What to do with $400k of equity

[Orks]

Hi All.

I'm 33 and currently own a house (our PPOR) in the Adelaide Eastern Suburbs worth approx $650k, with a mortgage of $250k.

I have a decent income but my wife is a stay at home Mum so generally after paying more than necessary into the mortgage there isn't a huge amount left over for servicing any other debt were we to dabble in investment properties.

I do however get a roughly $25k bonus each year which I've been putting into the mortgage, but it could probably be put to better use on the investing side of things.

So I'm hoping the wise people of Somersoft could give me some ideas as to how to use the equity in my PPOR to start building an investment property portfolio. Not looking for recommendations of location or type of property, I can handle that myself, but just how best to utilise equity as I have bugger all cash to use to invest ($5k or so).

Cheers

 

[Aaron_C]

Orks - best step is to secure a loan increase on the existing mortgage you have (or change lender if you have to) to obtain more equity out to use for investing. You will not pay any interest on this extra amount until you use it so it acts as a great way to invest without having to fork out cash from your own pocket. Plus it will be fully tax deductible if used for investing so your tax position will be better.

 

[Corey Batt]

Aaron has summed it up quite simply.

Pull out the equity as a split, have the funds parked against the borrowed amount so you don't pay interest unless the funds are used.

Then you've got a nice large amount of funds which can be used for investment purposes and can claim deductibility when used.

With regards to the bonus, if you're lump summing it onto the mortgage you're most likely using the most effective use of the funds. It is better to pay down non-deductible debt (personal use loans such as PPoR mortgage, car loans etc) and borrow 105% for investment purposes (by using available equity via loan split/LOC etc). You would be doing yourself a disservice by using the bonus for investment purposes such as a deposit whilst you have non-deductible debt.

 

[RPI]

I have always been a big believer in creating value. That can be through:
Renos
Development
Higher uses

Which one for you depends on you.

A great way IMHO is even if you are buy and hold and even if you have no interest in 2 & 3 above, you can still use 3 to accelerate your equity growth.

For a buy and hold purchase look for a site that allows a DA that will increase value.

The underlying property still needs to add up as per any other buy and hold.

Get a DA that increases the value. Revalue and take out your equity and repeat. There is no need to do the Development.

Obviously you need to make sure the DA adds value. A DA that doesn't require drawings can cost under 5k all up, one that does under 10k. A full smaller estate plan requiring hydro, traffic, eco for under 100k.

Doing the development costs a lot more, and you may have no intention of ever doing it. Getting a DA approval can create instant equity sometimes substantial.

The best one I have ever seen was on Tuesday.

100k outlay just over 5mill net profit.

Farm paddock to 300 cottage accommodation facility leased to mine. Sold it only with conditional leases in place.
That is obviously an exceptional Case.

You could also do a da that creates no value.

I had another this week that was a 200k odd increase on a 600k property. Cost him 4400 all up.

Another paid 440k for a 900m2 resi block. Next door has a 600m2 commercial site with bank val at 1.4m. Busy road and commercial next door was a negative to the agent.

Even small increases in equity still help speed you along

 

[Aaron_C]

You could also do a da that creates no value.

As is the case with most Melbourne development sites/projects these days.

 

[mattnz]

Another paid 440k for a 900m2 resi block. Next door has a 600m2 commercial site with bank val at 1.4m. Busy road and commercial next door was a negative to the agent.

Couldn't agree more RPI. Are you applying for rezoning on this one, or going to do high density residential or mixed use?

 

[mattnz]

As is the case with most Melbourne development sites/projects these days.

And most DA approved sites for sale elsewhere.

 

[RPI]

As is the case with most Melbourne development sites/projects these days.

Not good.

Is that even the case where you go resi to commercial, or small non-residential use?

What about essential services in resi areas, Medical Centre can go resi on a lot of councils, Chemist and pathology as ancillary use?

 

[Aaron_C]

Not good.

Is that even the case where you go resi to commercial, or small non-residential use?

What about essential services in resi areas, Medical Centre can go resi on a lot of councils, Chemist and pathology as ancillary use?

Problem down here is lots of resi DAs being granted because that generates the most sales per sqm. The glut has caused the prices of the end products to fall so projects are not feasible at all.

 

[RPI]

Couldn't agree more RPI. Are you applying for rezoning on this one, or going to do high density residential or mixed use?

This site is the 3rd block outside a 6 storey zone in the new City Plan 2012, we are going to push for inclusion in that or in the alternate as a transition zone for 4. If not we get 3 storey mixed use as is.

If he does nothing other than revalue and pull out equity and keep it as a rental, it will still be a great deal. I think he underpaid substantially too. But he did buy through a certain association/ loose group of agents that pays salary rather than commission and often (not always) sells stuff way too cheap.

 

[RPI]

Problem down here is lots of resi DAs being granted because that generates the most sales per sqm. The glut has caused the prices of the end products to fall so projects are not feasible at all.

That will do it.

I reckon you can pick the time in the cycle to get out of the development market by 2 key factors
- when the lawyers and accountants (who don't normally touch property) start trying to buy townhouse and unit sites
-6 months after all the how to make a fortune developing property seminars start coming back again


If you have the cash to a development great. I think the best thing for buy and holders is to not do the development, just get a DA that will give you higher valuation from the bank so you can use that to refi and get into your next property sooner. You need a great broker and realestate agent who you can get honest opinions on the value and ease of refinance otherwise it is pointless.

Each DA lasts 4 years and then you can get an extension on that for a small sum.

Development can be very profitable but has a high risk side and if you run into trouble you can lose the lot. Getting a higher use DA you know exactly what your downside is on the way in, whatever your quotes are for all the professionals required to get it plus the Council app fees.

If you do develop then you need a great project manager, lawyer, accountant and so on. Even then it is not without significant risk and I don't think should be done without financial and legal separation so if the worst happens, you lose the site, not everything.

D

 

[John_]

If you have the right team behind you, development is great better then getting a d/a and refi.

 

[RPI]

If you have the right team behind you, development is great better then getting a d/a and refi.

Depends on how quick you can turn stuff over.

I can often make more out of the DA side than the actual development, if you look at ROI even more so.

People make great money out of developments, I have done so in the past.

I may develop a part of the estate I am DA'ing at present if can't sell a part of it off. It is awkwardly shaped and I may end up with a remnant larger than I like.

Personally I make multiples of the purchase price on DA. BUT I am doing that for larger and/or difficult sites.

Basically, play to your skills.

D