Use my Equity or Savings

Hi everyone,

Just my first post to this chat. I have been reading a lot and learning from your comments.

I have one IP in Brisbane with 90K in Equity and 80K in savings.

• Should I use the 90K equity to buy my next IP?
• Should I use my 80K savings and keep the equity?
  
• Or should I use both and buy two IP’s?

Anyone that had this situation before can see any advantages or disadvantages (maybe it is more a personal decision, but happy to hear your comments).

My strategy is to grow up my portfolio to 10 IP’s in the next 5 years and always paying 20% deposit to have instant equity in each house.

Thank you in advance,

Dominican

 

Use equity with a split loan, especially as it is for an IP and should be deductible.

Save cash as a buffer and/or to offset you PPoR in the future

 

Try this thread
Terryw’s Ideal Loan Structure
and this
Tax Tip 60: Never use cash to invest

 

Hi Dominican,

I wish you luck with your journey as it is an ambitious plan but if you get there well done .

90k equity I will assume it is additional equity and the original loan was at 80LVR, this means if the bank values it the same as you do (not sure if you were referencing a bank val) you can utilize $72,000 or purchase roughly $360,000 property. However you will still have all the buying costs (namely stamp duty which will be about $12,000). Otherwise if you were going to use the $12,000 then you are at 60k or 300k property price unless you used cash.

Myself personally I would always use equity then my cash pool, as you should ask the bank when you have money for more money rather then ask them when you have nothing.

It is up to you if you want to buy 1 or 2 properties as you will be the best judge but I would use the equity money first and if there was remaining cash put it in the offset.

 

This is a good point Big Will. Maybe I am too ambitious.

Well, the first IP was 430K and I put 100K as a deposit. My initial idea was to buy two IP's with my savings and after use the equity of both IP's to grow up my portfolio.

I like the idea, of using Equity and keep my savings in my offset account (actually the monthly repayment when down from around 1350 AUD to 1090 AUD), but obviously the portfolio won't grow up that fast.

@Hodor thank you for your comment. I am thinking to be a rentvestor (renting and get tax profit with my IP's).

 

Borrow.

2 main reasons
1. keep your cash for private expenses,
2. borrow while you can as you may not be able to in the future.

 

You'll have to use LMI as much as you can, or you have a huge amount of equity elsewhere to use for the 20% deposits.

My opinion. To have any chance of the 10 ips in 5 years, you will need to use the banks money and a lot of it.

Btw just make sure they are quality properties. The number of properties is so unimportant. Its the total value of them and their quality that matters imo. Having 4 quality properties with a total vaue of 2.5 mil may be more productive than 10 medicore properties totalling 2mil. Of course always have to invest according to your own financial situation and goals.

Just my opinion.

 

No problems with aiming high, if you believe you can do it don't let me stop you as it is your life after all. My strategy is slow and steady as high risk = high rewards but also high losses. I will not be retiring in the next 5 years or have 10 properties but as @Leo2413 said think about the quality of the asset and not the number of houses.

My next purchase I could purchase 6x houses easily if I, but those 6 houses but they will not fit in with my strategy, yes those 6 houses might allow me to retire within 5 years but they could also make me hold them for not benefit for 5 years.

 

Using 20% deposits is fine..but have you done the numbers?

e.g. If you're buying $350,000 IPs you'll need 5% for purchase costs, and 20% for the deposit. That's $87,500 per IP. If you're planning on buying 9 more in the next 5 years, that's nearly $800k you need to come up with from somewhere.

So make sure you've got a plan (e.g an enormous savings rate, a value-adding strategy and the serviceability to pull equity from properties etc).

One thing people often overlook:

The money you have saved has been earned and you've paid tax on it. To replace a dollar of savings required earning another $1.30 - $1.50 (approx).

 

Usually with an aggressive goal like yours, you'll be best utilising LMI early and purchasing with smaller 12% deposits.

In general, its easier to see the next couple transactions. You may have the deposits and borrowing power lined up, and that may encourage a 20% deposit approach.

But you've got to see the end game - how will you get to 8, 9 and 10? Its much trickier coming up with deposits, releasing equity and having serviceability for those purchases than it is for the earlier purchases.

Think about the end game in making your today's finance decisions.

Cheers,
Redom

 

Let me put in a different way...

I have good income now due to my contract. I am able to save 100K each year for the next two years. Not sure what gona happen in the future... And I decided to invest in property and shares.

My idea is to buy two houses with my own savings (I have one already) and after use the equity to grow up the portfolio. In that way, I will buy two houses every year. I must to pay 20% deposit due to my personal visa status. As I mention 20% of 350K is 70000 + 10000 for expenses. but looks like I wasn't right after reading your comments is more factors to have in mind.

Well, I will keep reading and learning to figure out what is the best way.

Thank you very much!

 

do you have a fully paid off PPOR?

 

@Terry_w no PPOR I prefer to rent near CBD and get tax benefits from IP's. Maybe in the future.

 

In that case it would be a good idea to preserve as much cash as you can so that when you do buy a PPOR you will have a larger deposit.

 

@Terry_w I have been reading some of your post very interesting always... just a quick question:

What do you think about rentvestors? People that prefer to rent and live in a nice area that they cannot afford to buy and get the tax benefits using IP's. Is that a clever idea? obviously is a personal decision too...

 

Yes, i generally think it is a good idea, especially if you are running a business. But you don't want to give up that Main Residence CGT exemption totally as it is very valuable. So best to try to use it by utilising the 6 year rule where you can. i.e. move in and out again and the property could be exempt from CGT.

 

see
Strategy: Rent where you live and Buy Investment Properties Strategy: Rent where you live and Buy Investment Properties
Strategy: Rent and Maximise CGT concessions to Pay off the Home loan sooner Strategy: Rent and Maximise CGT concessions to Pay off the Home loan sooner

 

Hello, Firstly well done on having the courage and vision to have a plan.
I think get in touch with a broker, who and grow with you I think thats the best bet. Also why 10 IP's, I prefer quality vs quantity.

 

Thank you @jpcashflow! My today leasson learned is Quality & Quantity... I personally think that quality is attached to quantity in terms of borrowing capacity ;-)

What about these two scenarios:

Scenario 1 (quantity)

• Buy 2 houses for 350K each (700k)
• Rent both for 350pw each (700pw)

Scenario 2 (Quality)

• Buy a good quality house 700K
• Rent the house for 600pw

Thank you in advance.

 

There isn't one golden rule that is the thing @dominican some people will prefer the 2x 350k and others will prefer the 1x 700k.

It depends on what you want and what you feel will give you the best returns and matches to your strategy, also need to consider your risk profile.

Price has little to do with the quality of the property 1x 700k property in a small mining town is not what I call quality nore 2x350k OTP apartment in Beenleigh. However 1x 700,000 for a 1 acre flat block at Southbank with a 4b2b2c is a good buy.

TBH read a lot and trust/believe no one or what they say/do and question everything. As you are the only one who is actually going to be effected by the choices you make.