearly the big area to boost my knowledge is going to be assessing relative value of properties and areas to buy.

I estimated for a $300K property with no renovation costs I'd need $30K deposit, $10K stamp duty on the property and mortgage + say $2K legal fees and inspection fees. That's before considering a buyers agent and assumes the property is already tenanted and I don't do any work on it at first and I capitalise the lenders mortgage insurance into the loan.

So I was working on a target number of $42K, which would only be achievable right now if I sold down my share portfolio. I have $40K equity in it ($80K value, $40K interest only loan) but I worked out I can only pull out $17K as cash. The $10K in my first home owners account is locked in for another few years so out of reach. The idea of selling my shares for the deposit doesn't appeal to me.

To save the remaining $25K is definitely achievable in the next 12 months for me as my free cashflow is good. A slower start than I hoped as I had thought I'd be ready to buy now but I suppose the upside is I should be very confident by then in what I want to buy and where.

 

[Shahin_Afarin]

If you are purchasing a property for $300,000 then you will need $26,000 by way of a deposit, $1,500 for legal and about $500 for Building and Pest Inspection so that's a total of $28,000 at a minimum but that is an LVR 95% plus LMI. The LMI would be approx $7,000 which is added onto the loan.

In comparison, if you LVR was say slightly under 90% then the LMI would be just over $3,000 but you would require a minimum deposit of $41,000 plus the legal and B & P Inspection Fees.

However - it may work out better to borrow the maximum which 95% and then use the excess funds you have for renovations or as a deposit for your next IP purchase. In summary, don't just think about today - make sure your current plan caters for what you want to do later.

Regards

Shahin

 

[Trippy]

If you are purchasing a property for $300,000 then you will need $26,000 by way of a deposit, $1,500 for legal and about $500 for Building and Pest Inspection so that's a total of $28,000 at a minimum but that is an LVR 95% plus LMI. The LMI would be approx $7,000 which is added onto the loan.

In comparison, if you LVR was say slightly under 90% then the LMI would be just over $3,000 but you would require a minimum deposit of $41,000 plus the legal and B & P Inspection Fees.

However - it may work out better to borrow the maximum which 95% and then use the excess funds you have for renovations or as a deposit for your next IP purchase. In summary, don't just think about today - make sure your current plan caters for what you want to do later.

Regards

Shahin

Don't forget stamp duty and bank fees?

May also want to look at your budget for your holding costs, such as rates; insurance; repairs & maintenance....

 

[Shahin_Afarin]

Above numbers include stamp duty and bank fees for new applications are generally not much these days.

 

[Trippy]

Above numbers include stamp duty and bank fees for new applications are generally not much these days.

So you are going to finance the stamp duty and then pay interest on it for the life of the loan....If this is such a great idea then maybe also finance say the first 5 years of holding costs as well

I mean really, advising a first timer to loan 95% of the value is not good advice in my opinion.

 

[Shahin_Afarin]

You are not financing the stamp duty - the deposits mentioned above cover the 5% deposit and the stamp duty (stamp duty is around 3.5%)

Previous posts recommend staying under 90% but this is due to the LMI premiums spiking after 90%. There is no problem in going to 95% even if you are a first time investor. The right or wrong answer ultimately lies on what the strategy is moving forward. You should consider this before determining whether its good to go to 95% or 90% or even 80%.

 

[Trippy]

You are not financing the stamp duty - the deposits mentioned above cover the 5% deposit and the stamp duty (stamp duty is around 3.5%)

Previous posts recommend staying under 90% but this is due to the LMI premiums spiking after 90%. There is no problem in going to 95% even if you are a first time investor. The right or wrong answer ultimately lies on what the strategy is moving forward. You should consider this before determining whether its good to go to 95% or 90% or even 80%.

Sorry, re read your post and you are right, you have not included stamp duty in the loan. But you did recommend adding the LMI to the loan which is really not much better. If you cannot afford to gear an investment off the bat without a form of insurance because you do not have a big enough deposit...alarm bells should be ringing. Would you gear a share portfolio, not have enough deposit to set the facility up, pay for the bank to insure your lack of deposit, then add this to your loan amount and then hope to cover all costs AND turn a profit down the track

 

[boxdog]

Hello First Timer, welcome to the forums. I'm a newbie here too but not really a first timer property owner, in fact I have one IP so far and about to foray into further purchases.

Can the mortgage brokers here please put their hands up? Someone earlier mentioned getting a mortgage broker on this forum - that would be great. I am tossing up whether to go to Chan and Naylor for advice and finance presently or whether I should just go to a mortgage broker who could work out the best finance structure for me.

I'm not even sure how much C&N's "financing" is going to cost but I hope it's nowhere like $4k!!!!

BTW are any of you mortgage brokers gonna be at the get together in Melbourne next week?

 

[The Y-man]

Can the mortgage brokers here please put their hands up? Someone earlier mentioned getting a mortgage broker on this forum - that would be great. I am tossing up whether to go to Chan and Naylor for advice and finance presently or whether I should just go to a mortgage broker who could work out the best finance structure for me.

....

Uh, there have been 3 brokers on this thread alone


The Y-man

 

[The Y-man]

BTW are any of you mortgage brokers gonna be at the get together in Melbourne next week?

If you ask him nicely, PT Bear might be there.
And an accountant.
And maybe a buyer's agent (Jake - you available?)


The Y-man

 

[boxdog]

Awesome!! Please PT Bear, please?

 

[Peter_Tersteeg]

Awesome!! Please PT Bear, please?

It's just down the road from my office, I usually manage to get to the Mitcham pub.

 

[First timer]

Thanks for all the continued posts, I've found the chat on whether to jump in at 5% deposit or wait particularly interesting as that's what I've been mulling over the last few nights. Selling my shares is never coming up as an option in my mind so the two choices are to start now (well, 4 months by the time I find something I want most likely) with 5% deposit and stamp duty + costs (and cap the LMI), or start in a year with >10% deposit etc. The interest rate environment is a factor, as it's unlikely I can make more than 5.4% on my savings with the correlation that lending rates are very low.

At first I found the concept of lenders mortgage insurance absurd, until I realised I could still borrow at sub 6% despite having a substantially higher risk profile, so this is just a different way of the bank capturing their risk premium. Being a banker-I get that, even though I hate the idea of paying them a cent more than I have to [bankers are jerks ].

As for gearing up- well I'm undecided on that.... I've confidently geared up right through the GFC til now with share investing, and done very well out of it. Having no real financial liabilities and good free cashflow, with the extra joy (or horror?) of being nowhere near retirement I'm happy to take considered risks.

What those risks are in relation to gearing up I'll need to understand more- rising interest rates and ongoing management and maintenance costs on a $300K property don't really present a repayment risk to me with >$5,000 a month cash in bank salary with minimal commitments, they just reduce my return on investment and limit what other investing I can do, and maybe how much I can ski....

Buying an overpriced property is a clear risk, as are falling property prices. But I gather that housing prices are a lot less volatile than share prices and they won't try and repossess your home if the value should drop and your LVR is high. Is there a requirement to top up equity to maintain a bank approved LVR if the worst was to happen there? I assume once I borrow there would be no further valuations required unless I wanted to try and borrow more....

Then there are all the other risks which have nothing to do with the borrowing amount- like having terrible tenants... Again I think more research required but potentially not a game stopper for me.

 

[Andrew_A]

..there are all the other risks which have nothing to do with the borrowing amount- like having terrible tenants... Again I think more research required but potentially not a game stopper for me.

This has to be one of the most over rated risks, if you have a well maintained property in a decent location with competent management (the type that actually does a little work) and good insurance it's not worth worrying about.