I'm in a fantastic position – due to the boyant market and hard work, more than skill on my part. I own my own house worth $750,000 and have investments worth $3,000,000 and owe $1,400,000. However, I would really love my dream house now with ocean views. I have found such a house with Ocean views and on a 1133sqm block with subdivision potential (when deep sewerage comes in perhaps 3 yrs away). They want $950,000 for it.
I have a $500,000 equity loan ready and plan to use this to gain further finance to fund the the whole thing, no money down. There should be enough in the Equity loan to repay the mortgage for 2 yrs with about $100,000 left over.
In your opinion is this a good strategy as I prefer not to sell anything that I already own. Or is this the fastest way to disaster. Would I be better to sell some properties that I have OR should I invester further and increase my asset base wider with more medium priced properties and postpone my dream home for afew years? (in which case it will have gone up in price).
Who said having choices was fun!!!!!????
I would really appreciate comments from the high financiers out there! Help.
Kind Regards
Anita"I have a $500,000 equity loan ready and plan to use this to gain further finance to fund the the whole thing, no money down. There should be enough in the Equity loan to repay the mortgage for 2 yrs with about $100,000 left over."
Good financial position to be in Anita;
This sentence is a bit confusing though; it sounds as though you are planning to use the equity to repay the loan on the new dream home?
If this is the case, you are really only using one loan to pay another. Unless you are paying some actual cash off the Principal as you go you are going to end up with your loan increasing – the interest will be "capitalising".
The problem with this is that you will have
a) a loan which is not tax deductible because it is your PPoR.
b) after a few years your loan will be higher than it is at the start.You get no tax relief on your loan, so you need to be able to carry the loan repayments yourself through Personal Income, and in the event that you lose your job, you get sick, your property goes down in value due to a slump etc, and a combination of these forces you to have to sell, then you will owe more than the home is worth.
If you really have your heart set on this house, it may be better to liquidate some of your investments and pay as much cash as you can for the house, Your exposure will be a lot less in the event of some adverse life event.
You can always access the equity to do more investing, and do 'no money down' deals where you can offset your commitment through tax deductions and income in the form of dividends or rent etc.Thanks Marc
I understand what you mean. I did get to speak to my elusive accountant today and he said similar to you and to sell down. Although I didn't mention above that I would purchase it as an investment at first as the owners are building and would like to rent back. As we are in no rush to move we would allow them to rent back for as long as needed. This would also give us some bargaining power on the price.
If I was to fix the loan surely the repayments will be the same for say 2 year after which I can revalue the property and draw more equity. Isn't this a strategy that many guru's use – to live of equity? Also the $2.4 mil I have in equity will have increased after 2 years and also all the rents. Am I still strying to bite off more than I can chew? The thought of selling anything off makes me cringe! I do appreciate your professional advice!
Kind regards
AnitaHey Anita,
good to hear you have an automatic tenant.
Be careful that when fixing the rate on your loan you won't be incurring any fees to change it back should you wish to, otherwise fix it for the term you mentioned and let it go the distance.Living off the equity is something we do ourselves – not totally though, as I am a bit of a conservative investor – I am very risk averse, so we stay well within the supposed average yearly (or historical) price increases. I work on property values going up by a conservative 5% per year (I think historically it is around 7% or so), and we use well below this.
Of course, to get to this point you have to keep acquiring property that keeps going up in value; if you sell it you won't be able to live off the equity.
Many people don't do this – they acquire a good performing investment property, then they sell it after a few years, spend the money and have nothing left to show for it and lose out on future cap growth.
I think it comes back to that old mentality of you must become debt free. I don't have a problem with spending some of the equity, knowing that the value is going up more each year than I can spend.
Hello Anita
Your scenario above of capitalising the interest on $1M non deductible debt would give me nightmares.
People who live off equity don't usually do it by taking out $1M to begin with unless they have considerably more equity than you have at the moment, I think..
They usually take out something like for eg. $100K per year to live off which gives them an interest bill of about $7K which will be capitalised. They also realise that if their equity doesn't increase enough to take out another $100K next year, then they will just live on less that year. You will not have that luxury. Your interest bill will just keep rising. Have you thought about the next interest rates rise in your scenario?. Or the one after that.?
I'm with your accountant. Sell something or defer the dream.
wish you well
ElkaHi Anita,
I find that you're often better to ignore advice when the advice ignores your goals.The reality with this type of thing is that it's usually the time line of arrangements that dictate your success for the short term. I've found that you're best to arrange the largest LOC total prior to financing the next place. Ignoring this can cost years of progress.3.75M may access 2.625M of lending via 70% No Docs. Less the 1.4M of debt = 1.225M of Low Doc LOC's.I find the trick is to access this first, prior to buying anything else. A mixture of lenders reduces the exposure of each and makes for less reluctance on their part. I'd consider splitting the lenders between those with different mortgage insurers.Once this is organised, (splitting lender exposure again) an option I'd consider is to take 30% of the new buy price (if 950k, its 285k) from one of the LOC's to fund the deposit from yet another Low Doc Lender to get your dream place. If after spending 300k or so from the LOC's to get the 950k place, that's still over 900k left in the LOC's.Now, I'm not sure where your places are, or if you need Low Docs to do it, though equity living obviously works best when your portfolio is making more than you're spending. With the new buy @ 950k (plus legals etc), your new portfolio is at 4.7M. If it averages 10% per year, that's 470k for the first year.Considering all income and tax back, the 900k could last for some time. If you could stretch it for 5 years, you may have another 2M in equity untapped. There's also the option of selling something in years to come, to reduce the debt on the new place if that makes you more comfortable.For many people, so called sensible living and budgeting becomes the norm, thereby removing inspiration. For often the same people, property was always the vehicle that was supposed to provide for dreams and their ultimate lifestyle. We all say that life isn't a practice run, though most of us spend it watching better lives on television.There's a lot of ways to convince yourself of any decision that fear or ambition has led to.(With paragraphs?)
Hi Anita,
I find that you're often better to ignore advice when the advice ignores your goals.The reality with this type of thing is that it's usually the time line of arrangements that dictate your success for the short term. I've found that you're best to arrange the largest LOC total prior to financing the next place. Ignoring this can cost years of progress.3.75M may access 2.625M of lending via 70% No Docs. Less the 1.4M of debt = 1.225M of Low Doc LOC's.I find the trick is to access this first, prior to buying anything else. A mixture of lenders reduces the exposure of each and makes for less reluctance on their part. I'd consider splitting the lenders between those with different mortgage insurers.Once this is organised, (splitting lender exposure again) an option I'd consider is to take 30% of the new buy price (if 950k, its 285k) from one of the LOC's to fund the deposit from yet another Low Doc Lender to get your dream place. If after spending 300k or so from the LOC's to get the 950k place, that's still over 900k left in the LOC's.Now, I'm not sure where your places are, or if you need Low Docs to do it, though equity living obviously works best when your portfolio is making more than you're spending. With the new buy @ 950k (plus legals etc), your new portfolio is at 4.7M. If it averages 10% per year, that's 470k for the first year alone.Considering all income and tax back, the 900k could last for some time. If you could stretch it for 5 years, you may have another 2M in equity untapped. There's also the option of selling something in years to come, to reduce the debt on the new place if that makes you more comfortable.For many people, so called sensible living and budgeting becomes the norm, thereby removing inspiration. For often the same people, property was always the vehicle that was supposed to provide for dreams and their ultimate lifestyle. We all say that life isn't a practice run, though most of us spend it watching better lives on television.There's a lot of ways to convince yourself of any decision that fear or ambition has led to. Just make sure you consider all of you options and not just those options that fear will convince you of.Thank you for your comments above they are really appreciated and given me lots of things to think about. We are negotiating at $920,000 with rent back at $300pw for a year.
We are also thinking of selling 1 or 2 properties so we are not so stretched.
LR – I do understand your theories and agree entirely about watching other peoples lives on TV. I constantly remind and justify to myself that we are only here for a short time – so when do you ever get that dream??? I also agree about getting as much in the LOC as possible. I have done that already, as you have said thru a different lender. I have approx $645,000 LOC but this is to build 3 houses this year (behind existing houses on sub-div blocks). So I have left that out of the equation for now so as not to confuse things. I feel inspired by your words and feel that fear and lack of knowledge is affecting my judgment. I will let you know what our decision is going to be. The ball is back in our court just now.
All the best and thanks everyone for your kind and professional advice.
Anita
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