How to buy second property after first? Understanding equity and loans

I am planning out my investment strategy and have got a rough goal to purchase 3-4 properties.

I understand how to purchase the first one, but how do you progress to buying the second?

Take for example the following:

100k p.a. salary
Max loan of 500k
You buy a 600k home, with 120k deposit, borrowing 480k
Your loan repayments are 3% on P&I investment loan, and you get 450pw in rent

This creates a negatively geared property
Rental Income $ 23,400.00 / year
Total Expenses $ 24,284.39 / year
Pre-Tax Cash Flow $ 884.39 / year
Tax Benefit $ 327.23 / year
(Using Negative Gearing Calculator | Your Mortgage Australia)

Let's say 3 years has passed and your property has grown to a value of 650k, your loan amount is 450k

That means you have an equity of 200k in the property, but banks only lend 80% so your usable equity is 160k

Assuming your salary remains unchanged, and your first investment is negatively geared, how would the bank lend additional money to you for another property? And how would they calculate your loan capacity considering you have almost entirely used up the initial borrowing capacity of 500k?

Thank you in advance!

 

Your usable equity calcs are wrong
Loan Tip: Useable Equity Loan Tip: Useable Equity

$650k x 80% = $520,000 = max amount you can borrow without LMI (generally)
existing debt secured by this property is $450,000 so that means the lender will potentially lend you $70,000 at 80% LVR

They may not lend. As a guide you can borrow roughly 7 to 8 x your annual income so with the rent you might be able to get another one, but your equity may not enough unless you go above 80%

 

Thank you, so in this instance does that mean you only get 70k to work with to buy a home + whatever savings you have, or does that mean you can target a property worth 70k/(1-0.8) = 350k?

 

If you are borrowing 80% then it would mean about $280k purchase price (allow 5% for duty etc so divide useable equity by 0.25)

 

Got it! What about if an investor does an IO loan, maximising tax deductions and instead saves up enough for another deposit. How does the bank assess if they are able to loan more money or not? Or is it dependant on income and IP #1 rent increasing?

I guess what I'm trying to figure out is which strategy is better so you can get to IP #2 ASAP - P&I pay down and extract equity or IO and maximise cash flow to get more savings to then use for the deposit

 

doesn't change much, but IO is generally worse for servicing

Where are you living?

 

Currently renting in Sydney for 490pw.

 

The ideal would be to live in one of these properties and pay its loan off - but mortgage it for future deductible loans as that would improve borrowing cap as more of the total debt is deductible and you have no rent to pay. Rent rises whereas the loan associated with the main residence will reduce each year.

You could combine that with using the 6 year rule by moving in and out again and then pay it off while you are renting it out and moving in at some future point when the maths works.

But this may not be possible if your investment properties are in areas you don't want to live in

 

Where is a good place to learn about this? I have one existing PPOR and an existing investment in the same suburb. I am also in the process of building another Investment in the same suburb. The original plan was just to move to the favorite/best condition IP at retirement and sell the PPOR Tax-free. Could there be a better outcome for me? Can I rotate around the houses every 2 years and not pay CGT on any of them? I thought I read somewhere you needed a legitimate purpose to move, like I could move to the new build or the downsizer as had a legit reason, but could I then go back to the original and just say it didnt work out? Or the new build was too cold for me so I am moving to the other IP as it makes me feel more warm and fuzzy due to the established garden.

 

Really ?

You save, or get the funds to do same again.

You want to rely on extreme CG ? I think you will find this trick will not work, the whole system is in for a rough patch and they re structured so you cannot do exactly what you seem to be thinking of.

Work hard, and save !

 

Here.

See my tax and strategy tips

Index of Tax Tips Terry's Tax Tips

Index of Strategies Terryw's Structuring Strategies

 

Only if you die and get the timing right

 

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