Hi all,
I have a few questions that the more learnered of the forums may be able to help with.
So lets go …Firstly a summary, We have some assets already. About 300K in the bank (cash), fully own our home 300K+, and about 150K in rural property. No loans, no debt (yet), no official IP's.
Ok now the questions.
(1) I understand we should use some of the cash as a deposit on IP 1, but how much?. The reason is we have found some properties that are close to CF+ ,and would be, if we increased the cash injection at the beginning, but is this just fooling ourselves into thinking it's CF+ ?(2) Is it right to put just as much cash in as necessary to allow the balance to be paid by rent using an interest free loan. Including expenses of course.
(3) Or with the amount of cash we have should we be just buying outright until it's depleted and use equity from then on.
(4) I guess what I'm asking is if you had my initial starting point how would you proceed.
(5) What do people think of Commission homes (i have a phobia about them but the yeild is good.) I know the Cap Growth wont be great but maybe a portfolio mix is not a bad idea.
(6) With some of these lower priced properties would it be better to do an I&P loan and get them paid off and out of the way ready for some serious equity treatment later (especially ones that may not have great Cap growth).
I have lots more questions but this will be a great start.
All help appreciated.Pental wrote:Hi all,
I have a few questions that the more learnered of the forums may be able to help with.
So lets go …Firstly a summary, We have some assets already. About 300K in the bank (cash), fully own our home 300K+, and about 150K in rural property. No loans, no debt (yet), no official IP's.
Ok now the questions.
(1) I understand we should use some of the cash as a deposit on IP 1, but how much?. The reason is we have found some properties that are close to CF+ ,and would be, if we increased the cash injection at the beginning, but is this just fooling ourselves into thinking it's CF+ ?Usually investors aim for a 20% deposit to avoid loan mortgage insurance costs. You will need to additional money to cover the cost of state stamp duty and legal costs when buying.
You may find an offset account a better approach for reducing the loan interest charges and making the property cash flow positive while having cash available to use on call if the need arises in the future.Pental wrote:(2) Is it right to put just as much cash in as necessary to allow the balance to be paid by rent using an interest free loan. Including expenses of course.Question is confusing – Interest free loan ?
Do you mean you pay down the loan to a point where cash flow covers interest and principal to be paid.
or do you mean a lower interest loan where part of the interest is capitalised onto the loan to lower cash flow needed in early stages of the loan?
This is really a personal choice. I have done the pay down of the loan to a point where the rent paid off the rest of the loan.
You could use an offset account to achieve this although you must not have more cash in the offset than what is owed.Pental wrote:(3) Or with the amount of cash we have should we be just buying outright until it's depleted and use equity from then on.It is up to personal choice.
Depends on if you are after security or after gearing. What to consider is probably what level of gearing you want to do.
70% or 60% or 50%
IF you pay off the loan completely it is hard to redraw the money unless the redraw is used for further investment.
If you have it all in one house you may have to risk that house as security or take out a line of credit or redraw to invest in another property. Where as an offset account gives you flexibilityPental wrote:(4) I guess what I'm asking is if you had my initial starting point how would you proceed.If it was me I would try to have cash in an offset account as a safety net for cash flow management for when you lose a tenant or your employment.
Pental wrote:(5) What do people think of Commission homes (i have a phobia about them but the yeild is good.) I know the Cap Growth wont be great but maybe a portfolio mix is not a bad idea.I own an ex- housing commission house and it is solid concrete, steel roof trusts, concrete slab, no plaster board.
Very tenant proof house.
Has fake brick veneer on outside
Be careful of hot water gas inside laundry in ex housing commission in Victoria it is illegal and will have to be moved outside so that if the flue is blocked your tenant doesn't die from carbon monoxide while taking a shower.Pental wrote:(6) With some of these lower priced properties would it be better to do an I&P loan and get them paid off and out of the way ready for some serious equity treatment later (especially ones that may not have great Cap growth).Depends on your strategy is it cash flow or negative gearing.
If cash flow then paying it off quickly gives you cash flow to buy the next house and equity you can use to borrow more money.
Negative gearing relies on capital growth which can be hard to predict.Sorry duckster, my mistake. Question 2 should read "Interest only" not "interest free"
(2) Is it right to put just as much cash in as necessary to allow the balance to be paid by rent using an interest ONLY loan. Including expenses of course.
And following your very informative responses, I believe you have already answered the question.
I will now talk to my bank (and accountant) about the Offset Account idea. It sounds like just the thing to allow us to purchase using some cash to bring the loan to a manageable size which will be covered by the rent (expenses etc factored in), and thus leaving the remaining cash available if required. More research here for me I think, but a good start.
Thank you
Pental
Following on from Duckster reply make sure that your Bank offer:
1) A fully transactional offset account. Lenders such as CBA, Heritage, SGB etc etc dont.
2) That it is a 100% offset account.There are a few other variations depending on who the lender is.
It is the best loan feature to preserve both interest deductability and access.
Richard Taylor | Australia's leading private lender
You must be logged in to reply to this topic. If you don't have an account, you can register here.
