One Property Investment Story that Ended Well.
In the media, there are always plenty of tales of how property spruikers are ripping off ordinary Mum and Dad investors.
So I though a positive story would be a refreshing change.
About 4 months ago a client of mine, Teresa, from Sunnybank in Brisbane called me. She was excited about the idea of buying an investment property.
She had paid off a fair chunk of her Westpac home loan. Her loan balance was now $80000.
She had been following the national property market closely and believed that Perth was the place to buy an investment property as prices there had started to surge.
I told her she would be able to borrow all the funds at reasonably good rates, particularly if she took out a fixed rate. She believed that she would get good rental return on the investment property she intended buying. (NOTE: RENTAL RETURN = ANNUAL RENT DIVIDED BY THE PRICE OF THE PROPERTY) According to her research, the rental return would be a fair bit more than the loan interest rate. This effectively meant that she would have a positively geared property, where her rental income easily paid for all the property expenses including rates, insurance, agent fees and interest on the bank loan.
She was really happy about this, but knew that because her property would be positively geared, there would be an increased tax bill at the end of the financial year.
Teresa had some money for a deposit saved. But, as she had raised the issue of the increased tax bill, I suggested that she pay all the costs of buying the property with borrowed funds. I asked her to consider borrowing:
(a) The cost of the property - $440000 (including deposit to the agent)
(b) The Stamp Duty - $17200
(c) The building insurance - $420
(d) The pest and building inspection - $600
(e) Her solicitor fees - $1200
That meant establishing an investment Loan of $459420.
She gave me a slightly panicked look! After all - which Bank would be crazy enough to lend almost $460000 on a place only worth $440000? Also wouldn’t the Lender Mortgage Insurance expense be sky high? And, apart from all that, was it really the right thing to do?
I gave Teresa a detailed plan to take to her accountant for approval.
My plan was as follows:
I would establish another Westpac loan (A LINE OF CREDIT) using her Brisbane Home as collateral. The Line of Credit would have a limit of $150000. This would be entirely separate to her existing $90000 Westpac loan. She would use this Loan (The Line of Credit) for paying for costs associated with buying the investment property. As it turned out she actually used the loan to pay the real estate deposit - see (a) above plus all the other costs see (b) – (e) above.
She ended up using $107400 of the $150000 Westpac Line of Credit. The balance was left as a buffer in case any emergency repairs were needed. She only had to pay interest on the part of the loan used, not the entire $150000.
The rest of the required funds ($352000-80% of the purchase price) were borrowed through ING BANK using the Perth investment property as collateral.
A few days later her Accountant called and told me she (the Accountant) was happy with the suggested plan because:
(1) Teresa was borrowing ALL the costs of buying the property, while paying $0 in Lenders Mortgage Insurance. That gave her a great tax deduction at no additional expense.
(2) Teresa would be able to use her savings (the money that was put aside for a deposit) to help pay off her other $80000 Westpac loan on her Brisbane Home.
(3) The surplus funds in the Westpac Line of credit could be used to carry out repairs or make improvements to the investment property. This could further reduce her tax bill in the future.
(4) Her own home in Brisbane and the Perth investment property are financed by different banks. This provides Teresa with a layer of protection in case something adverse happens to either property. The bank financing the affected property would be unable to force the sale of both houses, just the one it holds as security for the loan.
The property in Perth settled a few months ago and all has gone to plan. We managed to lock the $352000 ING loan on a really sharp fixed rate for three yrs giving her peace of mind about repayments. She has used the Westpac Line of Credit to put in a new kitchen and air conditioning. She believes these improvements will boost the rent significantly. And she gets the extra interest deduction.
She is unworried about job loss or any other “surprise” as she has plenty of buffer funds available, allowing her to navigate any emergency. That’s because the extra funds she placed in her $80000 Westpac home loan can also be withdrawn at any time.
We agreed to review her portfolio of property on the anniversary of settlement and see if she was in a position to buy another investment property at that stage. (She plans to buy 3 more properties in the next 10 years). Congratulations on becoming an investor, Teresa!!