Moving up from one investment property to two..

[young*investor]

Hi All

Now I know there are a lot of posts about how to get started, or about seasoned investors taking on the 10th house.

What I need, is some help about organising financing for the second property, if possible?

Bought the first place a few years back, and am currently renting elsewhere myself. Wanting to buy another investment, but not sure whether to refinance the first to do it, or to use another deposit (which I've already saved up) and keep the second one separate.

Any recommendations? Haven't bought somewhere to live yet myself, as I'm not sure where I want to be long term, and it gives me a bit more freedom to move about...

Am home from work sick today, so wanting to be productive while sitting in bed feeling yuck!

[spaceman]

Imho

If I was you and could wear the -'ve cashflow I would look at refinancing and borrowing 100% of the new purchase price, without putting any deposit in.

Some people would say -'ve cahsflow is a bad thing and you're very unlikely to get a property with 100% finance to be cashflow +'ve.

I say as long as you're carefull and have your eye on the big picture -'ve cashflow isn't the bogeyman some make out.

Hope you're feeling better soon

Cheers
Spaceman

[young*investor]

Awh, thanks Spaceman...

So, refinancing the first place, up to the full current valuation, taking that extra cash and putting it towards a new place?

Can someone show me the calcs?

Lets say current place is worth $290k and I have debt of $190k....

[Keys]

I would pay down debt.

Paying off the mortgage (he doesn't have a personal one guys) is probably 
financially better than having that money in the bank earning interest @ 8.75% and then paying tax. 
You can always reborrow, thereby having all of the borrowings tax deductable. 

That's an interesting feature ([/php]) for the text.

[cube]

On those figures, you could buy a place for $210,000 without breaking 80% LVR

Total Value 000s = $290 + $210 = $500
Total Debt 000s = $190 + $210 = $400 = 80%

To do it without cross-collateralising the properties (ie. have with separate banks), you would increase the mortgage on your current property to 80% ($232k), and take the $42k to a new bank as the 20% deposit on the $210k property.

Your problem may be persuading bank 1 that you can support the increased mortgage without additional income - hopefully a decent mortgage broker can have that discussion with you first, and then say the right things to the banks.

Good luck.

cube

[Gatekeeper]

Pay Down Debt????

Me too.......

[Jurgs]

Young Investor, You have $100k equity and are looking at anothe rinvestment. Another relevant factor is how much cash you have saved.

Contrary to a previous post, I would be wary of being too negatively geared. Firstly, lenders in the current market have tightened criteria, so it isn't always possible to achieve the gearing levels it once was.

As your next step, I would speak to a broker, obtain your maximum pre approval amount, so you know what you can spend. Include your savings in this, so you have an absolute maximum figure you can borrow, and a maximum purchase price.

We are now in a buyers market, and with your top price in mind you can look for bargains. I would then look at individual properties on their merits. Look at the price, and rental return of each one, and whether it has capacity for capital gain when the market starts moving again.

If you find a property that fits the bill, armed with your preapproval, you can make a discounted cash offer and try to save more on the purchase price.

Your borrowing capacity depends alot on your personal income. I envisage with the limited information available, and your current equity levels, you are probably in the market for another property worth between $275 - $300 max. This will keep your gearing levels manageable, and approvable by the banks.

Mortgagee sales would be a good place to look.

[Keys]

Mortgagee sales would be a good place to look.

On this point I disagree.

Mortgagee sales are generally for properties where the person living there (may be the owner but not necessarily the vendor) doesn't want to leave. They can be destructive in their rage and depression at losing the home.

The purchaser takes all the risk at the time the property is sold. The person living there may be hard to get rid of.

[Jurgs]

I guess in extreme examples that may be the case, but in Auckland, a large proportion of the mortgagee sales at the moment are existing rentals, where owners are unable to raise rents sufficiently to meet mortgage payments.

These often come with an existing tenant, and can be bought below value. Again, each and every property has it's own unique characteristics that may or may not make them a suitable investment vehicle.

[JohnL]

I wouldn't be in a hurry to buy the second one yet, unless it has positive cash flow. The market may drop further yet and why be subsidizing a rental which is dropping in value when you can get 9% in the bank on your deposit money?

When you do buy, its good to use a second bank. Its starts giving you a 'history' with the bank and its easier then go back to both banks later on and add a couple more properties with each.

I would be tempted to use my cash for the new deposit (initially). Once the next boom is underway in central Auckland, you can start to gear back up to 80% LVR to buy more properties. At this stage a low LVR and better cash flow is an advantage when we don't know how severe the slump may be.

John

[Green Fish]

I would go a little further than JohnL: Forget the whole idea of buying a second property. Having one is problem enough.

[young*investor]

Okay, have savings of circa $25k, so I could either pay down the mortgage a bit, buy my own place or put it towards a second... have just been borrowing off my own income which is $50k... which I guess is where the banks may have an issue?

The 80% LVR is interesting, I was looking at either a place in the Hamilton/Tauranga or Palmy Nth... definitely not Auckland, thus fitting into about $250-$310k bracket.

[Green Fish]

But it must be 'wait and see' time. In other words, let's just sit tight and see what happens with the 'toxic US debt' virus. The plain fact of the matter is that hardly anyone can buy a property without finance from a bank. So if the banks stop lending, no-one can buy. The market value of an asset that no-one can buy is zilch.

[JohnL]

There have been some good threads on whether to ever buy your own home. Financially you are better off renting for some time yet. Some would argue you should always rent. Worth doing a search and reading the discussions.

John

[Jurgs]

If you buy a second rental, the banks will factor in your income, both rentals, less any ental expense you are paying. 80% is generally going to be their level of comfort on a deal like this, and thats usually a good guide. (although in this part of the cycle, perhaps 75% is a safer gearing level).

Quick calculations indicate that if your properties receieve average rentals, you should be able to borrow an additional $250k, which added to your savings has you buying at $275k. This would put total borrowings at $440, against values at $565k, at 78% LVR. (how you structure it can be sorted later)

This is all approvable, but is it a wise decision. Interest costs of nearly $44k per year make you heavily rental reliant, and even brief untenanted periods in either property could cause financial difficulty.

Financial diffculty combined with falling house prices can easily take a chunk out of your equity if you have to sell.

While we would get this level of lending approved (this week anyway), I would buy at a lower value to enhance your chances of being able to manage potential shortfalls. It's not a bad time to be conservative.