Hello, I did touch on this on another thread so I apologise if I cause any frustration. I just realise this is really a different topic.
I have a rural property with a small two bed home. No shed, barely a drive, simple fences, limited gardens (only that which I could grow with cuttings and seeds), no bore etc. I scraped together enough funds to have what I have, and have done my best to avoid tempation to max out my borrowings to include these items that I greatly desire but can live without. I have accepted the delayed gratification concept for greater long term financial stability/freedom.
The hard work that I have done by hand to the property as well as a good market has improved my property value and I am now able to draw out some equity (just a little). So I am trying to work out what the best most sensibly financial way in which to invest these funds.
1) nothing at all, leave them in the PPOR (by that I mean the offset) I am pretty highly geared as is.
2) Invest in my PPOR and generate greater equity by putting up a shed or extending to make the home 3 bed
3) Purchase a cheap IP (the closest I can get to cash neutral in a reasonable area)The reason I am struggling to get a hold on the answer to this question is that my areas property market has taken a big hit over the past 18months. It's a buyers market but history says it wont be forever.
Is this one of those questions that only I can answer?
Anyone got any views as to what they would do in my situation?
Okay, this has been doing my head in…. I think I am near the end, anyone
Unless I jag a bargain IP's in my current price range will require me to input around $500pm. If I calculate putting in that much for 9yrs and I calculate the estimated value of the property in 2020. I can see that I would need 5% property growth p/a to earn myself $74,000 in equity. (profit).
If I put that $500pm for 9 yrs into my PPOR loan (or offset) I would save myself approx $88,000 plus 6yrs
If I put some money into a shed I probably earn myself about $31k over the same timeframe.
Seems pretty clear cut.. (please correct me if I am wrong) By putting extra funds into my PPOR loan offsett I am saving myself 7% interest (the effective equal of me earning NETT yeild of 7% from investment property?)
In order for an IP to present as a better alternative to this it would need to somehow yield gross 12% (combining rental income and capital growth) Therefore if I achieved my goal of finding an IP with a yeild of say 6% I would need be confident that the annual capital growth percentage would be 6%?
Sooooo… if all this is correct I now better understand the importance of selecting the right property, one must be confident in the future growth or feel confident in their ability to create it through reno etc.
How am I going here guys, am I on the right track or am I missing a major component?
What the… I have used two of NAB's loan calculators with the same figures getting different answers…grrr
Hi intrigue.
I have arrived! You are not alone young padowon!
OK, minimal info but here goes. A lot of your decision should be reliant on your existing tax burden. Have you heard of tax variation (old name from ATO is a 221d)? If not, check out tax variation on the ATO website. Putting it simply, you have ZERO tax deductions on your PPOR however, often when one factors in the expected rental return on an IP along with the reduction (or variation) of your tax burden throughout the year from the ATO (works beautifully if you are PAYG but also works for self-employed), one usually has minimal ongoing out-of-pocket costs to upkeep the IP. You will get huge reductions in your current tax burden (up to 50% reduction is allowable from the ATO), you will get the growth in the IP along with the growing equity in your home and IP as you use your tax dollars and rents to pay off your home loan is half the time! Have I lost you yet young grasshopper?
OK, let's take a break and let you absorb the above.
TCNope not lost.. I dont think! Thank you so much for coming to my aid.
I have been using a negative gearing calculator I found and I can see that my out of pocket costs are halved due to the tax benefits. I think one of the challenges I may be having is that my budget (at the moment) is low therefore the homes are old and thus no depreciation. Maybe I need to wait a bit longer and save a few more pennies?
I understand leverage and I understand a little about tax benefits but with market conditions as they are it seems that unless I can obtain at least 6% rental return and 6% annual captial growth my money is better off saving me the 7% interest.
But I just keep going around and around in circles.
My spreadsheets are telling me that the return on property (at the moment, in my price bracket) is not that great (I could find myself spending years under pressure trying to make mortgage payments and not make any great profits) but my head and my experience is saying that with leverage 2 properties increasing in value is better than one. I cant figure out which one is right!
And maybe it is that the answer lies in 'what happens in the future' and thus would be determined by my condidence in what is coming. Or perhaps it is that the reality of the money game can be deceptive, no point making good profits if those profits are being eroded by the cost of the borrowing in order to hold the property.
Owe……………. I need a bucket of wine
WOAH there intrigue!
TAKE 2 SIPS, 6 DEEP BREATHS AND HOLD ON cause I may have a solution other than diazepam!
<moderastor: delete advertising> stop being like the proverbial dog chasing its tail and try to get some advice from the professionals – advice that's specific to you!
I hope you haven't had a meltdown and you find some rock solid, unambiguous, and lay term education and you should be onward and upward without the alcoholic poisoning.
CHEERS!
TCYou don's say what level you are currently geared at but I would be concerned with purchasing an investment property as this will not help your overall gearing. Part of being 'wealthy' (& wealth is relative) is your overall gearing level.
Yes thanks Derek,
I am not 100% sure I know the answer…. perhaps you can help
My PPOR is currently bank valued at $400,000
My loan is $302,000 IO and I have $13,000 in the offsett.
I have also got an LOC (equity) of $18,000 taking me upto 80% LVRWhat does that make my overall gearing?
I was considering using the $13k and the $18k LOC to purchase an IP under $250k, this would be at LVR 95% (not consolidated with PPOR) thus would also be utilising LMI.
I have a pre-approval for this and can service but I am pushing things a little. My PPOR consumes about 40% of my nett wage income and the IP would likely consume another 20%. I can do this but would be in a difficult place is I lost my job for example. I am not risk adverse and am entertaining this idea as I wish to get ahead however I need to be confident that the rewards justify the risk.
Over the weekend I have been thinking that whilst the market is oportune for me to negotiate a good deal, and I could possibly just do it. I perhaps need to take a little more time and save some more money. If one cant afford to fix the leaking bathroom in the PPOR one perhaps is not financial enough to consider and IP?
I am leaning towards saving some more in the offset. When I can afford it put in the shed, this will deplete my offset but hopefully improve my equity thus enable me to increase the LOC amount. If the LOC amount improves then I might be able to afford a newer home that would aid in depreciation and tax benefits. I am thinking that it is okay if I miss the property cycle low here because I will have time to research other areas in other states and perhaps their market conditions will be good for me when I am ready.
I am really focused on having what little money I have invested in areas that are working for me!
Any advise is most welcomed.
Hi Intrigue,
Yep – LVR on the home is 80%. I have ignored any offset as the bank only look at limits when determining levels of security.
In my opinion and in general terms 80% is OK.
If we fast forward and imagine you are able to achieve what you want – buy the $250K property at 95% LVR.
This will significantly change your overall LVR as you have a new asset worth $250K and debts of ~$267K used to provide purchase price ($250K) + purchase ($12.5K) costs + ~LMI ($5K) @ 2% of borrowings.
LVR on the second purchase is ~107%
Now I am not adverse to having a LVR of 107% on a single property as I have done it many times myself.
But for me the new overall situation gets a little unsteady as you have little wriggle room to move if your world goes pear shaped.
Your overall position now reads as follows:
Total assets = $650K
Total debst = $569K (As follows $320K on home + $249K on new property – additional $18K comes from LOC against your own home so we don't add that twice)
Total LVR = 87.5%Lots of numbers to explain there – hopefully they are clear enough and can provide some food for thought.
Derek
Thanks Derek, appreciate it…. so when you asked what my gearing level was.. the answer was I am 80% geared (meaning I have borrowed 80% of the value of what I have)
Yep and the new purchase takes you to 87%.
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