Hi this is my first post in this forum. I would like to begin investing in property and I am a little confused on something. I hear so many people buying 3 or 4+ investment properties and wonder how they service their loans. This may be a basic question I have but, if you are using equity in the first property and subsequent properties after to come up with your deposit for further properties, do you still need to make those payments (or at least the interest) for the equity you have used?
My situation at the moment…. I am 29, married and sole earner with one daughter and another on the way. My salary is $82000 p.a. and I have $50,000 in my bank account (was more but lost a lot on the stock market). I have a car debt of $29500.
My family and I lives with my mum paying only $100 a week rent. If I was to purchase an investment property and looking to get another one a year or two later, how do you guys structure your finances to make second and third purchases?
I also have access to a LOC on my mums house which has $110,000 available. She owned her house outright and was valued at $650,000 when the LOC was taken out 18 months ago.
My big concerns are being able to service my debts if I was to start property investing.
Thanks for your help
Luke
Hi Luke
Firstly welcome to the forum and I hope you enjoy your time with us.
You certainly seem to be in an good position to start your investing career as long as you are happy renting at home.
Normally depending on the type of property you are looking at (whether it be one for capital growth and slightly lower yield or higher returns and less capital growth) will determine what name or entity you would look to buy the property in.
Once this has been assessed you can look at going forward and seek out an appropriate loan and structure.
Some lenders will go upto a maximum 95% lvr for investment however if you work on 90% then at least your mortgage broker will have a wider choice of lenders to work from.
Remember when you buy a property you will receive rental income and this in turn is offset by the associated expenses such as interest, insurance, Council Rates and property management expenses to name a few.
Where the property costs you more to hold than income being generated the shortfall can be offset against your Tax at the marginal rate. In addition to the Cash Deductions you maybe also offset such items such as Depreciation on the internal fixtures and fittings as well as an allowance made for the Capital cost of the original construction based on the age of the property.
Such deductions help minimise the cash shortfall.
If you are a PAYG wage earner then such Tax credit can be reflected in your pay packet rather than waiting until you lodge your Annual Tax Return and this will also ease cash flow.
Once the property increases in value there is nothing to stop you drawing on the available equity for the next property and subject to being in a position together with the rent to show you can service the loan the process can be repeated.
If you start slowly and invest in an area with good ongoing rental demand you shouldnt have any issues however always good idea to keep a cash buffer available to cope with unexpected expenses.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks for the reply. I wouldn't mind staying at home for a few more years to come and I would like to purchase a unit somewhere in Sydney between $400-500,000. I understand the first part in acquiring my first IP and all the deductions etc associated with it. What I am confused about is if I go to purchase a second investment property and I am already negatively geared with the first one, if I use the equity in that investment property to come up with the deposit for a second loan, that will mean I am paying interest on that equity I have drawn out of the property as well as hoping the tenants in the second property service the interests of the second loan. Is that correct?
I am thinking worse case scenario here. I dread the thought of having to top up any shortfalls in the first properties costs, pay interest on the drawn down equity and pay any shortfalls in the second loan. Does this just come down to selecting the right property? I read about people who earn less than me and they have multiple properties to their name.
I went to an Aussie mortgage broker last year and he said Commonwealth would only lend to me 90% LVR I.O but I felt he was just satisfying his own business. Surely, there isn't only one lender willing to accept my business.
Hi Luke
Look hate to say that Aussie Broker has probably moved on as their shelf life is not too long.
Also i guess the CBA recommendation could have something to do with the bonus commissions they pay. Wonder why so many clients are jumping ship now.
Sorry i digress.
Your assumption is correct but remember the deposit for the 2nd property although it may come from property # 1 is funded by the tenants in property # 2.
As long as the property is tenanted the shortfall can be protected as you could always look at fixing you interest rate and then you would now exactly what the monthly comittment was for a period of years.
I did an article in the August edition of the API magazine about how i started so feel free to frop me an email and i will send you the PDF version.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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