Two properties at maximum % mortgage: Option 4

Welcome back, we hope you are enjoying “Which is the best investment option”?
To recap, we’re working through the below exercise:
If I gave you $100,000, what would you do with it?
Put it into a savings account
Buy shares
Buy one property @ 80% mortgage
Buy two properties @ maximum % mortgage

Let’s apply the same principle as we did yesterday, buying two properties of $400,000 each and borrowing the maximum amount from the bank – 95% per property.

The reason why people tell you to avoid borrowing more than 80% is because the bank will charge you Lender’s Mortgage Insurance. This is an insurance policy that protects the bank in the event of foreclosure. If you borrow more than 80%, there’s a chance that the bank won’t be able to recover all their money if you foreclose, as they will have to settle the loan and pay agent fees. If they make a loss, they can simply claim it back from the insurance company. LMI is about 2% of the property’s purchase price, so in this case around $8,000. (I’ll round it up to $10,000 for the sake of this exercise.)

Your cost breakdown would look something like this on two properties of $400,000 each:

2x $20,000 deposit
2x $20,000 costs
2x $10,000 LMI

= $100,000

Instead of investing your $100,000 in one property, you’ve invested $50,000 a piece into two properties. At this stage, you’re probably wondering why? Well, when they double in value, you’ll have $1.6 million worth of real estate instead of only $800,000. Over 10 years, you will have gained $420,000 of equity on each property, totalling your growth to $840,000. Plus, the rents will have doubled as well, giving you a larger income at the 10-year mark.

Results of investing $100,000 into two properties after 10 years.

Now you understand why saving 20% for a deposit is actually bad advice. For one, it takes you longer to save that deposit to avoid an extra 2%. And two, imagine how much growth you could have experienced in the same amount of time it took you to save that extra 10-15% deposit.

Join us next where we see which option Wins the Game!

~Daimien Patterson


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