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Next Move advice, finance strategy.

Discussion in 'Property Finance' started by Philip_M_H, 17th Feb, 2016.

  1. Philip_M_H

    Philip_M_H Member

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    Hi,

    Me and my partner are new in the property game and a couple of years ago acquired an apartment valued currently at $600k owing only $20,000. We moved out 1 year ago and put tenants into the apartment which have gratefully decided to renew their lease at $660 per week. We have been using the past years rent to rent another property purely on the location. Although now we want to invest the extra income into purchasing another property (House) between $400k-$600k which we have decided would be a PPOR renovation project to either eventually sell for the capital gain or renovate, rent to tenants and find a new PPOR. If its possible we also want to purchase a small unit within the same year after we settle on the first House purchase. So we would hopefully have an Apartment, House and Unit (In this order) by then end of the year.

    Can anyone help with some advice in the best way to purchase the next property? Is it best to use equity from the apartment to purchase the full amount of the next property (House) or a percentage for a deposit E.G 20% of purchase price? Would this leave equity from the apartment for the purchase of the unit later in the year? Should we stay with the same bank?

    We have a timeframe for us to be purchase ready and want to learn and discover all we can before starting our path into a healthy portfolio. Any advice would be greatly appreciated, please ask any questions if this would assist in providing advice.

    Thanks :)
    Philip
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You're in a great position with the equity and cash flow that you have, but it all really depends on what your incomes are like as to how much debt you can service.

    Usually, you'd get your deposit and costs from your apartment, and the balance in a new loan attached to the new property.

    You'll end up with 100% debt on your new PPOR property which isn't ideal, but a good broker will be able to show you some ways to slowly tip the balance there. The only way to really sort that out quickly is to sell the apartment and use the cash to buy your PPOR.
     
  3. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    You are in a pretty decent position.

    Assuming you get a valuation of $600,000 then you will be able to pull out $460,000 in equity.

    Re the next PPOR purchase run the numbers and consider whether its best purchasing the property @ 80%, 85% or 88% LVR. These are the main threshold in which LMI skews. You have a chunk of equity available so you may be able to get away with doing the purchase at 80% however this is very dependent on your plans after the PPOR purchase.

    Before you start looking at banks/lenders I would really map everything out and then choosing the appropriate lenders at certain times in your portfolio will be much easier. Ensure that the equity release is a separate facility and don't cross securitise any properties.

    By the sounds of your strategy you will definitely require a lender with a flexible cash out and valuation policy.
     
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  4. Redom

    Redom Mortgage Broker Business Member

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    Welcome Philip - pretty good starting position to be in.

    In terms of whats possible, banks will look at an assessment of your income and expenses. For your income, they'll include your salaries and 80% of the rental income. On the expense side, will be your living expenses, debts, etc. Whats left over between your income and assessed expenses, the bank will work out how much their willing to lend to you.

    Firstly run the above numbers on your plan with a broker/banker and work out whether its all possible.

    Then its about how to structure it:
    • Release the equity in your current home first. This means going to your lender/appropriate lender and getting access to your equity via two new separate loans or a line of credit with two splits.
    • From there, use these funds for your 20% deposit + duties + costs for your house and unit purchase later in the year. You can probably roughly work out whats required (e.g. 500k purchase of house + 500k unit purchase = $1mill total, 20% of that is 200k + stamp duty). This will help you determine the loan amounts.
    • Given the 'purpose' of the loans will be different - one for your own place, another for an investment, its important to have them set up individually and separately, so you can track it all come tax time.
    • Then purchase the house, and obtain the remaining 80% of the value of it via a separate loan. It can be with the same bank or a different one - just depends on your scenario, which bank your with, market at the time, etc. The thing to make sure is that the bank only use the new house as the security for this loan and don't look to access your existing IP. Each loan should be secured ever by only one property.
    • Do the same for the next place.
    • What you will find is that you'll have mainly have debt related to 'owner occupier purposes' - generally not efficient from a tax perspective as its not deductible even though part of it is secured by your current investment property.
    • Not generally ideal, you may consider debt recycling strategies to assist in tipping it the other way around. E.g. It may promote you to sell up and use the funds to buy the new place.
    Cheers,
    Redom
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Plenty of equity so borrow 104% for both the next ppor and ip. Dont pay lmi. Keep cash in offset on new ppor.
     
  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    I disagree with not paying LMI. I think whether or not to pay LMI would be dependent on heaps of factors mainly future goals.

    I tend to find most people here quite aggressive and as such having more funds at their disposal is more important that paying a bit more in interest per month.

    Numbers and comparisons generally provide awesome clarity as to which option to choose.
     
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  7. Philip_M_H

    Philip_M_H Member

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    Amazing responses, its very much appreciated. From my research thus far the plan was to use about 20% equity from the apartment and borrow 80%. From my Understanding this will then carry LMI?

    Shahin is LMI beneficial for future plans to grow a positive cash flow portfolio?

    Terry_W, 104%? or 10% and whats the benifit without LMI and can you explain "keep cash in offset on new ppor"?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No, you are right. It might be best to preserve deposit money by stretching things further.
     
  9. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    You won't incur LMI if you are borrowing 80% or less. And given you have a heap of equity in the existing apartment, you are not likely to need to but it depends on how far you want to spread your equity (and how strong your serviceability is).

    As other have said, it might make sense to:

    • Pull out $460,000 from the apartment
    • Use some of it as a 20% deposit for the next purchase and borrow the other 80%
    • Use some more of it as a 20% deposit for the next and borrow the other 80%
    • And so on
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my tax tip
    Tax Tip 60: Never use cash to invest

    And loan tip
    Terryw’s Ideal Loan Structure
     
  11. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    It really depends on your plans.

    Lets say your plan is to purchase a PPOR and then live it in for the next 120 years and you don't plan on using funds for any future investments (whether it be the purchase of a business, shares, managed funds, etc). Then going 80% LVR on the proposed purchase is likely to be the best outcome.

    However its assume you plan to purchase another 3 investment properties, invest $30k in shares, $50k in FX and another $100k in a business then using as less cash as possible on this "investment" make sense. Then the question is @ what LVR will ale the most sense? 85%, 88%, 90% or 95%.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Or you may be planning to live in your PPOR for 4 years and then move it out to rent it. In this case you would borrow 104% by using 2 loans. 1 at 80% against the PPOR and 2nd 24% from a loan secured by the existing property.

    Later when you move out you will have a large loan with a higher deductible amount. You will not be any worse off if you keep the cash you would have used in an offset account against the PPOR loan. You will be much better off if you do rent it out though.
     
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  13. r3ckless

    r3ckless Well-Known Member

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    Assuming your incomes can show servicing. I would borrow as much as possible on the investment, and thus borrowing as least as possible on the ppor. Rather pay the $10k lmi which is deductible than have a higer non deductible loan
     
  14. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    + 1


    ta
    rolf
     
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  15. Philip_M_H

    Philip_M_H Member

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    So 99% positive our incomes can show servicing, I'm understanding your advice would be to borrow us much equity on our apartment which is currently tenanted providing more taxble deductions and leaving us with a smaller loan on the next house (PPOR) purchase?

    From there moving forward would I then look at using equity in the PPOR to deposit on new Unit IP?

    So much advice its great to understand each strategy to see what works best for us.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It doesnt work like this. Tax deductibility depends on use of funds not security for loan.
     
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  17. albanga

    albanga Well-Known Member

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    Great position cash wise but no one has made mention of the potential 460k of non deductible debt this has been created turning PPOR into an IP.
     
  18. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Have so ;)