what buffer do you keep

As pointed out the impact of $300 per week will rapidly dwindle in size along with capital .

In the early 90's we bought a house in Pymble on half an acre , on a good street in the mid 500's which we subsequently subdivided and the two houses now sitting on those blocks ( probably around 500 each to build ) would be worth around 2.5 -3 mil each .

That 500 k would buy you a house on a standard block in Mt Druitt now . That's just over 20 years .

That's the reality of inflation.

That's why I want a portfolio of property ( close to fully paid off ) to finance by retirement . My index fund .

Cliff

 

In the last few months, I had to spend a lot of money and saw my buffer dwindling. It's actually reached close to our combined monthly salary. This would obviously increase, but having such a small amount is eating into my good night sleep factor.
I have a fair amount of equity in the IPs and PPOR (which we have been contemplating to convert to IP).
What would you do if you were in my shoes? Background: permanent jobs, 2 kids, 1.5+ mil debt, not spendthrifts (save 30% of our salaries)
My options
1. Interest rates are low, so don't worry. Buffer will increase in a few months.
2. Sell a property (Sydney ones have seen one property cycle)
3. Convert PPOR to IP and rent a smallish place (this probably won't increase the buffer much)

Suggestions please.

 

@Mumbai would you be able to wait out another 1-2 months and see if you are more comfortable with the buffer? What would be comfortable for you by the way?
I'd try 1 first and fall to 2 if it doesn't work. Not 3 especially if PPOR rent won't give you much leg up on saving rate

 

Thanks. I have been thinking the same. I will ride out another couple of months with erratic sleep

 

Are you able to do any value adds like minor renos, get a valuation and have some equity to use as a buffer?

 

Hey, here is a heads up, look very closely at your lenders docs in regard to offsets and thinking money is safe

some lenders the offset is not really separated and can be applied to the loan

make a payment error and most lenders can get hands on anything in any account

also if a lender is or becomes in trouble, they can freeze anyway

 

Mumbai, I would not panic myself, but at the same time I can fix most things myself & have quite a few minor assets I can sell of quickly if need be.

look closely at what you can cut out, we have very low outgoings, have also been looking at fixing loans which would save us a fair bit, there are lots you can do if you really look.

 

Minor renos rarely add a lot to the value - a $10k spend would be lucky to add $20k to the value on most houses, for eg.

They usually only make the property more sellable, unless selling in throws of a boom, and this might inspire more excitement amongst buyers who may be showing lower interest. (in which case the house is overpriced for what it is).

You may then access possibly 80% of that increased overall value increase.

Say your house is worth $300k, you spend $10k on a reno, it gets valued again (extra cost for that) at $320k. Two dollars increase for every dollar spent is about a normal expectation.

80% of $320k is $256k. 80% of $300k is $240k

An increase of possibly $16k in overall equity.

Valuers rarely look at the reno aspect to decide their values too - they look at recently sold comparables in the immediate area...number of beds, baths, how many square metres, block size and garage spaces etc....the new flat-pack kitchen and a coat of paint won't cut it to a valuer.

You can only access the equity if the DSR is there too.

Of course; with more expensive properties the value increase might be more significant, but then you also have to add a lot more dollars to the reno to get it.

 

I already have a fair bit of equity.

I am in process of fixing 2 loans and getting a good IO rate for other two. One of them had been P&I which was sucking money out. So, yeah working to consolidate the loans.
I can't see where else I can cut out. I don't to cut anything related to kids and insurances.

 

How do you do this Cliff? (the borrowing 105%ish without drawing down)?

 

For decision making? No buffer in decisions, but haven't needed to.

Cash buffer now about 3 months income. It fluctuates as I tip this into PPOR loan splits and draw down on the new loan for business/investing expenses.

I want my cash to always look low. I find that anything much above 30-40k, you begin to pay less attention to purchases, and that will obviously effect the big picture. Bigger bucks in deductible offsets are separate and don't mentally improve my position.

 

Do you pay LMI? Whats the benefit there?

 

Just remember the bigger the buffer.....the lazier your money is at working for you.

Not picking on Johnny specifically but reading through these if you have more than 12 months payments sitting in an offset etc.....that means you have money sitting doing nothing, earning zero interest, being fat and lazy.

Yes it may be sitting in an offset and saving you 4.5% interest.....but it should really be in another property working hard "at something....anything".

The way my wife and I think about buffer is spreading risk, eg we have equity in our PPOR if one of us gets lifestyle sick eg cancer etc, but for short term issues eg loss of job we have one variable LOC, OR if the bank pulls that LOC then we have $300k in equities (USA stocks).

So basically spreading across investment types AND spreading across countries in case USA catches a cold....or Aust catches China'itiss'.

Just a thought.

 

This really depends on risk tolerance. For me offset is better for sleep at night factor compared to other investment vehicles that I'm not comfortable with.

 

How bad is it for your rating if you apply for a
fee free, Interest and purchase free (Say 12 months or 18 months) credit card? If you're really disciplined couldn't you move some of your monthly expenses here and save cash (building a buffer as such?) and pay off the CC in full before the period ends. Is this is a viable option? I'm not saying it's good (I don't know, hence the question)..however can this be used to manage expenses if you're very disciplined or to have more cash sitting in your offset/buffer. I can see this as really handy when for example..1) You have massive expenses for the next few months which you know will ease out later 2) Say your partner goes on Mat leave.. Am I making sense? =

 

Don't know if you will be approved for that or not. Depends on your current liabilities. But would be a problem later on if you increase your loan amount to purchase another property.

I got a good deal from NAB a couple years ago when I wanted to furnish my new home. Didn't have a huge liability at the time but cancelled it after the promotional period ended because my mortgage broker didn't like my love of cards.

 

We are using funds from LOC's to top up the funds secured by the property .

Cliff

 

Best I talk to my broker, I don't really get it.

 

It depends. We did a minor internal reno on a place a year ago and got a good valuation. The suburb has moved quite a bit, so we got another valuation. They valued it the same because we haven't done anything to it. Will do some minor renos to the outside and will probably get another decent valuation.