Forum Replies Created
Thanks again for another report, Mike.
Cheers
Gezsjh_85 wrote:If your planning to invest in multiple properties I would stick to one bank if possible and have a plan, every investor will hit a wall where the bank will lend no more money, that is unless you have good cash flow as well.Hi sjh_85,
Just curious to know why you would stick to the one bank? As you noted in your post, it is highly recommended not to x-collateralize your properties when you're using one lender – do you know if this is an easy thing to avoid, or would the banks put the pressure on to do so?
From what I have heard, it's best to not have all your eggs in the one basket but to spread out and use different lenders if you plan on having multiple investment properties.
Thanks again, Richard and S/C.
In response to S/C, I do go a bit overboard sometimes in keeping statements etc in order, but it helps me in the long run – I hate being disorganised.
I don't have any investment debt at this point in time – personal debt. My wife and I have a mortgage for our PPOR, which, as this thread has taught me, can be a great starting point to get into the property investment market with the use of equity. I will be honest and admit that I have lost some motivation as of late, but I'm hoping to get back into the swing of things by attending Steve McKnight's upcoming Rescue Recharge Revival Seminar. Hopefully it will give me the motivation I had when I left the 3 Day Mega Conference in Sydney… Hopefully I will get off my rump and act.
Thanks to all for your positive and honest feedback.
Cheers
GezStumpCam wrote:Gez it's fine to pay off your PPoR loan or save it; it's all good equity of one form or another towards your next IP. Every single dollar of equity you create by either paying off your loan, putting into an offset account or simply waiting for capital growth means that you can borrow another four towards your next IP. You'll probably be surprised how much you can borrow already if your PPoR is just a few years old. It may come down to your debt servicing ratio rather than your equity. Of course the rent from an IP counts towards your income (the banks only recognise about 75 to 80% of it though) which helps. It's a little juggling act we all have to go through as property investors.
Just one thing Gez, if there's any chance you'll be wanting to convert your current PPoR into an IP one day, then you'd be best to not pay any of the loan; keep all savings in an offset account to preserve the tax deductability of your loan.If only I knew 25 years ago what I'm preaching now! We went all out to pay out our home loan in just one year with both of us working and sacrificing just about everything so I could go back to uni for four years with no home loan and rent to pay. After uni we wanted to build a bigger house, but had to sell our first home so we could afford the new one. If I could go back in time, I'd tell myself "Don't pay off that first home loan you fool! Save all your cash for the new home and convert the first one into an IP!" I don't think 100% offset accounts were invented back then, but it wouldn't have made a huge difference for just one year. I sold that first home for 53k; they're now getting 400k for the same type in the same area.
Uni educated me on how to make gizmos, but not about property investment. I know which one pays better in the long run!
Cheers, S/C.Hi S/C, Sorry for the delay, I've been away for a bit. Thanks for the great advice. My wife and I don't plan to turn our PPOR into an IP – neither of us are the type who like to move around. I'm comfortable here now and don't intend on moving anytime soon. Hell of an effort to pay off your house in one year. Although now you're kicking yourself, look at the positives – I admire the fact that you had the motivation and drive to work your butts off, make sacrifices, and stick to you guns. You achieved something back then that isn't easy through your determination. That's the kind of mindset I'm trying working towards.
In terms of where to put my money, I read and hear a lot about putting it into your home loan as interest rates on savings accounts are pretty average now. I used to be so proud of my savings account… until I finally found out that the interest rate had dropped by around 3%. (They don't seem to tell you these things)
My aim now is to put more into the home loan (or offset account) and less into our savings account… actually, would there really be much of a need for a savings account? Or should our offset account cancel out the need for a savings account? Thanks everyone
StumpCam wrote:Sorry Gez, been away for a while. The concept is a lot more general than just one property. Borrowing to the maximum possible simply means buying as many properties as you can within the limits of your equity and debt servicing capability. You are simply trying to maximise the total capital you control. The exact percentage borrowings for each property are just details.Kidd1 you've got the right idea, but you need to clarify it a bit better. You need to write something like: Owning $10Mil of property with a debt of $9Mil is better than owning $1Mil with no debt. If you say you own 10% of $10Mil, it implies you only have a 10% share on the deed. You have to own the whole $10Mil as far as the deed is concerned, even though you owe $9Mil on it. (I know that's what you meant, ie you meant the bank kinda owns $9M worth)
Cheers, S/C.
Hi S/C,
Thanks for your reply. My question may have sounded silly but being a newbie, keen to get into the game, I needed to clarify.
It's funny because when my wife and I bought our PPOR almost a year and a half ago, our understanding was to pay off the home loan as quickly as possible and at the same time, wanting to get into property investing, try and save money for a deposit. Back then I didn't know anything about pumping money into your home loan on your PPOR, as that could be the source of a deposit for an IP. The whole time I'd been trying to save money and be patient thinking that would be our deposit. I'm glad that isn't the only way.
Now it's just a matter of doing more due diligence and taking action on what you guys have educated me in.
Thanks all – very much appreciated.
Gez
Thanks for another report, Mike.
Will definitely request more.
Cheers
GezStumpCam wrote:gezzy wrote:I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
GezHi Gez, I'll put my 2c worth in and try to answer that: Borrowing the maximum means you have the maximum possible value of property in your name. If all your properties increase in value by say 5% pa, then if you've managed to stretch your borrowings to own $2M worth of property, then you've made 100k of CG after a year. If you've been more conservative and only borrowed enough to own $1M then you've only made 50k of CG.
S/C.Hi S/C,
Thanks for the reply and the example – unfortunately dumb-dumbs here is still having a little trouble grasping the above concept. When we say "borrowing the maximum amount possible," are we saying, as an example, "borrow 100%" (if it were possible) as opposed to 95% or 90% etc?
Other than the issue of deductible interest, what would be the difference in borrowing say 100% from a bank to purchase a property and buying it using 100% cash? How does one give you a larger potential for capital growth? Is that even what was suggested with the comment about borrowing the maximum amount possible?
Cheers!
GezAlso thanks to KY, obie1 and yorkie for the replies.
obie1 wrote:Sorry Gezzy I don't need to hijack your thread but hopefully this info helps you anyway…No dramas, Obie. The more info the better
Cheers
obie1 wrote:Hi Gezzy,
This is my first post on this site but hope I can help you a little.
I used my PPOR equity for my first IP and it has worked out great.
I borrowed 105% for my first IP using my PPOR equity as a 'deposit'. This covered loan costs and Stamp Duty.
My lender for my IP now has a second mortgage on my PPOR (I have over 250K equity in my PPOR)
In my case it has worked really well as I bought my IP for 415K in Dec08 and it is now worth $435k+ to my estimates from recent sales of the same sort in the same area, without doing any work on the property other then cleaning the gardens up a bit.
My IP is now worth more than I owe, only 6 months after purchase and due to low interest rates and high rents in Darwin it is paying it's way, covering the interest only payments already. (renting for $500/wk)
My advise is……..buy low and reap the capital gains on settlement. I went to over 60 open houses in the area I was looking at buying in and built a good raport with agents in my area. Be ready to buy if you look at a property, have your finances ready, you want to be able to sign a contract if you are confidant that the property is the right price, on the spot. (both my current PPOR and my first IP contracts were signed within 1 day of going on the market and both were for the asking price)
For me using my equity in my PPOR was the right thing to do, but it depends on how much equity you have in your PPOR, the capital growth in the area of your PPOR and your IP and how good you are at buying under market value.
I could have taken $83,000 from my offset account on my PPOR loan and paid the 20% needed to avoid LMI and make my IP stand alone but that would have given me $83k more debt that was not tax deductable and only given me a tax deductable debt of $336k of which the interest would be tax deductable. As it stands I have a debt of $434k on an interest only loan that is fully tax deductable and any extra cash I pay off my PPOR non deductable loan.
So….. I recommend using equity in your PPOR and giving your IP lender a second mortgage on your PPOR as long as you follow due diligance and research your IP purchase so you increase capital when you buy or by increasing capital gains by renovating or market forces in your area.
I intend to remove the second mortgage on my PPOR given to my IP lender as soon as my IP gives me a LVR of 80%, this will take a few years.
I would use it again if I needed to though for another investment.
Hope that helps…
OBIE
Thanks OBIE, that's a great post and I'm glad things have worked out well for you. Your post has helped me understand more the benefits of using equity as opposed to cash as a deposit. Plus it's always good to hear other peoples' success stories.
I'm just not for x-collateralising as I've read it pretty much gives the bank a strangle-hold over your… well, over you. I could be wrong but I think Steve noted in one of his books to not have all your eggs in the one basket. I think it was also noted by one of the speakers at the Mega Conference in Sydney that it's not recommended.
I'm not judging or having a go, though – you sure know more about what you're doing than I do.
Cheers
Gezgibbo1 wrote:There are many different strategies used by different people. One of the advantages of 20% deposit is reduced lending costs. One of Steve's main aim's is finding CF+ properties, this is easier when borrowing smaller amounts.Another strategy is to borrow the maximum amounts possible (nowadays still a cpl of lenders around the 93-95% LVR) borrowing the maximum amounts is giving you a larger potential for capital growth. This then enables accessing equity to fund future purchases. As the process continues your maximum borrowing in individual properties is reduced. If you have a PPOR and an IP its possible to get a 95%LVR on both depending on the security of the property, income, etc. Down the track lenders wont like you having 30 properties all streched out to 95% LVR. Here they acknowledge the additional cost of LMI but this is weighed up against the capital growth potential and future buying power of that additional capital growth.
This is why it is important to read up on many different strategies used by different people and then finding one that you are comfortable with. Borrowing larger amounts carries higher risks, you must judge if this will be balanced out by higher gains. Also some strategies work better in different climates. Some strategies are harder to finance in the current climate.
Thanks gibbo1.
I have been doing as much reading and research in the little spare time I have in order to learn and work out a strategy that would suit me, but still so many questions to ask – I guess it's all part of doing your due diligence. We are lucky to have a forum like this where there are so many helpful people. My strategy was to save up a 20% cash deposit but since I started this thread and received many positive responses in relation to using equity, I'm looking towards that option. Saving the cash will, and is, taking forever!
I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
GezHi All,
Another question – as stated in my first post, Steve McKnight recommends saving a 20% deposit to purchase an IP as opposed to 10% to avoid paying LMI. I just wanted to know what your thoughts were on this? With the positive responses I received in regards to using equity as a deposit, I'm now wondering how much should be used as a deposit for an IP – 10% or 20%?
Your advice would be greatly appreciated. Thanks in advance.
Cheers
GezWell done, spudway. You copped a lot of crap from your post when all you were seeking was help – it's good to hear you got finance in the end. Hope all goes well for you and your family.
Cheers
GezThanks also to Investors Zorba and Qlds007 for your input.
I really appreciate everything that everyone has to contribute.
Cheers
GezTerryw wrote:Hi GezzyBest to explain with an example.
you have a $100,000 home loan
$20,000 cash
and wish to buy a $100,000 IP.what would you do?
most would use the $20,000 for the IP as deposit, so end result is
$100,000 home loan = non deductible interest
$80,000 IP loan = deductible interestBut I would do this
$20,000 deposited into the home loan
$20,000 borrowed from the home loan
$80,000 borrowed for the IP
=
$80,000 home loan
$20,000 + $80,000 investment loan = $100,000 IP loanYou would have the same net loans, but increased your deductible interest.
Of course you will need to set the loans up properly, best to have a split on the home loan so the $20,000 is separate. Also best to have all loans IO with a 100% offset account.
Hi Terryw,
Thanks for taking the time to post the easy to follow example – it helps make sense of something I was not familiar with until you mentioned it.
Cheers
L.A Aussie wrote:It doesn't matter what the price of the IP is, it is either bought with cash and borrowings, or just borrowings, or just cash if you have enough.
If it was valued at $200k and you could buy it for 80% of it's value, then yes, you would have some equity.
Thanks again, Marc.
Cheers
kum yin lau wrote:Hi, I used my PPOR equity [paid cash when I bought it] to buy a 2nd, 3rd, 4th, 5th, 6th and 7th and 8th and 9th property. 5th and
6th are commercial and 7th and 9th are devt properties. 8th was PPOR 2 and supposed to be a devt but it was too hard and I sold.I'd always X collaterised because I'm in the category of 'hard to get funding' Whenever someone said they'll give me a loan, I always said 'Where do I sign?'
Be careful though if you're buying your 1st IP now. Many areas have peaked and prices may stagnate or even go backwards.
Good luck,
KYHi KY,
Thanks for your feedback and well wishes. If you wish to go into more detail as to how you achieved what you did, I would be more than happy to read it.
Cheers
Thank you Jamesy and RedRoof for your replies.
Terryw wrote:of course!Most people use the equity in their home. It wouldn't be a good idea to save up a separate deposit for an IP if you still have a loan on your home as you would be losing tax deductions.
Hi Terryw,
Could you please explain how you would be losing tax deductions? I've read many of your posts and value your advice and opinions. Thanks for the reply.
L.A Aussie wrote:The other "con" is that you have no equity with 100% loans, and if somethinbg goes wrong at the start and you need to sell, you may have to sell at a significant loss.This wouldn't be the case though if you were lucky enough to purchase a property at a bargain price, well below market value, would it?
Thanks for your reply, L.A Aussie
I think at times it doesn't matter who you build with, some people will have problems, others may not. My wife and I built with Porter Davis (in Point Cook) and have been in our house since March of last year. We have had nothing but headaches since we moved in and just last night we came home to one of the toilets not flushing. We have had to write letters in the past threatening legal action just to get a response out of them in relation to problems, defects etc. Their displays are beautiful (which is no surprise) but their customer service and actual work is appalling. We vowed if we ever had to build a house again, it definitely would not be with them. But like I said, that's been our experience and I guess not everyone has problems. But so you know, I have 3 workmates who have built with Porter Davis in Tarneit, Point Cook and Sanctuary Lakes and every one of them have had problems. I was warned but I didn't take the comments to heart – I've learnt the hard way but it's been a long, painful, frustrating learning experience.
Good luck.
