Now if you’re a bank or lender, you’d probably worry about loan serviceability with neither of us working, two dependent children, a PPOR loan, and an investment loan to repay. According to our mortgage broker, Nathan, women on maternity leave statistically don’t always go back to work. So to keep things ticking over I’m back to the bad ol’ 9-5.
Of course serviceability only matters if we were to apply for another loan. The existing loans are already in place (and being repaid) so the banks don’t care what we get up to.
And that point naturally leads to the announcement that we’re looking at a second investment build. Having now been back at work full time for a few months, we may even be eligible to borrow again sooner rather than later, which is great.
As with the first IP, we’ve got unused or “lazy” equity in our PPOR. What that means is the value of our family home is worth more than what we owe the bank, thanks in part to appreciating property prices and the fact we’ve gone to great lengths to pay down the loan and thereby save on interest charges. That equity can now be used to fund the deposit and costs on an investment property through a line of credit secured against our family home.
Rounding up, we used around $70k of this equity to cover the 10% deposit and other costs for IP #1, meaning we didn’t pay lender’s mortgage insurance on the 90% main loan. I’ve got a pessimistic spreadsheet showing me, worst case, how much it costs to hold this property with tenants in place and that works out to around $4k/year for the first few years; I’m meanwhile looking at the actuals and so far the costs versus incoming rent are more or less balancing out. Open Corp suggests holding costs are typically around $50-60/week.
Of course with Gemma not working this year (IP #1 is in her name) we’ll have to defer any tax benefits so it’s hard to get a true picture of holding costs.
Nonetheless, with the IP#1 build behind us, tenants installed, and actual holding cost data now available, I’m feeling comfortable about repeating the process.
Because the first build with Open Corp was so smooth and because I’m working full-time and have little time to spare researching the market, area, and property, I’m planning on going through Open Corp again despite the costs. At the moment we’re looking at a build in Melbourne and Mortgage Choice tells me we should be able to borrow what we need. I’m planning on using the same team, with state-specific replacements for certain roles of course (e.g. settlement).
I’ll note my intention at this stage is not to own a dozen properties, as some firms may suggest. I’ll do what we can afford to do and can do comfortably. Open Corp suggests five or six properties may generate the cash flow and create the equity needed to live comfortably in retirement but even that will come in time as the equity in IP#1 (and IP#2) grows and becomes accessible.
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
