澳洲Australia property Paying Down Strategy | Sydney


在澳大利亚 The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m


my advise would be not to get sucked in with this buy, 100% interest only, and then buy again 12 months later, and keep buying as soon as you can..

I would buy 1 good house, focus 4-5 years paying it down.. even pay it off in 7 years, then buy second IP, and do the same, second IP you can pay off in 5 years, 3rd IP you can pay off in 4 years..

Dont be a slave to banks.. pay off as much as you can before buying your second IP.. if you dont, when interest goes up, you will be caught like I was..

With this plan, in 10 years time if you own 2-3 fully paid off homes, you will have over 2 million in equity.. same cant be said with these highly geared property portfolios..

or at least get P&I loans, in 10 years you would have paid something off.. and for the sake of $150 per month, your better with P&I over IO

simple strategy is often the best.. and doesn't rely on capital growth. and you will be cash flow positive, in case things go wrong.

and I would add, live life now.. investing to be rich when old is a waste of time!!! enjoy your youth today! so you need a balancing act. I see far to many property investors which are worth millions, have several houses, are old... yet live like povos all their lives.. and cant get out of that rut and still dont enjoy their money when they are old.. how sad! know when to stop is also the key!  

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crc_error said: ↑
With this plan, in 10 years time if you own 2-3 fully paid off homes, you will have over 2 million in equity.. same cant be said with these highly geared property portfolios..Click to expand...
Understand where you're coming from with your thoughts and it's a personal choice, but I would strongly disagree with the above line.  

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crc_error said: ↑
my advise would be not to get sucked in with this buy, 100% interest only, and then buy again 12 months later, and keep buying as soon as you can..

Dont be a slave to banks.. pay off as much as you can before buying your second IP.. if you dont, when interest goes up, you will be caught like I was..

simple strategy is often the best.. and doesn't rely on capital growth. and you will be cash flow positive, in case things go wrong.Click to expand...

Hi crc,

Sorry to hear of your experience. Have you managed to recover and save some of your portfolio?

You certainly give good advice, considering that rates are now very low, I wonder how many people (both owner occupiers and investors) may be tempted to over committ now and may be in trouble in a year or so when rates rise?

Regards Jason.  

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steveadl said: ↑
Understand where you're coming from with your thoughts and it's a personal choice, but I would strongly disagree with the above line.Click to expand...
its all about cash flow, the more cash flow you can create, the quicker you can leap forward..

you dont need to necessary pay the houses completely.. but pay most of them down.. I would pay them down via offset accounts.. as I'm doing now..

after been forced to sell 2 IP's in 2005 due to raising interest rates.. I have found that gearing to the max is a no no.. I tryed to grow to quickly, buying 3 IP's in 3 years back in 2000.. rents didn't keep up with rate rises, and I was caught out with a large negative gearing costs of $30k PA. it would have only continued to get worse as rates continued to go up..

however had I just bought 1 house, in east bentleigh, today I would own it outright, and it is worth $600k.. I could get a second IP now, or have a 3rd one with very little debt..

can I ask why you disagree with me?  

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jingo said: ↑
Hi crc,

Sorry to hear of your experience. Have you managed to recover and save some of your portfolio?

You certainly give good advice, considering that rates are now very low, I wonder how many people (both owner occupiers and investors) may be tempted to over committ now and may be in trouble in a year or so when rates rise?

Regards Jason.Click to expand...
I pritty much started again, sold everything in 2005 (should have kept the house, and sold the two flats, but thats another story) and re-entered the market beginning in 2008 with a house with 850sq block in ferntree gully (VIC)

now I paid $365k for it back then.. 18 months ago, now according to RP data, the house went up 8.3% in 2008 and 2.4% in 2009 so it should be worth $404k today.. thats $40k equity, plus I managed to pay down $40k myself.. so I'm $80k up now :)

now I will continue to pay it down, it will become more and more cash flow positive, allowing me to pay it down quicker each year.. I worked out I should have it paid off in 7.5 years.. maybe quicker depending on what IR do. but the more you pay it down, the less effect raising IR's have :)

Now after 7 years, I can get a second IP, do the same, but this time I have 2 lots of rents plus my wage to pay off IP2, so whould pay it off in 4 years..

in 10 years time I will own both IP's, both should double in value as well, so you can count the equity!

I just stress to people, dont over commit.. your better growing SLOWER, rather than over commiting..

plus I recommend, stay away from flats.. houses always grow quicker.. and have more stable tenants..

I purchaed flats in st kilda melbourne and south yarra melbourne... but over 5 years, they grew very little.. even today 9 years later, their growth has not been impressive.. count the cost of negative gearing each year over 10 years, and I recon your not ahead at all..  

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crc_error said: ↑
its all about cash flow, the more cash flow you can create, the quicker you can leap forward..

you dont need to necessary pay the houses completely.. but pay most of them down.. I would pay them down via offset accounts.. as I'm doing now..

after been forced to sell 2 IP's in 2005 due to raising interest rates.. I have found that gearing to the max is a no no.. I tryed to grow to quickly, buying 3 IP's in 3 years back in 2000.. rents didn't keep up with rate rises, and I was caught out with a large negative gearing costs of $30k PA. it would have only continued to get worse as rates continued to go up..

however had I just bought 1 house, in east bentleigh, today I would own it outright, and it is worth $600k.. I could get a second IP now, or have a 3rd one with very little debt..

can I ask why you disagree with me?Click to expand...
Can I ask why you didn't fix some/all of your rates during this period which would have enabled you to keep all three properties? If not on establishing the loans, then perhaps when things were starting to get uncomfortable?

Risk management could have been more appropriate rather than selling once it was too late. I'm not trying to criticize you, just showing an alternative that would have allowed the higher leverage to work that you're now saying is a bad idea.

With this plan, in 10 years time if you own 2-3 fully paid off homes, you will have over 2 million in equity.. same cant be said with these highly geared property portfolios..Click to expand...
The reason I took exception to the above was the fact that holding a much larger portfolio at higher gearing could just as easily result in 2 million in equity in the same time frame, in fact likely larger. Sure there are periods of no capital growth etc in which case paying down principal would result in equity - but that's just your own cash. What if you put that into other investments during that time? Plus contributing to the principal of these loans drains your cashflow more through the early years which goes against your first point of it being all about cashflow.

So in effect you have 2 possibilities:

High leverage without risk strategies - high risk like you said.
High leverage with risk strategies - nowhere near as dangerous.

To me your story is more a lesson in risk management as opposed to the evils of high leveraging. But everyone is comfortable with different scenarios.  

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steveadl said: ↑
Can I ask why you didn't fix some/all of your rates during this period which would have enabled you to keep all three properties? If not on establishing the loans, then perhaps when things were starting to get uncomfortable?

Risk management could have been more appropriate rather than selling once it was too late. I'm not trying to criticize you, just showing an alternative that would have allowed the higher leverage to work that you're now saying is a bad idea.

To me your story is more a lesson in risk management as opposed to the evils of high leveraging. But everyone is comfortable with different scenarios.Click to expand...
CRC, I'd be asking the same question - why didnt I fix rates?

We know the leverage asap and hold strategy is not flawed because its working successfully for others.

Possible issues arise not in the strategy itself , rather the execution of it in relation to lack of focus towards maximising cash flows and minimising risks along the way, no matter what asset class or investment vehicle one chooses.  

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crc_error said: ↑
I pritty much started again, sold everything in 2005.Click to expand...
Sometimes a fresh start is best, so that was a good decision for you then so that you can move forward now.

crc_error said: ↑
now I paid $365k for it back then.. 18 months ago, now according to RP data, the house went up 8.3% in 2008 and 2.4% in 2009 so it should be worth $404k today.. thats $40k equity, plus I managed to pay down $40k myself.. so I'm $80k up now.

now I will continue to pay it down, it will become more and more cash flow positive, allowing me to pay it down quicker each year.. I worked out I should have it paid off in 7.5 years.. maybe quicker depending on what IR do. but the more you pay it down, the less effect raising IR's have :)Click to expand...
Now you have a plan that you are comfortable with and are working well towards. Having a fully paid off PPOR will certainly put you in a very strong position in the years to come.


crc_error said: ↑
Now after 7 years, I can get a second IP, do the same, but this time I have 2 lots of rents plus my wage to pay off IP2, so whould pay it off in 4 years..

in 10 years time I will own both IP's, both should double in value as well, so you can count the equity!..Click to expand...
This will certainly work, and allow you to sleep soundly at night along the way!

crc_error said: ↑
I just stress to people, dont over commit.. your better growing SLOWER, rather than over commiting..Click to expand...
Very wise advice, and I don't think many people would disagree! :D

crc_error said: ↑
plus I recommend, stay away from flats.. houses always grow quicker.. and have more stable tenants..

I purchaed flats in st kilda melbourne and south yarra melbourne... but over 5 years, they grew very little.. even today 9 years later, their growth has not been impressive.. count the cost of negative gearing each year over 10 years, and I recon your not ahead at all..Click to expand...
I am very interested in this part of your story crc, as I have a flat in an inner suburb (Melbourne) as part of my portfolio. It was built in the 70's and is in a low rise block and has a carport. Land component makes up 38%-40% of the value of the property. From what I can tell, this type of property is very much in demand at the moment. Prices of these types of flats moved very strongly in 2007 and they are continuing to move now. If you don't mind me asking, what type of flat did you previously own?

Personally, I don't mind the approach of buying slowly and paying down before purchasing again. In a rising market like we have now, this approach appears wrong, but if we were to hit a stagnant period of between 5 and 10 yrs of low growth (ala 90's) it would look very sensible.

Lots to think about here.

Thanks for sharing ccr, and all the best.

Regards Jason.  

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Rixter said: ↑
CRC, I'd be asking the same question - why didnt I fix rates?

.Click to expand...
I didnt fix rates cause the lender I went with had very expensive fixed rates.. It was Locumsgroup which was recommended by freeman fox at the time.. their variable rates were good, but fixed rates were expensive.. plus the advise was that fixed rates always cost more, so its better to stay variable..

but yes, I would have been better buying only 2 IP's, with fixed rates and lower overall LVR.. When choosing a lender, I should have looked at fixed rates as well in my selection criteria.  

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jingo said: ↑
Now you have a plan that you are comfortable with and are working well towards. Having a fully paid off PPOR will certainly put you in a very strong position in the years to come. .Click to expand...
Thats correct.. when I pay down this loan, not necessary pay off, I will have heaps of cash flow free to invest in the future, not been tied down to interest payments only. Rent doesn't increase fast enough to cover rate rises.. which is obviously ahead now.


jingo said: ↑
This will certainly work, and allow you to sleep soundly at night along the way!.Click to expand...
Yes, and I know that I will have something in the future.. and have free cash flow to begin to invest elsewhere...[/QUOTE]



jingo said: ↑
I am very interested in this part of your story crc, as I have a flat in an inner suburb (Melbourne) as part of my portfolio. It was built in the 70's and is in a low rise block and has a carport. Land component makes up 38%-40% of the value of the property. From what I can tell, this type of property is very much in demand at the moment. Prices of these types of flats moved very strongly in 2007 and they are continuing to move now. If you don't mind me asking, what type of flat did you previously own?...Click to expand...
I owned 2 flats.. 1 in Stkida behind fitzroy street, 60sqmtr 1 bedroom. Bought in 2002 for $270,000, today I estimate its worth $330k.. hardly anything to write home about.

Second was in south yarra, 50sqmtr, on alexandra avenue.. art deco, nice building.. paid $230,000 for it, in 2001, today its worth about $340,000 again not much excitement there..

However the house I bought was in bentleigh east, this was my best buy.. 400sqmtr block, 16sq 3 bed home.. paid $240k, $30k reno, today would be worth $550k...

jingo said: ↑
Personally, I don't mind the approach of buying slowly and paying down before purchasing again. In a rising market like we have now, this approach appears wrong, but if we were to hit a stagnant period of between 5 and 10 yrs of low growth (ala 90's) it would look very sensible.

Lots to think about here.

Thanks for sharing ccr, and all the best.

Regards Jason.Click to expand...
When you pay down, it frees up cash flow, and this allows you to invest further... having to many negative geared IP's limits your opportunity and enslaves you to interest payments.. I found over 10 years, my rent in the house hardly went up.. when I bought it, rent was $330 per week.. when I sold in 2005, rent was $320pw, today I would get about $410pw.. so rent hardly went up over the decade.. although capital growth was good.. so I would have been better off sticking to this one, pay down the debt before I move on to the next..

But I still have a new IP, doing well, and I'm also partially building up a managed fund on a monthly basis.. and its doing well with all the recent market gains :)  

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Give me a suggestion

I would like to know what others would do now in my position.

I have a house for 18 months. Worth today approx $400k, and I owe $250k. I have $35k sitting in offset and $5k sitting in australian managed funds.

I get $330pw rent, and pay 5.04% interest variable from CBA.

So presently my IP is cash flow positive!

My plan is to move into this house in a couple years time.

My plan is to pay it down MORE for the next few years whilst rates are LOW. This way when I move in, repayment will be smaller. Then I can focus excess cash flow into my australian managed fund. I currently live at home so I can do this..

Simple stratergy!

What would YOU do! :)  

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crc you need to do what suits your investing philosophy, comfort zone and risk profile the most... I think that's the most important thing.

eg. I don't invest in managed funds like you do (apart from index funds) because I don't believe in them (!) and don't know how to select between them.

But anyway... I would probably do now what you initially did in your IP journey, but with better property selection, financial control and risk management.

In fact... that's exactly what I did myself, and it's paid off enormously!

So I would say to gear up again and buy another IP... but that's my bias!!!

Based on your past experience though, you may not feel comfortable with this.

I think you're actually doing pretty well given your past mistakes... you've got 150k IP equity and 40k cash/funds, and a CF+ve investment (even with a 2% rate rise)... so your like a 1/5 th millionaire!

How well you do from here is going to depend on how much risk you are willing to take, and if you do take the risk, how you manage that risk.

I agree with Steve and Rixter, I think your first forray into IP's was more a case of failed execution of a valid investing strategy, not a bad strategy in itself.

If you can recognise this and learn from it, it may still be a reasonable way forwards.

Best of luck.  

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crc_error said: ↑
I would like to know what others would do now in my position.

I have a house for 18 months. Worth today approx $400k, and I owe $250k. I have $35k sitting in offset and $5k sitting in australian managed funds.

I get $330pw rent, and pay 5.04% interest variable from CBA.

So presently my IP is cash flow positive!

My plan is to move into this house in a couple years time.

My plan is to pay it down MORE for the next few years whilst rates are LOW. This way when I move in, repayment will be smaller. Then I can focus excess cash flow into my australian managed fund. I currently live at home so I can do this..

Simple stratergy!

What would YOU do! :)Click to expand...
I like your strategy of paying out your PPOR and I would stick to it. I'd probably get rid of the managed funds and just put the money into my offset account to reduce the loan.

Regards Jason.  

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JIT said: ↑
But anyway... I would probably do now what you initially did in your IP journey, but with better property selection, financial control and risk management.
.Click to expand...
so where did I go wrong with my property selection?

A house in East Bentleigh, flat in st kilda, and flat in south yarra.. they all are premium suburbs!

I think I went wrong with buying my 3rd IP, I should have stuck to 2 IP's, and payed them down a bit and waiting for rents to raise.. and yes, prehaps fixed the rates as well.

But in saying that, today I have 1 IP, which will be turned into a PPOR in the coming years, and I believe its a good idea to get rid of this what will be undeductable debt.  

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jingo said: ↑
I like your strategy of paying out your PPOR and I would stick to it. I'd probably get rid of the managed funds and just put the money into my offset account to reduce the loan.

Regards Jason.Click to expand...
the small managed fund I have is a very good one with a 10 year track record, 15.7% return to date http://www.primevalue.com.au/ so I dont think I need to get rid of this one.. but yes most managed funds are a waste of time.. agree here.

Others suggesting here to buy a second IP.. well if I buy another house.. say worth $370,000.. interest at 7% PA with 100% finance is $26,000 PA with $16,000 rent, so a loss of $10k PA on this one plus outgoings.

Plus once I make the first IP a PPOR, I will have to pay $17500 PA interest @ 7%PA, so my annual interest loss will be $32,000 PA... now I only earn $55kPA, so I believe this is far to much of a commitment, so this is why I dont see the sums adding up to get a second IP.

however if I pay off the to be PPOR, that will free up the mortgage payment to get a IP say 5 years down the track... I think this is a far more manageable stratergy for me..  

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crc_error said: ↑
so where did I go wrong with my property selection?Click to expand...
Obviously from not setting structures in place to maximise cash flow & minimising risks.

Structuring to maximise cash flows - possibilities include things like properties with attributes that meet current/future demand; newer properties to attract higher yields; greater non-cash taxable deductions from buildings depreciation and fittings/fixtures depreciation; value adding to increase rental yields etc etc


Structuring to minimise risk - possibilites include things like fixing interest rates or partial fixing to insulate yourself from prevailing & future economic conditions, acquire newer or more modern properties to minimise vacancy rates; newer properties to minimise repairs and maintenace; landlord lord insurance; income protection insurance etc etc.

Hope this provides some food for thought.  

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Rixter said: ↑
Obviously from not setting structures in place to maximise cash flow & minimising risks.

Structuring to maximise cash flows - possibilities include things like properties with attributes that meet current/future demand; newer properties to attract higher yields; greater non-cash taxable deductions from buildings depreciation and fittings/fixtures depreciation; value adding to increase rental yields etc etc


Structuring to minimise risk - possibilites include things like fixing interest rates or partial fixing to insulate yourself from prevailing & future economic conditions, acquire newer or more modern properties to minimise vacancy rates; newer properties to minimise repairs and maintenace; landlord lord insurance; income protection insurance etc etc.

Hope this provides some food for thought.Click to expand...
The properties did not have any problems, they were renovated, with new fittings. Depreciation only is applicabable for up to 5 years, anything beyond this is only small.

Those flats, were in good areas, yet didn't have much growth at all.. the house had good growth, and did double in 10 years, which is what its supposed to do.  

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crc_error said: ↑
Depreciation only is applicabable for up to 5 years, anything beyond this is only small.Those flats, were in good areas, yet didn't have much growth at all..Click to expand...
Up to 40 years on new or near new property. Why only up to 5 in your case? What do you think the driver of low growth was?  

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Rixter said: ↑
Up to 40 years on new or near new property. Why only up to 5 in your case? What do you think the driver of low growth was?Click to expand...
5 years is when you get the bulk of depreciation. beyond 5 years you pritty much only get building dep, which isn't much in the way of tax back.

The driver of low rates was cause the properties were flats.. as I mentioned b4, doing things again, I would only buy houses with land.. even if it means buying further out.

had I purchased a house in st kilda, my growth would have been almost double.. which is a big difference when paying the same amount if interest to purchase either type.

http://www.domain.com.au/public/suburbprofile.aspx?mode=research&suburb=St Kilda&postcode=3182  

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crc_error said: ↑
5 years is when you get the bulk of depreciation. beyond 5 years you pritty much only get building dep, which isn't much in the way of tax back.Click to expand...
From my experience buildings depreciation is a substantial amount over a greater number of years in new/ near new property compared to sub 1985 constructions. I get back approx 55-60% of the purchase price back in depreciation deductions alone.

My chosen GCA investment strategy is actually more tax effective than a house. This is bought about due to a higher buildings to land ratio component within the purchase price compared to a house.

crc_error said: ↑
The driver of low rates was cause the properties were flats.. as I mentioned b4, doing things again, I would only buy houses with land.. even if it means buying further out.Click to expand...
CG comes back to the supply & demand of a commodity. A House, Townhouse, Villas, Apartment, Flat, etc etc is purely the commodity and in itself does not determine more growth over another.  

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