Hi Eliana,

When I read this, my very first thought was “Never ask a barber ‘Do I need a haircut?’ as they have a vested interest in having you get that haircut.”  That RE agent in Gladstone wants to sell you a property.  In fact, RE agents are in business to sell you a property.  But OK, let’s take a look at Perth and Gladstone.

I have an advantage in that I was watching as Gladstone went into a huge price jump, followed by a crash.  It goes back quite a few years – there was some talk of a new huge venture in Gladstone, so some bought in on the news – but it didn’t eventuate.  Developers too, overbuilt in that area as I recall – result, too much stock and not enough buyers – result, prices crashed.

Google “Gladstone median house values over time” and check out what happened.  Check out the curve in the median graph, then tie up the year with news reports around those times.  Then think about “What is different today?”  Is there something ACTUALLY taking place up there that will make properties more valuable?  e.g. Will more properties be needed than are currently available?

Oh, and do a similar Google search for Perth and see its trend.  Which of the two looks like it has an upward curve right now?  That is only the start of course, but having the trend on your side is a good place to start.

Benny

Hi Eliana,

Re your first question, I recall Steve saying things along the lines of “Grow your wealth in Residential until you have enough Equity to be able to move into Commercial, then live off that Comm Income”.  The reasonings behind that come from a few factors:-

1.  Resi investing is usually cheaper to get into (better when starting out?).

2.  Resi has MANY more folks invested in it (everyone needs a home, but not everyone needs a place of business).

3.  Resi sees many opportunities for profits to be made, whether thru good buying, developing, renovating, etc.

4.  Resi has a wealth of different “playgrounds” allowing you to purchase according to your goals – e.g. do you need more Income right now, or more Growth?  Different areas provide differing results – e.g. regional vs city investing.  Lower vs higher socio-economic areas….

Onto question 2 – “I am enquiring if I paid LMI upfront instead of having it capitalized onto the loan amount , Can I claim this LMI amount in my tax return as tax deductions?”

Hmm, I think you could (but I don’t KNOW!) – and capitalising onto the loan can be a way of getting into something with a smaller deposit, and at a somewhat minimal cost.  Of course, this means you will need a higher loan, and above 90% the LMI becomes quite fierce (yet still a small part of the total loan, so one to consider).  And the second part of your question re re-borrowing is one for a Mortgage Broker, so I’ll leave that one alone.

Question 3 re WA – not my bailiwick, but I have long seen Perth marching to the beat of a different drum to the East Coast.  And up until a couple of years ago, it was heading downhill.  If you are seeing similar problems to us in the East (high immigration, high rental demand but super-low vacancy rates, builders going bust, etc) then your market may also have turned around and would be trending upward.  The good thing is that (unlike East Coast) your prices would be starting from quite a low point, meaning equity growth may come more quickly.

Back quite some years now, I recall Perth’s median actually EXCEEDING Sydney’s – an unheard of event.   I would think Perth would be quite a lot lower today, but perhaps on the climb?  How are the medians trending over there?

Regards,

Benny

Hi Wayne,

Is this how it works? Also borrowing 100% value, will I also have to pay LMI for the amount over 80%?

Surely it would depend on whether you went for two separate loans or a cross-securitised loan.  By going for two separate ones, you would eliminate LMI (I would think).  e.g. Borrow deposit/costs against your PPOR.  Take out a separate loan from your personal home loan, so it can be considered as “investing”, thus helping tax-wise.  Then borrow up to 80% on the IP, eliminating the need for LMI.  Personally, I’d use a different lender for the IP than for my PPOR…. but then your mortgage broker can guide you through all this stuff.

Beware of going the “all-in-one” cross-securitised way (some say cross-collateralised).  There are warning posts on here re that path.  If you can’t find them, just ask – I reckon I can find them….   Usually, that “crossed” way is helpful to your bank, but not so much to you.

BTW, please note I am NOT an adviser of any kind – just a bloke with an opinion and a few runs on the board. So DO check all this out with your favourite adviser,

Regards, Benny

Hi dd81,

First off, I am NOT any kind of accredited adviser, so I simply present a few ideas and opinions that may help you reach a conclusion or two.  Of course, anything I mention should be confirmed via your own accountant or other adviser.

You look to be in really good shape, and have some important choices to make.   Here are a few thoughts that hit me when I looked at your post – in no particular order:-

1. Keeping some cash available to get you through the Maternity Leave without troubles would make sense.  How much depends on the other “numbers” that are involved.  Perhaps keep enough cash to cover a further 18 months of the same income you had prior to the Mat leave.  That will likely still leave a bunch for paying down debt, or simply adding it to redraw on a loan.

2.  You appear to have funds in the Trusts’ Redraw accounts, but not in your Personal Loans.  Was that from earlier advice from your Accountant or someone else, or just a guess on your part?   Certainly paying into Redraw should reduce any Interest Cost on that loan, but will that change your monthly payments?  i.e. You may be paying a fixed rate per month that includes principal and interest – having $$ in redraw might mean you are simply paying more off the Principal (the saved Interest) without actually reducing your monthly mortgage payment.   That may suit you to do that, or it may not – your call.

3.  When you exit the Fixed Rate loans next year, your monthly repayments will likely SOAR !!!  The interest is liable to go from 2.54% to 6% or more.  That is not just a 3.5% lift – it is a 136% lift if an IO loan !!  That could alter your calculations considerably, so do be aware of that likely occurrence.  That alone might make sense of paying out one of those, and even reduce the other loan to a manageable level (but don’t forget point 1).

4.  “I have some properties under my name that the offsets / redraw are full, so no repayment required. Below are the loans that I am still paying interest on.”

Wow, you are doing well !!  Perhaps part and parcel of all this might be to consider your end goals – Steve often promotes the idea of using residential properties to generate growth, then, when the Growth component has reached the desired level of Equity, trade yourself into Commercial where a tenant pays pretty much all expenses and the income then “keeps you”.  What that level of Equity is, depends on your goals and desires.  Is now the time for you to be looking to parlay out of the existing properties?  Or perhaps sell one to pay off the debt on all the others?

Doing the latter would (of course) lead to higher tax payments, but that means you are MAKING more.  Tax deductions never did replace your losses – i.e. Money spent and claimed against Tax owed would effectively replace just the Marginal Tax that you “overpaid”.  Like, you might pay $2,000 on something but only get $600 deduction on your Tax payments (i.e. you still paid $1400 from your own Tax Paid $$).   With a property paid off, then you don’t get to claim any Interest on a mortgage payment, but then you aren’t paying a mortgage anyway – how cool.  And it throws off cash with little cost – and yes, you pay Tax on that cash that is now largely your Income.

I suspect you are already well aware of much of the above – but I include it for newer investors who may be reading this and formulating their own thoughts re property investing (does it work, and how does it?).  And for them, please go back and read the first paragraph of this reply.  :)

I hope some of these thoughts prove to be of some use to you, dd81.  Maybe not, as your portfolio tells me you are already a solid investor.  But your story might attract further comment from members who ARE accredited advisers and can guide your steps.  Or correct me where I stumbled *gasp*  :(

Benny

Hi Allan,

My thoughts would be to “Don’t overly complicate things”.   I’m sure there will be people who will be happy to pay $200+ per week just to have a roof over their heads.  I think if I were in your situation, I’d be setting a base price (let’s say $200 per room for argument’s sake) but have a flat rate for utilities. Maybe $20 per week flat rate – you then make up the difference with the bills.

If children involved, then sure, add an extra amount per child ($20/week?)   By having a fixed amount stated, anyone taking the room knows their required input accurately and can say Yes or No to that amount.   You pick up the difference (or pocket it) if utilities are more (or less) than the $40/week you get.

Note, the prices I quote above are realistic for Brisbane prices – you might choose a different base figure based on your area.

The above method saves arguments over power bills and who used what amount of water, power, etc.   It also saves time getting all bills and then divvying them up, then trying to sell those divvied up amounts to the sharemates.   It also saves nasty surprises if a power bill hits an abnormal high and they are only just scraping by with your roof over their heads.   Give them a fixed rate (rent + utilities) that they can depend on.

Let’s see what others think…… :)

Benny

Hi Heisenberg,

 Oh, what I meant by roll over is – whatever my wife and I can save thru tax deductions (for investment property) to be used to replenish the funds (albeit not completely) that were used to cover rental shortfall and outgoings? Hope I’m not wrong to think this way?

Ah, now I understand what you meant, so thanks for the explanation.  Right now might be just the wrong time to attempt negative gearing, as mentioned above, so do tread carefully.

By the way, with some folks “coming unstuck” around these difficult times, it may be that you may yet find a bargain, and help someone else to “move on” anyway.   Not to be unfair, but folks have things go bad at times, and often they find they just want to clear the deck and start again.  With home buyers struggling to find finance, they might need an investor (even if paying them less for their property) to buy them out so they can move on.   By making an offer, you might be the only one doing so, and they may accept that lower offer rather than keep feeling the pain of a mortgage that has suddenly got way too expensive to maintain.

Do get with a Mortgage Broker or similar to check your finance availability before going searching though – you need to know your limit, eh?

Good luck,

Benny

Hi Heisenberg,

Yeah, wrong time perhaps eh?  The current situation has the costs of building, buy prices, fuel, rentals, insurances, and interest rates, all going through the roof.  Now an increase in rental helps your situation, but everything else hurts it.  The big mover (for me) was the astonishing climb in Interest Rates.

In years past, a Central Bank would lift rates two or three months in a row, then sit back to see the effect before lifting more.  Not this time – we have 12 lifts in 13 months – they didn’t allow folks to come up for air !!!   Interest Rates on most IO loans went up by around 150% !!!   This of course has people struggling to keep a property positive geared.  Like, can one seriously put their rental rate up 150%?  But as you would know, rents HAVE soared recently, but nowhere near enough to offset the increases in Interest.   Thus landlords sell, and some folks renting are now living in cars.

Then there’s the “mortgage cliff” awaiting anyone who has a Fixed Rate loan coming due for refinancing soon.  i.e. They were on a Fixed Loan with Interest around (say) 3% and now can’t get a 7% loan (with the lenders wanting proof the lendee can handle a further 3% on top of that – eek).  What happens to them?

What MIGHT happen if enough can’t refinance is that more homes will appear on the market, and prices may start to drop again.   But I wouldn’t hold my breath on that either.  What I think is more likely is that the RBA will realise they have forced the economy into a recessionary state, and that they will see the error of their ways and cut rates again.

I was bleating about the RBA since they first raised rates in 2022 – hoping they might read this forum (yeah, right) and realise their errors sooner (go here to check it out if you wish – https://www.propertyinvesting.com/topic/5083103-how-does-an-increase-in-the-rbas-cash-rate-help/ ).  I think they should have raised rates off that Emergency Setting of 0.1% around the time we first had employment under 4% (about 18 months prior).

So I don’t think you are doing anything wrong, and putting aside $$ is always a good move ahead of any new investment venture.  Meanwhile, why not read around to glean some ideas of how others have succeeded.  e.g. check out some good books, forum posts, go to seminars, etc to round out your knowledge  ahead of that time.

Oh, and this comment of yours has me scratching my head – “…. and then roll over the next financial year?”   I was wondering just what that meant.  What were you planning to “roll over”?  Oh, and do check out Offset Accounts if you are saving $$ – these are such a benefit if used correctly.  I hope you are using one already.  :)

Benny