12 – Progress Update: Settlement

Settlement day today and everything went smoothly, as far as I know. I received an SMS from the bank to notify us settlement is complete, an email from our solicitor, and an email and phone call from our Client Liaison Manager at Open Wealth to say congratulations. So I’ll call that done.

I’d suggest this would be a good occasion to pop a bottle of bubbly but the wife is pregnant and heading out for dinner with the girls tonight, no less. So, in our usual way, we’ll let the occasion pass without much excitement. What investment property?!

Here’s a picture of a pile of dirt—but it’s our pile dirt (er, the bank’s pile of dirt rather)! Good to see the skies are blue in Queensland so hopefully progress can be made without too many disruptions from the weather.

I’m told by Open Wealth “the builder has arranged the soil test, engineering plans and working drawings and the plans have been submitted into council for approval”. “While the plans are being approved the builder will be organising the site works, retaining walls, sediment barriers, driveway shake-down and signage.”

Open Wealth expect 6-8 weeks for permits (ideally six since we paid the 5% builder’s deposit up front and should have jump-started the process) and then things start to really get underway.

I would have preferred to be further along by now, with the original aim of having tenants in place by the end of the 2014/15 financial year but settlement has pushed us out to October (worst case, on the basis of the 30-week construction guarantee Open Wealth includes). Naturally, this will be particularly awesome timing—he said sarcastically—as I’ll likely be overseas as we transition from construction to rental.

The base stage complete milestone is next, which is everything before framing starts.

All said, I’m impressed with myself for a) doing this and b) doing this as well as I possibly could using my newfound knowledge. When we built our PPOR in 2006, we were clueless and did as we were told. Rather than try and understand the process, we followed the bouncing ball. We lucked out in general, but for an investment property I felt complete engagement was necessary. This will be one of several (future) income generating assets which I intend to run as a business and I believe it would have been amiss of me not to dive deep into the semantics. Yes, we’ve still followed the bouncing ball in general because the process outlined by Open Wealth is aligned to my knowledge and strategy but I now understand why the ball bounces and I’ve not hesitated to correct its trajectory when I felt it was heading in the wrong direction.

Time will tell whether we’re doing the right thing but right now I’m comfortable knowing I’ve taken the first steps to secure my financial future and done it in a way that I understand and believe to be correct.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

11 - Bank Deals

Here we go again! I recently posted about the improved deal I got on our house insurance just by phoning up and asking for a better price. Almost to prove my point, I called up the lender who holds the mortgage on our PPOR, asked for a better rate, and they were able to pretty much instantly knock off .05% (pending new paperwork to sign).

Not a vast improvement but nothing to sneeze at either—that works out to about $50/year for every $100,000 owing (.0005 x 100,000). Since this is the mortgage for our PPOR, we can’t tax deduct expenses like mortgage interest so every bit less we have to pay back is more money to us instead of the bank.

It’s worth noting we’re already on a discounted rate by virtue of having both our PPOR mortgage and IP LOC together under the one umbrella product.

The bank wasn’t, unfortunately, able or willing to improve the rate applicable to our equity loan but did suggest we could convert that loan to a fully-fledged home loan to achieve a better rate. Interesting concept but I’m not clear on the tax implications—i.e. the debt may be considered non-deductible.

We’re on a variable rate loan product and intend to stay there. I briefly considered fixing some or all of the loan before the most recent rate cut but was obviously glad I didn’t as interest rates dropped .25%. Some pundits in the media are predicting a second rate cut this year.

Michael Beresford at Open Wealth recently published a brief but informative “Wealth Workout of the Day” video on the subject of variable vs fixed and some of the implications you may not have considered, such as pulling equity out of your property. Here’s the video.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

10 – Progress Update: Survey Plan Registration

In all honesty I’m not 100% certain what this means but we received a letter from our solicitor on Friday noting “the Survey Plan relating to our purchase has registered in the Titles Office” (which seems to be the Department of Natural Resource and Mines, Queensland). We now have a settlement date of 20 March—finally!

Like I said, I don’t fully understand what this means, but I think the land developer has now completed the necessary developments for the land we’re purchasing and the rest of the development (sewerage, street lighting, paving, etc). We’ll still need building plans to go through council, which can likely start only now (or post-settlement).

The solicitor also sent a draft settlement statement, part of which caught my eye.

Specifically, the bank (that is, the bank covering the main loan for this investment property) will be advancing around $185,000 at settlement and we are required to make up the balance.

Now we’re fine to do this through the line of credit we established to cover the 10% of the purchase price and costs but my naive assumption was that our main loan would be drawn down in full for the land purchase and part of the construction costs, before we’d start drawing down the LOC.

But of course that would be too simplistic. More importantly, to the banks thinking anyway, we could theoretically run out of money to pay for the build. No build means no income, which to the bank means greater risk that we’ll default on the mortgage. The bank which holds our main loan has no idea about our LOC.

No matter, we’ll do things this way and everything will balance out in the end. It does mean we’ll have to pay a tiny bit of extra interest because the interest rate on our LOC is slightly higher than that of our main loan. At least it’s all deductible interest.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael