In the quest for that first IP

Hi there,


My partner and I are in our mid 30's with 1 child and hopefully another in the next year. We are on combined incomes of about 230-240K before tax.

We purchased our PPOR early 2015 in Sydney in an area we love and that should hopefully see some growth eventually. (Crazy! but we actually found Somersoft and PC and all the wisdom that comes with it just after we settled:|)
However we would like to make the best of what has probably not been the smartest decision so far.

As far as strategy goes, we still need to work out our long term goals, but we're looking at passive income... lower entry point (hence cheaper properties), cash flow (neutral to positive geared properties) more than CG only. Happy with long term holds etc.

Some of our questions are

1. How soon is too soon to buy an IP?

2. How soon can we refinance/should we refinance? From what I've read after the APRA changes, it gets harder to meet serviceability when the number of dependents increase (Hence why we would like to buy an IP before baby #2 hopefully in late 2017)

3. Buying in both or joint names?

4. Who is the best person to see to work out what we need to do/money we need to have/ etc to allow us to buy our 1st IP? I want to ideally get our finances in order to allow us to save up if that is the way to go to meet costs for an IP. I understand using equity, however what if we don't have enough yet - given we just purchased? Would a broker be the best person? We don't really want to use the broker we went through for our PPOR. Want someone more IP oriented.

5. We are currently on a P+I setup. If we do require funds to purchase an IP, can we drop our variable component to Interest only to allow us to save up quicker? (I would prefer not using any cash to enter the IP market. However, trying to work out lost opportunity costs v/s using equity while we wait to have enough equity).

Happy to hear your thoughts and advice on this!

Thank you!

 

1. How soon is too soon to buy an IP?

I'd say this depends on your tolerance for risk. I have low tolerance, so I would not buy until I have significant buffer at hand for example. I think there's no "too soon" in investment. When you are ready.

3. Buying in both or joint names?
Search for @Terry_w tax tips

4. Who is the best person to see to work out what we need to do/money we need to have/ etc to allow us to buy our 1st IP?

Plenty of great brokers in this forum

5. We are currently on a P+I setup. If we do require funds to purchase an IP, can we drop our variable component to Interest only to allow us to save up quicker? (I would prefer not using any cash to enter the IP market. However, trying to work out lost opportunity costs v/s using equity while we wait to have enough equity).

Access equity. Change P+I to Interest only with all salary to offset would be my preferred settings

 

1. no timelimit
2. it depends. Now if you have set your loans up wrongly, or ineffeciently and/or you can get a better deal.
3. no, see recent threads for my views.
4. broker
5. you should set up a new split separately and this can be interest only. Don't use any cash for the new IP or you will be losing tax savings.

 

Thanks @EN710 for this. What would you classify as a significant buffer? X months worth of living expenses or is there any other methodology?

 

Thanks @Terry_w .

Would you recommend any threads for a beginner level?

Also, is there a thread with more info on setting up a new split?

Thanks for the advice!

 

maybe start off with my thread on the ideal loan structure:
Terryw’s Ideal Loan Structure

 

Interest payment for at least 6 months and living cost for at least about as long. Different for everyone, but to give an idea, the last time my IP vacant, it's for 3 months plus all the repairs. If there's no buffer, I'd be crying

 

Thanks!

 

Sounds good. thanks @EN710 3 months vacancy sounds scary! Appreciate the feedback. Cheers!

 

1. When you feel uncomfortable, when the time is right you will know. There isn't a magic number but I would guess it wont be for another 5 years or so. Remember I do not know anything else about you besides this post so it is a pure guess.

2. When you have enough equity to release and you are okay with the risk and repayments. As a rough rule of thumb and if you are looking at 80LVR and your current loan is 80LVR then for $25,000 extra in your valuation is another $100,000 to your next purchase. E.g. 100k extra on the valuation equals another investment of $400,000 purchase (provided you can cover the purchasing costs).

 

Hi Will
how do you find out if you have enough equity in your IP, for ex is there a formula or rule of thumb to say " you need a valuation done on your IP and PPOR to get equity out" how soon is too soon to do that. what if someone does an valuation on there IPs and come back with only 10K increase does that help.

 

If you got 10k on top of your original val I wouldn't be bothering as that is only 8k or you can purchase something at $40,000 with 80LVR (provided the property is also 80LVR). Hardly worth it. As you would need for a $400,000 at 80LVR deposit of $80,000 (which you have $8,000) so you will need another $72,000 in cash plus purchasing costs so about $100,000 in cash. So you may as well just keep your $10,000 for later.

If you had $300,000 in extra equity then you are talking about a different kettle of fish.

Another way if you were looking at moving sooner and if you have an 80LVR is changing your LVR to 90/95 then you would get access to more funds but that might be difficult to obtain with APRA and you have to pay LMI. Just make sure you understand the costs and what risks there are it is probably best to seek professional advice as I am not able to provide any advice financially (but I can give you my opinion) .

This is why I suggested it would likely be a number of years before you are ready for the next purchase from the limited information you have provided.

 

Thanks @Big Will! It's something like marriage then! when the time is right...


With all seriousness though, I think from the advice here, my first stop would be a mortgage broker to crunch numbers and check feasibility.
Thanks for your input!