Hello Everyone (I am hoping at least someone will read this post :D ),
This is my first time posting in this forum and definitely not my last, there is tons of very interesting content! I am in a situation presently I believe a lot of savvy investors will have a great understanding and hope they may be able to help with making the right decision.
My wife and I bought a house in 2007 for above asking price! 1st Mistake. We were young and silly and believed the tricks and had already fallen in “love” with the “perfect” house. The house has held up well and we have enjoyed our time here. It is a 3 bed 1 bath (bathroom needs to be redone and a few paint touch ups here and there before sale/rental) which we bought for $341,000 + $20,000 for god knows what now :/ I am a carpenter by trade and had planned on building an extension onto the house…in comes (not “income”, just more bad debt) another $60,000 LOC prior to the GFC…
I believe I have smartened up a lot since these early days of being way too frivolous with money and after inheriting quite a sum of money have paid down the loan to $242,000. I knew I had to get smart with money management and started a sharemarket & investment course and dabbled in the stockmarket before starting my first business. That business quickly failed (18 months) however it taught me a lot of very important things and introduced me to a lot of very influential and successful people, people that have encouraged an entrepreneurial spirit and helped motivate me through some pretty tough times which allowed me to see quite a bit of success last year and continuing through til now.
My wife and I have 2 beautiful children and our tiny house and lack of backyard is getting smaller by the day with a rambunctious 5yo boy and an ankle biter following down the hall!
I am in 2 minds about our situation as ideally we would stay in this house (based on a lack of education around what is best with regard to property) and pay the debt down before moving on to another place, however lately have been thinking about how to better our situation (I sure as heck don’t want to make it worse) without negatively affecting our position.
So this brings me in to the questions…
1) What do you believe would be the best course of action? Stay put, suck it up and continue to pay down debt, rent the property (apparently we should be able to get $340-$360 in rent / week. Current repayments are $1300 PI), or sell and start better by clearing all existing debt which should leave us around $100,000 cash.
2) Use the current equity in the PPOR to buy another house which would become our PPOR with current residence becoming the IP. IF this is the way what is the best way to go about purchasing our new PPOR and whats the wisest move, paying IO or PI?
3) If renting the property is the way how should it be structured? The house is currently in my wifes and my own name (Which I know isn’t ideal).
Any help is greatly appreciated and if you need any clarification on any points please do not hesitate to ask! And thank you so much in advance! My goal is to make the best choice for our future now without overextending ourselves.
THANK YOU! :D
Ronnie
Hey mate it sounds like your learning as your going which is great.
1) The best course of action is the one that gets you to your goals which I assume is getting debt free and income from properties?
2) I don’t believe you getting another property (IP) is a good idea until you have a deeper understanding and knowledge of why your doing this and the risks and benefits especially before you go and get yourself in more debt.
3) work out your goal and direction first
without knowing more than you said, if it was me I would
-work out a plan to smash repayments (goal of smaller loan so I could have safer equity options)
-add value to property with renovations or extensions if this will add value.
-review this repeatedly and review direction and market etc.Jaxon | Jaxon Avery – Financial Adviser
http://www.jpafinancialservices.com.au
Email Me | Phone MeJPA Financial Services Pty Ltd
Jaxon hit the nail on the head. If you don’t have clear goals you could spend the next 10 years spinning your wheels and then you realise that you’re not where you want to be and BOOM your kids are teenagers and are costing you an arm and a leg.
There’s this book titled ‘Values-Based Financial Planning’ by Bill Bachrach. I’m not recommending that you read the book as it’s aimed at prepping clients for Financial Planning advice, but I WILL recommend that you check out his Financial Road Map that is an integral part of his process. It will definitely help you identify what you want and where you want to go. You should be able to get a copy on line easy enough.
Tom@SadhanaConstructions | Sadhana Constructions
http:\\www.sadhanaconstructions.com.au
Email Me | Phone MePerth builders of developments and bespoke homes
NO!NO!NO.
DO NOT pay down the loan. Change the loan to interest only NOW!!!! See if you have an OFFSET account attached to the loan (NOT A REDRAW).
If not get one with an offset.
Pay interest only and put any extra money into the offset.The reason for not paying down the loan is that if you decide to keep this house as an investment then you have no loan (deductible debt) but you will have to take out a big loan to buy your new PPOR (NON deductible debt),
If you pay IO and put extra money in the offset you can then take this money out of the loan and all of the loan on the first house is tax deductible.
I hope I’ve explained to you understand it.OK! Get that sorted then think further to what you want to do. From the information given it’s hard to say what you should do. Do you like the area? What is your current income (will it support a bigger PPOR loan?) etc. Also what city are you in? That makes a huge difference as market conditions are different.
Don’t worry that it’s in yours and your wife’s name. That’s fine. If you are looking at having a multi property portfolio then you may want to look at trusts etc but don’t get too hooked up on that yet.
Post more questions as they arise.
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This reply was modified 9 years, 6 months ago by
Catalyst.
Catalyst Depending what Ronnies Goal is this may not be the best thing and also interest only COULD be one of the worst things to do depending if the market took a sudden swing.
just because you may have chosen that strategy and it worked does not mean your shoes fit everyone?
what’s your strategy if Loans went to 10% could you survive for the remainder of the time on Interest only?
I personally cant see myself ever going Interest only unless it was fixed at a ridiculous rate for 15+ years.
I do understand that its a quick way to build up but how are you prepared for a storm?Kind regards
Jaxon Avery
Jaxon | Jaxon Avery – Financial Adviser
http://www.jpafinancialservices.com.au
Email Me | Phone MeJPA Financial Services Pty Ltd
Jaxon it seems you don’t understand how an offset works.
You still paying the same amount off the loan but instead of GIVING the money back to the bank you are LENDING it to them. It sits in the offset (which reduces the amount of interest you pay, the same as if you were paying it down) BUT YOU have the option to pull it out if you want.
eg a) Loan of $300K- you’ve paid down $200K = you pay interest on $100K
b) Loan of $300K, you have $200k in your offset = you pay interest on $100k.The difference is a) you can ASK the bank if they will lend you say $100K to buy yhour new PPOR or
b) yo9u TAKE the $100k out to buy your new home (NO asking for permission, it’s YOUR money to do with as you please.Also if you then change the first property to an IP in a) only $100K is tax deductable. in b) $200k is rax deductable. That is a HUGE difference at tax time.
If loans went to 10% nothing changes your loan is at the same level that it would be if you had paid P&I.
And interest only is not a fixed period loan. google to help yourself understand how it works. Of the hundreds of people I know who invest in property I only know one that has P%I loans. It is just too restrictive on your ability to grow a decent property portfolio.
Of course if a person is hopeless with managing money then IO is not a good idea, but then they will never be rich anyway so it doesn’t matter.
One of my favourite quotes which has helped me on my investment journey. You don’t know what you don’t know.
I understand offset.
What I didn’t understand is Interest only and I didn’t know you can offset with such. I admit I did not see it this way or even know that.
So Catalyst as for Equity to purchase more properties does Interest only properties work the same? because it would seem (yes you have offset money) you have not paid anything off the loan?? so how is this getting you more financially ahead when you then pull it out to be back to only a bit paid off the interest?
Also depending on your view of rich, yes PnI can get you rich if done correctly, so can I only.
Kind regards
JaxoN Avery
Jaxon | Jaxon Avery – Financial Adviser
http://www.jpafinancialservices.com.au
Email Me | Phone MeJPA Financial Services Pty Ltd
People who “make it” don’t leave money idling in P&I accounts. While they are in the accumulation phase anyway. Depending on your SANF (sleep at night factor) as to how much you “have” to leave there. I know many investors who are happy to have 85% LVR. I am not one of them.
If you pay P&I and do not withdraw equity to buy again, it’s a slow road to the top (unless you are on a high 6 figure salary. You need to save deposits each time you buy.
Also don’t forget Capital Growth. So as your property goes up you take some of that growth out (via the offset) to buy again. If you paid P&I you would have to get the property revalued in order to ASK the bank if you can have some of your money back. Believe me this is a pain in the backside, especially once you have multiple properties. The bank wants to see ALL your statements etc. Of course not many people have enough to buy a property without borrowing any money.
Hard nosed investors buy as soon as they can so any “spare” money is put into investing. This is why I don’t like P&I. I would advise against it for everyone that has self control. If a person spends every cent they earn and have a massive credfit card debt (a sign of lack of control) IO is not for them. It’s all about using other people money.Always pay non deductible debt (eg a PPOR home loan) you are better off paying that off. But again do it via an offset in case you ever decide to make it an IP.
Property is about compounding.
Example. If you have 2 properties worth $500K each. Your happily paying down the loans. 10 years later your properties have double (theory I know) and they are worth $1M each = $2Mill. Assume you have paid off $300K so you owe the bank $700K. Your net worth is $1.3MInstead of paying P&I you pay interest only and buy another 2 properties $500K each.
After 10 years your properties are worth $4Mill. You haven’t paid any off so you owe the bank $2Mill. So your net worth is $2Mil.
I left buy property investing journey until I was older so needed to buy a lot in a hurry. I used equity to do that.
I bought a few houses under market value (before the boom of course- Sydney), did a quick reno and pulled my deposit back out to buy again. My LVR did not change due to the reno increase in value.
Of course this is pretty basic and there are a lot of other things in the mix (depreciation, rent etc but I hope it makes sense)
Hope that answers the question. If not ask further questions.
Rich different to different people. Rich to me is being able to do what I want when I want (nearly there).
Ok, Look overall at lot of what you said I need to dwell on because I just don’t have knowledge.
but
-Captial Growth, so you have done PnI in the past?
– So what Risk Spread do you work within?
– I see the benefits but also see a lot of risks but I am sure there is reward due to this. It sounds like you could get away
loosing $25,000 (currently) in one year because of no income from a property or loan increase dramatically or whatever I cant. I’m at a stage where that would put me neck deep. I still feel at the moment getting a larger amount of Net worth is the first step (in PPOR) then purchase first IP (IO sounds like the choice with the most options) but like you I don’t want my spread 15/85 I want Minimum 2-/80 more so 35-65.-One question that could change my perspective is EQUITY
– If I own Property A (Worth 300,000 Loan 200,000) it has 80k say in Equity
-I can use this without changing the first loan structure to purchase an IP (Worth 250,000 Loan 180k (10k in expenses for purchase)
-I would not be in the same financial Situation if I did Interest only??
PnI = Worth 550k Loan 380k = 170k Net worth
IO = Worth 550k loan 450k = 100k net worth.Now I dont know what happens after you pay off Equity??? but as far as I know this is how it works right? (above)
Kind regards
JaxoN Avery
Jaxon | Jaxon Avery – Financial Adviser
http://www.jpafinancialservices.com.au
Email Me | Phone MeJPA Financial Services Pty Ltd
Hi, I only paid P&I off my first home. Then I found out my mistake.
I have a low LVR, but I have a very low risk threshold. Plus that gives me good cashflow, which was my aim so I can retire. Very difficult to retire with a high LVR but people have high LVR’s to build a portfolio faster. Some then sell down to increase equity and cashflow to retire. But there are many different strategies to get to your goal.
I’m confused by what you are saying here:-
I see the benefits but also see a lot of risks but I am sure there is reward due to this. It sounds like you could get away
loosing $25,000 (currently) in one year because of no income from a property or loan increase dramatically or whatever I cant.I would not be in the same financial Situation if I did Interest only??
PnI = Worth 550k Loan 380k = 170k Net worth
IO = Worth 550k loan 450k = 100k net worth.What have you done with the other $70K (in the IO example)? It sounds like if you pay IO you are throwing away the money you would be paying if P&I. You still have $170K net worth if you have it in the offset account (or better still have invested it in something that returns more than the interest you are saving.
I think you are over thinking it. Where are you located? PM me and I’m happy to have a chat if you like.
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This reply was modified 9 years, 6 months ago by Catalyst.
You better should not do it again.
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This reply was modified 9 years, 6 months ago by A. James.
A. James
http://www.loveandbuyit.com-
This reply was modified 9 years, 6 months ago by
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