Hey everyone,
Here is my situation
I currenlty live in a 2 bed townhouse
Bank market valuation – $385,000
Purchase price (5 months ago) – $340,000
Loan – $308,000
Remaining – $300,000
Min repayments a month – $1625Now I'm wondering, if I should do a cheapish renovation before I rent it out?
The bathroom is original 70's condition with a home made orange plasterboard vanity, poo brown floor tiles and cream & orange wall tiles. Kitchen is plasterboard with laminate coating. Both in quite good condition mind you.
Being cautious I could
Rent for $400 a week furnished as is now
or
Rent for $450 a week furnished with renovation
Cost would be less then $10,000 for an IKEA kitchen, new bathroom vanity, floor tiles and wall tiles, timber flooring and wood decking in the courtyard. Everything except for the IKEA kitchen I can get at cost price and would do a lot of the installation work myselfI would be paying for the renovation using cash
Is it, financially a good idea to renovate it before renting it out it out? I will be holding onto the house for the foreseable future (10+ years)
No takers?
If you can get $400 per week as is – maybe go for this option as it is almost covering your repayments (are they interest only?). – when coupled with a depreciation schedule and other claimable items such as bank fees, visits etc it will cover the shortfall.
When your between tenants I would do the upgrades – this way you can claim it all.
Just my musings – someone with more experience may have a different way of thinking
maree_bradross wrote:If you can get $400 per week as is – maybe go for this option as it is almost covering your repayments (are they interest only?). – when coupled with a depreciation schedule and other claimable items such as bank fees, visits etc it will cover the shortfall.When your between tenants I would do the upgrades – this way you can claim it all.
Just my musings – someone with more experience may have a different way of thinking
Thanks for your reply!
No, repayments are Principle and Interest as I would like to pay as much as I can off the home loan while I am living with my gf. I am extremely confident of getting at least $400 a week and vaccancy is extremely low. 15 min train ride to perth CBD, 5 min walk to the beach, 5 min drive to University.
My target tennant would probably be uni students or people working in town who enjoy the beach. Another reason why im not sure about renovating as it wouldnt make a huge difference with a uni student but could with a city worker
Someone much wiser than me will be able to explain why you should structure your loan interest only. But my understanding of it is you can claim the bank interest on your claim. You would be better off putting the money you would be paying off the principle into a separate account (line of credit) to use for future property development, purchases.
If your targetting students you may be better off renting the rooms individually?
maree_bradross wrote:Someone much wiser than me will be able to explain why you should structure your loan interest only. But my understanding of it is you can claim the bank interest on your claim. You would be better off putting the money you would be paying off the principle into a separate account (line of credit) to use for future property development, purchases.If your targetting students you may be better off renting the rooms individually?
Doesnt that mean though that you will never own the house? Whats the point of that if your rent doesnt cover your mortgage? Your losing money and not gaining anything in the long run except equity (money from the offsest account) to purchase other properties, and if you keep getting IO loans then youll be doing a full circle of never owning a home outright but always paying the difference between rent and your IO mortgage?
Sorry, 21 years old and very inexpirienced
I'd like to rent it out wqithout a property manager so renting the rooms individually would be a lot harder. Might give it a go and put up a few flyers at the uni though
howardcm wrote:Doesnt that mean though that you will never own the house? …. and if you keep getting IO loans then youll be doing a full circle of never owning a home outright but always paying the difference between rent and your IO mortgage? Sorry, 21 years old and very inexpiriencedhowardcm you are making some very basic and costly mistakes. Lets just look at one – which is paying off the loan on a home that will become a rental. Remember that rents keep increasing and mortgage repayments stay pretty much the same.
There's two ways to look at this IO or P&I thing: my way and the wrong way
Scenario: IO loan and assume RE doubles every 10 years (conservatively)
Year 1: Buy IP for $400K with 80% loan of $320K on IO so equity = $80K
Year 10: IP worth $800K, loan still $320K, equity now $480K
Year 20: IP worth $1.6M, loan still $320K, equity $1.3M
Year 30: IP worth $3.2M, loan still $320K, equity $2.9MPlease tell me how, even using your best efforts paying off loan principal you can come anywhere near the equity that GC of the IP is doing. They probably exist, but I've never met anybody who has saved $2.82 Million in 30 years.
I just don't get this "pay off your principal so you ceate equity thing". All you are talking about is some forced tax-advantaged savings plan.
IMO just use cash flow to service more IO debt on IPs to get the equity generator thing happening 2 fold or 3 fold or as many IPs as you can afford.
At the end of the day if CG is not happening in RE then saving your way to wealth through paying off loan principal is not going to cut it for you.
I just really dont see the point, especially when it's CF+ paying P&I
IMO there wont be a lot of capital growth over the next few years so I may as well be putting my money into the loan creating enough equity for another purchase of a CF + property. This way the IP's will be paying themselves off creating equity while I wait for CG to eventually come.
If the only properties I am buying at the moment are CF+ paying P & I, doesnt it make more sense to have them actually paying themselves off creating a little equity to fund more IP's rather then putting the extra money in a low interest saver saving a cash deposit for more IP's?
propertunity wrote:howardcm wrote:Doesnt that mean though that you will never own the house? …. and if you keep getting IO loans then youll be doing a full circle of never owning a home outright but always paying the difference between rent and your IO mortgage? Sorry, 21 years old and very inexpiriencedPlease tell me how, even using your best efforts paying off loan principal you can come anywhere near the equity that GC of the IP is doing. They probably exist, but I've never met anybody who has saved $2.82 Million in 30 years.
Paying P & I you get the CG equity as well as the Equity you are getting from paying off the Principle part of the loan.
howardcm wrote:I just really dont see the point, especially when it's CF+ paying P&IIts up to you but for goodness sake don't pay P. Pay the cash into an offset account (which will lower the I paid on the loan) and can be withdrawn later for more purchases.
howardcm wrote:IMO there wont be a lot of capital growth over the next few yearsJust your opinion. Might not be right?? Depending on where you are buying these properties – you may well be right!
howardcm wrote:so I may as well be putting my money into the loan creating enough equity for another purchase of a CF + property. This way the IP's will be paying themselves off creating equity while I wait for CG to eventually come.Well it is really not creating "equity". You are just using a loan account to put your "savings" into. It is a strategy though and you have to be congratulated for having one. Many don't. Not my cup of tea though – to each his own.
howardcm wrote:If the only properties I am buying at the moment are CF+ paying P & I, doesnt it make more sense to have them actually paying themselves off creating a little equity to fund more IP's rather then putting the extra money in a low interest saver saving a cash deposit for more IP's?Better than low IR at deposit at bank – Yes absolutely. Better than using an offset account – Absolutely not, No. Better than a different strategy altogether? dunno – depends on your risk factor and personal circumstances.
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