Advice and thoughts please - Bought first property, what next?

[Envesty]

Hi all,

Its been 6 months since i purchased and moved into my first house at age 29.

I think i am doing very well, all the utilities bills and mortgage has been paid on time.

I want to climb the property investment ladder, i have 2 options, move out and rent the existing house for $470-490 p.w or buy another smaller 2 bed house in Mt Wellington or Otahuhu, live in one room and rent the other room out? or should i concentrate and pay as much as possible but still having a life style and get the house paid off?

I have been paying $331 more than i meant to on my repayments (min $949.50 fortnightly, actual repayment $1,280). I calculated that if i keep up the $1280 repayment the house will be paid of in 16 years (i will be 45 years old!) if the interest rates remains the same 5.79%.

Set out below is my maths:

Purchased Oct 2014 - 3 Bed Room, Mangere East	$438,888
Current balance on home loan	$347,000
Fixed for 2 years at 5.79% (commenced Oct 2014)
Fortnightly Repayments	$1,280
Insurance	$950
Rates	$1,600
Income from spare rooms fortnightly (power,water etc.. Included)	$720
Power, water, internet and sky fortnightly expenses	$210
I spent $1,700 on a heat pump

[Anthonyacat]

With a $347k non-deductible home loan, you need to pay that down as fast as you can. Paying down private debt has a very high after-tax return, and has zero risk. In some ways of thinking about it. It actually has negative risk.

Others might suggest otherwise, but there's almost no way to beat the return of paying down your personal mortgage.

Getting in flatmates/boarders is a great idea. Do that, and use the money to kill the mortgage.

[lissie]

Yup it's not a sexy view - but I didn't buy a rental until I had a freehold home. Also do you have a partner? Are kids an option in the future? Your priorities may change in the future. And yeah how would you go if the mortgage rates hit 9% as they did about 4 years ago, or 18% which they did a bit further back...

[Damap]

At the risk of sounding schizophrenic........
I completely agree with the above, BUT:
In isolation it is a poverty mindset view. You won't get ahead financially just owning your own home.
The above advice is a good risk minimisation position only.

So if you are comfortable with good debt and your personal finances are in order, which they appear to be, then renting your house and buying another one and getting flatmates is a fabulous idea. As you are young then buying a house every now and then can be relatively low stress way of building your wealth.
If you want say 5 or 6 years you are likely to pay 800K for a 400K unit now.
If you buy now then you will have that 400K in your (equity) bank instead, PLUS have your current home increase in value.

[Anthonyacat]

Yep. I think 'freehold' is probably a bit much. But there's no reason to even start thinking about putting money into an investment property until you've got a solid slice of equity in the PPOR. (EDIT: But I agree with Damap, if you focus too hard you'll hurt yourself long term. It's a balance between financial security and financial gain. See next paragraph)

If you're in a good position in a year or two, consider reborrowing on your home (see an accountant for best structuring; I'll be interested in new clients by then) rather than 'saving a deposit'. And still don't buy anything cashflow negative. Keep plowing the cash into the personal mortgage!


Also, as an aside, check with your bank whether there is a break fee on your loan. 5.79 for 2 years is a bit high at the moment, with [forgot name] doing all rates up to 5 years at 5.3%. Even a break fee might be worth it if you work it out over a period of 2-3 years. On a 300k loan, 0.5% is $1500 per year.

And there are other strategies to help mortgages disappear faster. Search the forums for them. The one I like (but requires a lot of financial discipline, seems like you'd be fine) is to put EVERYTHING on a credit card during the month, put all your wages into the mortgage, and pay off the credit card using the mortgage (small revolving credit facility) when it's due, to avoid interest. Also if you're paid fortnightly but the mortgage is set monthly, make your payments fortnightly. You end up making 13 payments in a year. It really adds up.

[Damap]

Also an aside Envesty it's great to see your posts from I am wanting to buy to buying and now it's all working well. Great job!!

[Envesty]

Anthonyacat - My repayment is set fortnightly, i get paid fortnightly.

And there are other strategies to help mortgages disappear faster. Search the forums for them. The one I like (but requires a lot of financial discipline, seems like you'd be fine) is to put EVERYTHING on a credit card during the month, put all your wages into the mortgage, and pay off the credit card using the mortgage (small revolving credit facility) when it's due, to avoid interest. Also if you're paid fortnightly but the mortgage is set monthly, make your payments fortnightly. You end up making 13 payments in a year. It really adds up.

I never thought of revolving credit! If i put everything on the credit card how do i pay each month and is it easy to set up a revolving credit?

[Rosco]

Hi all,

Its been 6 months since i purchased and moved into my first house at age 29.

I think i am doing very well, all the utilities bills and mortgage has been paid on time.

I want to climb the property investment ladder, i have 2 options, move out and rent the existing house for $470-490 p.w or buy another smaller 2 bed house in Mt Wellington or Otahuhu, live in one room and rent the other room out? or should i concentrate and pay as much as possible but still having a life style and get the house paid off?

I have been paying $331 more than i meant to on my repayments (min $949.50 fortnightly, actual repayment $1,280). I calculated that if i keep up the $1280 repayment the house will be paid of in 16 years (i will be 45 years old!) if the interest rates remains the same 5.79%.

Set out below is my maths:

Purchased Oct 2014 - 3 Bed Room, Mangere East	$438,888
Current balance on home loan	$347,000
Fixed for 2 years at 5.79% (commenced Oct 2014)
Fortnightly Repayments	$1,280
Insurance	$950
Rates	$1,600
Income from spare rooms fortnightly (power,water etc.. Included)	$720
Power, water, internet and sky fortnightly expenses	$210
I spent $1,700 on a heat pump

Hi Envesty,

A few points.

1) From your post you have flatmates and not boarders (food incl). So therefore each year you should be returning the income from these flatmates and claiming a portion of the expenses that relate to them. The outcome is probably around break even as you have a reasonable mortgage, or maybe even a small loss. Most people don't do this, and just think it is untaxable income which is not correct.

2) Go to a mortgage broker and see what you can borrow

3) Work our the cashflow on your current property if you do rent it all out. Work out your cashflow if you buy a new 2 bedroom with flatmate, and compare the overall cashflow from these two against your current situation. If it is less cashflow, can you still easily afford it

4) Interest rate risk - I normally like some 5 year fixed loans, to reduce the risk of interest rates going up.

5) If you can buy right, and the right property that helps you move ahead, and towards your goals, then now is always the time to buy. The difficulty is finding such a property!

6) What are you aims and goals? And your risk level. Establishing these, then helps to assess what you should be doing. If you aim is to be debt free on the property in 20 years, then your current plan is working, so you would just keep paying off debt. If however you have a different aim/goal, you might have to be more aggressive. It is all about what you want, and everyone is different!

Ross

[Anthonyacat]

I never thought of revolving credit! If i put everything on the credit card how do i pay each month and is it easy to set up a revolving credit?

Most banks have a revolving-credit-type facility. ANZ calls it their Flexible Facility, BNZ has Totalmoney, ASB I believe has Omni. Basically you pay your wages into a mortgage account (or a separate account that offsets with your mortgage) so you get charged less interest, and then pull it back out again to pay the credit card bill. Ideally just setting up the credit card on a direct debit for the full amount on the final day.

I've never seen any difficulty setting up a revolving credit facility. Sometimes it comes at a higher interest rate, but it's usually not much higher and the total amount will be small (how much are your total expenses each month, likely not more than a couple thousand dollars).

[Cpt707]

Hi Envesty, You have obtained some great 'mentoring' friends on 'propertytalk'. Their massive depth of experience will for sure be helpful. Knowing what you want and challenge yourself always....Also the 'protection' of your hard earned assets from now on is essential. The world is full of 'gold diggers' .. a Trust maybe...? Chris

[Envesty]

Hi Envesty, You have obtained some great 'mentoring' friends on 'propertytalk'. Their massive depth of experience will for sure be helpful. Knowing what you want and challenge yourself always....Also the 'protection' of your hard earned assets from now on is essential. The world is full of 'gold diggers' .. a Trust maybe...? Chris

I have a GF but no kids.

[donthatetheplayer]

Hi Envesty. Get amongst it! You have some great mentors on this site. I am a bit of a novice also but try to add some ideas so I'm contributing to the site and not just extracting knowledge from the pros on here! I purchased my first place at 27 and second at 32 (GFC slowed me down) and at 35 I've now got 4 properties in NZ, one overseas and am looking for my next NZ IP. It snowballs if you play it right.

One simple strategy I have followed is to keep my total outgoings for all properties at the same level or less than they would be if I was renting. This way I feel I am mitigating risk and not spending more than I would have to if I didn't have any property and just rented. At present my total outgoings are $600 p/wk for my home and all IP's. I live in a large home in Auckland so I think this is pretty good. Just to rent my house would cost $750+ p/wk.

An RC account is a must. Build yourself a big buffer in there so you can ride out anything. Once you have the equivalent of at least one year of income in there you are in a good position.

If I was you I'd try to add value to the property you own with some basic renos - paint, bathroom / kitchen upgrades, landscaping etc. Do the work yourself to learn and save money. Do it smartly, not costly. Get the property revalued after that and you might find you are pretty close to having enough equity for a deposit on another property.

Also - paying down debt is a good idea of course but time will reduce the debt for you. Especially with all the money printing going on right now. I look at my debt to equity ratio and servicing ability rather than my total debt - that's a big number!

[Envesty]

Hi Envesty,

A few points.

1) From your post you have flatmates and not boarders (food incl). So therefore each year you should be returning the income from these flatmates and claiming a portion of the expenses that relate to them. The outcome is probably around break even as you have a reasonable mortgage, or maybe even a small loss. Most people don't do this, and just think it is untaxable income which is not correct.

2) Go to a mortgage broker and see what you can borrow

3) Work our the cashflow on your current property if you do rent it all out. Work out your cashflow if you buy a new 2 bedroom with flatmate, and compare the overall cashflow from these two against your current situation. If it is less cashflow, can you still easily afford it

4) Interest rate risk - I normally like some 5 year fixed loans, to reduce the risk of interest rates going up.

5) If you can buy right, and the right property that helps you move ahead, and towards your goals, then now is always the time to buy. The difficulty is finding such a property!

6) What are you aims and goals? And your risk level. Establishing these, then helps to assess what you should be doing. If you aim is to be debt free on the property in 20 years, then your current plan is working, so you would just keep paying off debt. If however you have a different aim/goal, you might have to be more aggressive. It is all about what you want, and everyone is different!

Ross

Ross - Greatly appreciated on the above write up.

6) I want want my parents have 2 houses paid of they live in one house and the other house is rented out for $520 p.w the rental income they received covers all the bills for the house they are staying in.

4) I will look at fixing next year (October 2016) when my fix 2 year at 5.79% expires.

3) How do i prepare a cash flow income on rental houses statement? is there a template some where in the web?

[Frezzinghot]

I'd say jump into the next one, as long as you can service it and you are comfortable with the debt level its a no brainer man. I am no where near experienced as some investors on this site but have learnt not to over think my investing journey. Fear of failure has always been the hardest thing for me to overcome, (what would my friends & family think of me if I fail) get over that and your half way there I believe.

Just wished I had started earlier!!

FH

[kiwibean]

^ I am the same as FH, I bought my first IP three years ago and now have six. It was a leap of faith but now there is no looking back, all positively geared. The first step is the hardest. One piece of advsie ask loads of questions and network with others and talking about their strategies etc