Hi all, very green but would love to invest really soon. Have been hovering for a couple of months on the forum and thought I would ask the question… are we in a position to invest in property??
We owe about 270k on our PPOR which is worth 350k. We have about 20k in personal debt (which we are trying to reduce really quickly). Our joint income is over 100k, we have 3 gorgeous kids and want to create a future for them. We are happy to be fairly agressive as we both anticipate increases in salaries soon. We were thinking of renting out our PPOR and buying another IP (to have 2 IP's) and rent closer to the kids school. We are in Melbourne and prices keep going up up up.
So many people on here, with a lot of wisdom so would love all your comments.Hi Mooni75
The answer is probably yes depending on whether you can service further mortgages, whether you have any spare 'cash', and what your risk management plan is (being agressive is one thing, having a good well thought out exit strategy is better) . From what you've described, your LVR is at 77% – so you would probably be in a marginal position to borrow against further equity but it will probably cost you in LMI costs.
Perhaps if you thought about this from some fairly basic questions. In your current situation, how comfortable are you from week to week with left over cash and savings. If it's quite tight now, then a negatively geared situation (with possible capital growth) with little room to move might be hard to manage with further dollars required out of your own pocket. This might mean you would need to search for something that gives you positive or neutral cashflow.
How did the $20K in personal debt arise, what did you get for it (eg you bought a car, went on holidays, etc) and when do you think you could pay it off? Could you 'aggressively' pay this off in less than two months? Could you shift it all to a low or zero interest credit card arrangement? This might indicate how well you budget and what your true servicing capability might be. Also the personal debt would go against you in terms of current servicing capability.
This has probably raised more questions than answering your specific question, but the answers might provide some further steps you need to take before launching into buying another property.
If you want to explore ideas in more detail (rather than providing your personal/private info here) drop me an email at [email protected].
My 2c worth;
With 3 kids it is probably not a good idea to go aggressive on the first IP.
You have a house worth $350k, and a loan of $270k. In normal circumstances, banks will allow you to use 80% of your property's value, less any existing loans.
80% of $350k = $280k. You only have $10k of useable equity.
As 888 said; you can borrow more and pay Loan Mortgage Insurance, but in my opinion this is a very exposed position. With talk of more rate rises, and a possible slow down of housing price growth next year, this is dangerous. For younger, single people with no commitments, maybe worth a go.
If there was a market downturn, or one of the kids had to have an operation, one of you loses their job; you just don't know what life will throw at you; you could lose your home.
Renting out your PPoR could be a good first move for you. You both earn good incomes, so the tax advantages from this would be good; especially if the house was built after 1987 (on-paper deductions and depreciation).
You will have an automatic IP without having to try and buy anything. We do this with our PPoR, and it is a very good financial move; we own ours outright which improves the numbers a fair bit.
You will need to sit down with a good Mortgage Broker (there are few on this forum) to work out your numbers on this; how much rent you will get, how much rent you pay yourselves etc.
It would be also adviseable to look at changing your exisiting loan to interest only for this purpose, as the interest is tax deductible while the principal isn't when the property is an IP. This would help with the cashflow, and you can still pay down the principal if you wish.
If you do go down the path of using your PPoR as the first IP, make sure you take out Landlord's Insurance and get a Depreciation Schedule prepared for the depreciation. Both expenses are tax deductible; a cost of doing business, and the DS will pay for itself in the first tax return.
After a year or so of the PPoR as an IP, you will be able to see more clearly how you are travelling for the next one. There is no race, and you don't need to be super aggressive to do very well.
Hi there and thank you both for your input. We have done some more research and are definitely renting out our PPOR. I think we may have to wait before we get rid of our personal debt and built up some more equity in the house before we can invest in another. We will definitely be on the lookout for a mortgage broker – one with IP's… before we go into buying another IP.
Thanks so much
Hi Mooni
One thing i would say is make sure that your loans are structured correctly before you do anything else.
Not being aware of the interest rates you are being charged on your personal debts (but i will assume they are typical nasty unsecured interest rates) you can always look at rolling these into your home loan or to transfer the debt to an interest free period credit card as Garry has mentioned.
I can hear a gasp from here from other forum members !!!
If you do this what you should do is retain your repayment level at it was prior to refinancing meaning that the only difference is the interest rate. If this saves you 10% + then it would be well worth it.
Anything over 80% LVR will normally incur LMI however remember this is a tax deductible expense and should not deter you from moving forward. Treat it as an opportunity expense of doing business.
Richard Taylor | Australia's leading private lender
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