Hi everyone, I’m after some advice please.. I joined this site as I’m hoping to gain some unbiased, helpful advice (which I have been struggling to find elsewhere) to help me get the most out of my situation. I’ve been feeling stuck for the past few years. Here is my situation…
I brought a property in Mitcham, VIC in May 2008 for $428k, I lived in it for approx 6-8 months with my x girlfriend, we broke up, I chose to keep the house as an investment property so I brought her out. The property was valued (by a company sent by the CBA) for $460,000 in February 2009.
Tenants moved into the property in April 2009 and to date they contribute $1490 per month (after the real estate agent takes their 7% fee). They are reliable tenants. I have put up the rent once, I will put it up again in April 2012.
My loan is with CBA, I’m on their ‘Wealth Package’, my current rate is 7.06%, I negotiated a lower rate around a year ago (I threatened to switch banks and got a .11% reduction). The ‘Wealth Package’ costs me $350 to implement each year. My loan type is interest only/variable. There is 27 years remaining on this, I owe $409,351.20, $5644.80 of this is in an offset facility. My monthly average repayment amount is around $2400.
To date, I have been getting my tax return in one lump sum. This year I plan to put the majority of the return into the offset account. Based on last year’s return, I’m estimating that I’ll get approx 9k.
I also rent with my girlfriend and a house mate, I pay $520 per month.
I have a government job, it’s relatively secure, I currently make $55,604 pa. I am trying to upgrade my role, if successful, id make 66k pa but there is no certainty of this (I am 32 years old).
I currently have 23k in super also, I am more than happy to use this (if I can) and extra super I accumulate to add to buying property.
Over the past few years, I have been to seminars and done some research online, I’ve met with a few bank mangers etc. Essentially, they tell me I don’t make enough money to get another investment property, this has pretty much zapped my progress/confidence and then there’s always the interest rate rise concerns (which I know are inevitable). My accountant tells me that when I have enough money in my offset account, it would be a good idea to get another investment property. I’ve put this advice on the shelf as I figure it will be a while until I reach this stage and a think I cant afford it. I just got the house valued again to see how much equity I have (22 June 2011) and the real estate agent advised that the figure is 500k. My initial reaction to this is that im a little confused as to how the property has only increased 40k in over two years.
Im sorry to ramble on so my question is.. is there something I’m missing or something bankers/real estate agents are not telling me? Is there something that is glaringly obvious to you guys reading this that I could put in place to generate some cash and put my asset to better use?? Ive shot a few buzz words at you but I don’t really know exactly how to get the most out of my situation. Some sound financial advice would be fantastic. I know I don’t want to take massive risks but I’m not inflexible to practical suggestions. What do you guys think??!
To date, my plan is just to keep the Mitcham property ticking away in the background, continue to rent, then sell the Mitcham house one day in the distant future. Im hoping its value will wipe out my mortgage and give me enough money to buy a decent property outright in the outer suburbs/a cheaper area etc.
Any advice would be very much appreciated, I really want to put something into effect!
Cheers
Anthony
Hi Anthony,
congrats & welcome etc.
1) You have very little in super at present and unless you have a smsf you can't gain any form of control over it. However, if you were in position to, you would be only investing for the long term (at least another 28-33 years time) so it is a long time to lock away your money but the upside is it CGT free once you hit retirement age and income is concessionally taxed up until that time) – super laws change all too frequently so you probably wouldn't go down that path yet….
2) Is your gf going to be a willing participant? ie will she join you in your investments, like your ex? This will add to your borrowing capacity. At present, you have around 20% equity in your current IP, the banks may allow you to redraw some of this equity to act as a deposit for your next property.
3) Is your current loan P&I or IO? Interest only will reduce your repayments (and increase your borrowing capacity) but in a stagnant/falling market will not get you far as the LVR may outstrip your equity, however this works well in a rising market but who knows when that is going to happen?
4) Why has your property only increased 40k in 2 years? It is more like $72k over 3 years or just over 5% annually. Markets do move but are not necessarily as apparent or volatile as equities, as the only time you know how much you are going to make on a property is the day you sell, you may be on a rollercoaster but won't realise it because you are not in the market.
You have very little in super at present and unless you have a smsf you can’t gain any form of control over it. However, if you were in position to, you would be only investing for the long term (at least another 28-33 years time) so it is a long time to lock away your money but the upside is it CGT free once you hit retirement age and income is concessionally taxed up until that time) – super laws change all too frequently so you probably wouldn’t go down that path yet….
Firstly, thank you for your prompt and honest reply. Thank you for the above info, noted.
2) Is your gf going to be a willing participant? ie will she join you in your investments, like your ex? This will add to your borrowing capacity. At present, you have around 20% equity in your current IP, the banks may allow you to redraw some of this equity to act as a deposit for your next property.My gf is a participant, we have a contract in place that my lawyer friend has drawn up. She has gone back to uni so her saving capacity is limited, however she is putting her savings into the offset facility. She is aiming to have contributed 20k by the end of 2013. We do intend on purchasing another property when she returns to FT work. I was just hoping to secure a property sooner while prices are cheaper etc, I am realising though that there appears to be no magic option than to keep doing what im doing and wait, which is ok.
3) Is your current loan P&I or IO? Interest only will reduce your repayments (and increase your borrowing capacity) but in a stagnant/falling market will not get you far as the LVR may outstrip your equity, however this works well in a rising market but who knows when that is going to happen?It is IO.
4) Why has your property only increased 40k in 2 years? It is more like $72k over 3 years or just over 5% annually. Markets do move but are not necessarily as apparent or volatile as equities, as the only time you know how much you are going to make on a property is the day you sell, you may be on a rollercoaster but won’t realise it because you are not in the market.
I am opinionated. Take me at face value, read between the lines.I see your point, thank you for this perspective.
Hi Anthony,
I hit this wall a few years ago. I earn relatively the same as you and by the looks my outgoings would be slightly more. I also rent not PPOR.Have you consulted a Broker? They can find better finance paths and are more creative than banks. Banks will treat you like gold until you have reached your borrowing capacity then kick you to the gutter like a dog.
Also you may have a heap of equity in your property from the last 2 golden years in Melbourne. You could have a healthy deposit sitting right under your nose.
I guess you have to be comfortable in borrowing more and know yourself that you can repay it even if the money is tossed at you.
You have to make the figures work, get a bit creative. Trust me it can be done….;P
Hi Anthony,
From first glance it looks like a tighter situation to move forward but i wouldn’t say it is impossible. let me strategise for a minute here, its what i do for a job!
First thing would be the valuation on your house. Did you only get one real estate agent around? i would get 5! or a $200 professional Valuation is a very good investment. this could increase what equity you believe is there and provide a deposit and buffer for moving forward.
Your tax return this year will be a great thing to have in your bank account too. Do you have a depreciation schedule? how old is the property?
Assuming you can get a better perspective on the valuation, and potentially a depreciation report (depending on the age of the property) this could change your cash flow. I would then get a tax variation form which will allow you to apply any losses against your weekly salary insteas of waiting until the EOFY to make this claim. What this would do is increase your monthly cash flow and potentially make you look better for the banks potentially.
Assuming you can now move forward, i would look at a property that wont cost you anymore money to hold and is in an areas set for good short term growth with long term security. With the right team around you i think you can move forward here but it will be tight.
You asked for non biased views here, i guess this is my personal opinion but also what i do for clients so there would be an element of biasedness in the fact that this is as strategy that i have to deal with quite often and i use a fairly similar structure for most people in this situation.
Cheers,
Josh Atherton
[email protected]To be blunt, you've had the property for 3 years, and you've only got $5,600ish in your offset account. That suggests a savings ability of less than $2,000 per year. Quite apart from what the banks/etc say, are you sure yourself that you can afford another IP?
Anthony_Black wrote:Over the past few years, I have been to seminars and done some research online, I’ve met with a few bank mangers etc. Essentially, they tell me I don’t make enough money to get another investment property, this has pretty much zapped my progress/confidence and then there’s always the interest rate rise concerns (which I know are inevitable). My accountant tells me that when I have enough money in my offset account, it would be a good idea to get another investment property.Hate to say it Anthony .. but both your bank manager and your accountant are right.
It WOULD be a good idea to get another property. It would also be a great idea to take over Channel 9 .. in fact why not just stage a coup and become Australia's first Dictator. The options are limitless. The reality is your capabilities.
At the moment you have made a little contribution to your property and from the 428k you started with (dont forget that stamp duty) you are now with a little equity and a little bit of the loan repaid. Kudos to you, thats a great start. But your current LVR is what the banks will be looking at. And even with the best valuer in town .. he's still going to come back and tell you that your actual ownership/equity in the property is approaching 20%. There is a reason that most banks are conservative 80/20 loan issuers. It allows for a fall of up to 20% (your ownership of the property) before they call their loans in as you dont own any part of the property anymore. Banks dont like to lose. In fact they gear it so regardless of what they do, they make money.
So, talking to the banks is going to be a little hard. You've got a reasonable asset .. but with the level of gearing you are working with on it .. its going to take another market move before it does anything. So, you may be jumping into the dealing a little too fast for either using your equity .. or realising your property and making enough of a deal on it. Wherever you are in the property cycle its always about timing.
And, now is not the time to sell .. its a time to buy if you can.With whats happening in the US (and regardless how immune we think we are to whats going on .. we are NOT) we are heading for a once in a lifetime period of major inflationary pressure. The US govt is trying to pay back debts .. and printing more currency to do so. Thats a recipie for higher inflation. And in this country we are going to be exposed to similar pressures thanks to our stimulus plan.
That will change the value of money. Changing the measures of how your property is valued. Reducing the relative size of what your mortgage is. And you'll end up with more equity .. and probably more cashflow from your job. Both will mean your ability to borrow will increase.
Outside of that .. a second job … a means to increase your cashflow .. or a guarantee are all ways to push for getting that next property. Dont let a bank manager sway you … think different.
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