3 years, 3 properties, $400k equity, what now???

Hi Everyone,


I've been reading through PC for some years now finally posting something here.

Internet is a scary place but I’ve been inspired by reading about other people’s story, so hopefully this post will be beneficial not just to myself only but the people reading/contributing to it as well!

Please kindly understand any English errors as English is not my first language.


Here is my story,


1) 2015 - Bought first PPOR at $555k. A unit in the eastern suburb of Melbourne. LVR 80%.


2) 2016 - PPOR valued by bank at $590k, so decided to pull some equity out and bought first IP at $301k. Similar properties were being sold at $320~$330k. Located near Ipswich in QLD, rented at $340/w, covering all the costs. Purchased through a buyers agent. Property is fairly new, about 5 years old. No significant maintenance is required. Also no more renovation / land available to do any extra value adding activities. Overall LVR 82%.


3) 2018 - Got very fortunate and a friend passed on an OTP house+land package signed in 2016 at $517k. Location near the Tullamarine airport. Friend cannot settle on completion due to finance issues, so I settled on this property as a nominee purchaser. Paid the friend $20,000 as a friendly thank you gesture and the property is worth $620k if sold immediately. Rent is $480/k so slightly negatively geared, but still very happy to take a brand new property significantly under market value, with reduced stamp duty (as the contract was signed in 2016). No refinance was done as I had saved just enough to make this transaction happen. Overall LVR is now around 73%.


Current situation.

1) PPOR - Worth $620~$630k, loan $472k

2) IP in QLD - Still worth the same, $320~$330k, loan $265k

3) IP near airport - Worth $620k, loan $413k

4) Overall equity is around $400k. There's been a lot of transaction costs throughout (stamp duty, buyers agent fee, lawyer etc) but I'm quite satisfied considering the starting money of $130k 3 years ago.

5) Current cash on hand is very minimal due to recent purchase of third property.

6) Current income is just sufficient to cover for living costs and negatively cash flowed IP.

7) Maxed out on borrowing capacity.

8) I'm in my mid 30s, married with one child and single income.


Please provide any ideas/advice/comments as what I should do next to improve the property portfolio.


Thank you


Sam

 

If you have maxed borrowing capacity then you either need to reduce debt or increase income, or both. I would strongly advise confirming with a mortgage broker that you have in fact maxed your borrowing capacity (you have probably done this already).

Not a bad spot to be in, there could be worse things to do than spend a few years just enjoying yourself and watching you portfolio increase in value.

There are several ways to increase income, it may be through your job, increase rents or take up something part time that you enjoy.

Congratulations on your position, its a good place to be.

 

Thanks for your comment. I've already checked with the mortgage broker and was confirmed I've been maxed out on my borrowing capacity. I barely made it for the latest purchase..

Assuming the property price and rent will grow (hopefully), would you be keen to share your thoughts about at what point in time you would move onto doing the next deal and what you would do?

 

hi @Samj40004, nice first post, a great position to be in

what is your plan, or what do you want to achieve via property investing? pay off PPOR debt quicker, debt free, passive income, certain size of portfolio?

 

Did you use cash for some of the last purchase?

 

Thank you. The market and my friend's offer worked well for me. I want to be able to create a good amount of passive income. Tactic is to purchase as many properties as possible at earlier stage, and sell some off when the rental income will provide enough income, and live with little or no debt. I read about you Eric and you did a really amazing job!

 

This is a classic example of the type of thing I post about regularly. This example highlights precisely why you can only go so far using the pre APRA buy, hold, harvest approach. It also highlights how flawed that model is post APRA.

While this is an excellent position to be in, you are now kinda...well, stuck.

Pre APRA, the 400K of equity could probably have been easily harvested and 3 or 4 more properties would probably have been fairly straightforward.

Post APRA, the 400K of equity cannot be harvested and no additional purchases are possible. t may as well be 600K of equity. Or 800K. It has the same value to your borrowing capacity right now... zero

Your 472K PPOR debt is now your biggest problem. While all the debt will be hurting your borrowing power, that 472K offers no rental income or neg gearing whatsoever on a lender servicing calc. So it really hits your capacity hard. Barring a very large pay rise or a lottery win or similar, getting rid of that debt is the key to unlocking your future borrowing capacity

If you turned your focus to cash cows and debt reduction, and paid down a lot more of your 472K PPOR debt, you'd have superior borrowing capacity than you have now and whatever equity you had could actually be harvested. Otherwise, you may be stuck where you are for many many years....

If you sold 2 of your properties and replaced them with 2 cash cows, you'd be able to generate an extra @ 16K net per annum ( @8K each) ... perhaps a little more.That would aid the rapid repayment of the 472K PPOR mortgage.

Some questions...

Do you have the ability to hold your current properties and get 16K net in extra rent from them?

Do you have a a 20K salary increase ( 16K net) on the cards ?

If not, and if you wish to expand further , your way forward seems very straightforward to me....

If you do not wish to expand any further, you need not do anything, I guess.

Also keep in mind, with additional scrutiny of living costs likely to be coming everyone's way sooner rather than later, borrowing capacity looks like its only going to get tougher... so procrastinating will not help ...

I dont say any of this to be mean or harsh...but this is the way of things now.

 

Yes. All from the savings from work income. No refinance.

 

This could have been better handled so as to save you tax and help pay off the home loan sooner = and greatly improve serviceability.

 

How would you have done it better?

 

Paid down the non-deductible home loan and reborrowed.

Tax Tip 9: Don’t use Cash in Offset account to Invest Tax Tip 9: Don’t use Cash in Offset account to Invest

Tax Tip 6: Using Redraw to invest Tax Tip 6: Using Redraw to invest

 

Thank you for the insight. My answers to both your questions will be no. Rent maxed out at current market level, no additional work can be done to lift it further. May be I should have bought something with GF potential for my first IP. Also my annual income won’t be going up much in the next two years. Some questions for you..

1) Why did you mention 20k income specifically? What difference will it make?

2) What level of return did you mean by cash cow?

3) Pre APRA - did the bank lend people money based on the equity, not focusing much on the income? What’s the major change?

 

Thank you for the insight. But you should review this link. .

TR 2000/2 - Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities (Published on 1 March 2000)

 

What do you think that ruling implies and how do you believe it refutes Terry's strategy?

 

Are you saying you borrowed money?

 

Hi @Samj40004,

Is your wife able to produce any income?
Single income is tough if you’re only just getting by and not likely to increase anytime soon.

 

1. 20K Gross equates to @ 16K Net, which is what 2 x cash cows would generate per annum

2. @ 8K CF+ each, or 16K CF+ if you have 2.

3. banks didn't lend based on equity Pre APRA , but borrowing capacity was @ twice what it is today - particularly for those carrying debt on several INV properties, so the difference is that equity was able to harvested and used towards additional purchases much more readily under that credit environment. If for example your borrowing capacity was double what it is today, your 400K of equity could probably be harvested and used towards 20% deposits + stamp duty/closing costs for additional purchases. The other 80% required to complete those purchases would likely also have been available if your borrowing capacity was double what it is today.

The other consideration which didn't really apply pre APRA is the P&I resetting of IO loans... I don't know whether your INV properties are secured by IO loans but if they are, and you have no borrowing capacity left, your loans will re-set after their IO terms expire, and you will be forced onto P&I repayments. If that happens after 5 years of IO, your repayments will increase by a little over 50% when they re-set to P&I. That assumes the P&I rate is the same as the IO rate. The impact may be a little lower if you can negotiate a lower rate for P&I than you are currently paying for IO. But its going to be a significant increase to your holding costs either way.

So however you look at it, getting rid of PPOR debt as quickly as possible is the single best thing you can do to

1. improve borrowing capacity
2. improve holding power when loans re-set

This is something that every investor with PPOR debt and 2 or 3 INV properties running IO , and who have little or no capacity left, should be getting their heads around.


If you arent able to afford repayments that are 50% higher, extra income - whether from salary ( which you have ruled out ) or rental increases( which you have ruled out) is just so valuable in a post APRA environment . In your case, because those options have been ruled out , I'm suggesting you could consider selling some of the properties that have made you the growth/equity so far, and replace them with cash cows so that you can attack the PPOR debt .

It will position you to move forward again in the years to come. If you dont reduce the PPOR debt, you will need to increase your income significantly or face being stuck without the ability to continue purchasing... for years

There is simply no escaping this reality. Every broker on this site will confirm that once you reach your ceiling ( as you have ) you are stuck unless you take a different tact.

 

Thanks for the kind words.

Re borrowing, as you indicated, if can't buy more properties at this point of time, maybe a good idea to release some equity from the current portfolio and park it in offset account for future investment (lending can change quickly), and maybe you or wife wants go get a second income at some point of time.

 

So you are valuing your equity at 400k assuming the current valuations hold.

Your debt unless I'm miscalculating it is 1.153 million. That's a lot of debt for a single income family to hold, even on a good income.

I would be sitting down with your significant other and doing some goal setting and figuring out what action to take next.

 

@Samj40004 well done on what you've achieved so far.

This is a personal question, so no pressure to answer or maybe inbox me if you prefer..
If 80k is considered average income, 100k -above average and 120k -high income, which of these is your PAYG closest to? I'm just wondering how you are able to manage paying for 3 properties with just 1 income plus one of them being a non-income producing asset. Is it the high depreciation benefit that is helping you stay afloat?

Not criticising you here, I'm just trying to compare to my own situation. Please inbox me if you do not wish to disclose here.