Hi All Just need to know if this is possible and a good option. My current position. Property 1 - Owner occupy Bank Value - 925k Loan - 500k Available equity 240k @ 80% LVR Property 2 - investment Bank Value - 800k Loan - 560k Available equity 80k @ 80% LVR Total 320k equity At 80% LVR 300K should allow me to borrow 1.5m Can I then take the 1.5 and purchase for example 3x 500k properties. ( obviously slightly less minus stamp duty etc) Or example 6 x 250k properties. Then rent everything out including current owner occupied. 700pw 800pw 500pw 500pw 500pw =$13,000 rental income. Per month Existing loans $1,060.000 on intrest only 3.3% repayments $2915 per month New loan $1,500.000 on 3.3% IO $4125 Total repayments $7040 Per month. Rental income $13,000 Per.month more or less. Have I calculated this correctly ? Then I can sit on these for x years until equity grows and do it again. And I can rent a nice property to live in for my family. With a home office that could help reduce tax. Does all this look right or have I miss calculated? Will the banks take into account rental income? And subject to our personal and company income.? Is this s option and if you were in this position is there anything better I can do?
...what about the other costs involved with owning an IP? Its not just loan repayments. You're much more likely to have a net loss than a net profit...
Yes I am aware that there are other cost involved. Thank you for your responce. My question however was are my calculations right so far?
Yes I understand 100% that serviceability, credit history, credit score, market value, interest rates will all have there part in this working or not. I also understand there are other cost associated with the property which I must account for. Assuming all the above checks out. Is it a viable option ? Thank you
I don't understand the point of these figures though if they aren't based on reality? Yes you can borrow X amount of money. Using that to purchase to more properties will get you Y amount of rental income and Z amount of additional expenses. How does that help you plan your strategy?
Theoretically, your high level, “back of a cigarette packet” calculation looks possible but probably not so realistic as follows: 1. Allow about 5% for transaction costs, so on $1.5m, would need about $75k, so unless you got this money extra, this would come out of the available equity, and the balance of equity would be less, and thus the maximum amount to borrow with 20% deposit would be less. 2. Have assumed gross rental yield of just over 5%, whilst not impossible, if in a major city is less likely. 3. Need to factor in general rental expenses, 20% - 30% of gross rent. 4. Assumed long term low interest rate for I/O would be available. 5. However, the biggest killer is probably serviceability where the bank’s serviceability calculations assumes higher interest rates etc. So whilst looks like it might be possible, in reality not likely so. Maybe an extra property of a modest amount but not full on as you have calculated.
5% yield - where are you aiming to get that? What about vacancy periods? What about interest rate rises? I would suggest your focus on net rent, not gross rent. Budget on Operational expenses being between 30% and 40% of your gross rent. Then you have interest charges. Also calculate pre-tax and after-tax income.
Even if you could get the loans. At rock bottom rates. And could find that yield. (Very unlikely.) 30% costs would bring your net to about 2k per month. Going back to pandi would eat all of that up. Unless you have significant cash savings somewhere else, repairs and vacancies would kill you. Sure the calc works but only if you assume nothing bad ever happens.
Other things to consider include: - What if loan valuations are lower when valued by the bank than you assume? - What if you have few vacancy weeks for each of the properties, or if rents decrease (so should calculate rental say on less than 52 weeks)? Plus banks do not add 100% of rental income but a smaller percentage. - What if you receive unexpected major expenses (e.g new roof, or retaining wall, appliances changes such as air conditioner, or dishwasher, etc...or something major)? - What % of expenses have you deducted to maintain each IP - not just interest (usually 1% of Purchase price or 20-30% as suggested, property manager, rates, insurances, smoke alarms, land tax, minor repairs)? - What if IO interest changes to P&I after 5 years? - What is your exit plan (many plan how to invest but not what they want at the end game and when that will be?)? - Can you add renovation to this mix to make it better to increase rent and or equity too? Basically do you have buffers in place for these extra cost being at 80% LVR? Yes, in theory the numbers are possible BUT you forgot to allocate the other numbers as I mentioned above? Also assuming banks will approve your serviceability too. Not to discourage you but you need buffers in place when circumstance change outside your control. Start with the next IP (one at a time - it is more about the asset base you accumulate rather than how many IPs you buy and hold) and so on and learn on each and then progress further, when your finances or time or equity permits!
I know someone who tried this strategy before the GFC when banks would basically lend you whatever you asked for. It worked for 2 or 3 years before capital gains slowed and put the breaks on his equity growth, the banks wouldn’t let him roll over to a new interest only after his initial interest only period ran out, and he lost the lot. (I always thought he was bonkers, but it was interesting to watch it play out).
The theory is fine... but practical application is the challenge. For instance: Lenders will shade rental income by 20% IO loans will be assessed based on servicing P&I repayments over 25 years IO INV rates will be higher etc
Yes Miro your mathematical calculations are correct, however use those calculations more of a scenario rather than as a real world example as the end result in the bank account will be very different. I say this as you have excluded many costs that have been mentioned by others in this thread and you are relying on financing costs remaining in your favour and haven't allowed for other risks that you will encounter with multiple properties under your belt.
It will depend completely on your personal income as to whether you can actually borrow $1.5M...and also, IO rates will not be 3.3% for investment. So you'll need to adjust those figures. Strategy is important...what will you do once the IO finishes? You need to be sure you can still service the loans, and refinance them into a new term if necessary. It's not as simple as you've written unfortunately.
