Hi,
I just settled my 1st home today. I am still not fully clear what I am doing but I'm taking the risk trying to get into the property market. Otherwise I might never gone in ever.
Here is my situation: I bought a property for 200K. I have a loan with one of the bank for 120K. That makes the repayment is $850/month. 80K was from my own pocket, I have 20K left now. At the time that seems to be a good idea to put all my money for it, though I dont feel that way anymore. The property is 2 br apartment with a very low vacancy rate. I've checked the rent I can get is $1350/month. The outgoings (council, body corp, water) are $250/month. That is still $1100/month. I am going to live there and I might rent the other br out for an additional income of $675/month.
Now the question is what should I do?
Should I just pay the minimum of $850 repayment. Deposit the 20K for a high interest lock in long term. and within a year I think I can save up another 15K. so for 35K I can take a 2nd mortgage? And maybe I move to the 2nd property and the 1st property will pay by itself from the rent? And after 30 years the property will be fully mine?
Or should I just pay as much as I can? I can do $2350/month instead of $850. That means the mortgage will be finished in 5 years. And after 5 years I have full access to this equity and from there I can buy multiple properties balancing the growth and repayments. Say after 5 years the property value is still 200K. I can do 5 mortgages on 5 properties of same value with $40K deposit on each?
Or maybe in I can sort of liquidize the 80K from the deposit I made on the 1st property (Dooh what I was thinking >.<). I dont know what the term is. refinance? 2nd finance? From there maybe I can get 40K out + my 20K deposit so I can do a 2nd mortgage much nearer in the future?
Please helps and thanks,
blaze
PS: Sorry if my English is confusing. I'm still learning
Hi Blaze
Firstly welcome to the forum and I hope you enjoy your time here.
In simple terms i would imediately switch your loan to an interest only loan with a line of credit and then attach a 100% offset account to the interest only.
If you deposit the extra funds in a high earning term deposit account you would probably receive mabe 6.5-7% for a fixed term of which the interest earned would be added to your taxable income and you would loose potential upto nearly half of this in Tax. The funds are also not available on call.
With a 100% offset account you would receive the same interest rate as you are paying on the home loan with the amount being offset against the interest you are being charged on the mortgage. The big difference is the funds are availabble on call and there is NO TAX payable on the income.Richard Taylor | Australia's leading private lender
Hey Blaze,
Thanks for the post and welcome to the community.
First, congrats on the property purchase. It is no doubt an exciting time!
Your question about how to leverage to buy a second (or third etc) property is a good one, and it is a topic that all investors must address sooner or later.
As far as the finance is concerned, one of the many finance experts on the forum should be able to point you in the right direction as far as options go. Some comments I can make though are:
1. The tax situation is a little confused when you rent one bedroom out. Your principal place of residence (PPOR) is usually capital gains tax free, but this is not the case if you rent out a room and claim some of the loan interest as a deduction. You will need to apportion the gain… some will be tax free, some will attract CGT. This shouldn't put you off as such, but it is something to be aware of.
2. Did you buy the property for income or growth? Your decision about your expected profit should point you in the right direction about how to finance the property. For example, if you wanted income, then you would try to max your income and min your expense. As such, an interest-only loan may be appropraite at a high loan-to-valuation ratio. For example, perhaps an 85% interest-only loan (anything above 85% may attract mortgage insurance) could work for you as it would preserve your deposit base and also max your income.
3. Be wary funding new property purchases with debt. Others disagree, but I feel the safer and more sustainable approach is to sell and cash in some of your equity rather than refinancing to the hilt.
4. I'd love to see more accurate financial info about the expected cashflow and growth from this property. I think this would help you get clear on the likely end outcome. For example, here is a very rough set of numbers based on an interest only 80% interest-only loan @ 9% interest:
Rent: $16,200 (your figure)
Management: $1,296 (8%)
Outgoings: $3,000 (your figure)
Interest: $14,400 (9% interest on loan of $160k)
Total exp: $18,696Cashflow: $2,496 (say $2.5k)
Annual growth required to cover -ve cashflow: 1.2%
If you assumed an average growth rate of 5%; the value of your property compared to loan and -ve cashflow would be:
Year; Value; Loan accum + negative cashflow; Equity
0 ; $200k ; $162.5k; $37.5k
1 ; $210k ; $165.5k; $45k
2 ; $220.5k ; $167.5k; $53k
3 ; $231.5k ; $170k; $61.5k
4 ; $243.1k ; $172.5k; $70.6kHopefully you can see how the numbers come up. I would do a speadsheet based on this sort of approach.
The question is, at what point do you access equity to go again? And at that time, do you sell or refinance?
Generally, and subject to affordability, it is better to refinance for getting to properties 2 to 4, but after then you will probably need to sell and keep going.
Has this helped?
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Woot, thanks for the welcoming and the haste replies. I am enjoying myself here
Now that you mention about tax on term deposit; the 100% offset seems to be a very good idea. My initial thought was the account keeping fee of the 100% offset is higher than the loss I made by putting my money onto a term deposit. If I have thought about this earlier I might get a different kind of mortgage package that has 100% offset feature. At that time I thought I dont need that much flexibility hence I take the other package with less flexibility but lower interest rate.
@steve, Initially I am looking for growth than income. However as 1st home buyer I would like to live into the property I purchase. That is why it is not pure investment but "investment + to live in" property. The suburbs that I like to live in, the house prices are extremely too high for me. I cant find anything suits my budget. That is why in the end I settle for an apartment which I know it wont grow as much as the houses with land be, but what can i do? I just need to generate more money to live in on those houses on my selective suburbs.
With the interest only options I have thought about it but I am having an impression that the interest rate is higher and u can only do it on the 1st 5 years anyway. With what I have now 120K repayment $850 is on 7.67% and when I check NAB interest only options their rate is 8.39% making the repayment on $826. I would save $24/month = $288/year. 5 years = $1440. That is basically how much I save between my current mortgage deal and the interest only options. And on the 6th year the rate would go to standard variable rate and the repayment would be $978 for the next 25 years. And comparing those with "flat" $850/month for 30 years, I would have thought my current package is a better deal. Please correct me if I am thinking on the wrong direction.
Quote:Year; Value; Loan accum + negative cashflow; Equity0 ; $200k ; $162.5k; $37.5k
1 ; $210k ; $165.5k; $45k
2 ; $220.5k ; $167.5k; $53k
3 ; $231.5k ; $170k; $61.5k
4 ; $243.1k ; $172.5k; $70.6kHopefully you can see how the numbers come up. I would do a speadsheet based on this sort of approach.
I'm not red-ing to correcting you but just to show that I do understand them
Quote:The question is, at what point do you access equity to go again? And at that time, do you sell or refinance?That is basically what I am asking you
. But my initial answer would be refinance for the 2nd one. Because of the 80K by "mistake" and I really like 1 property per year rate than waiting longer to produce profit in selling it.Please enlighten me if I'm thinking the wrong way. Thanks again.
Quote:
The question is, at what point do you access equity to go again? And at that time, do you sell or refinance?You can access 80% of your property's value for the purposes of more investing normally. You can actually go higher (to 95% LVR) these days, but in my opinion it is a very risky practice.
The 80% must include any existing loans.
For example; you own a property worth $400k. You have a loan on it with a balance of $200k.
You can borrow 80% = $320k.
You still owe $200k, so you can borrow $120k.
This is subject to your ability to repay the loan as well.
When you sell, if it an investment property, there is capital gains tax to consider. If you sell within 12 months of purchase,, you will pay tax on 100% of the cap gain, at your marginal rate of tax. if you sell after 12 months, you pay tax on 50% of the gain.
The purchase costs on the next property, plus the cap gains tax, may eat up a lot of the capital gain you have made.I would refinance rather than sell, and keep accumulating. But that's just me.
You will need to talk with a property savvy Mortgage Broker to work out your financial position and how much you can afford to borrow for the next property.
If you're young, have few obligations, and a reasonable income – which it sounds like is your situation – I'm all for being aggressive.
I'd refinance to 95% LVR and look at mortgage insurance as an expense of greater exposure to the market. LMI for 95% of $200K costs you around $3K in order to gain access to an extra $30K – $3K = $27K. If you use that $27K as a deposit on another property, that $3K expense quickly becomes insignificant relative to your future profits from that additional property.
See if you can avoid overly excessive fees on the refinance by staying with the same lender perhaps, and stretch your equity as absolutely thinly as humanly possible, ie as deposits on perhaps 3 or 4 properties, if your borrowing power will allow. The proviso is that the properties should have strong, or at least reasonable, capital growth potential. (And my 2c worth – I'd prefer lower valued homes in fringe CBD areas rather than apartments, but that's just me.) I think 2008 is going to be a cracking year in several real estate markets and you may be kicking yourself if you're sitting on the sidelines watching, with only one apartment in the mix.
If you end up with additional cash in future, yes, I'd always put it in an offset rather than pay down the loan – EVEN on your PPR. Then if you move out of your PPR and want it to be an investment property, you can take all your equity out of the offset account to buy a new PPR and claim a tax deduction on the loan interest.
Yes, I'm very aggressive. "Those who say it cannot be done should not get in the way of those who are doing it."
Warmest regards, Tracey
Hi again,
There's no magic formula about how much to refinance. It comes down to your risk profile, affordability etc.
Of course, whatever you buy with your refinanced capital needs to be returning more than the cost of the funds, otherwise you will be going backwards.
The interest rates quoted were not based on a real loan product. They were just for discussion purposes.
On the basis that you are looking to buy a home first, and then reduce your exposure to the -ve cashflow, your plan has merit. You certainly seem to have a grasp on the financials, so well done.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
. But my initial answer would be refinance for the 2nd one. Because of the 80K by "mistake" and I really like 1 property per year rate than waiting longer to produce profit in selling it.
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