Hi,
I have just discovered Steve Mcknight and his book 260+ properties in 7 years as well as this forum which has such a huge wealth of information. However I feel on the cusp of doing something great but keep pulling myself back unable to make the leap and I think it is because I am overwhelmed by all the information.
I have a passion for real estate and have been wanting to get into investments for abut 10 years but we have always been financially saddled and strapped by paying off a big mortgage on the house we live in and on extravagant spending habits which have from time to time had to be sorted out thorugh the use of our homes equity.
In the past year we have had to move from the house we designed, built and loved in Perth to the Kalgoorlie Goldfields. Due to this move Our household income has increased and we have rented out our beloved home in Perth. We have purchased a house to live in in Kalgoorlie which eventually we will also rent out.
The problem is we are now financially tied up and may be able to make one more purchase before we exhaust our borrowing power.
For those out there who want to crunch the numbers and give me some advice this is a quick run down. Household after tax income $11 000 per month. Rental income $1600 per month. Mortgage repayments Perth property $4200 per Month, and Kalgoorlie property $2900 per month. The Perth Property is valued at $700 000 with $538 000 owing and the Kalgoorlie Property is valued at $450 000 and $400 000 owing. The Kalgoorlie Property will eventually rent for about $2000 to $2200 a month.
The extravagant lifestyle has now been culled and we have a new mindset our plan for this year is to pay $40 000 off the Perth Property and get the Mortgage under $500 000. But I am also interested in investing in a property north of Brisbane ie Caboolture, Bribie Island areas. The dilemma we face is can we make the Perth property more viabvle or should we sell and of course the emotional attachment is huge so the thought of selling gives me shivers especially as I am not sure if this is the correct move Financially.
I feel myself knocking at the door of investment heaven but just can't seem to step through. In terms of Financial advice we have none and don't even know where to look to find a good advisor we have only used accountants for tax returns in the past and they never seem to give out much advice even when you ask them what would be the best options they look at us like we are speaking a foreign language.
I know this has been long winded but I am in serious need of some straight talking advice like Dr Phil or something.
Thanks
NatOK, first let's address the fundamentals:
Do you have a (GOOD) accountant, solicitor, and mortgage broker? I think these are your key team, and the mortgage broker is "even keyer"
– plenty of people on the forum to give you recommendations on this front.Do you have structures in place? (Trust, corporate trustee, etc – as appropriate for your situation – talk to that accountant and solicitor.)
Do you have clear objectives? Examples: Are you after capital growth or income? If you're after growth, how much income are you prepared to sacrifice to get it, and vice-versa? Do you want to quit your job(s)? If so, in what timeframe? Or do you just want to build a retirement portfolio? If so, how much do you need to retire and when will that be? Where do you ultimately want to live (ie do you want to move back into your Perth home)? How "active" do you want to be – do you want to be a "set and forget" "buy and hold" investor (and yes I know you can't really "set and forget" any property), or do you want to be much more active by doing renovations or developing? Personally, I recommend that if you're going to be active and manufacture capital growth, make sure you hold the asset (or some of the asset) when you're done; at least some passive component to your portfolio is a good idea to let time work its magic, and so that your portfolio doesn't totally stagnate when you take a break (or are forced to take a break). I also like to be an investor, rather than have a property-based business (as many people doing wraps and developing have).
Once you can answer these questions clearly, then you're ready to invest some more.
In the meantime, don't reduce the loan balances; put the additional funds in a 100% offset instead, and that way if a PPR (principal place of residence, ie your home) turns into an IP (investment property) at a later date, you can withdraw the funds from the offset to buy a new PPR and the interest on the full IP loan balance is tax deductible. (But if you pay off the IP loan and redraw to buy a PPR, the redrawn component isn't tax deductible.)
Warmest regards,
Tracey in Brisbane
The total value of the 2 properties is $1,150,000.
Banks will normally lend you 80% of your propertie's value, less any loans current, which is $920,000.
You owe $938,000. Your LVR is 81% approx. Any higher than 80% is getting towards dangerous levels in my opinion.
You have no USEABLE equity in these properties to use as deposits on any further purchases or renos right now.
You would need to use cash, or refinance everything to a higher LVR situation; not good.
Basically, all you can do is hammer away at your loans and decrease the balances, wait for some more cap growth and then re-assess.
Try to arrange to pay only the interest portion of the Perth property at this stage, as the interest is tax deductible while the Principal is not. This will help with cashflow and free up more funds to use on the Kalgoorlie loan.
See if you can arrange to pay all the rent and income straight into the loan on the Kalgoorlie property as this is your PPoR currently, and pay this loan down asap as this loan is not tax deductible.
If you move out of the Kalgoorlie property and rent somewhere yourself, you may be better off as there are more tax deductions over both properties as they both become IP's. I would be sitting down with your accountant to crunch those numbers to see if it is more viable than living in the property yourselves.
Also look at getting Depreciation Schedules done for both properties to give you access to the on-paper deductions for the tax returns. This can be significant, and can accelerate your debt reduction if you re-invest the tax returns back into the loans.
Its interesting to read your perspectives. I am surprised not to have been advised to sell my house in Perth. This option is playing at the back of my mind as an easy but emotionally painful way out. I could put some of the proceeds on the Kalgoorlie house reducing the debt a possibly creating a positively geared investment for the future and have a deposit for other investments as well as freeing up a large amount of borrowing capacity.
The only down side seems to be that I had always hoped we would move back to this house and although my head tells me its just bricks and mortar my heart says something else.
My overriding desire however is to fund our lifestyle through investment and ideally I would like to be living in Queensland not Kalgoorlie. We are only here because the mining boom provides us with a much higher income but i am painfully aware this will not last forever so we really need to get set up in the next few years.
Natalie
Pretty much as marc points out, pay IO on the IP (Perth), get a dep'n schedule for Perth (you won't need one for kalgoorlie until you start to rent it out). Consider moving into rental accommodation paying less than you will get from your PPOR.
Pay down as much of the principal as possible on the PPOR (Kalg) as this interest is non-deductible (or possibly use an offset account to maximise savings and get the benefit of the interest reduction without paying tax on interest/tying up the money).
It is probably time to take stock, build some equity by repaying some of your loan (reduce risk) and stabilise yourself for a little while.
Will the above equations change dramatically if you have kids (high mortgages and single income)? Will you be moving back to Perth/selling etc ie what is your exit strategy at this stage?
Certainly do not pay down the principal on the mortgage on the Kalgoolie property if you are thinking of renting out the property in the near future and purchasing another PPOR.
Also have you considered selling the Perth property into a Trust structure.
Certainly you would incur stamp duty but dependant on the other figures could be still be viable especially if you intend to purchase another PPOR.
Richard Taylor | Australia's leading private lender
Richard, what would you do with the losses which are retained within the Trust? I can't see the advantage of shifting this property at this stage as it is generating a considerable loss.
Macnatt wrote:Its interesting to read your perspectives. I am surprised not to have been advised to sell my house in Perth. This option is playing at the back of my mind as an easy but emotionally painful way out. I could put some of the proceeds on the Kalgoorlie house reducing the debt a possibly creating a positively geared investment for the future and have a deposit for other investments as well as freeing up a large amount of borrowing capacity.The only down side seems to be that I had always hoped we would move back to this house and although my head tells me its just bricks and mortar my heart says something else.
My overriding desire however is to fund our lifestyle through investment and ideally I would like to be living in Queensland not Kalgoorlie. We are only here because the mining boom provides us with a much higher income but i am painfully aware this will not last forever so we really need to get set up in the next few years.
Natalie
You could do that, but why? Are you experiencing financial hardship, or just in a hurry to keep investing?
Simply moving out of the Kalgoorlie PPoR and making it an IP is another step.
The benefit if you did do it would be you could go and buy maybe a couple of cheaper properties with a better rent return for better cashflow, but you would be wasting a bit of dough in the selling and buying costs involved.
Try to think with your investor's brain for a minute; you could move to QLD, and rent a nice place, and have the two properties ticking over nicely.
Pay down the loans for a bit, get some more Cap gain (Kal is still going strong) and then look at a PPoR in QLD later if you must. You could even sell one of the properties to pay out the loan for the PPoR if required, then use the equity you have in the new PPoR for more investing.
Food for thought.
In reply to Scotts post we already have 2 primary age children and most of our monthly income is already from a single wage my meager earnings just supplement. I would like to stop working and concentrate fulltime on investments while my husband continues his career and hopefully eventually my earnings will overtake his and he can reduce his workload. He is 42 and the toll of alifetime of long hours and hard work is starting to show. I am 35 and feel it is time to do my own thing and see what I can make of investing but as I said previously I have been wanting to do this for the last 10 years so I hope I am not still sitting here in 10 years looking back on all the coulda woulda shouldas.
Richard can you tell me more about the Benefits of selling the Perth Property into trust as We have had lots of loan increases in the past which paid for lifestyle expenses (when the property was ppor) I am concerned that the bulk of the interest is in fact not actually tax deductible after all.
Thanks
nat
– plenty of people on the forum to give you recommendations on this front.
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