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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Frugali on September 10, 2016, 01:31:08 AM

Title: Debating a second property...
Post by: Frugali on September 10, 2016, 01:31:08 AM
Hi all,

My wife and I and both 34; we bought a reasonably priced home 3 years ago and we've been paying down pretty aggressively, so we're well on our way to paying it off in the next 12 months.  I'm fortunate through my job to get a ridiculously good mortgage deal (rate currently under 1% and up to 100% loan to value ratio) so you could argue we'd be better off investing rather than paying the mortgage down.  You'd be right - however, we also have 3 kids, so having the security of a paid off home is likewise very appealing for us.

But now we've almost done that, we're turning our attention to what to do next; do we remain debt free and instead invest our future savings in the stock market, or do we leverage ourselves again with a second property given the mortgage deal is too good to pass up??

Any thoughts/opinions appreciated!
Title: Re: Debating a second property...
Post by: marty998 on September 10, 2016, 04:20:41 AM
Need more info...this entirely depends on where in the world you are, the type of property market, tax treatment of various investments in your country, and your future plans and if you need liquid assets or relatively illiquid ones like property.

Title: Re: Debating a second property...
Post by: undercover on September 10, 2016, 10:11:31 AM
It's also not evident whether this will be a second home for your own uses or a rental. If you find a good cash flowing property - then why not?
Title: Re: Debating a second property...
Post by: Frugali on September 10, 2016, 11:37:23 AM
I am based in Hong Kong.  I don't have a detailed understanding of the tax treatment of a second property (though taxes here are generally very low overall), though I do know there is a requirement to pay double stamp duty after the first property, which would mean approx 6% versus the usual 3%. 

Sorry to clarify yes - we would be looking at this as purely a rental property. I guess my question around 'why not?' is whether or not we want to take one another huge mountain of debt for many years to come, or whether we should only limit our investments to the extent of personal savings rather than leveraging them.  Of course the intention is to have someone else paying the mortgage, but it is nevertheless a debt burden (while it is not something I worry about as such, you never know what is round the corner, e.g. The SARS outbreak here a decade ago resulted in properties halving in value).

I'm not concerned about the investments being illiquid as such; I am more interested in the cash flow.  However, as we are aiming to FIRE in 10 years, my concern is more so whether tying up a large majority of our wealth in property is a good thing, or whether having already paid off our primary home, we'd be better investing in other areas such as the stock market.
Title: Re: Debating a second property...
Post by: KMB on September 11, 2016, 08:47:23 AM
I'm curious about the terms of this mortgage deal. It seems too good to be true.

You're crazy not to take advantage. Pay off your place and buy another property. You're on track to pay off your original mortgage in 4 years, if you buy another one you should be able to pay it off in less time. Rinse and repeat. It won't take long for you to develop an enormous cashflow and if you are only levering 1 property at a time it would be very low risk. A slam dunk if I ever saw one, dude.
Title: Re: Debating a second property...
Post by: Frugali on September 11, 2016, 06:28:05 PM

Yes my first thoughts were also it was too good to be true!  Mortgage rates in HK are very low at the moment anyway (around 2%), though I work in the financial services industry so my company offers a staff mortgage to help people get on the property ladder (which is not always easy with house prices sky high).  They only offer it for the home you are actually living in, not multiple properties; however, our plan would be to move into a new place, take a mortgage on that, then rent out the existing place.

Anyway thanks for the advice, you're right that it probably is the best option, it's just the idea of being completely debt free is also very appealing!  he only other downside is it does lock me in to my job, as if I leave then I have to suddenly find the 30-40% deposit required for a standard home loan.
Title: Re: Debating a second property...
Post by: SwordGuy on September 11, 2016, 09:12:03 PM
This is a big one.

Do you have to come up with the 30% if the company decides you are leaving your job?  Or just if you decide you are leaving your job?

That's really, really important - especially if you can't come up with that money and you have to or your lose the property!

If you already have 30% of the property paid off do you have to come up with another 30% if you leave?  Or does your equity cover it?

Second, how many years until you can retire?    If you are renting out your old home you should be able to pay for your new one in 3 to 4 years (unless you buy too big a home!).   

Do you think you can stick it out for that long even if you get a new boss who is horrible?
Or at least until you can either (come up with the money), which sounds like it would take about a year for you to do that.    Once you do the first home this way, you'll be able to do each subsequent one that much faster.
Title: Re: Debating a second property...
Post by: waltworks on September 11, 2016, 10:11:36 PM
I'd just sit down and do the rental cashflow math using your cheap mortgage numbers. If you can only rent your million dollar studio for $3000/mo, not a good deal even with a 0% mortgage, just to randomly pick some bad numbers. You'd probably do way, way better just dunking extra money in the stock market, and be less exposed to problems with HK real estate (all eggs sound like they're currently in one basket?) but I don't know anything about HK real estate or rentals.

Title: Re: Debating a second property...
Post by: Frugali on September 12, 2016, 01:15:21 AM
SwordGuy - It is a bit of a grey area to be honest; the T&Cs do not specifically state under different scenarios.  It simply states that you need to move to a standard residential mortgage if you leave the company.  The percentage you would need to pay would be based on the current valuation of the property at the time, e.g. if you bought it for $2m (this is HKD by the way, not USD sadly!) but it was worth $3m when you left the company, on a standard 70% LTV mortgage, they would lend you up to $2.1m.  So in that case, there'd be no issue; you could just switch without any further deposit required.  Obviously if property prices went the other way and you were in negative equity, it wouldn't be so pretty.

How far they would actually go to enforce this in practice is difficult to tell; I suspect if you were made redundant you might have a case to argue, but if you got fired or left of your own accord, maybe not so much!

How long til I could retire...  I'm still working on figuring that one out!  While our current spending is low, as an expat in HK we are faced with the prospect of school fees here in the coming years for 3 kids, which may change our spending levels dramatically if we decide to stay!

Waltworks - Yields are pretty reasonable I think, so does need a bit more investigation.  I do have some investments in the stock market currently which I'm holding on to, though it's true that most of our excess is going towards the mortgage at the moment to try and get it out the way.