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My proposed structure for buying a first home, then first IP

Discussion in 'Property Finance' started by fleathedog, 14th Jul, 2016.

  1. fleathedog

    fleathedog Member

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    Hi all,

    I’m thinking of buying my first property in Brisbane, with a view to building a portfolio over the longer term. This first purchase will be a 2BR flat in the inner suburbs – my budget is $350k. I only plan to live there for around 3-5 years, before renting it out as a pure investment.

    As a first home buyer, I qualify for the stamp duty concession, but I have to live in the place for 6 months, and can’t rent out the second room for 12 months. I have $85k and my father is willing to go guarantor for whatever portion of the loan necessary to avoid LMI, so here’s what I’m thinking…

    I purchase the property with an IO loan at 100% LVR, which I'm told I'll be able to do with the guarantee, put the cash in an offset account and live in it for a year, after which time I can rent out the second room. By this time I anticipate I’ll have paid off my HELP debt, and with a tenant, I’ll have an extra $1,100~ per month cash flow. Around 50% of the interest will also now be deductible. With this extra cash flow, I’ll be able to afford a second loan for an IP.

    My question is though, what would be the best way to fund the second, purely investment property? It’s unreasonable to assume there’ll be much equity after just 1 year, which leaves only the cash in the offset account. Should I use this to purchase the second property? I've heard this is a bad idea, as it can 'pollute' the loan purpose, but I honestly can't understand how...

    Any thoughts on this would be greatly appreciated!
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    If there's no equity in the first property then it sounds like you'll need to use cash to fund the deposit for the second (unless you go down the guarantor path again).

    Cheers

    Jamie
     
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  3. tobe

    tobe Well-Known Member

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    Why cant you rent out the other bedroom in the first year?
    Note, not all lenders will use this boarder income, and the ones that do need to see at least a lease agreement and usually your tax return showing you declared the income.
    Like Jamie said, use the cash you didn't use for the first purchase as deposit on the second. or hit your dad up for another guarantee.
     
  4. fleathedog

    fleathedog Member

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    Apparently it's a condition of the first home buyers concession that you cannot rent out space for 1 year after purchasing the property

    Yes, this whole business of boarder income does complicate things. In any case, even if the bank won't include it for looking at my ability to service the loan, cash is cash, and it will actually increase my ability to service the loan. It may even be worth paying off what little remains of the HELP debt before then to make sure it will be included.

    And yes, it appears using the offset cash is my only real option, as I don't think dad would be up for a second guarantee!
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Assume that 50 k of the offset cash goes to the IP deposit

    Dont use the cash per se.

    Set up a separate split on the PPOR for the said 50 k, repay the new 50 k split, thence redraw from that

    Voila, simple debt recycle process, making for 50 k more deductible debt

    ta
    rolf
     
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  7. fleathedog

    fleathedog Member

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    Interesting idea. I'll definitely look into that when looking at my first IP

    I'm not sure I get this.. Say I take out $350 on the PPOR at 100%. So after putting down the deposit, I set up a 'separate split on the PPOR', such that I now have a $50k and a $300k loan against the PPOR, right?

    Then I set up a redraw against the IP, and pay down the $50k loan on the PPOR? Won't that mean my LVR on the IP will be 100%? And I've now paid down $50k on the PPOR (on which, after 1 year, 50%~ of the interest is deductible anyway)?

    In any case, I think my first move is correct - I'll take out 100% with the guarantee from dad, and plonk all the cash in an offset. It also leaves me enough flexibility so that in the intervening year between buying, and having a tenant and partial deductibility on the PPOR debt, I can plan my next move!
     
  8. albanga

    albanga Well-Known Member

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    Personally I would suggest focusing on paying out the guarantor before looking for your next IP and also strongly consider NOT paying out that HELP debt. There was a recent post about this. Whilst it does effect your servicing ability it is basically the cheapest loan one can get.
     
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  9. fleathedog

    fleathedog Member

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    Cheers. I looked up that thread and had a read through, and I agree, HECS/HELP debt is very cheap. So it's probably not worth paying off before getting the first loan, as the borrowing capacity numbers I've been given are comfortably above what I need.

    However, it's only around $4500 now, and will be practically gone by the time I start seriously thinking about a second property. So it might be worth paying out whatever's left at that time.
     
  10. thatbum

    thatbum Well-Known Member

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    Are you sure about this? Its never been a condition on any of the schemes I've seen.
     
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