Good Evening all,
What a great forum with heaps of information. I was surprised how many people were posting on Christmas Day and NYE!! It was also a little sad that I was looking around on here as well – but I didn't seem to be lonely.
Anyway, this is my first post and as part of my NY resolution I have decided to stop spending (holidays are fun!) and to start taking property investing a bit more seriously. It's always been at the back of my mind, but now I'm looking for general advice – or specific if you like – about where I should head.
Current situation:
PPOR – Value ~ $620k. Loan ~ $558k. LVR 90%. Principle & Interest Loan.
Investment Property – Value ~ $425k. Loan ~ $274k. LVR 64%. Principle & Interest Loan.
Additional cash sitting on PPOR offset – ~ $50k.
– The investment has been used for collateral on the PPOR. The investment was our first home, then we used the equity in that property to buy the PPOR. That equity ($100k) I've added to the PPOR loan amount.
Considerations that I think are important.
- I'm still youngish at 32, married with 1.5 kids (next due in a few months). I'm definitely happy to be in for the 'long haul', and think it's ok to be highly leveraged and to acquire property now. This might mean having to pay LMI, but at the moment that might be worth it in the long term?
-
Unless something seriously dramatic happens, I should be able to carry a large portfolio to see through the downturns. ie. If the property+ are vacant for a period, increased interest rates etc. I'm also insured fairly well, I am probably worth more dead than alive
- I am pretty happy with my super overall, so if I'm going to invest then I think property is a good way to diversify.
So, the questions are:
- Should I use the $50k to get another investment property with an LVR of ~ 90% and just pay the LMI? I think the LMI cost is relatively small if the property value increases even at a moderate rate in the short term.
- Should I just save up another $30k+ to save on the LMI?
- I need to do something with my loans. I guess I could swap them to Interest only to try and build up the available cash to purchase the next property?
- Something else that I haven't considered? Not invest at all and keep traveling?
Thanks in advance!
LMI is not a bad thing depending a a number of things (loan size, risk tolerance, etc). For me personally, its the cost of doing business.
I would personally convert all loans to interest only and create a "superman" offset account against the PPOR loan. Have all income traffic (i.e. salary, rent, bonus, etc) going into this account since it is not tax deductible. So you want to keep this as low as possible and the IPs as high as possible.
I would also consider upfront valuations to see how much equity I can tap into – it is most likely that different lenders/valuers will value your property differently.
Lastly, if you are going to go LMI – aim for a 88% LVR as LMI skews at point 88% and 90%. so definitely aim for 88%.
TheFinanceShop | Elite Property Finance
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with your loans.
i would consider changing at least the investment property loan to interest only. As that is the tax deductible loan. And redirecting the "principle "component into your offset account of your PPOR. As your PPOR has the debt that is not tax deductible. Thus your principle payments will pay more off the principle if you have more in your offset account.
Change both if you want. And have the discipline to set up a direct debit every pay (not hard) to continue to pay the same off into your offset account. Other people require the principal and interest because it's the only way they save money.
50k would get you a 200k property with non LMI. Depends perhaps you could try for a cosmetic renovation to then revalue and pull your equity back out. Creating the leapfrog effect. Where you use the same 50k again and again to purchase and revalue. It's too small a amount to look at any property development really.
Hi The New Guy
Firstly welcome to the forum and i hope you enjoy your time with us.
Personally i think i would be restructuring your existing IP loan to an interest only loan and then looking at taking out a further equity loan to release more equity for another IP.
You could also look at creating a equity sub loan on your PPOR loan to allow for further access to funds.
LMI is not a bad thing and is a Tax deductible expense where the funds are used for investment so with sufficient serviceability there is no reason why you can't look to increase your overall property portfolio.
You mention that your Superannuation is sufficient but there is no reason why you can't look at setting up your own Self Managed Super Fund and gearing within this.
Make sure your Broker structures it correctly and you should set yourself up for a prosperous 2014.
Cheers
Yours in Finance
Richard Taylor I Ph: 07 3720 1888 I [email protected]
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Hi all,
Thanks for all your replies. I'll let my wife know that no one recommended that we continue travelling
To answer some of your questions and add a few comments:
- I have organised a meeting with the bank tomorrow. First off the list is to change IP loan to interest only.
- I will chat about a sub-loan / line of credit. That sounds like a good safety net if required.
- I'm not too keen on using the equity in any existing properties as that will cross collateralise all my properties in some weird triangle mess. So, I'm also going to discuss the 88%-90% LVR loans and costs.
- With super, the vast majority of my super is in the PSS – which is a defined benefit fund from the Commonwealth Public Service. I am pretty happy to leave it there, but it's worth considering for my private sector super.
The other benefit of doing a stand alone loan is it won't lock me into the same vendor. At the moment I'm with NAB, who aren't bad, but I have a loan under DHOAS with them and their very good for those loans. Now I have the ability to go with any vendor and at least provide some incentive for NAB to come to the party.
So, in general I'm thinking:
- Investment property ~ $350k. 90% LVR. $10k for stamp duty and $5k for other expenses. If I get a line of credit then that should make this relatively safe. Otherwise, I can save up $10k-$20k relatively quick, possibly before I would even settle on a property since I haven't started looking in anger yet.
Let me know if I'm off track, or you have any other ideas. Meeting with the NAB tomorrow.
You do not need to cross securitise your properties in order to access equity. You just need to set them up as separate. It is more likely that the lender will recommend that you cross securitise your properties (in order to make it harder for you to leave the bank) but tell him/her that you want the properties to be standalone.
Is there a reason you are going 90% because you enough equity to go less.
Also if you are going into LMI aim for 88% rather than 90%.
TheFinanceShop | Elite Property Finance
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Shahin,
Can i clarify the advice you gave regarding superman offset. For my IP loans, its IO and no offset account. Is it better than to have at least 1 offset account for every investor? Or would LOC work?
With the valuations, am I right that its tax deductible?
Thank you
Christine
Thanks. Can you provide a bit more detail about how I can go less than 90% by using equity? I'm using total loan / total value and getting around 80% (832/1045), so I assumed that I couldn't go any higher, is this not the case?
I'll remember to aim for 88%, in fact I'll ask for a LMI cost for both just to be sure.
Most people will have a PPOR Loan and one or more investment loans. PPOR loan is not tax deductible and IP loan/s are SO you want to keep the PPOR Loan as low as possible (without paying down the principle in case you are going to convert it to an IP in the future) and you want to keep the IP loan/s as high as possible.
Most lenders provide free upfront valuations so you should be paying anything.
TheFinanceShop | Elite Property Finance
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TheNewGuy wrote:Thanks. Can you provide a bit more detail about how I can go less than 90% by using equity? I'm using total loan / total value and getting around 80% (832/1045), so I assumed that I couldn't go any higher, is this not the case?I'll remember to aim for 88%, in fact I'll ask for a LMI cost for both just to be sure.
What is the purchase price and what is the State?
TheFinanceShop | Elite Property Finance
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I’m looking at about $350k in qld.
Ok. I’ve got it. I’ll bring it up tomorrow. Thanks.
Ok you will need a minimum deposit of $82,000 plus legals so lets say $84,000 in order to keep the loan at 80%.
If the IP is worth $425k then you have $66k in equity there so you just need a further $18k.
I would order the upfront val ASAP. NAB does this. Do this before submitting any applications.
Also you have already been cross securitised by the looks of it so I would clean that up sooner than later.
Also as you have already paid LMI – you will have this as credit.
It all sounds complicated but its actually quite simple.
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
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Hi all,
Thanks again for all the comments and help. I've had the meeting with the bank and this is what I've found out / started.
- There is no security across the two properties. Excellent.
- I'm turning the IP loans into IO.
- I'm going to get a Line of Credit on the PPOR, but it needs a valuation, so I've started that. I can't get the LOC over 80% of the property value without further LMI.
- I can get a loan for a $350k property. Depending on how much the LOC is will really determine how I go about getting this loan, in relation to LMI / free cash etc.
- FYI. On a $350k loan. 90% loan, LMI ~ $5800. 88%, LMI ~ $4000. 85%, LMI ~ $2100
So, I guess I'm going to have to start looking more seriously for a new property.
Hi NewGuy,
Hey, great news above – well done !!
Just one thing I wanted to run by you – I think I recall you saying that you had borrowed against the IP to purchase your PPOR (at least, that is how I read this) :-
Quote:The investment was our first home, then we used the equity in that property to buy the PPOR. That equity ($100k) I've added to the PPOR loan amountOK, but what do the actual loans say? Does the IP actually have $374k in loans against it, and not $274k?
All I am cautioning is that you confirm with your broker/lender/accountant the complete situation. See, if the $100k IS against the IP, then that $100k is NOT tax deductible (as the purpose of the loan was NOT for investment). Of course, I may have misinterpreted your writings too…..
Just a thought, as now is the time to clear any such things up prior to moving forward,
Benny
Hi Benny,
Yes, that is what I said and you interpreted it correctly. That $100k is against the IP and unfortunately is not tax deductible. However, I left out some of the detail in my posts. That $100k is actually in a separate account, so I have an account of $274k and one of $100k that are both secured against the IP. So when it comes to tax purposes I just use the $274k account and it saves plenty of complications at tax time.
What I've actually decided to do (in more detail), unless someone has a better idea is:
$100k account. Interest Only. Variable @ 5.18%. 100% Offset account. IP secured, but not tax deductible.
$274k account. Interest Only. Fixed 2 years @ 4.99%. IP secured. Tax deductible.
$458k account. Interest & Principle. Fixed 2 years @ 4.89%. PPOR. Was contemplating IO, but I feel like I should pay some principle down, even in acquisition phase.
Offset account – linked to the $100k account. This is the superman type account that Sharin referred to, which I currently use in this regard anyway.
Line of credit – 5.73%. No set up fee, no monthly fee, etc.
This is with NAB's Choice Package (billed to the $274k account), so there are no fees for pretty much everything.
The expectation for me is when I nearly pay down that $100k by using the offset account, I can then start looking at acquiring another property.
Happy for opinions.
Hi TNG,
Quote:So when it comes to tax purposes I just use the $274k account and it saves plenty of complications at tax time.Ahh, all is good then. The following comments from you sent my thoughts in another direction:-
Quote:Offset account – linked to the $100k account. This is the superman type account that Sharin referred to, which I currently use in this regard anyway.Since this is IP-secured, and since you are considering paying it down via the Offset, it may be worth looking at doing just that. Pay it right out, THEN re-mortgage to purchase a second IP. This then makes the borrowing tax-deductible from that time on.
Of course, doing this just to save tax shouldn't be the main concern – but it does appear to me to help "clean up" your structure for the future. I'd be interested to hear what more knowledgable people on here think of that, in case there is an even better way,
Benny
Hi Benny,
That's actually a good idea. Depending on how long it takes to find the next IP, I might be getting pretty close to paying it off. So I'll keep it in mind.
Thanks.
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