Hi there,
I am new to these forums. I am about to buy a 2nd IP and am seeking advice. I own the home I live in, worth $450,000. I have an IP worth $1mill with 400,000 owing on it. Rental income from this is $2100 pcm.
I have just had a loan approved for a maximum of $420,000 for a 2nd IP. I will be borrowing 100% of the value of the 2nd property, plus all Govt duties etc.
Obviously I'll calculate the IP income vs mortgage and other expenses. I am opting for interest only to reduce my repayments. I will be retiring in 15 years and will sell the property at that time so I am looking for capital gain. I am also talking with my accountant shortly to discuss tax reduction on the basis of the investment. Are there any negatives associated with this tax strategy?
In terms of IP criteria, my idea is to purchase within 15kms of Melbourne CBD and avoid anything with lifts. Other than that I am totally confused. The "flattening" of the market and the vast number of inner city apartments that will be developed over the coming two years have made me nervous.
I am grappling with questions like: The loan limit does not stretch to a house, but should I look for a small older style apartment in, say, St Kilda, or a town house or villa further out? Are there greater returns on one style of property over another? Should I break my self-imposed 15km limit? There are new villas in places like Seaford (close to beach but over 30kms from CBD) that look great, and I can claim all that depreciation – yippee!, but will that really be a good choice in the long term? Should I look for a property worth less and minimise my debt level?
Any advice you can offer would be greatly appreciated.
Cheers!
Hi there,
In my opinion it is always good to have IO with offset account for your IPs. As money will be more flexible, and we aim for capital gain therefore not much of point of paying down the principal, as it will reduce your tax benefit as for negative gearing. Plus you could always leverage your equity in buying new properties.
As for property type, according to theory and past experience in long run house does have a better growth in capital gain then units and apartment. According to your situation it really depends what you want, if you go for property with better capital growth you will have to bear more costs in short team, but it will give better portfolio on the future. But in current market, anything could happen, I guess property value might not increase much in next few years, who knows… but if you are to invest it for over 15 years, i don;t see any trouble.
I think you should consider the ownership structure for the new IP, as purchasing it in a trust gives you the opportunity to distribute income to different people to reduce your tax liability.
Cheers,
LukeHi Carmsie
How are you structuring the loan for the 2nd IP purchase?
Was the approval of $420k from one lender or from a broker? If the former, then you might want to look at having your borrowing capacity evaluated by a broker who has access to numerous lenders. Who knows – you might be able to purchase a house after all.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi all,
Many thanks for the advice – all very sound and helpful. The approval was from one lender so I'll explore what a broker has to offer and a Trust structure. If I can get a house it will be better in the long run.
Any views on the 15km limit from the CBD? Could a new house in the outer suburbs be a profitable purchase in the long run? Obviously, I'll check vacancy rates, income, etc.
The 2 properties I have now were originally bought as homes for me to live in. All I had to do was find the area I liked and then a house I liked. Gotta say, buying for investment alone is far more challenging!
Might be a good idea to chat with an accountant regarding depreciation on a new property that you are considering to sell in 15 years time, especially if your tax bracket is anticipated to be higher in 15 years time compared to now. I'm not an expert with tax, but from my rudimentary understanding of it, the depreciation improves your current cashflow. But when you sell, you have to 'pay back' that depreciation at the time you sell, by subtracting it from the cost base of your property before calculating capital gains tax. There might be another ruling that actually forces you to do this, even if you never actually claimed any depreciation on the building (but were able to do so).
Again, I would ask a good accountant about this.
why is your $million property returning only 2.4%? Speak to your property manager to get a rent increase. Does it need some minor maintainence to achieve the rent review?
Scott No Mates wrote:why is your $million property returning only 2.4%? Speak to your property manager to get a rent increase. Does it need some minor maintainence to achieve the rent review?That does seem quite low. We have a $450k IP in Canberra that’s achieving better rent than that.
Also, keep in mind, an increase in the rent will improve your borrowing capacity.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Melbourne has so many options. Yes the market has stalled a little but cycles are apart of investing. If you are keen to invest in Melbourne and are after a unit why not try, Brunswick, Northcote, Footscray, Carlton and for a diamond in the rough out around Braybrook or Altona.
One of the things you will always have to take into account with property is that you should be in it for the right reasons.
I happen to have had the insight of working with my father .. who has had a consistent investment in property for over 50 years. And one of the things he does (and he's VERY conservative on property) is buy when the timing is close to right. And thats his version of speculation. You dont try to judge the bottom, you'll miss it. You dont try to judge the top .. again .. its too hard to guess. But you should be able to work out what represents good value and an unseen boon to you.
Buy property with multiple uses, which meets the current and forseeable market demand. Its one thing to invest in a property for one reason .. and return is a good reason .. but it must have upside as well. And flexibility. Once divided so many times .. and beyond its feasible use, a property no longer presents as a good investment.To factor that back into what i wrote in the first paragraph .. my father's second major invest was a block of units in a then outer suburb of Bentleigh (1970) which was returning a healthy 12% (wouldnt you LOVE to turn the clock back on that one!). And yet .. 28 years later when it came to the time to sell .. he sold it to a developer who wasnt scared by the rotting wood in the windows (a major expense). For my father at the time .. it would have been prohibitively expensive to do all the windows and it was just easier to sell. The developer strata'd the block and resold them as rendered and renovated, making a quick and tidy buck. So there was a little money for everyone out of that deal.
There is a lot to learn from that deal. Bought as a positively geared cash cow (it was returning above and beyond its loan amount from day one) there was a time when even as a lucrative cash cow it was time to sell. And it hasnt stopped him from making more and extended purchases. Also .. leaving a little money in the deal made it easier to sell.
Summary .. if you are sitting on an investment and its only returning 2.4-3.2% (and a lot of inner city property has reached this level) and you are borrowing on min 6% (making sure that the property is negatively geared (= A LOSS) from day one) and the land value is rising to close to the apportioned property value (making sure that you'll be paying land tax on your overall portfolio at the higher rates) then the question comes back .. WHY ARE YOU INVESTING IN A STRATEGIC PROPERTY SOLUTION THAT DOESNT WORK?
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