Can I afford an IP or put extra in PPOR?

Hello Ravenhard,

Good question, it is what you want out of the next ten years or so that matter really.

If you are going to be a property investor then get ready for debt. Have a reason for investing in property, see the end game.
Our properties are with us for life, they will provide an income stream as we wind down our working life.
The hands free path as it were.

"But having a think about it I am not totally convinced we can afford it"
In my opinion on the numbers you have written here you can afford it.
Is the property new or near new and thus providing a strong depreciation?

"how we should go about getting finance"
I recommend a broker who owns investment property (but then I would)
You may want to consider using a second lender.
If not then no cross collateral.

"what are the tax implications"
You will have some tax deductions available to you as you are now a property investor, these are listed elsewhere, but I like new or near new for investors who have good income and want a hands free ride for a while. (I spent today trying to find a leaking water main in the tree roots).
There will be advice that you should buy in your name based on the income differential, but things change over time and sometimes both having skin in the game is good.

Where to buy?
Well I like Darwin, but that could be because i am living there. It is nice to be able to see the property the first time round, but you want a good renter in location and dollar value. Capital gains history may be guide to capital gains future. No 'lemons'.
We have properties that have been GFC'd below purchase price and we have properties that have held and risen, look for that.

I would only pay LMI if I had to, anyway to avoid is great. Tap CBA for a loan for future investment properties equal to 25% of the value of the property you want to buy. Don't draw it down until you need it. If you home values at $700k there is $60k spare there by my calc.

As a property investor I don't see the value in paying off my home loan until I have my fleet up and running (this is called opportunity risk), flip side to that is the home loan is the only non deductible debt you have so many will advise that you chew away at it.

Good luck
Nick

Hi Ravenhard

Welcome to the forum.

Your borrowing capacity based on those numbers should be quite high.

However – you need to look at your personal budget and work out how much you can afford (and are willing) to spend on an IP. I haven't crunched the numbers on the proposed purchase but it doesn't look like it will be overly burdensome in terms of holding costs.

For funding the purchase, I'd be inclined to take your current loan up to 80% LVR which should give you about $60k to play with – you can use that for the deposit/purchase costs and keep your savings parked in an offset attached to the variable loan against your PPOR.

Cheers

Jamie

It sounds like there is no doubt that you can afford another IP, but with the new IP comes the extra debt and undoubtedly extra stress. Growing your debt does seem to be a way to become financially independant some time in the future, but that being said it can also lead you down a dangerous track. So I never see it as a bad thing to pay down your PPOR as much as you can, it will free up your extra cash to have a higher quality of life, or invest in other ways.

That being said, I do like how you plan to pay off your IP, a lot of people seem to be under the impression that because it is tax deductible, it is not a bad thing to be paying interest on a property for years and years to come. I would much prefer to just be free and clear of any debt and simply sit back and collect the rent, not have to worry about banks chasing me down if things do become a bit tight. This approach may be a bit more conservative than other ways, but I believe the risk is a lot less.

Anyway back to your decision, I would agree that you should avoid paying the LMI, hence an 80% LVR is beneficial. And yes I beleive taking 60k out of the property, allows the extra interest to be tax deductible. I believe I read this in Steve McKnight’s book, but you probably should double check with your accountant before you do this.

Now back to affordability, looking at it a realistic way, hope this makes sense

You have $170,000 in combined income, and assuming you can rent the place for $360 per week, that would add an extra $18,720, since they only accept 80% of rental income, reduce this to $15,000. Giving a total gross income of $185,000.

Assume you pay an average tax rate of 35%, leaves your net income at $120,000.

Taking away living expenses, I am not sure what yours are but assume $40,000, gives disposable income of $80,000.

Assuming paying all debt in interest only terms, at an interest rate of 8.00% (I know you can probably get 6.00%, but I believe it is best to be conservative), paying $80,000 at this rate, gives you a total debt allowable of $1,000,000.

Since you are looking at increasing your existing $500,000 mortgage to $860,000 (the $40k in your savings taken up in stamp duty and buying expenses) then it looks like you should be able to comfortably afford the new property. However I have made a fair few assumptions above, so you would have to look at what would suit you in your situation.