Hi Bec,

Is it the best idea for me to move out? What is the next step do I move into the next one too and so on until I can build up enough equity to buy “my home” or is there an easier way to do this?

As Terry indicated by living in the property long enough to establish it as your home (principal place of residence) you will have the advantage of this property remaining CGT free for 6 years after you move out. This can be a big kick along for your investment journey. Bear in mind you can, largely, only have one PPOR at any one time.

As to whether or not is is the best thing for you to do – well that depends [].

One of the downsides of owning (or buying) your own home is that the interest payments are not deductible and as such constantly upgrading to a bigger home can hold you back unless you can meaningfully use the equity as you move along the journey.

But then you do have a place you can call ‘home’.

Derek

derekjones1@bigpond.com

Hi Jeannie,

Without knowing Heritage I can only post a copy of a response I gave to some else asking similar questions about another group. Hope these are of use.

Some thoughts for you to consider.
1. How long have Heritage been in business?
2. How many investment properties does your ‘consultant’ own?
3. How long has your consultant been investing?
4. How does your ‘consultant’ earn their money?
5. What will they get out of each and every purchase?
6. What service do they offer?
7. How much does it cost to use each aspect of their operations?
8. Can you use your own mortgage lender? property manager? valuer? If not – why not (it is a free world)?
9. What sort of after sales support do you get?
10. Does their approach fit comfortably with you?
11. How much pressure is bought to bear?
12. Are all decisions made in Heritage’s presence?
13. Are there rent guarantees? (Run away fast if there are!)
14. How does the price compare to similar properties on the open market?
15. ASIC/ Ministry of Fair TRading Issues?
16. Where have Heritage’s past sales been? What were they? How much is the open market paying for them now? What are they rented for now?
17. What are similar properties (to the one being considered) renting for? Check with a couple of REA in tthe area?
18. What is the vacancy rate in the area like?
19. What infrastructure is planned for the area?
20. Are brochures high on ‘gloss’ and ‘glitz’ and low on facts?

Just a few to get you started.

At the end of the day only you will know what suits you and your situation.

Derek

derekjones1@bigpond.com

Hi Ken,

1) is it true that if we buy a house and make repayments, the first 2 or 3 years’ repayments will be the interest part and thus we won’t have too much equity in the house?

Yes – pretty much so – provided you are only making minium payments. I recommend you find a loan calculator and play around with the various options to see what each option does for you bottom line.

http://www.realestate.com.au/cgi-bin/rsearch?a=loan&t=res

2) is it a “bad” idea if we try to get a commercial loan to buy a business by borrowing against out PPOR house?

Without knowing the ins and outs of your situation I would suggest the more distant you can keep the two loans the better off you will be.

Definitely one for legal advice to ensure you and your home and business are as protected as much as possible. Given the implications of a wrong decision at this time – this is one that should be ‘checked out’.

Derek

derekjones1@bigpond.com

Hi Lisa,

Good luck with your search for a ‘mentor’ – you may also find it useful to read a few posts from some of the more knowledgeable people here (and who are in tune with your investment thinking) and send them a PM – they can only say no.

You may also want to consider the merits of at least a couple of people this way you can have some checks and balances in the process.

However, all said and done, ultimately the decision has to be yours.

Good luck with the hunt.

Derek

derekjones1@bigpond.com

Hi Leswon,

In a round about way interest only could be considered ‘dead money’ as you describe it.

You need to change your mindset about CG – you do not need to sell the property to realise the gain. It is possible to release the equity for other investments and/or cash. Ultimately it depends upon your investment philsophy.

To give you an example – assume you bought a typical, median priced property in Perth in 1970 when they were $16000 and held it using interest only loans up until now when the median price in Perth has just reached $236000.

Your debt remains at $16K and over the 34 years you have held it you have paid around $49K (all tax deductible @ $28/week) in interest on an asset that has increased in value by $220000. At the same time the median rent has increased considerably and would be making this asset positively geared.

While $16000 was probably ‘expensive’ 34 years ago – today it is a little more than petty cash.

Obviously in this example there is no consideration for repairs etc but I hope this clears up the benefits of interest only.

Derek

derekjones1@bigpond.com

Hi Ken,

I suggest you do a ‘google’ search on Boggabilla – this will help you determine whether or not the property is right for you.

For me a population of 639 is too risky. The town itself is 769km north west of Sydney and can be found on the Q/NSW border near Goondiwindi.

As I have said in another post – Steve also reinforces the need for the property fundamentals to be right – it isn’t just a matter of getting a cashflow positive property.

Derek

derekjones1@bigpond.com

Hi Leswon,

Was going to let someone else have a go at this for you but….

Leveraging available equity off your existing property appeals most to me – this way you can (to a certain degree) have your cake and can eat it too.

One of the first issues you will face is how much security a lender will recognise in your property. I am sure it will be considered ‘rural’ and as such they will not, in the main, recognise it at 80% – so the ‘gold mine’ may not be as big as you think. One of the brokers will confirm or reject this assertion – it is possible that some of the less mainstream lenders may go close to 80%. I’ll await their learned opinion too.

Your long and short term goals will really determine what is right for you – with your short term goals being little stepping stones towards your long term success.

A key question is what is it you want from your existing property – given it is 50 acres I am sure there are some ‘lifestyle’ considerations to be had that will really determine what you can/want/need to do. How much have you ‘outgrown’ your existing property? Is there further ‘outgrowth’ to be had? manage in the future? How long before you become ‘too old’ to manage 50 acres? Is this an issue?

Do some research to determine what effect building a larger house or kit home will have on the value of your property. Consult local REA/valuers to get an idea before you committ to anything.

Over capitalisation may hold you back for an inordinate amount of time.

I cannot think of a reason for not using your equity to fund the ‘deposit and costs’.

The alternative (apart from buying under value) is to save your hard earned cash. Bear in mind these savings are post tax dollars and for every $100K of purchase you will need $25K (excluding LMI) – how long will it take you to save $25K?.

I use a broker who lives 400km away and I do all my business by phone/fax and email.

Unless you are a ‘face to face’ person then it isn’t necessary to see your broker on a regular basis. I am sure the brokers who regularly post here would look after your loan interests as distinct from being qualified and/or legally able to give financial advice.

Derek

derekjones1@bigpond.com

Hi Leswon,

Loans can be altered fairly easily from I/O to P & I without any drama. I suspect the ‘bank’ would love you to change to P & I loans as they will reduce their exposure to you, and the loan is being paid off, albeit slowly.

“If so, all money already paid towards the IO will also be taken into consideration and deducted?”

There are no deductions to be made. If you have an interest only loan of $100K – you will still owe $100K as such all the payments made up until that moment only cover your interest bill.

So your P & I payments will be based on the full $100K loan.

Derek

derekjones@bigpond.com

Hey Lisa,

My brain has an answer.

Assuming all the properties were identical and bought today. A bit simplistic but you get the drift.

you would need 500 properties
you would have put in around $6m for deposits
have total borrowings of $18m

All for $50K/annum.

Assume you held property to the value of $1m and it grew by 5%.

5% of $1m = $50K.

And if it were neutrally geared all at no cost.

Just me being contrarian[:p]

Derek

derekjones1@bigpond.com

Hi Leswon,

As a quick calculator a lender will recognise (and lend) up to 80% of the value of your PPOR – income restrictions may come into play depending on the various numbers.

Here is a little sum for you[]

Value of home X 80% – existing PPOR loan = equity available.

You will need around 25% of the total price of the investment property for deposits and costs.

Buying an IP for $200K – you will need available equity of around $50K to fund the purchase of the property and to pay purchasing and borrowing costs.

This figure can be reduced if you are prepared to pay Lenders Mortgage Insurance.

Hope this helps.

Derek

derekjones1@bigpond.com