What Strategy Is Best If You Want To Buy More And More Rentals?
7 June 2019
What Strategy Is Best If You Want To Buy More And More Rentals? Part 1
Martin and Jo own a personal house and they are looking to buy a rental.
Personal house worth $700,000 and debt of $400,000 with ANZ. Currently being repaid over 20 years. In five years, expecting $328,000 balance.
ANZ will allow them to borrow another $160,000, which could be used as a deposit for an investment property of up to $530,000 (I would recommend with a second bank).
They have income to meet the banks service requirements around the extra lending.
They can currently save around $200 per week, or $10,000 per year.
What would you do? How will the different strategies work over the next five years if the market is flat?
1. Buy nothing and repay personal house quicker – The dull and boring approach, but also the very safe approach
If the extra $200 per week is put into the personal mortgage, reduces term to around 13 years.
After 5 years the loan would be $270,000. Gain in equity $58,000 over the current payments.
After 5 years could borrow $210,000 from ANZ, which could be used as a deposit for an investment property, or two, of up to $700,000 in value (I would recommend with a second bank).
A similar approach would be to invest the $200 per week into shares or other investments. This isn’t my area but this could potentially give a higher return.
2. Buy a normal rental, 5% yield
Losing $5,000 per year as average yield, based on 4% interest rate.
Would have to be interest only as no cashflow to enable Principal & Interest payments.
Would still have $5,000 savings per year that could go towards extra debt repayment on personal house. This could reduce the personal home loan term to 16 years.
After 5 years the personal loan would be $301,000. Gain in equity $27,000 over the current payments. Plus still have $150,000 that was used to buy the Rental.
After 5 years could borrow $29,000 from ANZ, which could be used as a deposit for an investment property of up to $97,000 in value (I would recommend with a second bank). This wouldn’t be enough!
3. Buy a high cashflow property, that can pay for itself plus principal over 25 years
Need around 10% Gross Yield, or $1,000 per week for 51 weeks, on a $500,000 property! As this would probably have multiple dwellings, there would be higher rates, insurance and repairs, but overall my quick calculation was $16,500 cash surplus, less $4,600 tax per year, would leave around a $11,900 surplus after tax, which is approximately the principal over a year on a $500,000 mortgage.
Similar to point 1, the personal home reduces to $270,000 of debt over 5 years.
Plus the $150,000 used to buy the rental with ANZ would have reduced to be $131,000. These would total $401,000 with ANZ, and at 80%, Martin and Jo could still borrow another $79,000 from ANZ.
If the Rental cost $500,000, and is still worth $500,000. The original debt, with say Westpac, would have been $350,000 at 70%. After 5 years of debt repayment, it would be down to $305,000.
So in Theory Martin and Jo could borrow an additional $45,000 from Westpac.
If the ANZ extra funds were put together with the Westpac extra funds, that would be $124,000, which could be used as a deposit for a second investment property of up to $413,000 in value.
In a flat market this strategy still works!
Watch out for our newsletter next week with some further examples of strategies that Martin and Jo could use.
If you haven't subscribed yet, you can sign up here: click here to subscribe