We are a small family with one dependent child (1 years old) and live in perth. We have a morgage of $470 for a house which has an evaluation of $540,000. We have personal loans against assets (cars) but no other libalities.
Both of us are in early 30's. We both earn approx $200 k plus annually and can get a loan of $300- 400 for investing into properties.
Never been into IP and when we start reading these forums, so many opinions, so many choices, we get easily confused.
We both have good common sense skills, but not so much business skills.
A brief research and looking at IP our friends have bought, Is considering properties with development potential is a good starting point for a beginner level invester.
Or it's soemthing which should be left for "experienced" investers only?
Can someone please shed some light on our situation and may be suggest us the way forward for us to secure our future.
Thanks in advanceLosty
Hi!
Firstly about this personal loan for the car. What is the interest rate on that compared to the homeloan interest rate? In other words, would it be better to pull money out of the homeloan offset account, or redraw on the homeloan, to pay out the car? If this is possible and the rate on the homeloan is cheaper, and there are not big penalties for paying out the car early, maybe look into this to save yourself some money.
Something else worth looking into if your household salary is high is: is it better to own the car, or is it actually cheaper to lease it on a salary-sacrifice arrangement, thereby saving on income tax?
Personally, I would address these two questions first. I personally would probably look at knocking the personal debt on the head first, and maybe reducing the homeloan a bit more before getting another property. Others would do differently.
It is by no means "too late" for you. You are very young with a lot of income-earning years ahead of you.
Have you looked at your finances to work out how much "spare cash" there is each month after paying your mortgage and car loan and living expenses? In other words, is there enough "spare cash" to take on mortgage repayments of an IP?
Do you have a spare wad of cash to use as the deposit of the IP? You might find it tricky to use the existing property as security for the IP, because your Loan-to-value ratio of your home is still at 87%.
If you can give us some extra info on your situation with the answers to the above questions, the knowledgeable folk that frequent this forum might be able to give you some more sturdy suggestions
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Losty
I'd suggest you read this forum thoroughly and subscribe to a magazine like Australian Property Investor (API). it has some great articles for newbies and has quite a few stories about couples who have started from scratch and done very well.
Once you have become familiar with API and found a area of property investing that appeals to you both, have a look through their
http://www.businessmall.com.au/
section. Here you'll find a huge range of books, covering the many niche areas of property investing. Good luck.Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
JacM,
Thanks for your kind reply. See my answers below.
JacM wrote:Hi!Firstly about this personal loan for the car. What is the interest rate on that compared to the homeloan interest rate? In other words, would it be better to pull money out of the homeloan offset account, or redraw on the homeloan, to pay out the car? If this is possible and the rate on the homeloan is cheaper, and there are not big penalties for paying out the car early, maybe look into this to save yourself some money. –Yes the car loan interest rate is higher than home loan. But we own two cars with remaining amount of $45000 on them.
Something else worth looking into if your household salary is high is: is it better to own the car, or is it actually cheaper to lease it on a salary-sacrifice arrangement, thereby saving on income tax? – I looked into it and got our accountant to advice. It doesn't save that much currently to go on salary sacrifice. His advice was to put more into your super to save tax than salary sacrificing the car. Another option is to have an IP. If it's a negative cash flow property, tax can offset some of it.
Personally, I would address these two questions first. I personally would probably look at knocking the personal debt on the head first, and maybe reducing the homeloan a bit more before getting another property. Others would do differently. – Good idea, but needs to work out how.
It is by no means "too late" for you. You are very young with a lot of income-earning years ahead of you. – Thanks for the encouragement.
Have you looked at your finances to work out how much "spare cash" there is each month after paying your mortgage and car loan and living expenses? In other words, is there enough "spare cash" to take on mortgage repayments of an IP? – We have $30000 cash in savings. which sits in the offset account of our home loan.
Do you have a spare wad of cash to use as the deposit of the IP? You might find it tricky to use the existing property as security for the IP, because your Loan-to-value ratio of your home is still at 87%. – We do have spare cash at hand and like to use it on IP than buying things which we dont need.
If you can give us some extra info on your situation with the answers to the above questions, the knowledgeable folk that frequent this forum might be able to give you some more sturdy suggestions
Hope to hear back from you and others soon.
Thanks,
Losty
Hi Losty,
I don't want to be rude, but I really wonder how can you owe such a high debt on the cars? Especially with such high incomes, why not pay off the personal loan first?
My husband and I have been in the property investing game for about a year, not expert yet but we know the basics and own several IPs. From what we learnt in all those books, seminars and forums, 99% of them all say the samething: the number one priority for anyone who is serious about investing or wealth creation, is "clear personal loan" and "'budgeting". That is step number one before you go out and buy any IP.
Honestly, my feeling is that you seriously need to do a proper budgeting to control spending. Because with your income and mortgage position, you should be able to easily pay off all your personal loan within months.
As for the next step, if I were you I would do a buy and hold type first to get a feeling about how the game works, then get into the innovative way of adding value, such as renovation, subdivision, then finally move into development.
In my opinion, it would be pretty risky for you now to move into development straight away, as it is a lot more complicated than you would imagine.
hope it helps.
good luck
I agree with danviv1.
It is a weird decision to leave $30k in an offset account saving interest on a homeloan that has a lower interest rate than that of the personal loan for the cars. I'd be pulling that $30k out, putting it straight onto the car loan, and then clearing the remaining $15k asap.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Btw, Losty, just noticed your accountant's suggestion on putting more money in super. If I were you, I wouldn't follow that advice. You have no control on how your super will perform and you can't have access to it for 25-30 years! at early 30s, you can use the money else where and make double or triple of the return super can give to you.
I personally don't expect to retire on my super at all. it's just a bonus when I reach a certain age.
Hmm….thanks for the feedback guys….something which we must do now…will look into it …
Is using a financial adviser is a good idea to plan our budget/ sort out loans n stuff? If so, can anyone recommend a decent financial planner in perth.
Thanks,
Losty
Danviv1,
Once again a very valid point …!! That's why i am on this forum to learn where we stand and where to head in coming months. Thanks again for your valued input.
Thanks,
Losty
I now consider my super to be a moneypit. I give them money, they lose it. Fabulous arrangement. I think the safest retirement plan is not have all your eggs in one basket. ie perhaps have some in super, some in property, some in some other type of investment. then if one of the pieces goes belly up, you have other pieces that are hopefully still afloat.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi.how about this super scenario?
Husband: $100K income – contribute 9% = 9K same as employer contributions
Wife dittoSmsf costs = $6000 establishment, thereafter $3500 [this is very costly; can be much less]
Consider Year 1 a wash. [Standard 40% tax bracket every year for 5 years, interest earned @5%]
Year 2 : Tax savings = $$36000 x 25% = 9000 less $3500 costs = $5500
Capital accrued = $36000 interest earned = $36000 x 5% = $1800 x 90% = $1692Year 3: capital accrued = $79192 x 5% x90% [assume 10% tax within superfund] = $3563
Year 4: capital accrued = $124255 x 5% x 90% = $5591
Year 5: capital accrued = $171346 x 5% x90% =$7710
End of Year 5 : total balance in smsf = $184556
How much cash have the both of you actually contributed in 5 years? $18000 – $5500 = $12500 x 5 = $62500
ROI = 195.28% = 39% p.a.
I 've not even considered the daily interest or the savings that can be eked out by shopping for cheaper ways of accounting etc.
Why would anyone NOT do it?
KY
Kum,
Thanks for your inputs and calculations.
If i understand it correctly, your calculation demonstrate putting money can save tax.
I dont fully understand your calculations ( i am sure they are simple to understand, but i lack basic knowledge). I will review them and try to make sense.
In the mean time i hope to see some healthy debate on this issue.
Thanks,
Losty
Hi,
Have to say I feel the same about my super 'bonus'. That $16k (yes that's right!) is going to get me what when I hit 65?
I don't see having $45k owing on personal debt as the worst thing in the world, but I would look at getting a little bit of it knocked on the head because it will reduce your borrowing power.
Is the 30k for the tax man?
Set up some structures (please see good accountant who can talk you through everything) to protect your IP when you buy. Make sure you have minimized your tax etc, etc. Get some advice from a good mortgage broker (plenty on here). Get chatting to a solicitor about making sure you have a will, get life insurance. This is the basic common sense stuff.
Read and LEARN everything you can about property investing, buy some magazines, some books, hang out here.
You can buy something that has subdivision potential and really do nothing with it if you want. You may want to sit on the block (as long as it has a house to give you an income) for a couple years so that you can learn more about developing.
Start doing something now as you will never regret it, and in the majority of cases information is cheap, mistakes are costly!
Good luck let us know how you get on!
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeHi losty, your case made me really look at the numbers.
It's so simple it's almost idiotproof.
$9000 p.a. = $750 p.m. x 2 = $1500 p.m.
Accrued interest tax saved
$1500 $6.25 $31.25$3006.25 $12.53 $31.25
At the end of 15 years, the total accumulated is $744430.50
That doesn't include the tax savings.
Essentially, by each partner paying $130 – $150 per week into an smsf & not doing anything more except ensure it's in a high interest [daily rest internet acct will do it], by the time you're 50, you'll both have close to a million in cash.
Is that so difficult if you're earning $100K each?
KY
Hi Losty.
If you think you might need support to get on, and keep on the path, you could investigate Margaret Lomas's company Destiny Financial Solutions. I am not a member myself, but did look into it. Basically she believes in lower priced, positively geared property which will need less of a financial commitment from you, and could (with budgeting help) enable you to pay down your own loan. I believe you pay them a fee and they provide financial guidance and ongoing support. You could try one of her seminars that are pretty cheap, to see what you think. Or buy her books. Basically I agree with the advice so far that says you are on a very good income and should be able to do really well. We are on less than half your income and have managed to do OK, but it does require a bit of determination.
G
Kim,
Thanks for you calculations. These calculations hold true if we both are working to the retirement age or i happen to earn $200 k and my wife stops working after that. I guess with increasing family commitment, the numbers you have crunched may not be realistic unless i am missing something. Nevertheless it does prove the point of extra money in super goes a long way to your retirement.
kum yin lau wrote:Hi losty, your case made me really look at the numbers.
It's so simple it's almost idiotproof.
$9000 p.a. = $750 p.m. x 2 = $1500 p.m.
Accrued interest tax saved
$1500 $6.25 $31.25$3006.25 $12.53 $31.25
At the end of 15 years, the total accumulated is $744430.50
That doesn't include the tax savings.
Essentially, by each partner paying $130 – $150 per week into an smsf & not doing anything more except ensure it's in a high interest [daily rest internet acct will do it], by the time you're 50, you'll both have close to a million in cash.
Is that so difficult if you're earning $100K each?
KY
Thanks DWolfe for your kind encouraging words. BTW when you say $30k for taxman, what do you mean? Our bank do not charge any tax on this, AS FAR AS I AM AWARE. Might have to look into it?
DWolfe wrote:Hi,Have to say I feel the same about my super 'bonus'. That $16k (yes that's right!) is going to get me what when I hit 65?
I don't see having $45k owing on personal debt as the worst thing in the world, but I would look at getting a little bit of it knocked on the head because it will reduce your borrowing power.
Is the 30k for the tax man?
Set up some structures (please see good accountant who can talk you through everything) to protect your IP when you buy. Make sure you have minimized your tax etc, etc. Get some advice from a good mortgage broker (plenty on here). Get chatting to a solicitor about making sure you have a will, get life insurance. This is the basic common sense stuff.
Read and LEARN everything you can about property investing, buy some magazines, some books, hang out here.
You can buy something that has subdivision potential and really do nothing with it if you want. You may want to sit on the block (as long as it has a house to give you an income) for a couple years so that you can learn more about developing.
Start doing something now as you will never regret it, and in the majority of cases information is cheap, mistakes are costly!
Good luck let us know how you get on!
D
Re. the superannuation contributions,
It is essential to bear in mind what $745,000 will be worth in 15 years – not what it is worth now obviously.
For example, looking back to 1995, you could buy my previous house in Mount Hurtle, Woodcroft, Adelaide for
about $130,000, but now it is worth around $450,000. Hence the spending power of $750,000 wouldn't
be the answer for your retirement, in my opinion.Regards,
GNup, not the bank. I was wondering if this was money that was there for some reason, like to pay tax, or for whatever reason hence the reason you haven't used this money to either pay down the cars, or as deposit for another property. It is good that it is in the offset it is at least doing something, but if you could be doing something better with the money, then you need to.
Well 700k is great. So 700k / 25 years (minimum life span after retiring) = 28k a year. Some people may be happy with this, but after earning 200k a year then it may not quite cut it.
Just saying, is all!
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeThe savings are meant to be used for deposit on an IP we intend to buy. But reading through responses here, everyone is suggesting it to use for debt reduction.
Not sure where the hard earned money is best to use for.
Needs to evaluate it carefully !
DWolfe wrote:Nup, not the bank. I was wondering if this was money that was there for some reason, like to pay tax, or for whatever reason hence the reason you haven't used this money to either pay down the cars, or as deposit for another property. It is good that it is in the offset it is at least doing something, but if you could be doing something better with the money, then you need to.Well 700k is great. So 700k / 25 years (minimum life span after retiring) = 28k a year. Some people may be happy with this, but after earning 200k a year then it may not quite cut it.
Just saying, is all!
D
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