To listen or not

My very good friend has done extremely well for himself, owns a very successful business and also owns a few very nice propertys around Sydney , for as long as I can remember he has been trying to help me. First of all he helped me set up a budget to save to buy my first house, 10 years ago he gave me rich Dad poor Dad to read (never read it until last year) he has always encouraged me to better myself and I respect his opinion on just about everything.
So as I'm finally ready to start my property portfolio my mate wants me to run everything through him to get a different perspective on my strategy and decisions, he is quite excited about the whole thing.
Currently my loan application has been submitted and pending pre approval at 91.76% LVR recommend by my mortgage broker, it's all part of my strategy to get into more property more quickly.
After speaking with my mate yesterday and telling him where I am at he questioned my choice to go in using a smaller deposit and paying LMI, he suggests I go in with 20% deposits and not wasting cash on LMI at all, he also suggested I slow down the process using only 20% deposits on every investment.
Personally I was feeling very confident with my strategy up until my mate's suggestion, he is the most successful person I know so it's hard not to listen to his advice.
I thought asking on the forum might offer some expert opinions on my situation.

Regards
Darren

 

My opinion if I were in your position would be to sit down and assess my goals.

It sounds like you have a great mentor and a good encouraging friend.
You need to sit down by yourself and assess WHY you're buying property, WHERE you want this investment to take you. Ie. What is your ultimate goal?

Once you have set a few goals, crunching the small numbers here and there fall into the background.

You need to have a strategy.
What your mate has offered is his advice.
You need to do your own due diligence and open up an excel spreadsheet and figure out if buying now + paying LMI will give you greater returns rather than waiting to build up a 20% deposit and forgoing the capital growth (assuming you buy well).

This is something only you can do.

 

In the current lending environment he might be right. The journey is a marathon not a sprint.

Need to know when to put the pedal to the metal, though.

 

It is always good to have an experienced/successful persons opinion but remember it's your journey. I'd do more research and go with your gut. I've had plenty of bad advice from very successful people and plenty of good advice for very unsuccessful people.

I will say though that LMI has it's place in every property journey at some point.

Hope this helps and I didn't just put you off more.

 

While I think it's important to do what works for you, I happen to agree with your mate on this one especially at this time.
I have a high risk kind of profile and once did a 104% loan with a 10% deposit(equity) and used LMI and it didn't feel the best.
I'm ok with using equity for deposits, though.
I also don't think there is any reason to accumulate asap. I don't really get it. Pace yourself.

 

No easy answer here. There is a balancing act between your appetite for risk, objectives, market conditions, lenders etc etc. An 80% LVR is a more comfortable starting position and that maybe why he is suggesting it. In my view, maximise your borrowing while you can and stick the deposit you don't pay into an offset account.

For example, lets say you have a $100k deposit for a $500k IP plus you have the additional cash for transaction fees and taxes.
At 80% you have 'lost' all of that deposit $ for the benefit of a lower interest bill and avoidance of LMI. At 90% your deposit is reduced by $50k and you have to pay some LMI, lets say it is $3k (this is a guess), now you have $47k left over. Put it in an offset account and your interest bill is reduced but not quite to the same extent. However the benefit you gain is flexibility and a nice cash buffer.

Now you have options and should you want to do it a second IP could be much closer. No doubt this is a more aggressive strategy, if you don't want the second IP leave the cash in the offset or pay down the loan if you really must!

I'd get a tax accountant and financial planner to examine your circumstances and work through the best options.
Good luck!

 

Thanks for the replies everyone, @CosmicTrevor my plan is to buy my way into 2 properties and park the remaining cash in an offset account, all my extra funds and savings will also go into the offset working toward the next deposit, if I went for the 20% deposit I feel it slows everything I have been working toward, time to double check my numbers and talk further with my mate I know he wants me to succeed so his suggestions should not be ignored.
Have an appointment 9am with my property focused finacial planner in the morning.
Feels good to have options

 

Generally the older and more experienced you are the more conservative you get.

Going for high LVRs now may be more risky, but it could help you save cash for the next properties.

On the other hand going 80% now is not the end of it as you could increase the loan on this later to 90% and then pay LMI then - it may even save you money because the property may have grown and the LVR would be lower resulting in lower repayments.

Keep in mind it is getting increasingly difficult to borrow, even with icnreasing existing loans.

 

Darren, ring your mate right now and tell him to go jump.......onto his computer and join PC.

The more successful investors on this forum the more chance of their magic rubbing off on me.

And yeah, I usually go 20% deposit.

 

good advice

 

It depends.

I know what I would be doing if wanting to stretch as far as possible, there are ways to contain the risk, the extra cost is almost nothing as time passes. So it depends on what the concerns are and your thoughts on it all.

 

Darren! I am disappointed in you sharing our discussion on a public forum like this!

I will never help you again!

 

It largely depends on how much cash you have laying around, whether you have non-deductible debt, and how many properties you want to purchase (and how quick).

 

It's easy for someone who is wealthy to forget how hard saving a 20% deposit is

Do the sums - how long will it take to get IP2, assuming no growth in IP1?

What about an eventual PPOR?

The PPOR factor (assuming you don't have one) is the ultimate reason to use high LVR for IPs. You want as much cash as possible to put into, or offset any non-deductible debt.

Also, a 20% deposit can mean there's not much cash left for buffers and emergencies.

So for me, I'd be paying the LMI. If you want to limit the cost of this, keep a happy medium and put in a 12% deposit. This keeps the cost to a minimum- it's a lot more expensive over 90% LVR.

 

It might be a good idea to sit down with a good broker, assess your borrowing capacity and map out a scenario where you buy houses with a 12% deposit vs a 20% deposit.

In the past it was easy to borrow money but now funds are much more limited so you need to be very careful to manage your borrowing capacity effectively.

 

Darren, you have a very good friend there, lucky you.
Considering he gave you RDPD 10 years ago and he's stuck by you all this time continuing to help even though you only read the book last year, shows what a champion he is.
Your call in the end, but I'd run a few different scenarios which suit your circumstances by your mate first to see what he thinks of them.
He doesn't have any financial interest regardless of which way you go, so his advice is probably the purest available.

 

If that ^^^^^ is your strategy then stick with it.

LMI is a leveraging tool that can be used as a strategy to accumulate more property in a shorter time frame. Its deprciable over 5 years and any interest incurred is tax deductible.

I would rather pay LMI and hold the difference as a buffer but hard to comment definitively without seeing the full picture of your situation.

 

Really appreciate all the advise from all the heavy hitters on the forum, thanks everyone.
After meeting with my finacial advisor this morning we went through both LVR LMI options and it's clear in my mind to stick with my current strategy.
Best thing about a strategy is it can be adjusted as necessary.
Thanks again everyone

 

Personally I have never been concerned about paying LMI...have always seen it as a tool to be able to put as little of my own cash into a deal as possible. As others have said, then you can park excess cash in offsets and have flexibilty....especially if unexpected repairs or Maintainence are required...you need the funds for those things when "stuff" happens.