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

Discussion in 'Investor Stories & Showcase' started by Samj40004, 9th Apr, 2018.

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  1. Samj40004

    Samj40004 Active Member

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    If I can outline a little bit of my thoughts after learning from the replied posts..

    1) With cash flow, I have 2 more years of IO and won't have so much issues. Even with the negative gearing from the recent purchase, I am paying the bank less than what I'd be paying if I rented my current PPOR. I could be doing better with my CF as Euro73 suggested but I'm not complaining much.

    2) If the bank can no longer offer IO, I will end up selling some. I'll be happy to wait for 2 more years and see if this turns out to be the case for me. During the 2 years, even at 3% growth rate I'd get about $100k CG. If 5% $160k, 7% $227k.

    3) Overall, the interest rate is likely to go up further, and banks started charging higher rate for IO. I don't want to lose the opportunity of CG from my portfolio, so in this 2 years time I'll look for ways to boost my income.

    Please feel free to leave more comments. I'm learning a lot and sincere thanks to everyone for the posts! :)
     
  2. The Y-man

    The Y-man Moderator Staff Member

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    Basically that is what we have done over the years - we didn't buy as good a stock as you seem to have got, and we had a lot of smaller apartments etc. Over the years, we sold these to either pay down debt or "trade" them for better properties.

    The Y-man
     
  3. Samj40004

    Samj40004 Active Member

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    I got curious by who you are referring to by ‘we’ but I guess that’s not the main topic here.. What were your goals when you purchased a lot of smaller apartments? What type of properties did you consider ‘better’ when you traded those apartments? It must have cost you a lot in that selling and buying process! :(
     
  4. Samj40004

    Samj40004 Active Member

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    Thank you for your posts I am learning a lot from you!

    If I understood correctly you are emphasising heavily on the importance of cash flow. It gives you better borrowing power, can withstand the changes in banking conditions, allows you to retire on passive income etc. Income tax is heavier than CGT but depreciation allows for tax savings. This is all great. After all investment is about return on the money spent. But then wouldn’t you be better off by focusing more on commercial properties rather than residential prioerties?
     
  5. euro73

    euro73 Well-Known Member Business Member

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    It gives you extra income, which if used to reduce debt will lead to improved borrowing capacity.

    Commercial properties are great. Nothing wrong with what you are suggesting. But they are generally more expensive, and generally higher risk of vacancy as well.

    In very simple terms, if they are tenanted and running as you hope they run, the numbers are great. But if they are vacant, you will need deep pockets to service the commercial loan.

    Also - if you don't have any additional resi borrowing capacity at this point , you certainly wont be qualifying for commercial lending either :)

    For you, the ticket to accessing these things down the line is getting rid of that 472K PPOR debt. I suggested selling 2 of your properties , taking the profits and using them to reduce a nice chunk of the debt, and replacing the 2 properties with 2 cash cows to finish the job off because it would transform your borrowing capacity position quick smart. Basically it would mean the 400K of equity ( lets call it 300K of after CGT is paid) would actually become useful, rather than useless as it is currently. Right now you are literally wasting that 400K. Its doing nothing for you. It is useless.

    Imagine this scenario.

    You sell 2 properties, pocket the 400K ( 300K after CGT ) and reduce your PPOR debt to 172K. You dont put it into offset ( that doesnt assist borrowing power) you pay it directly off the loan. ( that does assist borrowing power)

    Then you drawn down on some of that equity ( because you have borrowing capacity again) and use it to provide 20% + stamp duty for the purchase of 2 x cash cows to replace the 2 x vanilla INV properties.

    Then you continue to make the same minimum monthly repayments that you make now ( based on 472K balance) plus you use the extra 16K per annum that the 2 x cash cows generate, and you attack the 172K of remaining non income producing non deductible PPOR debt. You'd be able to pay off the 172K owing on the PPOR in just a handful of years .

    Then, if you wanted to you could add 1 or 2 more INV properties or start investigating commercial opportunities, or start pushing extra contributions into your Super...

    The point is, getting rid of that 472K mortgage is the key to unlock these opportunities.
     
    Last edited: 13th Apr, 2018
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  6. Beano

    Beano Well-Known Member

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    so if you buy only the land and the land is leased then would you consider this to have high CG ?
     
  7. The Y-man

    The Y-man Moderator Staff Member

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    Wife and I.

    The Y-man
     
  8. Smuh5

    Smuh5 Active Member

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    The other day I heard a webinar from Helen Tarrant who had built a large commercial property portfolio with a similar amount of equity like yours. She reckons you could have 2-3 commercial properties in your portfolio and retire with a comfortable passive income, due to the fact that commercial income provides a higher return.

    This is where I saw the webinar and it was definitely an eye opener:
    Helen Tarrant – Australia’s Queen of Positive Cashflow

    I hope that gives you some insight to what commercial property can offer.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What if one of them became vacant for 5 years?
     
  10. sash

    sash Well-Known Member

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    That is absolutely correct...you need CG. as well some level of CF.going for CF only will stop you from building your portfolio.

    The better CG comes from the larger cities 5 majors plus GC, CC, Wollongong, Newcastle, Hobart, Geelong..some others also in this mix.

    But cities under 100,000 people harder to get the solid CG.

     
  11. Gypsyblood

    Gypsyblood Well-Known Member

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    Hey @Samj40004 im in a similar boat as you, 3 properties (PPOR and 2 IPs) in 3 years, all on P&I. I extracted 80k from PPOR for iP2’s deposit and 40k from IP1 for a personal reason. Currently taking out another 115k of equity from PPOR to help my brother buy his 1st home. I have another 80k I can take out after this from IP1 which I plan to do even thought I have no goal for the funds just yet but would like to have these funds available Incase there is some tightening later.

    No plans to buy anything for a couple of years, just want to pay debt down. I have put in some money in stocks meanwhile but not comfortable with buying another property just yet. Plan is to just build buffers and invest in blue chip stocks for yield and wait till PPOR is reduced by the same amount as the equity I took out.
     
  12. Danyool

    Danyool Well-Known Member

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    As it has been suggested Melbourne is nearing it's peak, I'd be careful banking (calculating) CG at 7%, even 5%. Imagine it was zero, or even negative - that is, prices went down in 2 years! Not trying to scare you, or know for sure what will happen, but just another scenario to think about.

    Also, how secure is your job, and do you have income protection insurance? Say you had an accident and couldn't work for 6 months. You can use up all your sick leave and annual leave, say 2 months, but still got to pay bills/interest for 4 months to keep your empire going, as well as looking after your family/baby.
     
  13. Danyool

    Danyool Well-Known Member

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    Don't forget that he has already calculated his PPOR equity in the 400K

    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

    His IP in QLD doesn't have much equity, the lions share is tied up in PPOR and IP near airport ~$200k before fees, taxes, etc.
     
  14. Samj40004

    Samj40004 Active Member

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    So that's total of $195k + $120k = $315k from your PPOR and IP1 as equity? That sounds like a lot of CG! What's your cash flow like for having them all on P&I?
     
  15. euro73

    euro73 Well-Known Member Business Member

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    That only makes my recommendation an even more compelling mathematical argument ...

    You're telling us that all the equity /performance has been in his PPOR. The INV properties havent grown much.

    So my comment to @Samj40004 would be - why leave yourself with both vanilla cash flow and vanilla growth, and at the mercy of a P&I re-set? Hows that going to get you anywhere fast?

    Sell them. Pay out the INV loans and pay out whatever sub accounts you secured against your PPOR...I will assume 20% + stamps.... and replace the poor yielding and poor growth properties with something that will at least get rid of the 472K PPOR debt as quickly as possible.

    By the way, you cant access 100% of the equity unless you sell. You'll be limited to 80, maybe 90% of the equity. So if your PPOR is valued at 630K your lender may allow you to extract cash out up to 90% of that amount. ie 567K. You owe 472K so you'd only be able to get your hands on 95K, minus whatever LMI is payable.

    Similarly, for IP #1 if its valued at 330K you may be able to access 90% ie 297K. You owe 265K so the max equity available is 32K minus any applicable LMI

    IP#2 . 90% of 620K is 558K. You owe 413K so max equity available is 145K minus any applicable LMI

    All irrelevant though... as you have stated that you no borrowing capacity left :) So we come full circle to.... sell. Pay out your loans. Pay down some of the 472K PPOR debt with whatevers left over. Start over with stronger cash flow....
     
  16. Danyool

    Danyool Well-Known Member

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    Well, glad your maths picked that up...

    You're telling us that all the equity /performance has been in his PPOR.

    No
     
  17. Gypsyblood

    Gypsyblood Well-Known Member

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    I’m on 3.64 for ip2, 3.71 for PPOR and 3.71 for IP1 at the moment. I have no other debts and I’m able to save a buffer after payments, so I would say cashflow is fine
     
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  18. hieund85

    hieund85 Well-Known Member

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    Very low rate for IP. Can I know the lender?
     
  19. euro73

    euro73 Well-Known Member Business Member

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    As I said. All irrelevant given he has no borrowing capacity left . Whether his properties grow well or not, any additional equity he generates is useless unless he sells.

    Im interested to know ....how large is your INV portfolio? Do you still carry PPOR debt? What sort of net position do you hold, equity wise and cash flow wise? How extensive is your knowledge of finance and servicing calculators?
     
  20. Gypsyblood

    Gypsyblood Well-Known Member

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    Loans.com for PPOR and IP2 at 3.71. Reduceloans for IP1 at 3.64. All have offsets, unlimited withdraws etc.
     
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