Newbie who just bought an IP...any advice/help with strategy moving forward considering IRs?

Hi there,

I've been a little reluctant to post but thought I'd put myself out there...

My partner and I have just bought an IP in Brisbane. Being such a newbie and hearing all the IR noise at the moment has shaken me a little bit, I'm wondering if we've made the right decision.

Our situation is below and would love it if anyone has any advice to help keep us in a good position and get through the rises over the next 12-18 months! If anyone has time to chat on a call or PM me via PropertyChat it would be great to have a conversation with a more experienced investor and get to know the community.

• We've purchased a 4x2 in Brisbane for $620K (Market value $650K)
• We pulled 160K equity from our PPOR to fund the deposit
• The equity and investment loan altogether is $656K (covered all the additional costs)
• Our rent is $500 a week and our IO repayments are currently $1,430 a month. IR is 2.79% for the equity loan and 2.22% for the IP loan.
• Our PPOR loan is currently $860K with monthly repayments that are fixed for another 1.5 years at $3,162 a month (IR 1.79%).
• The plan would be to increase our IP rent by $50+ a week in November when the lease is up. Hoping we can increase by this much but will be led by the Property Manager.
• I am hoping that come tax time we will get a sum of money back from our depreciation schedule for the property and we will put this money straight into the offset.
• We're on a decent income of about $250K and I am putting an additional $500 a month (more once my partner starts to contribute a similar amount) into the offset to create a buffer against the property over the next year. Does anyone have any advice on how much of a buffer you should have against an IP?
• I have signed on with a good property accountant to help structure things correctly/give us advice on our situation.
• I'm thinking a little far ahead but in 5 years' time when the IO term finishes, are we best to revert to P&I, or do we go IO only again if we can? P&I payments will mean a lot of money out of our pocket.
• My goal is to build a bigger portfolio but considering what we've bought and that we are having to put money towards it with the IRs going up, I am wondering how we will now grow? Any advice would be great. I have tried to do the right thing, read heaps, leverage whilst we have no kids, and use a reputable Buyer's Agent but worried I have picked a terrible time to buy and haven't done my math properly.

@sash
@Sackie
@Gockie
@Dmash
@MTR
@Gen-Y

Thank you.

 

While its normal to have concerns, you have to ask yourself, if you feel this nervous now how will you build a bigger portfolio?
Maybe read more about the psychology. Run some worst case scenarios, at your income you shouldn't have issues (depends on your spending and savings rate). Falling prices doesn't have any immediate effect, and may lead to higher rents.

 

+1 for work on psychology. Continue to learn and grow with investing knowledge etc. But definitely don't skip over on the psychology part, especially if you want to build a 'large' portfolio.

Congrats on getting started at such a young age. With time, you could do really well.

 

No we haven't

I have run some worst-case scenarios and we will survive, we will just have to cut spending and our cash savings won't be as much. I agree though, it has crossed my mind if I can't deal with the uncertainty now, how will I go with multiple properties. I think it's best for us to just see how we go with this one and then reassess in a couple of years.

 

IMHO multiple IPs is less risky than a single IP.

Reason 1:- if one has a single IP and one loses a tenant, then one has lost 100% of one’s rental income. Whereas, if one has a portfolio of say 10 x IPs (assume they all have the same/similar rent) and one loses a tenant in one, then one has lost only 10% of one’s rental income.

Reason 2:- Diversity of assets across different suburbs, different towns, and different States (preferably) lowers one’s risk.

With regards to property investing @Courtney1991, you are currently in the riskiest position.

As soon as you are are up-for-it, buy more IPs to lower your risk.

I just wanted to post a different perspective.

 

Thank you for this perspective! It's great to see all points of view. I have always envisioned having more than one and diversifying, I guess it's getting over the psychological stuff with the first one and then making sure with the next one the yield is a bit higher as we're having to fork out a little bit with this current one. My plan is to build a buffer for IR rises and then once we feel comfortable hopefully look for the next pending if we have any equity, maybe with a higher yield to offset some the cash we're having to fork out for this one with the IR rises. Not sure how we will go with serviceability though, we might be capped.

 

Over 11 years rates have only dropped. This means about one third of mortgage holders have never experienced a rate rise. There's a lot of anxiety out there about this, especially given debt levels have only increased on the back of low rates.

Lenders assess your borrowing power based on rates being 3% higher than what they actually are. This means there is capacity in your budget to afford rate increases. The simple reality is that there will be less disposible income and you may have to make some choices you don't want to. This has always been true for mortgage holders at some point, it's just that many people are experiencing for the first time.

The bad news is it will get worse. Rates are only predicted to rise in the forseeable future.

The good news is at some point it will get better. Eventually inflation will mean incomes increase to match the rate increases. There will be a lag, but it will happen.

The really good news is that after all that, rates will drop again. At that point your loans become easy to afford and will likely stay that way even with future rate increases.

The key to all this is to hang in there for the long term. The first few years of investing (or home ownership in general) are the hardest.

 

Don't panic you will be ok.

I would ride things out your income is very good.

One of things to do is to increase CF by taking the any tax return for property in advance via a payroll deduction ..talk to your accountant.

PM me if you need any detailed answers I can point you in the right direction.

 

Tax variation application? Have recently heard about this myself, seems like a good idea. Banks can use this as improved serviceability? And you make up the difference come tax time?

 

You need to be careful..don't overclaim by too much otherwise you could be up for a penalty.

 

The ATO takes my mondays & tuesdays. I wouldnt feel too bad if i overclaimed haha

 

Peter as a mortgage broker can you recall how the banks treated the investors in Australia in the 70's when interest rates rose rapidly. I was in NZ then with solicitor loans not bank loans so the pressure was pretty well self imposed by affordability. By the time interest rates were 24% I only had two properties left from six.
I always wondered if banks would have been been lenient.
Also solicitors did not do any stress test so students like I could borrow pretty well anything (so long as we had the deposit)

 

@Beano I'm not quite old enough to remember the state of finances in the 70's.

One thing I learned around the GFC of 2008 was that money and the economy is like a wheel. As long as it keeps spinning you're going somewhere. If it stops spinning, then you go nowhere. During the GFC Australian rates got to 10%-11% whereas they'd previously been just under 7%.

At this price it became very hard to borrow money. For home owners and investors, but more importantly for businesses. When businesses couldn't afford their loans they started to shut down. This was where the financial crisis in Australia occurred. Not because of bad debts, but because debt in general became affordably. Money became less available, the wheels stopped spinning and the economy started to stall. The recovery came when the RBA dropped rates by about 5% within 4 months down to 5%.

Today the median rate is no longer around 6%-7%. It's probably more like 4%. Debt levels in households and business have adjusted to this cost. If rates increase too far beyond this (say 5%-6%) then we well see real problems. Hopefully the RBA and government can also see this and will put mechanisms in place to not let things go that far.

 

...till they ask you to pay it back with a 75% interest penalty.