My situation, advice sought.

[Daynger]

Hello PTers, i have been lurking here for a bit but have rarely posted but i have found a property i want and i may need second opinions.

I currently own a home in Hillsborough Auckland:
Purchase price in 12/2011: 495k (pre auction offer accepted!)
Current CV: 630k
Agent appraisal: 900k to 1m as it stands.
Rental appraisal: 700/week
Money spend on improvements so far: about 10k.
Current mortgage: 360k (split in to fixed due to rejig 110k (5% i think), revolving credit 180k and revolving credit2 70k)
My revolving credits currently have 160k and 60k sitting in them.

As it stands i am smashing my current mortgage at 1k fortnightly and my revolving credits are full or very near full alot of the time, one revolving credit is my personal savings and the other is my company savings/backstop reserve.
Im a 38y/o self employed electrician/security tech with two employees and i currently make about 160k a year (personal income 70k, business made 90k) and the business pays me rent each week too.

The house i want or think i want i will be viewing this weekend in Waikowhai, it is an auction and they have no price bracket advice that the REA agent has or will divulge but im picking it will be a 1.2m to 1.4m buy, there is no CV information on the council GIS viewer.
Preliminary sounding out of the bank (asb) they will give me 1m or 600k for a commercial property which i think may be a little light for me getting this other property.

Keeping my existing house would actually be more beneficial in the terms of income as the rent would cover the mortgage easily and the new property looks to be easily changed to a granny flat downstairs but im not sure the bank will take this into account.

If the bank doesnt want to play nice is there still merit in approaching a broker?
Any recommendations on a broker?
Does this all sound feasible?
Are there any holes in my plan that are glaringly obvious to an outsider that i may have missed?
Is it the right time to be in a 1.2m dollar hole?
Can i resit buying a racecar?

Thanks
Daynger

[sidinz]

So your plan is to borrow against the equity in your current house, move into the new one and rent your existing one out?

Have you looked into the tax implications of this? I.e. minimising income tax by selling your existing house to a company, refinancing and therefore having your equity in the new place?

[Rosco]

Hi Daynger,

Normally you would look at doing a restructure, which would move your equity from your current house into your new personal house. So the now rental property would have 100% debt. I would always suggest you get expert advice on a restructure, as if done right, all the interest on the rental loan would be deductilbe.

But first, is this property a good rental? You need to look more at the opportunity, possible growth and other items, and I have put simple cashflow below, before tax. With 100% mortgage and say 4.5% interest rate, it would be costing you around $19,000 per year. Obviously you would get a tax refund from this, but it will still be a large cash loss each year.

Also with your new property costing around $350,000 more, your personal debt would increase from current $330,000 to $680,000. So your interest costs will double and also your interest exposure (what happens if rates go up) will increase dramitically.

If you do go ahead, I would suggest looking at some long term (5 year) fixed rates to give you some protection incase interest rates go up

Ross

	Expected Rental Return -
	House Value		$950,000
				$950,000
	Less Deposit
	Total Borrowed			$950,000
	Income:
	Rent -	Weeks	50				35000
		Per week	700
			As a % of total house			3.68%
	Less Expenses:
	Accounting					1500
	Bank fees					50
	Body Corporate					0		If interest goes up
	Insurance					1500
	Interest		Rate	4.50%		42,750		7.50%	$71,250.00
	Property Management at 7.5% plus GST					3,019
	Rates					3000
	Repairs and Maintenance					2000
	Seminars					100
	Subscriptions					300
	Travel					86
	Total Expenses						54304.75		$82,804.75
	NET CASH SURPLUS (DEFICIT)						-19304.75		-$47,804.75

[Beginner1]

So your current equity is $900k-$360k = $540k.

With 40% LVR you can borrow maximum of $1350k

Current borrowing : $350k which leaves you $1000k for the new purchase.

Regards
Ex electrician (quit at 28 years of age)

[Daynger]

Thats where the bank is leaning i think.
Would they not take into account the extra 240k in the bank?

[Daynger]

That might be the plan, i had though of making the rental 100% mortgaged up to reduce the new house mortgage.

[Daynger]

Thanks for the detailed post there Rossco.
As above i had thought about making the rental 100% mortgaged to minimise the personal mortgage cost.
-19K a year seems like a massive hit, the 700 i quoted for rent was the lower end of the scale (3 1/2 bed, 2 full bathroom +wc, deck with views, dbl garage old but completely livable condition, very good primary 100m up the road.)
Would it be better to set the rental up in a company or trust and keep the personal house in another trust? The rental taking a loss and offsetting my personal income ect?
I would definitely fix for longer terms at the beginning until i got used to payment size and had my head around exactly what was going out and coming in.

[sidinz]

So your current equity is $900k-$360k = $540k.

With 40% LVR you can borrow maximum of $1350k

Current borrowing : $350k which leaves you $1000k for the new purchase.

Regards
Ex electrician (quit at 28 years of age)

For fixed/new borrowing, sure. But don't forget that some of that $360K is revolving credit which can be put towards a new purchase.

[Beginner1]

For fixed/new borrowing, sure. But don't forget that some of that $360K is revolving credit which can be put towards a new purchase.

If he consider his revolving credit he can borrow extra $1000k-$360k = $640k. This leaves 1000k max for the new property..

[sidinz]

I get different figures.

Needs to leave $360K in current property to meet LVR restrictions.
Currently has $640K equity. So $280K towards deposit in new purchase + $1120 new lending (@80%) + $220K available from existing RC.

So could spend up to $1620K. Whether he'd want to is another story.

[Nick G]

20% LVR on your own home, 40% on investments.

Assume the new one will be your own home...
PP: $1.3 mil, Deposit required, $260K

Keep the current rental
Value: $950K, Deposit (equity) required: $380K

So you need $640K total equity in both of these properties at those valuations. Your current equity is $950K - $360K = $590K.

You're $50K light.

Unless you have other assets I think you're another couple of smart investments away from being able to safely splurge on a big house like this. Your rental will be cashflow negative and you will be spending over 1/3 of your income on interest alone.

[Beginner1]

[QUOTE=Nick G;406219]20% LVR on your own home, 40% on investments.

I thought 40% across all your properties including family home.. Learn something new everyday.. Cheers Nick..

[sidinz]

20% LVR on your own home, 40% on investments.

You're $50K light.

No, he's not. While the bank will include the revolving credit for equity/LVR calculations, the fact remains that he's got $220K of it sitting there that he could put towards the purchase.

[Beginner1]

No, he's not. While the bank will include the revolving credit for equity/LVR calculations, the fact remains that he's got $220K of it sitting there that he could put towards the purchase.

Revolving credit doesn't mean its his money. Just a another loan pre approved. Revolving credit topped up mean he hasn't used his loan facility.

[revdev]

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