Forum Replies Created
Hi Calderan,
Welcome aboard – and please don’t worry about any “dumb questions” – ‘cos the only dumb ones are the ones you DON’T ask (and we never get to know about them…. :p )I’d like to share a couple of pointers with you – you sound like you are as keen as mustard, so I’d suggest you take some time to read heaps – good books, this forum, some links especially (see below), and really start to get to know HOW it all works before choosing which way that you would make it work. You see, there really are many ways to “make it” with Real Estate.
Currently, Steve has a free book offer (pay P&H only) that is a well-written look at “How he would do it again today, knowing what he knows now, but starting from scratch”. I found it a very worthwhile read.
Go here to get your copy – https://www.propertyinvesting.com/store/0-financial-freedom/Also, take a look here – it is a thread I am working on that contains several answers to new members’ questions, including a couple of stories of “How people can make it in Real Estate Investing”. https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/
Other than that, check out future posts for “meetups” where investors get together all around the country – endeavour to get to one or two of those, just to meet up with like-minded people. There is usually one a month in several of the major centres.
As Kinnon says, we don’t (usually) race to pay off good debt. It is too advantageous to keep it in force. Now bad debt (credit cards, car loans, etc) – that is another story altogether. THAT is the debt to get rid of.
Anyway, grasshopper ;) A lot there is to learn, but learn it you will. The ride you will enjoy !! :p
Benny
Hi Ryan,
Welcome to you, new member – you have come to a good place !When starting out, there is lots to learn, and I would suggest you take some time to devour the articles in the “Training Centre” on the Home page. read some good books, and make friends with some of the professionals on here (Mortgage Brokers, etc) as they can guide you, based on what all of your situation is. Share your whole financial situation with one you grow to trust, and be guided by their answers.
As well as that, take a look at the following thread, which is geared to answering many of new members’ early questions. Who knows, you may well learn the answers to questions you didn’t even know you had !! :p
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Enjoy !! Keep on questioning – as you question, some answers will resonate with you, and help you to form your goals and thus set your path.
Benny
Hi Shaun,
Yep, sounds CF+ to me. Sounds like a commercial premises, and that the builder is renting back the place from you UNTIL he sells the other nine. Then he’ll be gone, and you will need to fnd another tenant (but they have already signed up for the other nine – is there a tenth waiting in the wings)? Being commercial, the rental returns are often good, but, when down a tenant, you can be without rent for quite some time.Now, there is just a small chance that the builder wants to stay there as a long-term tenant after all – but I’d think the earlier scenario is more likely.
Benny
Hi Terry,
An interesting first post – I guess you are new here, so welcome aboard !! Your comment below intrigued me, and leads me to ask how you do it?:-all have been cashflow positive from day one, with gross returns between 10.3% and 7.75%. More importantly the net return is around 7% at purchase date.
That bit about Net Yield at 7% – I was most interested to learn how you do that if you wouldn’t mind sharing. See, even with the super-low Interest Rates of today, a 10% Gross would usually struggle to get 3% Net because a 5% mortgage Interest Rate would be having its effect, as well as the other ongoing expenses (Rates, RE fees, Ins, etc).
But if you eliminate the mortgage…… 7% is likely – is that what you have done? Or using wraps, lease options ?
Benny
Hi WTR,
Does anyone know if when using an offset account and redrawing on it would affect LMI?
The simple anser is “No, it won’t affect LMI at all”. This actually highlights the major difference between an Offset Account and a Redraw. With a Redraw, you have returned the money to the Bank, and being able to access it again is not as simple as with an Offset.
With an Offset account, it is like having a Savings Account that is NOT joined at the hip to a Mortgage account, but it DOES offset the mortgage while funds exist in the “savings account”. e.g. If you have a $300k mortgage, and have saved $30k in your Offset account, then any Interest owing on the mortgage is calculated against $270k, not $300k. If you had $300k in Offset, then you would owe NO Interest on your mortgage.
And, AT ANY TIME, you can remove all funds from the Offset, and the mortgage remains as it was (i.e. you owe $300k and Interest on it). This last bit is extremely useful when changing a PPOR into an IP as your cash can become the deposit on a new PPOR, and the original $300k mortgage stays as a (now) tax deductible cost of running the (new) IP.
There are a few other things to consider (like, will your lender allow a 100% Offset, etc) but by and large, that is how they work. No LMI stuff – you are simply withdrawing your funds from a “savings account”>
Benny
Thanks Richard – please do if you can,
Benny
Hi WTR,
Well done – you are obviously giving this a lot of thought and effort. I recall doing similar figures when starting out – it all helped me to go into my first deal with confidence.I am not sure if your $60k to $75k is correct (these numbers are different in this day and age from when I started – e.g. WAY lower Interest Rates today) but certainly, it is worth doing the numbers as you have done. Just a couple of cautionary points to add here though:-
1. Some Banks won’t lend up to a full 100% of Rental Income, so be ready for that. One of our excellent MB’s could give you chapter and verse on this side of things – just allow for that possibility for now.
2. At some point, Banks will refuse further lending to you because “..you are too rent reliant!” (Um, it is a bit like saying a shop is too reliant on their regular customers, isn’t it?). Again, a MB will be able to guide you re this too.
Meanwhile, keep on searching – these little gems still sparkle, even though their lustre might be dulled a little !! Great find, and good hunting,
Benny
Hi WillK,
And a big welcome to you too – I hope you find good information on here to help you on your journey.You have indeed set yourself on a wealth path, and the inheritance can only help….. What you should do may well be quite different for different people, depending on each one’s goals. e.g. Paying off a rental IP would be a VERY conservative move, slowing your path to financial freedom. In return though, such conservatism is a very safe path too.
If on the other hand, you were wanting to GROW your portfolio (as you indicate you want to do) then I would offer an alternative to this :-
Put 300K in my offset account so I won’t pay any interest on my rental and purchase my second property and minimise the interest on that one. Use the income of the properties to pay off the bank loans and purchase further properties.
Terry has already mentioned “buy a PPOR if you don’t have one” – and that is a sensible use IF it suits you to do so (you might be in a situation where purchasing a PPOR doesn’t make sense right now – e.g. if working out-of-state, and wanting to buy only when you “come home again”).
My thought would be to pay down any/all NON-deductible debt – your PPOR (if you have one), car loan, credit card, etc and not even look at paying down IP (deductible) debt at this stage. Instead, use some $$ as deposits on more IP’s, then use the Offset accounts to “Store” cash (and reduce Interest too) until another good buy comes along.
Nothing wrong with paying down debt at all – but do it in the right order (NON-deductible first). The use of an Offset provides a way to simulate “paying down” an IP mortgage without losing the flexibility of access to YOUR $$ when a “better use” option comes along for you.
Benny
Hi Newbie,
Welcome to pi.com – we hope you are able to utilise the knowledge found in here to your advantage. And in sharing, you’ll be giving back to others who follow. You sound like you have some pretty good options to choose from, and have certainly been doing some very useful thinking there. Seems you have already covered a lot of possibilities, and maybe even dismissed some of them.Re other options or ideas, two that stand out in my mind are:-
1. https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697977
That one tells of what one young bloke managed to do on his own in about 2 years – and he was a Pizza delivery driver on ~$40k. Well worth a read just for the ideas presented (hint – he did a lot of renos).2. I’ve just finished Steve’s book “From 0 to Financial Freedom – How To Do it Today” and the main idea that I took from it was when he said “If I had to start again today, knowing what I know now, I’d start by creating an income stream” – only he puts it a lot better than that. For a few dollars, this book is well worth the read (and an ebook available too??) :-
https://www.propertyinvesting.com/store/0-financial-freedom/Hope they help somewhat,
Benny
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Benny.
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
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
Hi Woohah,
So the question is, Is equity worth it if the immediate on-selling prospects aren’t too great?
Were you planning to on-sell it soon – e.g. a flip? Or does it have a role to play for you as a renter first? Does it have reno capability, or subdivision? Do you have the funds to accomplish those, and does this fit with your goals?
It sounds like quite an opportunity on the surface. Using some figures as an example, let’s say you are purchasing a property for $200k and it would be worth $300k (50% equity increase, yeah?) You will have costs to buy it, and costs to sell it (inc CGT) if you suddenly needed to sell it. You may well need to discount it to sell again (much like the previous seller is doing, allowing you to buy cheaply).
How much would you need to discount it if you had to sell? Run the numbers – there are one or two possible surprises in there for you. One of these is the fact that you are buying with a 50% uplift, but it would only need to drop 20% or so on a resale to have you in serious trouble.
e.g. Sell a $300k house at a 20% discount = 300 – 60 = 240k Then subtract buy and sell costs, RE comms, any CGT, borrowing costs, etc and that remaining $40k could disappear quickly, even into negative territory.
Look for ways where you DON’T have to onsell it – will it pay for itself as renter, leaving you the Equity to draw against for other opportunities. It could be a great deal – but, as you have done, be sure you understand your Exit plan before buying.
Great question,
Benny
PS I just paid more attention to the Title – seems you are looking at half-a-million profit? Wow !!
If that is right, then that changes my figures in the example SUBSTANTIALLY, and perhaps even the whole message !! Anyway, it should give you a guide – and keep in mind that Stamp Duties on purchase can climb ferociously as the values go up. Take special note of these duties in your State !!It could also amplify any discount you may need to apply if you need to on-sell it quickly (fewer buyers can afford these higher-priced deals, so you are likely in a marketplace with other investors who will be sharpening their pencils before buying from you.
Re-doing the numbers:- Buy $1m, gain 50% = $1.5m Now, if re-selling quickly, a 20% discount brings you back to $1.2m. This leaves $200k to hopefully cover all buy/sell costs (esp Stamp Duties), RE agent comms, etc. There may even be a little left for you. But watch the discounting carefully – your 50% gain only needs a 30% loss to have you underwater !!
Hi Derric,
And a big welcome to you !! You’ve come to a good place. Good on you for taking a look at IPs – there is lots to learn, so don’t be in too much of a rush to go out and buy – just yet.Of course, you may have already done some research, thought about things, and are now READY to buy. But if not, do school up (on here, in books, meeting/talking to others who are already into property, etc). Have you thought about your goals, your strengths, the particular path you want to take? This latter could be – Buy and Hold, reno’s, development, flips, etc. Then drill down into your chosen way to read all about HOW to avoid the pitfalls and make it work.
As an example, when I started, I took 9 months to just learn before buying a thing. That “gestation period” wasn’t planned to take exactly that length of time, but it did “give birth” to a confident, budding investor (me) who went out and bought 2 IP’s in a week to start off, then a third within the first year.
I am a “numbers” person, so, much of that 9 months was spent developing spreadsheets that told me how things would work out if I went the way I was planning. My plan was to only buy existing houses, with good sized blocks – nothing flash, just good median or below properties, allowing me to renovate them down the track when the time was right.
If you are REALLY new (as in, not even sure of the basics) this thread below should give you some of those basic, good-to-know ideas :-
https://www.propertyinvesting.com/forums/general-property/4349450Hope it helps,
BennyI’ve been very happy with Kirstie at Qld Law Group in Springwood – they have offices in the city too, if you are nearer the CBD.
Benny
Hi Pati,
So, are you guys saying this is not a good enough investment?
I’m saying the example is looking OK – but is there an actual property on offer that meets those numbers? I reckon it would be hard to find one in this day and age.
The figures look quite OK, and yes, positive geared by a little bit – but when an ACTUAL property comes along, have them run the actual numbers to see if it really does measure up. I’m thinking there might be words like “Well, the numbers aren’t QUITE the same…” and then a whole bunch of positive features rattled off that have you thinking “That sounds good”, then a contract put under your nose….. etc. And the ACTUAL numbers might see you -$50 each week rather than +$36. Who knows !!!
Just be careful – those numbers are fine, but it seems they are an EXAMPLE,designed to pique your interest.
Benny
Hi eyelove,
If we were able to access some of the equity to buy the PPOR it would make things so much easier as we had earmarked the cash on hand for other purposes.
As long as you don’t “contaminate” any current loans on the IP that are deductible, then go for it. Go for a totally new loan against the IP – the new loan will be non-deductible, but ensure it is a new and SEPARATE loan and not a current loan increased (as Catalyst warned). Set the Offset up against that new one, and you are on your way.
That is the ideal one for an Offset, and rents, etc should go into that one.
Benny
PS the usual – you know “This is not advice, just my opinion”…. ;)
+1 to ltroeth
Benny
Hi Adrian,
I’m not an accountant, so do check my thoughts with the right person – but here is what I believe to be true.Purchase Costs are allowed to be claimed over a 5 year period – so, not as a lump sum. If you were to sell again in the future, any unclaimed amounts remaining can be cleared at that time. I think Building and Pest would come under Purchase Costs, but could be wrong.
I would think any reno items would be difficult to claim as “maintenance” (you are not renting it yet) and would likely be added on to the Capital Cost of the property. You effectively “get that back” via a higher cost base, so less CGT on eventual sale. I think the ATO presumes that you would have paid less to purchase a house needing a renovation, and any costs to do so become part of the Capital (along with an expected lift in Equity, yes??)
But then, you DO get some payback in Depreciation, and the new kitchen items would boost that total, allowing you to claim 37% or so in the first year as a tax deduction. So, some relief there….
Hopefully an early revaluation showing Equity growth will allow you to borrow back YOUR money (plus a bunch more hopefully) thus effectively providing another Deposit to go do it all again.
Anyway, do check my answers with your accountant or other qualified adviser – or maybe other posters can,
Benny
Hi Claudio,
Good on you for asking the questions first – smart move !! You have already received some invaluable knowledge from several qualified members, each offering good reason to question this loan and where it may lead.This is a very important decision for me and my family and I am a bit scared to take the wrong choice, I hope someone can help me to find the best (if there is one) solution./
Absolutely right. I’d suggest you check the other answers you have already received, and contact one of the repsonders (maybe the one whos response seemed to “click” with you. But really, any and every one of them would be able to explain what loan type would be best for you, and (maybe) WHY this loan could become a problem into the future.
Pick up the phone and call one of them. :)
Even as a non-adviser, I could see several holes in the advice you have already received fro. Never ask a barber if you need a hair-cut – you know what the answer will be, right?) :p Get the answers from one of our residents – I’m sure you will be much more confident and knowledgeable after spending time with one.
We are buying our first home
Well done – your needs might be different to those of investors right now, but remaining flexible is the key. Who knows – you might want to become an investor a few years into the future. Thinking of your loan structuring NOW is a really good move. Well done.
Now, where’s that phone!!! :p
Benny
PS Just to help you get up to speed on a number of basics, try this :-
https://www.propertyinvesting.com/forums/general-property/4349450Benny
Hi Claudio,
And a big welcome to you – I see this is your first post.On an loan of 450000$ means an interest of 60000$ in 30 years, 2000$ at year, and this is the reason why we have decided to go with them.
Just so you don’t get too confused later on, I wanted to point out that you are missing a zero on both of those amounts.
One year’s Interest is ~$20,000 and not $2000 (otherwise everybody would be wanting one !!!) :p
Therefore, you will be paying $600k over 30 years. Still a good rate in this day and age though,Benny
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