Seeking advice on approach, 12/88 and LMI

We’re 50, PPOR worth about 600k paid off (about 250k sitting in the offset), 450k super, earning 120k/95k.

We want to continue to salary sacrifice into super to the concessional cap which hopefully will lead to about $1m in super by 60/early 60s. That’s mostly exposed to AU/Int’l shares.

Outside that, we can easily spare $1200/w without dropping our current lifestyle and we’re looking at building a smallish IP portfolio with a 10-year minimum view to capital growth.

We’ve had a preliminary discussion with a broker (member here) who has been very helpful. Suggested model is to exit current mortgage, get PPOR valued, get finance to 80% and use that for deposits, leaving a comfort buffer. We aren’t looking to build a massive portfolio (thinking 3 IP @ 400k each but its flexible and we’d like the option to go more). The rough aim is to have $1m super and $1m property at retirement.

I’m after advice to hone our thinking and get some ideas how best to structure things if I may.

I’m leading with the assumption that low cost/cost neutral is where we want to be within a reasonable timeframe.

Given our intended total exposure, but the desire to remain flexible in our plan, should we 12/88 and pay LMI or 20/80? I know LMI isn’t a huge cost but I’m also conscious we’re likely to use a buyers agent for the first property at least as we will probably be going into markets we don’t know and we’ve done the analysis paralysis for long enough – so I’m keen to consider what costs are really necessary. We can continue our own research in parallel and hopefully be better positioned/market educated for IP 2 and 3 but we’re happy to pay now for expertise.

Related to that, am I right in this - We take the equity from PPOR for deposits. We pay interest on that and its not tax deductible (but other acquisition costs can be rolled into the IP mortgage), so with that in mind going 12/88 make more sense (I’d get tax advice of course – just looking for a steer on my thinking).

Any thoughts on doing properties in separate names – would get professional advice based on circumstances, but wondering if there are any initial thoughts on that.

Any feedback welcome.

 

If you have enough equity in your home to get you where you want to go, definitely use 20% deposits. There's no point paying lmi if it can be avoided.

The interest you pay on your PPOR equity will be deductible if you're buying IP's.

The bigger decision for you will be whether to pay P&I or IO - do you want cash neutral based on P&I payments? If paying IO you'll want to be sure that your borrowings remain low enough to allow you to refinance when the IO period expires. What's the plan for the properties at retirement?

 

Thanks Jess. More food for thought. At this stage, the plan for the properties on retirement is to sell assuming favourable market conditions.

 

Perhaps keep each split for each IP deposit separate so you can track it's interest separately, hopefully you have your broker advising this as setting up the loan structure properly at the beginning will save you a lot of headaches down the track.

Have you got yourself an accountant that is savvy with investment properties?

 

He tells me he has lots of experience with them but I really dont know how he stacks up. I'll sense check any assumptions/conclusions before proceeding.

I'm happy to hear other views, but I was thinking P+I and get cash neutral (or low out of pocket) asap is the best way to go. A loss is a loss. I would get the accountant to run the numbers on a likely scenario and timeframe to get to an acceptable cashflow position and what that looks like will dictate the staging of buying, keeping in mind we dont want to be delaying too long given our age/timeframes.

Does this make sense or should I be looking at things from a different perspective, or factoring in other vital points?

 

Get some tax advice.

If you borrow to invest the interest can be deductible even if the security is your main residence.

Paying LMi would be a waste of money in your situation I think.

 

Can you tease that out for me please? Do you mean that trying to get cash neutral quickly means you'd be unable to service another IP in the meantime?

 

Ah, I see what you're saying. I'm factoring in that we have an additional $1200/w min free to bung into the offset. So I'm keen to run the numbers on how soon we can get things to cashflow neutral if we're hammering additional to the offset. Does that make sense?

 

I'd be making a figure up as we dont have a market in mind yet, but for rough sums I'd likely mess about with 375/w on a 400k house.

 

I see what youre saying (and I thank you for your patience).


So, rough math
$400k P+I @ 5% = $1000f/n

Rent $375/w less costs = $14000 net pa = $538f/n

Shortfall = $462f/n or $231/w.

That’s easily affordable to us, so lets say we do that and for easy math say with tax breaks taken into account it costs us $200p/w or $10k per year to hold.


Is the thinking then that you buy right, wear the cost (and opportunity cost), wait for the cycle (say 10yrs) and voila, that property which has cost you $100k over the 10 years is worth say $650k. So maybe you decide to sell, pay out the remaining mortgage/CGT and walk away with the balance.


If that’s ok thinking then for our current plan i.e. likely sell in retirement assuming favourable markets, rather than trying to live off cashflow, then assuming you can afford to service the mortgage and ride out rate rises/vacancy etc, aiming for CF+ or neutral is a ‘nice to have but not necessary’ and you'd be better off doing 2 or 3 IPs under the approx $200/out of pocket structure?

 

Do the sums again with IO payments of about 5.5% - or higher if you want to add a buffer for increasing rates.

Give the 10 yr time frame, use of 20% deposits and the plan to sell at the end, it may pay to think about using IO and invest the difference into something else to increase the asset base in retirement instead of paying off the loans. If you were going to hold for cashflow, reducing the principle is useful, but if you're selling anyways and have a focus on growth rather than long term cash, you can get a head start on other income producing assets in the meantime, or sacrifice into super or similar.

 

Yep, makes sense. Thanks.