Hi,
I have tried to read up a bit on this with property investment as me and wife are looking into buy another house – to live in.
I am not sure how it all works. We are going to talk to an "accountant" but before we do I just want to make sure that I got the fundamentals right.
At the moment we live in a town house that has about 200k equity and we have a 350k mortgage. The townhouse is located in an estate and I have asked around a bit and found that the other townhouses are rented for about 490/w (obviously the real estate agent take a bit from that – don't know what their std rate is)
We are looking in to buy a bigger house for about 500k.
Am I right in assuming that I can take my equity of 200k and put in as deposit for the new house? That will give me a second mortgage of 300k.
The rent we could get for the townhouse would not cover the whole mortgage – assuming that our mortgage repayments are 1010/2w.
With our incomes we could "cover" that difference.
Is it worth for us going down this path?
Any suggestions and/or explanations would be appreciated.Thanks
JonasYou will have $200k equity between the total value of both properties. Your total borrowings will be $350k + $500k (the value of new premises). You don't mention any savings that you will be contributing (to cover legals/SD costs).
Total Assets = $450k + $500k
Total Equity = $200k
Debt = $750kLVR = 750/950 = 79%
On the other side of the coin:
Net Rent: 50 wks @$490 x 90% = $22,050 pa ($850/fortnight)
Interest only loan: $750k @9.0% = $67500 pa ($2600/fortnight)
Shortfall (out of your pocket) = $45450 pa ($1750/fortnight)Other issues to consider – job security, 2 incomes may be needed to cover the shortfall (about $900 per week/higher when you have no tenant), interest rate rises etc.
If the new premises isn't going to be rented out, then you will only be able to claim the interest expense & costs on the current townhouse, not on both properties.
You may need to consider renting out the house which will have the greater expenses.Hope that helps (or scares the pants off you).
Hi Johk
I think Scott has put it quite clearly – if you are keen to live on a knifes edge and are prepared to lose the lot – go ahead.
What I find interesting is the the townhouse based on your figures would have a value of around $550K yet you feel you can get a bigger single house for $500K. Must be making some sacrifices on quality or state of repair.
My view would be you would want to be on very substantial incomes and have good personal insurance (income protection etc) to even consider this option.
You need to consider the potential negatives as well as positives so you can make an informed decision.
In the current markert you would probably be lucky to get a bank valuation that agrees with your valuations.
Best of luck.
johk wrote:Am I right in assuming that I can take my equity of 200k and put in as deposit for the new house? That will give me a second mortgage of 300k.Although you are WRITING the truth, you are THINKING wrong here.
What you are THINKING is :
You 'take' 200K equity ( for free.. lala fairyland money ? ) hence you end up with :
350K mortgage
300K new mortgage
that's 650K mortgage, and that's not correct.You write :
350K mortgage. You 'take' 200K equity = new 550K mortgage on existing house
500K new houseprice, minus 200K equity = 300K mortgage on new home
That's 850K mortgage total and that's correct.It's real simple maths. Equity isn't 'free fairy money', it's extra mortgage , it's debt, it's a loan and you need to pay 10% interest on it.
Can you afford to pay back 85.000 per year ?
Are you ready to lose 85.000 per year equity on top of that ?You are starting a plan that will lose you about 170.000AUD$ per year.
If you can afford it and be happy losing that much money EACH YEAR , then you should do it.If you don't want to lose money , then stay out of property until 2010, then come back here and ask for new advice.
Scott No Mates wrote:Total Assets = $450k + $500k
Total Equity = $200k
Debt = $750kAssets = 550+500
Debt = 850K, not 750KHi Jonas
i think the strategy you are thinking of is as follows.
What most real estate investors do is to try and build up a 'buffer zone' of equity. In your case you have built up a buffer zone of $200k. The next step would be to get a line of credit so that you have access to that money (you will only need to pay interest on this money if you actually use is – other wise you will pay NO interest on it). Then rather than use all of your equity for the deposit on the next house you would only use as little as possible.
Lets say you brought a $300k property and managed to get a 90% loan – this would mean that you would need $30k of your equity (plus roughly $20k for stamp duty and expenses). If this was the case you would still have a buffer of $150k. This money can be used to help pay the interest repayments on both of your loans. This may sound weird as you are eating into your equity in order to build more equity! Does that concept make sense? The reason why Investors think this is ok is because they assume that house prices will go up and in a few years time they can get their properties refinanced and their equity has increased – and therefor so has their buffer zone (despite using some of it to pay off the interest of their loans)
I'm sorry if this post is a bit confusing
The main question you need to ask is. . . . Are you comfortable using this strategy in the current conditions? That one is up to you to decide
If your buffer zone isn't big enough and property prices dont increase then you could find yourself in some trouble. Cheers
Banjo Smyth
Hi,
Thanks for your replies and advices.
We didn't go into this with the mindset of buying an investment property.
We were actually looking for a new house with a bit of land and an extra room. We found this new estate being built a bit further out from where we live and put our name down for one lot. As the town house we live in is in a good suburb here in Brisbane – next to Ascot and Clayfield – we believe that it has more potential to increase in value than the new house. That is how we got started on maybe trying to take the equity of the town house and put it in as a deposit for the house – as we would like to keep it.
But after reading your advices I realise I was a bit off track.
Back to the drawing board – if we want the new house it seems we have to sell this house. Hmm need to do some thinking.Thanks you,
Jonasthere a few things not quite right here.
Moving from your PPOR and turning into an investment property is usually a little untidy financially particulary if you have paid money into the loan using a redraw facility. Normally not the best approach depending on circumstance. Your better off selling the townhouse buying a new house and then buying an investment so to limit non deductable debt and max deductable debt. Currently you will be doing the opposite in your suggestion
Jonas
Nothing to stop you buying your wifes interest in the property or alternatively selling the property into Trust and borrowing 100% of the market valuation.
You would pay out the existing loan secured against the property and the surplus could be used as deposit for your new PPOR.
All of the interest used to purchase the IP would tax deductible.
One downside is that additional Stamp Duty would be payable although depending on the numbers could still be a viable option.
I have numerous clients in the Clayfield / Ascot area and this strategy is a standard wealth creation tool where you are trying to transfer the non deductible debt to a deductible expense.
Richard Taylor | Australia's leading private lender
Hi there.
This is how I understand the process, correct me if I am wrong, Thanks!
Bank Loan – $400k
House price – $500k
Stamp duty etc – $30kCome up with $100k for deposit to avoid Mortgatge Insurance. Now on the subject of Mortgage Insurance (MI), is it necessarily a bad thing? Everyone I talk to, try to avoid the MI and the extra costs etc, I don't know what it will cost for $530k. Can someone comment about MI?
Continuing with the example that I understand.
One borrow $400k to purchase $500k property (80%) and settles the transaction (minus stamp duty etc) leaves say $370k. Now the entire loan amount is tax deductible in the eyes of the taxman. That $370k will then be used to purchase a PPOR property.
Now that would mean the $400k loan interest, fees etc can be used to offset my taxable income whilst having freed the money to purchase our own home?
Have I got it right with the theory here?
Thanks a lot
Hi Vincent
Sorry to say if i understand your thread that your understanding is incorrect.
Richard Taylor | Australia's leading private lender
johk – have you heard about all those people that are using their credit cards to pay increased interest rates? The banks solution is to give them more credit… gotta wonder exactly what the banks agenda is in all that. My point is that I would hate to see another Australian end up in that position.
As someone suggested, why not try and sell the townhouse for as much as you can get and then upsize with the profits?
ummester wrote:johk – have you heard about all those people that are using their credit cards to pay increased interest rates? The banks solution is to give them more credit… gotta wonder exactly what the banks agenda is in all that. My point is that I would hate to see another Australian end up in that position.As someone suggested, why not try and sell the townhouse for as much as you can get and then upsize with the profits?
This is only a small %of the people with loans. It's nothing new either for people to have financial stress. It's self inflicted unfortunately (in most cases). But you're right; maybe we can save one more from it here now.
To answer the original question,
The USABLE equity you have in your existing PPoR is 80% of it's value ($550k), so you can access $440k, minus any existing loans ($350k). Current USEABLE equity is $90k.
This means you can access $90k for use towards a deposit on a new townhouse.
If you buy a townhouse worth $500k, there will purchase costs of approx 6% to add on – $30k, so your all-up cost will be around $530k.
Now, you can only access $90k – which will have to be used towards the deposit and the purchase costs, so after the purchase costs are considered, you can only use $60k of your equity towards the deposit.
In the current climate, getting loans of 80% LVR or higher is very difficult. If you do, there will be Loan Mortgage Insurance (LMI) added on of a couple of grand as well. Work on an 80% loan for the moment.
80% of $500k is: $400k.
You need to come up with $100k for the deposit, PLUS the LMI (say; $2k) PLUS the purchase costs of $30k = $132k.
You can only use $90k, so you are $42k short.
Unless you can get a loan of over 90% LVR (doubtful), you cannot get a loan for the new townhouse.
Also, assume you could get finance for this, you will have a new loan of $532k as the whole thing is made up of borrowed funds – the PPoR equity, new loan and LMI.
The interest on this is $920 p/week (9% interest).
With your existing property, assuming you could get the rent you mentioned ($490 p/week), allow for approx 20% of this to disappear in holding cost such as rates, insurance etc. Your nett rent is likely to be $392 p/week. Say $390 p/week.
Now, add this all up –
existing loan of $350k = $605 p/week interest (9%)
new loan of $532k = $920 p/week interest
Total weekly interest = $1,525
Less nett rent of $390Total weekly loan interest commitment after rent included = $1,135. With a tax refund this may get down to around $1k per week out of your pocket to service both properties.
You would also want to keep around $20k of funds available as a reserve for un-planned life events and repairs to the properties.
At this stage, if you want to buy another property and begin the investing career, you would probably need to be lowering the sights to a property of around $200k or so to have a chance of getting finance, and without putting yourself in danger.
So, do you want to give up the nice PPoR to live in a $200k cheapie? Most people won't.
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