Would You Pay off a Loan, or Buy Another Property?

• 

  IIGnomeII on 21/10/2014 - 08:41

  +1

  I would take option 3 - talk to a financial advisor

  But if you are after advice from a shopping deal website I would probably drive down a large portion of the original loan and then take out the next one once I am almost down to $100K.

  • 

    StewBalls on 21/10/2014 - 08:45

    +1

    I would take option 3 - talk to a financial advisor

    At the very least, a good tax accountant…direct principal reduction for an IP is not always the best alternative; depending on your individual circumstances of course, offset can be your friend here! ;)

  • 

    Tcm9669 on 21/10/2014 - 08:47

    Already spoke to financial adviser, he reckons I should have 2. But I will be stretching my salary a bit thin in case tenants vacate etc.. (no rental help). This is why I would like some generic opinions.. maybe someone on this shopping deal website has gone through something similar and can provide more insight.

    • 

      StewBalls on 21/10/2014 - 08:51

      +5

      But I will be stretching my salary a bit thin in case tenants vacate etc.. (no rental help).

      One simple rule…Never over-commit. It's great that you've clearly recognised this, and alarm bells are ringing…if it's not feeling right (disposable income wise), then it's just probably not the right time for you to branch out.

      Just remember, FAs aren't the ones that have to cop the loss if you default on your loan…they can advise, but at the end of the day it's your money at stake, and you're better off to be cautious. You have plenty of time to build up your property portfolio, it's a long race & best to build slowly on strong foundations rather than go in too hard & lose it all.

      • 

        Tcm9669 on 22/10/2014 - 21:55

        +1

        FAs aren't the ones that have to cop the loss if you default on your loan

        Exactly my fear here. FA says GO, I say.. not so sure.

    • 

      IIGnomeII on 21/10/2014 - 08:51

      +1

      Then I think the question you should be asking yourself is how long can I survive without any rent coming in from these properties, if it is less than 6 months I wouldn't take up a second loan.

      • 

        Tcm9669 on 21/10/2014 - 08:54

        Thanks. I think that would be a fair goal and a decent time range to get a tenant in. Also, edited my OP to provide clarification.

        @StewBalls: That's what I'm trying to make out here. My financial adviser reckons I should do it… me, I'm torn in between.

• 

  redlover on 21/10/2014 - 09:32

  If I were you, I will go ahead and purchase the second property (with one condition: I have enough money to pay at least 20% of the loan). worst case scenario if your property don't have tenant for long period of time and you feel you cant afford it, you can always sell it. In saying that, you must do your homework i.e assessing that the property have a promising future.

• 

  aegcp on 21/10/2014 - 09:38

  One word: Leverage. In an ideal scenario, you shouldn't be paying off your investment property, specially with after tax money. Use the extra money to buy more properties that doesn't cost you much to maintain, pay interest only (see below), and let the time do its thing.
  If you're worried about vacancies etc, I'd think twice about buying the next property until you have an emergency fund ready. If your properties are well located, maintained in proper condition, and in an area with low vacancy rate, there shouldn't be an issue renting them (get landlords insurance as well). But, emergency fund (buffer) is what you need to sleep fine during the night.
  Don't pay off your investment loans. Has your "financial adviser" mentioned anything about offset accounts? if you want to pay them off, pay them through the offset account. It does the same thing, but you're not giving the money to the bank. Offsets are good, providing your money habits are good.

  • 

    Tcm9669 on 21/10/2014 - 10:19

    Yes. When I say pay-off loan, I mean put extra money in my offset account. That way I have access to my funds if needed.

    Now as for your statement that I should not be paying off my investment property.. Why? It costs me around $10k a year in interest only. Rental would just about not cover that, plus, land rates, water sewerage and other charges. So even after tax refund, I'll be out of pocket. Therefore, I never understood why not pay off as much as possible?

    Maybe I'm missing some point?

    Thanks

    • 

      aegcp on 21/10/2014 - 11:43

      well, simply you bought a property that costs you money to maintain -negative gearing-. you're basically 'hoping' that prices go up so you can get ahead long term against the money you put in every year. Some people buy cash flow properties, or neutral properties (which costs you very very minimum to hol). Some buy property that cost them money (you). Not paying off an investment property is a strategy that many investors follow. The main reason is the additional money you are paying to try to pay it off can be used as a leverage to buy additional property. That way you increase your asset base and generate wealth. There are no right or wrong approaches, but the majority of investors do this. I'd recommend you grab few books on property investing and go through them. good luck

      • 

        Evil-Elmo on 21/10/2014 - 13:21

        I don't see how having two investment properties necessarily generates wealth. Surely it just increases your exposure to the property market which, if it goes up in value, then generates wealth. Similarly, should the market stagnate or go down, it will reduce wealth, right?

        I ask this as someone who doesn't own any investment properties, but has considered getting on the bandwagon. I just have trouble making it stack up.

• 

  cypher67 on 21/10/2014 - 12:42

  +1

  Id pump as much as you can into your existing loan until your at a point that you would be comfortable with the 2nd property. There is also more stress free ways to invest your money. However keeping equity on your house saves you on the interest, even though your money isnt making you money, its at least saving you money.

• 

  shortgum on 21/10/2014 - 21:25

  This is depending on a lot of things. not just 1 or 2 answer. Personally pay of debts is great to level off stress if property got vacant for prolong period. Debts are debts you can't give rely on rental to run itself. Worst case scenario if no body lease your place (worst case). But yeah, seek professional 'trustworthy' advice that suit you most

• 

  SmiTTy on 22/10/2014 - 12:05

  Doesnt sound like a financial decision .. sounds like a personal risk factor.

  What is your SANF (Sleep at night factor).
  If its going to stress you out and you won't be able to sleep … then dont buy another one
  If you're comfortable with the potential "risk" .. then go ahead

  stress aside, personally i would buy another.

• 

  SlickMick on 22/10/2014 - 13:46

  I would never pay off an investment loan unless I was going broke or retiring. Invest your excess cash somewhere. If you aren't comfortable with a 2nd property, consider other options. It's probably good to diversify anyway.

• 

  martinj on 22/10/2014 - 19:51

  How about investing in something else? Diversify your investments so you're not only holding property.

  • 

    Tcm9669 on 22/10/2014 - 21:53

    Such as what? Also, I don't have much capital. Property is ideal because I can take loan against an asset. Other investment options, I'm not so sure..

    • 

      SlickMick on 23/10/2014 - 12:49

      you could buy shares with whatever cash you were going to put into another mortgage.

      you can negative gear any investment. It's easier to borrow for a property because banks still believe (as do I) that you're a whole lot less likely to blow your dough than many other investments.

• 

  ukulele on 26/10/2014 - 22:49

  +1

  My 2c. This is exactly what I did recently.

  A couple of years back I bought my first investment property. Because I live at home all the rent went back into the loan and I paid the repayments out of my salary, I was basically doubling the compulsory repayment.

  After some time I had around 25k available in redraw and was presented a deal by my mortgage broker, who happens to also be my sister. I used the 25k as the deposit, in hindsight it was not enough but the deal had a quick expiry. My mum guaranteed the loan up to 80% LVI so I didn't have to take out LMI.

  My Experience:
  - Do your homework, you make your money when you buy smart
  - I live at home so I make enough money to cover the repayments even if no one is renting.
  - I think having a 6 month emergency fund is too conservative. Perhaps maybe 3? In my instance I had 0 emergency money at settlement of #2 because I used all of my savings/redraw but with two properties the rent builds up quickly.
  - Do your maths tax wise. On a month to month basis #1 is cashflow positive however #2 is cashflow negative. #2 is a newish apartment so it has heaps of depreciation which is a non cash expense but is deductible (it will partially increase the capital gains tax you would pay upon selling). Due to depreciation; at the end of the financial year #2 is essentially positively geared.
  - Choose Interest only to maximise available cash (#1 was P & I until recently)

  My Future
  - I don't make enough money to cover the repayments outright if I were to buy another.
  - I'm looking to diversify and get back into shares, however right now I am putting all extra cash into #2 for "emergency/vacancy money".

  • 

    Tcm9669 on 27/10/2014 - 08:06

    Thanks heaps. This is EXACTLY my situation. However, how can I declare depreciation? Do I need to get inspections? Is it worth the $200+ fee?

    Would appreciate your feedback seeing as I'm exactly in your situation.. Although my property is actually negatively geared, and I definitely need to extend my LMI, but that's not an issue as I can get the commbank wealth package which saves me some $.

    Appreciate this.

    • 

      ukulele on 27/10/2014 - 09:40

      +3

      How can I declare depreciation?
      - Usually the most common route is to get a qualified quantity surveyor to survey the property and they will give you a depreciation schedule. It will tell you exactly how much is claimable on a yearly basis.
      - If you make additions or changes you may need to get a new one (ie massive renovation etc).
      - Simple additions such as new aircon unit, carpet, curtains should be easily calculated by an accountant. From memory airconditioners are deductible 20% a year for five years. Buildings are 2.5% for forty years. There are schedules you could probably find at the ATO website.

      Do I need to get inspections?
      - Some quantity surveyors don't need to inspect but that's honestly a bit dodgy? Most will inspect

      Is it worth the fee?
      - It depends on the type of property. (Again only talking from my experience)
      - #1 is a quite old duplex unit so it was not worth doing a depreciation schedule as everything is basically depreciated 100%. I have added some split system aircons and that has been easily handled by my accountant.
      - #2 is a 2 or 3 year old apartment (block of around 25 apartments). When crunching the numbers before buying I saw a depreciation schedule of a similar unit in the same building and the numbers stacked up well.
      - So I reckon do your research eg ask your accountant/friends/relatives/agent about depreciation. I was lucky, I got to see an actual depreciation schedule of the apartment down the hall. Your accountant most likely has clients who have bought a similar property to the one your looking at and can hopefully give you at least some rough numbers to work with.

      It's worth noting that some depreciation will add to capital gains tax upon selling. If you claim capital works (buildings built after 1985) this will increase capital gains tax. However you may as well access the cash now rather than later. Also if you hold the asset for more than 12 months you get a massive reduction in capital gains tax anyway. Also also, if you live in #2 for a period of time (I think it's 6 months) then rent it out after that and sell it up to (I think) 7 years later, you are not liable for capital gains tax.

      I hope I have helped a bit, but you should have a long chat with your accountant to clarify these points (and others) 100%. That being said, I wouldn't jump in solely because it's a tax deduction.

      • 

        Tcm9669 on 27/10/2014 - 09:54

        Wow, very helpful post. The insight I was looking for. I will look more into the depreciation schedule, but my property was built in 1990's so I don't think it's worth the depreciation, as for #2, I will see. Also, accountant said 6 years for capital gains tax, not 7 (might be helpful for someone else reading this who is in our boat).

        I already talked with a FA, and he said I should go for this, as long as I'm renting one property, I should be OK. Interest only loan (great tip btw), I can cover even without much rent coming in.. however that's not ideal situation of course.

        I will schedule an appointment with my accountant, seems like the logical next step from this point. Then, I'l do some more number crunching and I will see how I can pull this off… maybe… I do see a few red lights ahead, but maybe even if I do this in a few months, add on some savings and build some emergency funds.

        Thanks very much for your input.

      • 

        tomclancy on 27/10/2014 - 10:58

        @ukulele: Extremely informative post. And bloody accurate. Even the 7 years CG free period you mention is correct - The 6 years that Tcm's accountant said is because the first 12 months of the 7 years is meant to be 'the period you live there'. So it's 6 years from the day you move out after having it as your PPoR for 12 months.

        @Tcm: for depreciation schedule I couldn't recommend Deppro higher. Used them many times, they visit the property, take photos and include a massive report. Of course all you care about is the last page which is the depreciation schedule, but it's an interesting read. Also, Deppro have a guarantee that if they don't find double their fee in depreciation then their fee is free. An average unit less than 10 years old might have depreciation deduction $3k - $7k.

      • 

        cheapm8 on 26/05/2015 - 16:52

        @PBG: I was trying to find some info in regards to you mentioning that you need to live in the investment property for 12 months to make it your primary residence. I could not find any mention of the 12 months timeframe in the follow pages from ATO. Please correct me if i am wrong.

        https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…

        "the length of time you live there – there is no minimum time a person has to live in a home before it is considered to be their main residence"

• 

  bobwokeup on 25/05/2015 - 14:54

  +1

  I know this was posted last year and I haven't read the replies but I put all my money into an offset account (preferably offsetting against your own home but don't pay principal & interest on your own home as the offset account will reduce the amount of interest you pay) and save up for a deposit on a new investment property. Use the equity in your own home or investment property and any shortfall use your offset account to purchase the new investment. Keep doing this and when you are in a really good financial position then pay off your home loan followed by the investment properties. Do this until you have enough properties to comfortably retire and live of the capital gains/rent.

  • 

    cpho on 25/05/2015 - 17:55

    Unless you cant tenant your properties out, lose your job, or interest rates suddenly increase, and then you're hit with large interest repayments which you cannot afford, and the bank comes along, and kicks your ass. Having many properties isn't a one-stop solution.
    Only buy/borrow what you can afford.

    • 

      bobwokeup on 26/05/2015 - 16:26

      Yes good point I shouldn't assume that people know not to borrow outside your capacity to pay a loan should any of those circumstances occur. I was out of work for 3 months and I wasn't worried as I have savings and landlords protection for the properties. Yes landlords doesn't cover all situations but it's definitely worthwhile.

      Having many properties is a long term goal which was my point and in my opinion (also a proven one) it is a good solution to retire early…