Hi all,
I’m a newbie to this forum. We want to start an investment portfolio but want to do it correctly right from the start.
We are a family of 2 adults and a 6yo daughter. I have a Commonwealth super pension and a part-time job totaling over $40,000 pa. My wife is between jobs but has an anticipated part-time income in the near future of about $20,000 pa. Our daughter is in Year 1 at a private school (fees approx $10,000 pa).
We live in Adelaide and our PPOR is a freehold unit valued at $260,000. We own a block of land (freehold) in Port Elliot valued at about $150,000. We conduct our banking with the CBA and have about $50,000 in a Cash Investment Account.
Over the last 5 years we have dabbled in vacant land with some good success, but now wish to be more enterprising by developing a multiple IP portfolio.
We have just set up a Family Trust and now need to know what loan structure is best for us and how to go about it.
An initial approach to the CBA has resulted in a very unimaginative, rigid “pre-approval” for us to purchase a $350,000 house with a rental of $350 pw:
1. $254,000 for 30 yrs @ 8.32% serviced by husband’s income $40,000 & rent $18,200;
2. $395,000 for 30 yrs @ 8.32% serviced by husband’s income $40,000, wife’s income
$20,000 & rent $18,200.
We have read with interest regarding the problems with X-collateralising and understand the importance of 20% deposit and 80% loan (ie 80% LVR) for Mortgage Insurance purposes.
To utilise the 50% of profit (for CGT purposes) from the sale of the Port Elliot land, we have to wait 12 months from settlement on purchase which was in January this year. We’re sure it’s in our interest to quit this block to free up funds for deposit(s) on IP, but are unsure whether to sell now and quit any loss or wait till after Jan 2008.
We would appreciate any advice regarding how we should proceed with loan structuring.
Peter
I suggest people just establish LOCs on existing property to 80% LVR, then use this for the deposits and costs of the new properties with each new property getting its own 80% LVR loan. The LOC (Line of Credit) can be used to pay ongoing expenses and possibly any shortfalls on the interest for the other loans.
As you wife is not currently working it would be good to not have her guarantee any loans – no point as she has no income. If she guarantees loans then you are adding risk unnecessarily and are reducing her borrowing capacity. If she is a trustee, maybe look at removing her – but talk to the person who set it up as this may effect beneficiaries.
Do a few loans with you guaranteeing, and then maybe set up a new trust with the wife taking on new properties later. You both should be able to benefit from each property as you are related.
All loans should be IO, and maybe you need a 100% offset account on one loan. Use the offset account to store any spare cash, don't pay off loans.
To maximise borrowing capacity look at using the big banks now, don't use LMI. This will enable you to get more No Doc loans down the track.
Also if you set up a large enough LOC, you can pay cash for properties and then mortgage them after settlement. This way the bank will not be limited to lending based on contract price. So if you purchase under valuer you may be able to end up getting a higher loan.
eg. Buy for $80,000 cash. Then apply for loan. Bank values it at $100,000 and you get a 80% loan = $80,000. You release this $80k into the LOC and repeat the process.
And have you thought about keeping the land and building on it? If you sell you will have various costs and then stamp duty again when you buy a replacement property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Peter,I'm from Adelaide too, its good to see someone else on this forum from SA. Firstly you should unlock the equity in your PPoR with either a LOC or an offset account facility. They both operate in a very similar fashion. However depending on the amount you borrow and which lender you use depends on your interest rate and the fees associated with the loan facility. You can do this to 80% LVR avoiding lenders mortgage insurance, however I know some serious investors who go up to 95% LVR, it just depends on what risk you are comfortable with. You would then use these available fund for deposits and costs of future investment properties. Again you could use funds putting down 20% deposit and borrowing the other 80%, however there is also the option of putting down 5% and borrowing the other 95%. There is no right or wrong answers, it really depends on your goals, what you are comfortable with and your investment plan over the long term. Also, think about what you want to do with you vacant land as it could be geenrating income for you if you built on it. This is quite a basic overview.Peter, I'm think of starting a property investment group in Adelaide so investors and like minded people can get together once a month and share their experiences and views on things. If you are interested send me an email. All the best with your investing.MattProperty Investor and Financial Strategist [email protected] property specialists
1. Thanks Terry.
Establishing an LOC on our PPOR and using it the way you suggest seems a good way to go. My wife is a trustee of the FT and hopes to gain employment in the next month or so, before we buy our first IP. With that scenario (and assuming it eventuates), I think the current FT arrangement is okay. We plan to buy IPs in the name of the FT.
Would you:
. expand a little on why “All loans should be IO” and the mechanics/thinking behind “a 100% offset account on one loan”;
. explain why you advise us to use “the big banks now” rather than other non-bank lenders;
. suggest what “a large enough LOC” could be, based on our figures?
With regard to the land, we need to think about this. We may choose to start our IP portfolio with ready made renters before considering renos, building on land or subdivisions.
2. Thanks also Matt.
We think we now understand the LOC option. How does an “offset a/c” option work?
With regard to your “investment plan” comment, what form should this take? (eg how formal?). To “generate income” from our land, it appears you are advising building and then renting, rather than building and selling or reselling as vacant land?
Will email you re property investment group.
3. Lastly, to
. Richard Taylor (tailored financial solutions),
. Craig Fulton (ducs finance solutions),
. Sharlene (moore financial solutions),
. Wayne (alpha mortgage solutions),
. Stewart Wemyss (prosolution),
. Alistair (APerry),
. v8ghia,
. any other forum members,
would you kindly comment on or add to this post. All advice is gratefully welcomed.
Peter
Peter, A couple of answers for you
Q) “All loans should be IO” and the mechanics/thinking behind “a 100% offset account on one loan”
A) An interest only loan will maximise your borrowing capacity (Although some lenders will still assess your borrowing capacity on a principal & interest basis) and give you more disposable income each month. Any surplus income could sit in your 100% offset account and would reduce your monthly interest burden.Q) why you advise us to use “the big banks now” rather than other non-bank lenders
A) Many of the non bank lenders will mortgage insure every loan irrespective of the LVR. Whilst the premiums may be paid by the lender you are using up your borrowing capacity with the mortgage insurers. Keeping the loan to < 80% with a banking institution will maximise your non mortgaged insured debts and mean that if you need to utilise lodoc / nodoc lending in the future you will still have the ability to do so.
Richard Taylor | Australia's leading private lender
Hi Peter – welcome to the forum, and a big congratualtions on what you have achieved so far. Great stuff.
Couple of things I might add, although I really did think about cutting and pasting Terry's comments…..
In no particular order…….
You don't mention wheter you own your PPOR or or not Peter? If so—-good on you, and then depending on your future plans, don't at all be afraid to put extra into your IP's – why pay interest if you don't have to, and that is where an offset account may indeed be suitablle – if you expect to have money that needs 'parking' or that you want the flexiblity to 'remove' your money later for whatever purpose…….I am a big believer (of the record of course…) of using a bank (non securitised lender) IF (big if) you have a deposit of at least 20%, are borrowing more than $250k, and have plans for buying/controlling more than a mill of property – if not, it is a greyer area, and open slather s far as lenders go – in my opinion.
One thing I will say, re your Port Elliot block Peter, seriously January is almost here, and how long would it take you to 'save' or make via capital growth the amoungt of money you will save by getting the CGT discount on the land. Wait. If you are fired up and raring to buy now, it would make more sense to use your 50k in the cash account from what you have said, to fund a 20% deposit on a house, then look at accessing equity via a LOC on your own home.
Don't br afraid to cross collatorise if you are only going to have two properties together with that lender, and it saves you money, and you don't plan on selling for several years.
All the best – you're half way there!Not financial advice – just a great idea!
To utilise the 50% of profit (for CGT purposes) from the sale of the Port Elliot land, we have to wait 12 months from settlement on purchase which was in January this year. We’re sure it’s in our interest to quit this block to free up funds for deposit(s) on IP, but are unsure whether to sell now and quit any loss or wait till after Jan 2008.
Just in case you were not aware the Capital Gains clock works on purchase date not settlement date. Nothing to stop you listing the property for sale and signing a Contract now if the date you signed the purchase contract was over 12 months earlier.
Richard Taylor | Australia's leading private lender
Hi Peter, A few more answers. 1) An offset account, is a transactional account like a savings account however it's amount is offset against your loan amount. For example if you have a loan of $200K and $20K in your offset account, you only pay interest on $180K. If you then spend $10k from the offset account you pay interest on $190K. 2) Investment plan, again there are no right or wrong answers. My current investment plan is to buy and hold, however, I know people who buy and sell and do quite well. I was suggesting that you could build on the land and then rent it out, but I don't know the Port Elliot rental market very well, however consider that if you built you could claim substaintial depreciation on the property and seeing that you already own the land freehold, if you got reasonable rent, it might turn into a positively geared property inwhich case I would definitely hold onto it. Look forward to hearing from you again, Matt Centrone Property Investor and Financial Strategist. [email protected] multiple property specialists
Thanks Richard.
Was looking forward to your comment, especially your clear explanation of Terry’s comment re “look at using the big banks now.”
We are now putting the Port Elliot block on the market to free up the equity/funds to purchase IP(s)/commence a portfolio. The block does not appear to have increased much in value over 12 months and we feel we can do much better.
Question: Are we better off waiting to realise these funds and then pursue our first IP purchase based on:
. equity held in unit of $250,000,
. funds from sale of property – $145,000, and
. cash in bank – $50,000?
We are looking at a property up to $400,000 with “guaranteed” rent of $400-500 pw.
How would we go about this and leave plenty of scope for further IP purchase in 6-12 months?Thanks also v8ghia.
I’m glad you also replied. I value your clear and positive comments. Thanks also for your congratulations and encouragement.
Yes – we do own our PPOR.
We have spoken to an agent re our Port Elliot block and will now sell it. Will be able to take advantage of the CGT 50% discount on any small profit realised.
Re my question above to Richard. Have you any suggestion as how to best structure to purchase a $400,000 / $400-500 rental IP (house)?
Thanks also Matt.
1. We don’t think the build and rent scenario for the Port Elliot block is our best option.
2. Is an Investment Plan something you recommend to your clients? IE to be formalised (written down) with dates for each planned action etc.
3. Would you also like to comment on my question to Richard re an initial $400,000 IP purchase based on our equity?Regards
PeterHi Peter,
I definitely recommend an investment plan for all my clients. What I actually do is work out with my clients their goals long term and short term. This is formalised and written down. I start by preparing a property portfolio review, which basically looks at their current financial situation, the structures they have in place, their avaiable cash flow and then show them their potential and work out a strategy of how to achieve their goals. I then review these goals with my clients every 6 to 12 month.
Mate I think its great that you've decided to sell the block and have made the decision to start growing your portfolio. Like I said I don't really know the Port Elliot rental market very well but I imagine that it would be very seasonal so you've probably made the right decision. I don't think you'll have any problem purchasing $400K IP with the figures you have stated above. My question is what type of property is it and how is the rent "guaranteed." I am sometimes wary of rent guarantees. Also I'd be happy to prepare a property portfolio review for yourself free of charge as this is a service a do for all my clients for free.
Or if you just want to catch up and have a chat about how to structure the purchase of the investment property, drop me a line or give me a call. One thing I will say is that it is very important to have the right structure from the start because this usually determines your borrowing and purchasing capacity in the future.
Cheers,
Matt Centrone
Property Investor and Financial Strategist
[email protected]
Office: (08) 82120788 Mob: 0402278019Peter
Yes certainly given the equity in your current properties securing a new IP for 400K should not be a problem.
Given your current marginal tax rates you may want to explore the option of purchasing it in Trust as the deductions will be limited so iniitially will end up costing you each week but the added bonus of the Asset protection and the ability to distrubute the income down the track is a big plus.
Just be careful about taking advice from anyone who is not licensed to provide Financial Advice.
Richard Taylor | Australia's leading private lender
Thanks Matt for your comments regarding investment plans and the purchase of a $400,000 IP. BTW, I've looked at the Investor Finance web site.
Thanks also Richard. We set up the family trust as a base for our planned IP portfolio. Yes, I agree with your caution re only acting on advice from licensed financial advisors.
I would still appreciate comment from other experts.
Regards
Peter
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