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  1. #1
    Mummabear is offline Gone.....and no doubt already forgotten
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    Default Info on buying investment property

    I was wondering if anyone here had any info on buying an investment property?

    We don't have a lot of money, our savings hover around the $5k mark (we're just building it back up after DH being out of work for 3 months).

    We have around $100k equity in our house (we haven't had it valued but I think it would be around this, maybe as low as $70k or as high as $120k). We had thought about refinancing and using the money to do this place up, but we know this isn't where we want to stay, we ultimately want a property but there is no way we would be able to afford one now. There is also no way we would get a loan for a new residential home as we simply do not have enough income.

    We don't really know how the whole 'investment' thing works, someone had told us that you don't need any actual cash to buy an investment, that you can simply use the equity in your home to fund the purchase and the rent to cover the mortgage (obviously allowing for a shortfall, repairs, maintenance, vacancies, etc). Is this right?

    If so, we were thinking that we could use our current equity to purchase an investment property, then once that has developed some equity use that to buy another, etc and then in about 10 years sell the lot and buy our property.

    Is this actually a feasible idea or do we have it all completely wrong???

    Any help would be greatly appreciated.

  2. #2
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    Hi, we have just gone on to buy a second property (settling in a few weeks).

    We were able to use the equity in our current house (about 100k) so that we didint have to pay lenders mortgage insurance (usually you need a 20% deposit) however, we did have a bit of trouble being able to borrow enough to purchase the second house. At the moment they are a bit stingy with the lending, and our combined income is not that great. We ended up just getting across the line with 250k loan, and having to pay some of the purchase price, as well as all the costs by selling some of our shares, which we werent that happy about doing.

    We will be moving into the new house, and renting out this one, which isnt the most effective strategy in terms of tax etc, but we needed the extra bedrooms as we are expecting #2

    If you have anymore questions, feel free to ask

    ETA: it is feasable, but the main things to consider are
    your income
    any other debt you have (inc credit cards, ours had a 5k limit and we had to get rid of it, even though we never ever pay interest on it)
    cost of the second home
    purchase costs
    costs of any work you need to do on the other house
    Last edited by Pregnor; 16-08-2010 at 12:20.

  3. #3
    SuperGranny's Avatar
    SuperGranny is offline Worlds best grandma! Winner 2012 - Most Helpful Member
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    hi mummabear, You have summed up what Investment properties will eventuallyallow you to do. You can buy property without using any of your own money, if the banks will agree to lend to you. First off, go and talk to your bank, ask about what they will lend to you, and what security they will want. It can be done with very little of your own money, but it can also go belly up if you over commit, or you have a time without tenants, or without the rent coming in. We have done this for many years, and it does work, but not without problems and you have to be able to ride out the storms. Marie.

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    Mummabear is offline Gone.....and no doubt already forgotten
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    Hmmm. I'm soooooo confused. I looked at a financial forum elsewhere on the net and ended up

    So, in order to get a loan do we have to be seen as being able to afford it without having tenants pay the rent? If so then we're up 'you know what' creek without a paddle. We looked at selling this place and buying another residential to live in, but we wouldn't be able to get a loan that would enable us to buy anything worthwhile. In order to get an investment loan do we have to be able to show that we can afford to make the weekly repayments on both mortgages on our own (no tenant paying)???

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    I am not sure if that is exactly what the bank is looking for, but its always a good idea to have some kind of back up just incase. We have rented out this home before, and while the tenants paid rent, they also trashed $1500 worth of floor coverings (new just weeks before they moved in) and we had to repaint, and replace the kitchen. This was despite going through an agency. You also have to remember you are paying 2 lots of rates, more insurance, and your RE agents and maintenance on a second property. Also you have to consider what would happen if there is an interest rate rise.

    We might just have the $$ to pay both at the moment, but ideally it would not be for an extended period of time BUT if it came down to it, we are able to sell more shares if we encounter a problem.

    Maybe you should sit down and think about how much you can afford to pay each week - worst case scenario. Then you will be able to figure out how much you would like to borrow, and have a look to see if there is anything in your price range, and see how much the rental value is.

    Perhaps something like a unit or an apartment is a more affordable option, rather than a house? Also, you could consider doing the loan interest only for the first few years.

  6. #6
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    The main crux of being able to do this, is having the cash flow to actually put money towards it.

    You dont need a huge deposit ($100k equity will normally be quite fine) ... but you DO need to have cash/income available each month to make the repayments.

    rental income alone will NOT pay the mortgage in most circumstances, and if you are relying on the rent with no cash injection from yourself, that is when you get into major trouble.

    If you have some to put towards it each month (without struggling, and being able to live your life - allowing for sudden extra's etc), then an investment property can be a good way to make money.

    I will write a bit more in a while, to explain in simple terms how leveraging works ... and how to make money. But ... the simple answer is - if you dont have the cash flow, it is risky.

  7. #7
    Mummabear is offline Gone.....and no doubt already forgotten
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    Yeah, I think when you put it that way we're dreaming a bit - I don't think we are in the financial position to pay 2 lots of rates, repairs, fees, etc. At the moment we barely have enough to pay one lot

    Thanks for shedding a bit more light on it for me. Maybe we'll just keep saving so we're a bit more stable and re-think in 12 months. Argh, it's just all so frustrating. So many of our friends are financially comfortable, have investment homes and lovely residential homes - I know it's not about 'keeping up with the Jonses' but it is disheartening when you both work so hard and when you look around you feel so far behind the 8-ball compared to everyone else. I just don't know what we're doing wrong

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    Your income is what's really important. if you had 300k of equity, wanted to buy a house for 400k, but had a low combined salary you wouldn't get a loan. Especially in todays current financial climate. Banks are much more careful about who they lend money to.

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    We looked into it recently, but through one of those organisations that manage it all for you. In the end they pressured us far too much and I baulked at the way they were rushing is, but the reality was that we probably couldn't afford it comfortably.

    Just like buying a property to live in, look at whether you can afford the payments at a higher interest rate and I wasn't convinced we could.

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    I think if its something you are interested in, then its worth talking to someone in the know that can explain it all and see if you are in a financial position to do this.
    For example, my DH and I didn't have a huge amount of equity and we are on 1.2 incomes (ie DH is full time and I work 0.2 fte) and we found that we could financially afford to get an investment property (& find out what the tax benefits are as well, as minimising tax is a huge incentive!). Obviously the bank won't lend you the money if you can't service the loan, so that means repayments (interest only is the most common), paying body corp if its a unit, rates, insurance etc
    The group we went through was The Investors Club (TIC) (mods feel free to delete link if its not allowed) www.tic.com.au and you can fill in a financial capacity form (obligation free) or attend an info session (also obligation free) and find out more - from there they are very helpful every step of the way ie locating properties that give a good return on your investment, help with mortgage brokers, depreciation etc, leasing arrangements, and their services are free (no its not a scam, as DH were quite sceptical too at first). We were never pressured nor persuaded in any way by these people.
    Good luck with it!
    Last edited by zenifa; 16-08-2010 at 16:27.


 

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