Should I wait.....

Hi Guys,
I am at a crossroad in my journey. I have held my first IP for 2 years now (Toowoomba) with Offset account - split loan, we are on one income with 3 children in primary school and 1 at home with my wife. I want to buy our 2nd IP but confused on how to go about it. Should I:

1. Wait until my wife goes back to work, so that the banks will see that we can service the loan, or

2. Use the equity from IP to borrow for deposit, or

3. Renovate IP at current stage until wife goes to work and then borrow to purchase 2nd IP.

I would like to hear some feed back.

Thanks,
Ryan.

 

With 4 kids and a non-working wife, servicing may be tight so the first step would be to see what's possible from a finance perspective - have a chat with your broker. Equity is useless if you can't service the loan.

All 3 sound like a good idea to me, in 3, 1, 2 order

 

HI @Ryan,

In my opinion it really depends on your deposit/serviceability and tolerance to risk. Your point 1 leads me to believe that your own income is not astronomical so you might have serviceability issues. If that's the case then you may have no other choice but to wait for your wife to go back to work. However, if your broker determines that your serviceability is fine and you have enough equity to fund another IP, then it really comes down to your overall financial situation which only you know. But if you have the A) equity, B) sevicability and C) overall you are comfortable with the risk level due to perhaps cash reserves, planning to buy neutral or positive G property etc then I would say go for it, assuming you are OK with those 3 factors.

 

Thanks Jess,
it is good to hear it from a broker.

 

Hi Leo,
thanks for that advice, I will take it on board. i will get in contact with my broker.
Thanks.

 

No problem
Of course, it's completely dependent on your current income - if you're on a decent wage you may be perfectly fine to go again. FTB that your wife gets will be useful too, so don't just take my word for it - you may be able to go again sooner than you think.

 

I am on 75k at the moment, which I don't think is enough. I am hoping we can go sooner rather than later. I have a long term goal to be financially independent in the next 20 years. Thanks once again.

 

Hey Ryan,

Your broker can tell you if you can or can't buy another one. From there you can then re-arrange your 3 points mentioned to suit whatever your broker said. Also check if doing a reno on IP1 will increase your equity significantly. Is IP1 vacant at the moment or nearing its end of lease?

 

Hi Jerry,
it is nearing its end of lease in July.

 

If you haven't already, try to define in dollar terms what 'financial independence' means for you, and then work out some strategy/plan to get there. Imo having some soft of a plan to get you to your target will greatly increase your chances of actually getting there. Of course there will be revising and tweaking along the way, but having some kind of planned direction to your target can really increase your chances of hitting it imo.

Good luck

 

Thanks.

 

• Limited equity growth so far. No QLD boom (yet anyway), only 2 years
• 5 dependents (wife & 4 young kids)
• Good but not spectacular income, $75k
• Presumably limited savings?

Waiting until you're a dual income household again seems like the prudent course of action to me. Leveraging up while you're supporting 4 people on a single income seems pretty high risk unless you're very confident you can buy a place without any nasty surprises, you know what way the property market is going to go & you can find a way to budget it while still maintaining a decent quality of life for your family + budget for emergencies, e.g. loss of employment.

Renovating it is (in my personal opinion) probably the safest option from a financial perspective, but if you're not planning on selling it any time soon, its just going to be a short term expense for an improved long term yield. How many years is it going to take to see a return on investment in a market like Toowoomba? That said, do you really want to be trying to reno while juggling a young family with that many kids + a full time job? Keep in mind you'll need to have it vacant to reno, every week you don't have a tenant in it is going to cost you money.

If I was you, my focus would be on keeping household costs low, paying down debt / building up a really solid amount of $$ for expanding the portfolio in a few years time and enjoying being a dad with a young family. I know there is no way I would want to expose myself to that much risk or in the case of reno, time away from my family at a time like that, but only you really know if you can personally make it all work.

As I believe someone else has previously mentioned, you've got a goal - Financial Independence in the next 20 years.

Now consider that goal with the SMART Criteria:
SMART criteria - Wikipedia, the free encyclopedia

Is it Specific? not really - how much $$ or cash flow do you need to be financially independent? How many properties at what % leverage, cashflow, etc do you need to achieve that?
Is it Measurable? not yet - see above to work out what you really want first, then you can work out how to measure your progress toward it
is it Achievable? too early to tell, see the previous 2 first. Maybe it is, maybe you'll have to consider shifting the goal posts. 20 years is a long time.
is it Relevant? Why do you want to be FI? only you can really answer this one. Is this a good use of your energies and efforts?
Is it Timebound? yes, but 20 years is a pretty long period, maybe consider breaking it down into more manageable chunks. You know where you want to be in 20 years, where do you want to be in 10, 5 & 3? what do you need to do in the next 12 months? What can do you in the next month ?

Good luck.

 

Hi Plutus,
thanks for your email. You have really given me a few things to think about and I will take it all on board, I am inclined to wait until my wife goes back to work, but in the mean time I will also be talking to my broker about my options and get ready for when the time comes. Your right, I don't want to be taking on too much risk at this stage while we are on one income, so I will take your advice.
Thanks once again.

 

Yes to the above when considering whether buying IP in the near future is prudent. Broker can tell you if you can borrow and what your serviceability looks like to the bank. Do you have buffer if some nasty needs repairs? Can your wife get a job if she has to? Who then looks after children? Do you have adequate life insurance, health insurance? Review your TPD benefits as well and income protection.

What if interest rate rises by 2 or even 3 per cent? How does that affect you? Can you still hold the type of property you buy?

Probably more to think about in terms of preparation. Can your Toowoomba property get higher rental? Can you earn more elsewhere? What's expenditure like?

 

Hi Larry,
Thanks for your response. I have definitely thought about all those points and have decided to wait until my wife heads back to work. I want to have a good buffer going into the 2nd IP.

Thanks.

 

Yeah. It can be done but depends in your risk profile. I want to be able to sleep at night.

 

This, my friend, is more important than financial independence.

 

There is little point having three fortresses if you cannot protect any of them. Better to have two with solid protection around them. Strengthen your position as you go along... don't weaken it. Fiercely protect what you have. I agree... wait till your household income is higher before buying more.

 

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