hi everyone, i’m newbie into property investment. Not sure if we can still penetrate into Property Investment. Our current status, we’ve got 190K equity in our PPOR (recent valuation) but only got 10K of cash savings.
We haven’t invested into anything but we wanted to try this PI as we’ve read/seen good results based from reading here.
Grateful for your ideas/responses.
Hi P@ck
Firstly welcome to the forum and I hope you enjoy your time with us.
Limited information to go on but the main thing is the potential equity. I am unsure whether you are referring to “borrowable equity” or “property equity” as there is a massive difference but let us assume all is well at this stage.
Subject to serviceability there is absolutely no reason why you can’t put that first foot on the property bandwagon.
Firstly make sure you don’t use your cash as this can have other uses but use your equity. Why not borrow 100% + costs.
Ensure that your Broker has some idea how to structure an investment loan and works backwards definitely not cross collateralising the investment loan with your home (A little trick the Banks try too encourage feeding you the line it is good for you or for them they can never quite remember).
Set the loan up with a new lender and engage a process of debt recycling over time to free up your equity enabling you to go again and again.
Start slowly and build a good team around you.
Cheers
Yours in Finance
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This reply was modified 10 years ago by
Richard Taylor.
Richard Taylor | Australia's leading private lender
Hi richard,
I’m referring to property equity. what is borrowable equity?
Also, not sure how much is the maximum that i can borrow with my current equity. what do you mean by 100% + cost? Does it mean that i can only buy a property within $190k mark?
Sorry for the questions. Just started learning these terms in IP.
Hi P@cketeer,
I’m referring to property equity. what is borrowable equity?
Let’s say your property is worth $950k and you have $190k equity. That says you have an 80% loan. You may borrow more, but that would depend on serviceabilty (your income – is it enough?) and whether you are wanting to borrow at 90% (which would release $95k for you to use for other investments. In that case, your property equity is $190k, but borrowable equity is only $95k at a 90% lend.
But if your home is valued at $500k, and you have $190k equity, this means your loan is $310k, or just 62% of value. You can borrow up to 80% without paying LMI, so there is $90k for you. Or borrow with LMI to 90% and you can borrow $140k. Those borrowings can be deposit/costs for a new IP. And the loans to purchase the IP should be tax deductable.
In that second case, your property equity is still $190k, but your borrowable equity is much higher thn the first example. Hope that helps.
Welcome aboard, packeteer – there is lots of good information hanging about. Do check out the Articles found in the “Training Centre” (on the right of the page) as these are formulated to give you a lot of information in an easy-to-read fashion. Good luck,
Benny
Thanks Benny and Richard.. that’s very helpful to start with.
I’ll check those articles.
Cheers,
P@cketeerhi richard,
after computation, i’ve found out that my borrowable or useable equity is 92K.
based from my readings, simple rule of thumb is to multiply the useable equity by 4. Which means my max purchase price for IP must be within $368K mark? Is this the norms? Will this avoid me paying LMI if I will use this rule?
The useable equity can be be used for purchase cost, deposit, stamp duty, etc.? Am I getting this right?
Hi again P@ck
Ok thanks for the clarification that makes a big difference.
Well remember that 92k has to cover your deposit and acquisition costs.
Yes keeping the loan to valuation ratio under 80% will remove the payment of LMI however will certainly limit the growth of your portfolio.When we work with an investor we try and ascertain their initial and longer term goals.
If all they want to do is buy a single IP then sure going with a 80% is all fine and dandy. If however they want to grow their portfolio and build an income stream over the years then look at going to say 88.5% lvr.
Mortgage insurance is an opportunity cost which in most cases can be added to the loan and the premium itself is Tax deductible over the life of the loan / 5 years whichever is the lesser period.
There is a big difference in LMI costs amongst lenders even though they maybe using the same insurer. Of course cost is only one factor as there is no point in saving a few dollars if you can’t get the loan thru.
Hope this helps.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi P@ck,
after computation, i’ve found out that my borrowable or useable equity is 92K.
Current valuation is $502,500 then? 80% of that is $402k, and you owe $310k – difference = $92k. How’d I go? ;)
based from my readings, simple rule of thumb is to multiply the useable equity by 4. Which means my max purchase price for IP must be within $368K mark?
If your purchase costs were $92k, you’d be correct. However, they are nowhere near that amount usually. With no LMI, and with a smart MB on your side, purchase costs can be as low as 3%, or up to 5%. So, more like $13k to $20k. You should be able to purchase one IP with an 80% lend up to a value around $440k.
But then, as Richard said, if your goal was to build a portfolio, you might be better off to pay LMI to use less of your equity, and perhaps allow the purchase of two IP’s in quick succession.
So much of what will work best for you is up to YOU, the investor. The equity side is one half of the equation. The other is serviceability – how much you can afford week-to-week. There is a lot to learn, but you’ve taken the first steps – now keep on reading and learning, and even talking with a MB to nail down the figures. It helps to know how much you can afford before you start looking.
While you are in learning mode, do check out the posts in the thread linked below too – I think you will find most of them very useful… ;)
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Benny
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This reply was modified 10 years ago by
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