Hi folks,
I’ve been lurking around this forum trying to absorb as much information as I can: I have been reading plenty of books/webpages/blogs about property investing too. I am looking for some in ideas on how to progress from here.
I’m 23 years old living in Adelaide and keen to start looking for an IP. Currently working permanent part time (earning 30k net per year) living at home with my parents. Over the last year I’ve managed to save 20k, and my savings account is now up to 35k. Two years ago my parents transferred their IP into mine and my sister’s name: my share is now valued at 150k, I receive just over 6k rent per year, therefore my income totals 36k per year. There is no money owing on this IP.
Initially the plan was to use my saved 35k as a deposit for an IP. I have a good savings record and can save roughly 1k a fortnight. At the moment I don't have many expenses so saving is easy. But after using some mortgage calculators quickly it seemed like the banks would only loan me a small amount (170k or so?), probably due to my low income. However, this would still be enough to purchase a cheaper IP after some research. Can I extract some more money out of the banks provided I have LMI?
After some reading I discovered the success property investors have had using equity in their homes/IPs to buy more properties. Taking that into account, would it be possible to use the 150k equity in the JV with my sister as deposits for IP's? If this is possible, I could use 120k from this (80% of 150k) as two or more deposits to purchase multiple IP’s straight off the bat? Sounds good in theory but I’m not sure if I would be able to service the loans, so I don't think the bank would agree to this due to income (unless they were close to neutral or positively geared). If I understand correctly the bank would feel more secure doing this but I would come across the dangers of cross collateralization (if I understand CC correctly that is). If this was possible I could hold onto the 35k to fund improvements on the purchases with my dad.
I feel that my parents gave me a nice headstart, now I just want to make the most of it. I apologise in advance if my ideas and questions are silly. But then again people say there are no stupid questions, only stupid answers…..
Any advice would be greatly appreciated
Daniel
Hi Dan welcome to the forum and congrate on your great headstart, your in a great position!
Firstly lets start with the basic:
There are 2 important part when applying for a loan; one is the serviceability ( meaning how much can you afford per month to service a loan, based on IF the interest did go up by 2%– serviceability calculation based on current rate + 2%). The 2nd is the deposit- ie loan ratio (LVR) …when both of these foundation meets half way you got yourself a loan
Your issue is not deposit, but more serviceability.
1, LMI is not going to help in serviceability, it helps with ppl who lack deposits
2. Releasing equity from your IP wont make a difference in improving how much you can borrow – as an amount you “release” is borrowed. – however it will help you keep your 35k savings for another uses ( improvements etc).
I done a basic calculation, i presumed no credit card, no HECS debt, no debt what so ever ….your max borrowing capacity( serviceability) is
$160,000- $170,000 PPOR purchase—HOWEVER if the next purchase is for a investment getting rent of $300pw– then your borrowing capacity goes up to $240,000- $260,000.Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Hi Daniel,
I take the option of risk management first. Rather than look at buying multiple properties ' straight off the bat'. look for one in your price range. ie based on what you can borrow now. Lets say that Michael Chan is correct and you can borrow somewhere between $170 – $260k, then look for a property that you can buy in the lower range and that you can add value to and create your equity as fast as possible. You will need cash on the side to do this so the lower range maybe best.
Select the type of property based on what you have to do, research, buy, renovate, add a bedroom, whatever it takes, get the place revalued and also rent it out for more than first estimated.
Once you have 2 IPs, then look at your next option. Do I use the house your parents gave you as collateral to buy another or do I look for partners ( your sister perhaps) to join forces financially and buy another IP and leave the first house as back up?
You have many options to continue investing even though your current serviceability is low.
Ian
http://theblockblog.com
Free Property Investment Information, Tools & Resources for Investors with a Sense of Humour.Thanks for the replies.
Given my potential issues with serviceability and low borrowing capacity, would it be more worthwhile to:
1) Look for a property in a lower-priced area to improve to increase both rental income & capital gain. The problem here is I am a little worried about the potential issues with dodgy tenants in these cheaper areas (though being careful about choosing tenants and having a good property manager would help here).
2) Look for a cheap apartment in the inner city. I notice that rental yields are fairly high, but I'm thinking capital gains would be much lower.
Hopefully over the medium term I will be able to secure a better job which will bring in more income. Given I am looking mainly for growth in equity rather than immediate income, option 1 makes more sense to me. It would also help when looking to buy more properties in the future.
Both options most likely would not pay good capital gain (compared to the average capital city’s increase)…finding a low price property that gives good yield + Capital gain ( without any work) is like winning lotto in the property investing game,
You can “hope” for growth…but yea….
My personal theory is; Capital gain comes in two form
1. can be created ( renovations, developmental, sub , granny etc…) so if you want capital growth buy land/house where you can easily make changes..2. Location – Gentrification of the area, transport, work hub etc…
End of the day you need to have a SET strategy; don’t just go and buy because you can afford too…..
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Hi Daniel,
I would use the equity in your parents IP (its in your name so assume they trust you…) to purchase your own IP. Set up an interest only loan, with a 100% off set and place your 30K in it (good to also have a buffer account – maybe in UBank earning 6.51%), do a tax variation through the ATO and buy a new build in QLD – get 10K new builders grant (apply for it your set and you get it with 10 business days – straight into the off set), then sort out your depreciation of new fixtures. Once you have equity built up, set up a LOC account to pay property out goings as well as purchase high yielding share, additionally set up a Margin Loan – 60% geared is a good balance and just let the interest capitalize, then have your dividends go into your off set until you are ready to go around again.
Good luck, good buys in SA also!!Hi Dcwwood
Just wondered why you would recommend investing Daniel''s $30k at 6.51% and having to pay Tax on the interest at your highest marginal Tax rate when you could place the funds in a 100% offset accoount and get circa 7% Tax free.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
The trouble with owning a property jointly with another is that when you want to use the equity she will have to agree and participate in the loan. The same with the opposite situation if the sister wanted to borrow you would be required to be on the loan or to guarantee the loan. This would mean you would be both assessed as borrowing the full amount.
eg, if the property is worth $300,000 and you each borrowing $120,000 then for subsequent loans you will be assessed as owing $240,000 each for this property. And guess what happens if the sister stops paying her share of the loan?
So there are 2 risks here:
1. Double whammy hurting borrowing capacity, and
2 Risk of one party defaulting.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Richard, I did suggest for Daniel to place all his 30K into a 100% offset account, but the way I structure my investment finances is to also have a buffer account. Ubank is simply a high interest online saver account – yes you pay tax on it but its there as a ‘buffer’ so if I ever want it I can get it quickly and not take money out of my off set account.
For my wealth strategy I like to have on each IP an interest only loan, 100% off set account, LOC, credit card and buffer account – but I also have a margin loan – its a bit of effort to set up, but worth it!!
Terryw – I had no idea that would be the case. So just for my own understanding, even if I wanted to use the equity on my own my sister would still have to agree and be on the loan. That's a pain, she has no interest in investing.
Danrc wrote:Terryw – I had no idea that would be the case. So just for my own understanding, even if I wanted to use the equity on my own my sister would still have to agree and be on the loan. That's a pain, she has no interest in investing.Yep, because she owns the house as well….should u default on your loan, the bank needs to be able to legally take the house…not half.
So she be signing the mortgage docs as either co-borrower or guarantorYou can buy her half of the property off her, and that can be your IP if you really want.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
dcwwood wrote:Ubank is simply a high interest online saver account – yes you pay tax on it but its there as a 'buffer' so if I ever want it I can get it quickly and not take money out of my off set account. For my wealth strategy I like to have on each IP an interest only loan, 100% off set account, LOC, credit card and buffer account – but I also have a margin loan – its a bit of effort to set up, but worth it!!Hi DC
Richard's right – you're better off having this money in an offset. It will carry out the same functions as the Ubank saving account – albeit without paying tax on the interest. The cash in your offset account should be just as simple to access as the cash in your ubank account.
Also, there's no real point in having an offset against each IP loan – if you have a PPOR, you'd be best served just placing the offset against that loan.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Jamie we can only try.
I was under the impression that an offset account could also be used as a buffer account for cash also but maybe i am getting old fashioned. Been a week or two since i last bought a property so might have been getting rusty lol.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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