Hey guys,
I am interested in purchasing my first investment property and I have few questions.
1. My PPOR is worth $415K now (property was worth $370K when I bought it 10 months ago). I took a mortgage loan for $295K – I have paid $45K in extra repayments so far.
In essence, I have $160K in equity and I am currently able to make $3000-$3500 every month as extra repayments towards my PPOR loan. Worst case scenario – I can still make $2000 as extra repayments per month.
So, based on the above, should I go for an IP worth $400-450K right away or should I wait another year or so to build up more equity? I am concerned because I do not have any extra cash besides the $45K extra repayment in the PPOR offest account. So I would be borrowing (100% of the IP value + solicitor fees + insurance + stamp duty).
2. I currently have an offset account with my PPOR loan. A mortgage broker suggested that I should go for a LOC for my IP.
Based on my calculations, I would be paying $450 per fortnight as out of pocket expenses towards my IP. This has taken into account the rental income, property management, other fees and the tax benefits into consideration. So, this is where I am confused. I don't understand how LOC exactly works. Is the LOC issued for the $160K equity or for the $400K (value of the IP)?
Would I be paying the $450/fortnight from the LOC -or- would I be paying the $450/fortnight from the offset account of my PPOR?
3. My aim is to pay off the PPOR mortgage loan within the next 5 years and go for a bigger house. I would like to make the bigger house my PPOR and make my current property an IP (eventually). The mortgage broker advised that if I do this, I would be paying more tax and to get around this, I need to transfer the property to my wife's name (she is on low income). This makes sense, but are there any legal issues associated with this?
Regards
Mike
OK.
I need to go so will just answer a little now.You say you have an offset account. Is that where the extra $45K is? If so you are not paying down the mortgage.
If you intend making your PPOR into an IP DO NOT pay down the mortgage.if it is an offset account you can pull that money out when you turn it into an IP and the full amount on the loan is tax deductable.
You could get the PPOR revalued to give you more equity to withdraw.
Can you give how you arrived at $450pf/n out of pocket please.
I would not be happy with that investment AT ALL.What area are you looking to buy and what are you looking to buy for $400-450K. Why that price? You may get a better yield on a cheaper property.
Hi Mike,
welcome to the forum and to property investing!
Whilst I am not a mortgage broker my understanding by experience is as follows:
Given your equity position you would have enough to draw from a line of credit to provide a deposit for the investment property. I would use your equity for this not your offset account cash. By doing this it means you can still offset the interest of your PPR which is not tax deductible and maximising the tax deductions on your potential investment property.
Essentially you would be borrowing 100% of the investment property when using equity to fund the deposit. This is quite common.
In regards to the dispersement of the repayments, you would assume that if 10% of your investment property loan is from the line of credit than you would allocate 10% of the negative gearing towards that loan and 90% to the other loan proportionately.
$200 per week out of pocket is a lot and by buying a property that puts you behind so much could significantly reduce your borrowing power in the future which would hinder your ability to expand your portfolio. I would be looking for at least neutrally/positively geared properties and I assume that my opinion here on the forum would be reiterated. There’s great areas in Aus that are achieving excellent capital growth and will do in the future along with high rents. This is just my thoughts and how my portfolio is structured.
In regards to paying off your PPR and then making it an investment property, what about just keep putting extra funds into your offset account, you can the use these funds for you principle place of residence when you buy a bigger one, which means that you would then be paying interest on the investment property whilst you put the funds into the new house. This would maximise tax benefits I would imagine, especially with costs of the property as you can offset any losses against your wage which appears to be significant.
I hope this helps!
I also thought that forking out $450 from your own pocket per fortnight to hold an IP is a lot. If you can give us more details we'll be able to comment in a more relevant manner for you.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
i’m forking out $200 a week out of my pockeet for my investment property,..its VERY painful, its an awesome investment, will payoff in the end, but if you can avoid it try!
Thanks for the quick response – That was really helpful.
See spreadsheet below to know how I came up with the $450 per fortnight amount
I used http://www.allhomes.com.au/ah/act/sale-residential/11-revell-close-gordon-canberra/1316797481111 as the basis for my calculation (i.e, Property worth $400K fetching $400 rent per week).
It looks fairly thorough. You have allocated for an extra 1% interest which is good, however in current real terms the 1% difference could be $153 per fortnight.
Being an older property there’s no/limited depreciation (depending on exactly how old). I would go for something that could provide a bit of depreciation to minimise your 37% tax bracket without you having to be out of pocket.
What growth drivers will impact this property do you see?
racmike wrote:Hey guys,I am interested in purchasing my first investment property and I have few questions.
1. My PPOR is worth $415K now (property was worth $370K when I bought it 10 months ago). I took a mortgage loan for $295K – I have paid $45K in extra repayments so far.
In essence, I have $160K in equity and I am currently able to make $3000-$3500 every month as extra repayments towards my PPOR loan. Worst case scenario – I can still make $2000 as extra repayments per month.
So, based on the above, should I go for an IP worth $400-450K right away or should I wait another year or so to build up more equity? I am concerned because I do not have any extra cash besides the $45K extra repayment in the PPOR offest account. So I would be borrowing (100% of the IP value + solicitor fees + insurance + stamp duty).
Hi Mike,
Whether or not you purchase the next property is your decision. However, based on the numbers above, you should be able to tap into enough equity to purchase your next property and not have to dip into the cash in the offset. Some LMI will probably be payable (which can be added to the loan so you don't have to fork out for it).
racmike wrote:2. I currently have an offset account with my PPOR loan. A mortgage broker suggested that I should go for a LOC for my IP.Based on my calculations, I would be paying $450 per fortnight as out of pocket expenses towards my IP. This has taken into account the rental income, property management, other fees and the tax benefits into consideration. So, this is where I am confused. I don't understand how LOC exactly works. Is the LOC issued for the $160K equity or for the $400K (value of the IP)?
Would I be paying the $450/fortnight from the LOC -or- would I be paying the $450/fortnight from the offset account of my PPOR?
I'm not sure which lender your currently with but you might not need a LOC. The simple, ideal set-up would be to have two loans against your PPOR.
Loan 1: Current loan – interest only with an offset attached
Loan 2: Interest only – being used as the deposit/purchasing costs for your IPYou would then either use the same lender (or another) for Loan 3 which will be the remaining portion for the investment property.
racmike wrote:3. My aim is to pay off the PPOR mortgage loan within the next 5 years and go for a bigger house. I would like to make the bigger house my PPOR and make my current property an IP (eventually). The mortgage broker advised that if I do this, I would be paying more tax and to get around this, I need to transfer the property to my wife's name (she is on low income). This makes sense, but are there any legal issues associated with this?Regards
Mike
OK, then convert the current loan to IO now (with the offset attached) – this will ensure you don't pay down more of the principle (as this loan will later be converted into a deductible debt). Instead of paying money off the principle, you simply place it in the offset and withdraw it later when and put it in an offset attached to your new PPOR.
You could also look at transferring ownership to a spouse but there's usually costs involved – best to speak with an accountant about that.
Hope that helps.
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]
racmike wrote:Thanks for the quick response – That was really helpful.See spreadsheet below to know how I came up with the $450 per fortnight amount
I used http://www.allhomes.com.au/ah/act/sale-residential/11-revell-close-gordon-canberra/1316797481111 as the basis for my calculation (i.e, Property worth $400K fetching $400 rent per week).
Ah, this is just down the road from me
I haven't looked closely at the numbers but I wouldn't be surprised if the holding costs were about that.
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]
racmike wrote:Thanks for the quick response – That was really helpful.See spreadsheet below to know how I came up with the $450 per fortnight amount
I used http://www.allhomes.com.au/ah/act/sale-residential/11-revell-close-gordon-canberra/1316797481111 as the basis for my calculation (i.e, Property worth $400K fetching $400 rent per week).
Why your interest rate is 8%? fixed?
and your agent management is 9%. A little bit overpriced? Mine was 5.5%.Hi
Interest rate is set at 8% to account for increases in interest rates.
From what I have heard, 8% is the average for property management in Canberra. I could be wrong.
Thanks to everyone – I now have a better understanding of IP.
I am still a little bit unclear on how LOC works. Below is my understanding.
Say, the equity on my PPOR is $160,000 and my IP loan is $400,000.
I assume that this means that my LOC limit will be set to $160,000.
Let us say that the repayments for the $400,000 IO loan is around $1000 per fortnight, out of which the tenant pays $300 and the tax man pays $300.
I can either pay the remaining $400 off my savings, or I can pay it from the LOC. If I pay it from the LOC, the next fortnight, I would have to pay $400 + interest on $400.
Is that how it works?
Thanks
Mike
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