Do your cash flow projections include PI repayments?

Hi,
When you do cash flow projections, will you be including P&I repayments from now on? In case you can't get repeat IO terms? I am hoping to get my first IP soon, but am cautious because repeat IO periods may not be an option for me. Is it just safe to assume (and plan for) just a 5 year term, with repayments to revert to PI after that? Just wondering if this is how experienced investors are thinking and planning now.

 

I think the safe option would be to assume that an IO loan, if you can get one, would revert to P and I when the term was up.

Who knows, yu may get a pleasant surprise.
Marg

 

I would suggest working on a 5 year IO basis, then revert to a P&I for the remainder of the term. For me personally the intention is to keep IO where possible - even if I have accounted for P&I in my cashflows

 

Part of my safety buffer assures that I stay largely on track if all my IO loans suddenly revert to P&I tomorrow.

 

Yes.

 

Your cash flow projections have to reflect the cash that goes out - so debt p+i reductions are part of your cash flow forecast.

Your profit forecast does not include debt reduction.

The forecast net asset position does include debt reduction.

 

Definitely factor in P&I - there's many cases where its likely certain investor profiles/scenarios will be able to extend their IO period once or twice at a minimum however so it's not something set in stone.

The reality which I'm seeing is that people will end up with a blended portfolio which over time will slowly all switch over to P&I.

Whilst the optimum strategy has traditionally been to have IO debt indefinitely for an investment purpose - this is being less possible from a regulatory and servicing standpoint. What people will instead have to look at doing is:

• Accelerated repayment of owner occupied/non deductible debt
• Draw equity out for investment property deposits
• Interest only on any investment purchase (whilst the interest rate differential isnt so great as to justify just going P&I from day 1)
• Extend IO where possible until owner occ/non-DD paid off
• Rollover investment debts to P&I when there is no further non-deductible debt

Where a bit of finesse is important - is to balance paying off that mortgage on your own home within 5-10 years if possible, else you will have a point wherein you're paying down your tax effective investment debt instead of your PPOR with your cash flow. This isn't the end of the world, but a little more in your favour if it can be avoided.

TL;DR - there's no one size fits all, just keep paying down non deductible debt and then focus on investment debt where you can.

 

They MUST include P&I payments after 5 years. We're coaching our clients to assume that everything will be P&I after 5 years as its definitely a thing and you have to be prepared for that.

People who are trying to buy 4 properties in the next 12 months, for eg, will have all 4 revert to P&I within months of each other, which could take an extra $6k or more a month from their cashflow all at once - That's a full time job income for most people!

People who have bought aggressively over the last few years are going to be be doing some serious planning now to make sure they have a management plan for when this occurs.

People who are just starting out can take their first steps with this in mind from the start.

 

Thanks everyone! Very helpful.

 

I agree with the basic concept. But I feel it is somewhat simplistic.
Sure P&I is a realistic consideration that needs to be factored in.
There are so many other variables unique to each investors circumstances, so to tar all of your clients with the same 'must pay P&I bush' may not be the most beneficial strategy of them.

I think that is a very linier approach when looking at the investors overall goal, timing, cashflow position and stage of investing.

Yes it is negligent to simply roll a client into IO each time they buy and let them swim for themselves when P&I comes along, but planning for this is done from the onset of the investing journey.
This is why it is integral to also have the buffer for each and every property. - protect the downside risk.

Same thing does for taking into accounts life events - kids etc. is an investor to sell now because his/her spouse will be off work to look after the children and they suddenly cannot service their loan(s)? No.

P&I is a serious concern for many investors running the IO cashflow gauntlet. But it shouldn't sway the investor if the have a solid mapped out plan from day 1 - that is what I'm trying to get at.

But I do appreciate you being ethically sound Jess in your advice to your clients making them aware of the P&I potential timebomb.
GG

 

Interesting - so if someone can't afford to repay their P&I loans and have no servicing with which to refinance, what would you advise them?

Bank servicing is not the only issue here - real life cash flow is and if you suddenly can't afford your repayment due to not thinking 5 years in advance you've got some real problems.

It's not a blanket strategy to forward plan - it's an actual necessity.