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2 Properties - How to structure for #3 and #4

Discussion in 'Investing Strategies' started by archangelsupreme, 11th Apr, 2009.

  1. archangelsupreme

    archangelsupreme Well-Known Member

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    Hi everyone - just need some advice on structuring my finances to allow ease of purchasing property #3 and #4. My goal at this stage is to at least own this much by the time i'm 30....i'm 25 at the momment).

    I kinda know what I have to do but wanted to get some feedback and suggestions.

    I just recently purchased another investment property and now hold the following:

    Property #1:
    * Valued between $500-$650k on average (weird i know, the valuations I got back vary greatly)
    * Borrowing 80% off a "very conservative" IMO bank valuation of $520k so $415k.
    * Renting $1200 per month (low I know, but renting to a family friend and they pay all expenses)
    * Positive Cash Flow Property (if you factor in the excess funds i have currently offsetting the loan)

    Property #2:
    * Purchased at $500k.
    * Borrowing 80% so $400k. The remaining balance to be paid out of excess funds I have offseting Property #1.
    * Rental potential is around $430-450 p.w.
    * Cash Flow Negative Property (though not by much...boderline really)

    Excess funds (once used to offset Property #1) prior to the purchasing of Property #2 was at $180k......after the purchase of Property #2 this should decrease to around $60k. I'm using the excess funds from #1 (i.e. equity) to avoid cross-collaterisation.

    So my position in terms of gearing is ~80% at $815k / $1.02m. Of which I have about $60k in offset.

    My question is how best to structure my finances to reach Property #3 and #4 in the next couple of years (1-3 yrs). I'm aiming for around the $350-400k mark for both.

    I know I have to somehow build the equity out of this. If I was to borrow 80% for property #3 (i.e. $340k assuming property is valued at $430k including stamp duty)...i will need at least $90k equity. By current measures, i've got another $30k to build and that's leaving no room for buffer. I think it will take me another 0.5-1yr to reach that mark from my work pay.

    Even if I do manage to purchase property #3 in 1 or so years, it will leave me in a pretty weak equity position heading into #4.

    I'm reading all these stories about people owning 20+ properties in a matter of 5-10 yrs....clueless as to how they do this so fast. And here I am struggling to position myself for #3 and #4. Am I doing something wrong? The only think I can think of is that the majority of these people buy in the low $200k-$300k bracket for most of the properties....thus potentially having more equity to play with????????

    I've got about $70k in shares which I'd rather leave seperate and not touch to fund my property purchases.

    The only thing I can think of now is to just borrow 90% of the value for #3 and just pay the damn LMI (you can claim deduction over 5 years can't you)?????

    What do people think of LMI in this instance, should I just bight the bullit and do it???? Is there some strategy I should take into account that I haven't already?

    Need your help. Thanks.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You need to consider the cost of the LMI vs the benefit it gives you.

    If paying LMI means you can own an asset that is growing in value sooner than you would otherwise ... and the overall return is going to be higher after those costs ... then just pay the LMI.

    This does assume that the asset will grow in value of course.
     
  3. archangelsupreme

    archangelsupreme Well-Known Member

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    Yes, i'm of the same understanding in regards to LMI. Sim, have you used this method personally?.....or anyone else here on the forums???

    I'm thinking of playing a wait and see game for the next half year to see how the market fairs after the FHOG stops (assuming it does) and unemployment starts to ramp up and its affects on house prices in Melbourne. Though I want to position myself in the best possible way should I choose to re-enter the market again.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I have typically borrowed to 90% and paid LMI (usually 89.9% or there abouts actually ... fees usually jump quite a bit above that level).

    ... but at the time, I also had significant other liquid assets and high cashflow coming in to manage the risks.

    Risk management is key to working with high gearing levels in my opinion - make sure you have strategies for dealing with a changing economic environment.
     
  5. Billv

    Billv Getting there

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    I agree, there is no point in stretching yourself any further.
    If in the future you see the market taking off you can always pay LMI and access the equity in your current IP's.
    For now, I'd concentrate on building up the offset account or if you can afford it you could salary sacrifice into super and buy shares with it.

    cheers
     
  6. archangelsupreme

    archangelsupreme Well-Known Member

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    I'm definately going to continue investing in shares...though just not at this point when the market is rallying....i'm waiting for the inevitable correction (i hope) to purchase more.

    What's your outlook on shares BV?
     
  7. Billv

    Billv Getting there

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    archangelsupreme

    Long term IMO there is 1 direction for shares and that's up so we should buy now while they are still on special. ;) There could be a small pull back but prices will go up again.

    Other investment types (even term deposits) are now poor performers so even if shares go sideways for a while we are not going to be worse off than if we had our money in the bank for example.

    Shares and entry level property are my current favourites but superannuation is also an interesting area because my previously negatively geared properties are now making me money and if I don't salary sacrifice I'll end up paying a lot of tax.

    So I am in an accumulation phase and diversifying in all the 3 areas.
    I spent some of my cash buying shares but my accountant picked up on it and made me change my mind.
    Doing the numbers, buying shares with salary sacrificed money is a much better option .

    I'd hate to dissapoint the doom & gloomers but times are still good :)

    cheers
     
  8. archangelsupreme

    archangelsupreme Well-Known Member

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    That's a very positive post indeed...LOL, there's no question about long term....though i'm still kicking myself for not buying more before the rally...LOL the power of hindsight.

    I'm definately wanting to diversify hence my line in the very first post that Id rather not touch my share portfolio to fund my next property. I like to keep both chugging away

    Now that i've bought a property I think i've kinda got an itch...LOL...i want to buy the next one like NOW...hahahahaha....though i know I should wait a couple more months before diving back in.

    As you can see, I'm a relatively new investor...so my emotions still get the better of me sometimes....argh, lame-o
     
  9. Billv

    Billv Getting there

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    It depends on where you buy
    If your area of interest is hot from first home buyer activity and you can buy now then go for it. There is no point waiting to buy when prices would be $30K+ higher
     
  10. archangelsupreme

    archangelsupreme Well-Known Member

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    Shouldn't it be the other way around, when house prices in the outer suburbs are being inflated by FHO you should avoid shouldn't you?

    Plus i'm not really interested in investing in the outlying suburbs. Prefer inner-Melbourne suburbs such as:

    * North Melbourne, Brunswick, Kensington, St. Kilda West, St. Kilda, Elwood, Armadale.

    Though I am starting to branch out a bit further and looking at the western side of Melbourne...i.e. suburbs next to Footscray.
     
  11. Billv

    Billv Getting there

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    It depends what you buy and where you buy.

    Once Vendors are conditioned to higher prices they won't be reducing their prices to suit your budget.

    Also, as long as interest rates stay low they'll be in no need to sell.