Hi All,I am eager to buy my first IP, My wife and I have a PPOR worth 320000 and have a mortgage on it of about 251000, however we are in a fixed interest rate loan for another year and half, from my understanding I cannot use the equity in the house on a fixed interest loan. We also have a small amount of money saved, about 20K. Our repayments for the house are 1700/month, and it is in my wife’s name. My wife and I earn a gross of about 100000pa. I am eager to know what the more experienced investors would do in our situation?
Are we in a good financial state to be investing in property? If so how much should we borrow to invest? Buy big? or start small?
How should we go about investing…? Buy a run down place and fix it up? How to best use our 20K?
I know a lot of these questions might have been asked before but I suppose we are a little nervous about investing and need that bit of affirmation from the more experienced to get us going! We would like to invest without using the equity in our PPOR.
I would love to hear your feedback.
Hi IS
As per your other post I am assuming that you cannot offset the 20K savings against the interest you are being charged on your PPOR.
Remember albeit your loan is fixed for another 18 months but 1 day that will expire and the opportunity to split the loan will be with you.
If you were a client of mine I would recommend you looked at releasing equity in your current PPOR through a LOC or similar to 90% of the current value and then taking out a totally separate IO loan with an alternative lender to a level of say 95% of the purchase price. Place the 20K savings in the Investment offset account and at least reduce some of your interest repayments.
The LMI which will be charged is considered a loan cost and of course will be tax deductible over the term of the new IO loan or 5 years whichever is the shorter.
The offset account will keep the funds at call and enable you to reduce your monthly comittment.
Once the fixed rate expires switch your saved funds and the rent from your IP to an offset account linked to the variable portion of the PPOR loan. No point in having 2 at this stage.
With regards to the type of property you should look to acquire this is a personal choice however start small and spread your risk and over the long term you wont go too far wrong.
i appreciate your comment about not wanting to use the equity in your PPOR but using your cash for a deductible expense certainly doesnt seem to make much financial sense especially when you have non deductible debt.
Richard Taylor | Australia's leading private lender
Thanks for you super quick reply Richard,
The reason I do not want to tap into my equity atm is because we are at a great fixed interest rate of 6.95, great compared to todays rates anyway. I do however agree with you that once the fixed term is over then the way to go would be to refinance and put whatever our income is into an offset account.So for the time being you would recommend not using the money saved (20K) as a down payment on any IP but rather borrow the money instead and place the 20K in the offset account of the IP loan?
We also want to start investing in something small, we were thinking perhaps buying an IP at about 280000 that is in need of renos and do it up in order to increase the value (capital) and rental yield…
Does that sound like a good plan? Im not sure if that is starting small for our situation!
Hi IS
Remember accessing the available equity does not mean you have to loose the fixed rate you have.
All you would do is take out a top up loan or a LOC on the property sitting behind the current PPOR loan.
This would not effect your fixed rate loan at all.Depending on what you can access would determine whether i would utilise any of the Cash savings as deposit or acquisition costs.
Yes depending on the property something under $300k sounds like a good starting point.
Richard Taylor | Australia's leading private lender
Wow…really??? I was not aware of being able to use the equity in the PPOR whilst it is on fixed interest rate. In fact I met a home finance manager from Westpac that told me that I couldnt do that at all. Instead she wanted to sign me up for a separate IO loan.
Thanks for the info, im learning a lot about what options we have…
Thats why I love this forum….
HI IS
Yes you can easily do a top up loan through Westpac on a variable rate loan even though the PPOR loan is fixed.
Personally the idea would probably be to then do the separate loan with an alternative lender.Shoot me an email if you need starting the ball rolling with the top through Westpac as wi ould be happy to help.
Richard Taylor | Australia's leading private lender
HI IS
Yes you can easily do a top up loan through Westpac on a variable rate loan even though the PPOR loan is fixed.
Personally the idea would probably be to then do the separate loan with an alternative lender.Shoot me an email if you need starting the ball rolling with the top through Westpac as wi ould be happy to help.
Richard Taylor | Australia's leading private lender
Thanks again Richard,
Your responses are very helpful, I will keep researching furthur into this in order to see what sort of path we would like to take with our new loan.We are currently not with Westpac, but we just went into a westpac to ask about what our options are!
Cheers.
IP
You will have to keep the top up loan with the same lender with whom you have the current fixed rate as they will not accept a
2nd mortgage.Richard Taylor | Australia's leading private lender
Yup, I understand now.
Thanks again Richard, really appreciate your help!
Cheers,
Sponge
I will be the devils advcate here just to create a diffrent view. You have 70k in equity in you home. "We also have a small amount of money saved, about 20K" Not to be rude but 20k not much nowdays. As investers we all agree on the following Intrest rates are going up. Property is flat or going down (even real estate agent cant hide it) Given these facts why do you want to spend all you 20k, empty the bank account and suck the equity out of your home given the current market. Your paying $425 pw on your current loan.REnt on the I.P. will be negative in fact you will have to top it up or add to it out of your pocket. All this for say a minium of 7 years to make what? Why not wait & save up at least 50k get you home loant down & wait till you find a property that a bargan in say 2.5 years. It hard enough to make money from I.P. even when your paying cash. Just some food for throught.
Good Luck
T……………..I would tread very cautiously in this type of enviroment. The uncertainty seen has not been experienced by many. There is bad news after bad news from the United states . A few years ago RTs suggestion would've been appropriate.
I would at this time take a conservative approach no LMI.
I stand to be corrected by thats my view.
Cheers
SGHi Tony B and Stargazer,
Thanks for your reply, I do appreciate your point of view, and I need someone to say it as it is and pull me back to the real world, and I think I chose a bad time to want to get into the IP market.Having said that I do however feel that by just hanging around and putting my money into a savings account is not really taking control of my future. The way I think about it is that if we buy an IP now, even though we are in the poor end of the cycle, are not things bound to change? will not the market pick up again? If we buy something now are we not in a better position to spot a bargain since there is not much competition out there?
Would anybody advise on borrowing more than the cost of the IP so that you have cash flow for those tough times where the place might be vacant or any unforeseen circumstances. That money can remain in an offset account until it is required?
Just a thought,
Love to hear your views
Sponge,
I agree with stargazer and tonyB, now is not the time in your position to jump into IP.
Whilst you may be ready to jump in and try and buy at the bottom to make money, I think personally for you the best tactic is to use you 20K to offset your existing loan and save as much as you can.
When you get a larger deposit, probably in 6 -12 months, then look at the IP option. Remember the loan on your PPOR is not take deductible, you effectively get the 6.95% tax free from your loan. Even if you got 8% by saving you need to pay tax on it probably 30% thus only get about 5.6% in hand.
Also will never know when the bottom of the market is till we pass it. Thus best to buy just as the market starts rising, this could take a while. In the mean time you are putting money down a big hole if you buy now for no reason.
Read up lots in the mean time and keep looking, you may find a bargain if you are not rushed.
IS,
I can't disagree with previous entries that current imes are uncertain, but to say the market is flat is in my view too simplistic. There are niches in the market that have performed well and are bound to continue to perform well even in the next 12-24 months.
The best comment I remember ever reading when I just got started was "It's not timing the market, but time in the market" – I believe that, all the research supports it and therefore the best approach for most of us is to invest when it suits you financially. Some people might be good at timing the market but most of us who have a day job also, are not and are better served by "time in the market" and that means at least 1 cycle (7-10yrs), but 2 is better.
Don't rush out to buy your first IP, read about promising markets (look at demographics, infrastructure developments etc) and source a good value for money property that you can afford to hold on to even if things get worse (interest up to say 12%). If you can add value by a minor (i.e. cosmetic) renovation even better but don't overcapitalize. I would suggest that instead of going for something around the $300k mark I would in your situation have a look at 2/3 bedroom units or townshouses in some of QLD growth corridors (asking prices around $200k-$230k).
Erik
Hi,
I'm with Erik. Go slowly, do lots of research, watch for the bargains – they are certainly around and more are likely to come. It may be worth getting that top-up loan now (and park it in an offset account) as it is getting harder and harder to get finance from the banks and if values fall, you won't be able to access as much. Sit on the money, do your research, look out for something that has sound fundamentals and enjoy the luxury of time that allows you to buy something in a 'distressed' situation that has room to add value.
jkmt
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