Perth Apartment off the plan - My only option??

[Rufus]

I am considering purchasing an apartment off the plan in an apartment development on Terrace Road in Perth. The 2 x 2 I am looking at is $700,000 and settlement will be late 2008. This is one of the main reasons I am looking, and the other reason is that the demand in Perth at the moment and into the forseeable future for apartments is very strong, and most are being bought by baby boomers to live in. This should lead to price growth/stability which I know has been a problem with apartments in other cities.
I have property worth $1.8m now, but no income capacity to borrow money for any more properties at the moment, other than this type of property which I don't need to pay for for nearly 3 years- I have sufficient funds in my line of credit to make the 10% deposit on the apartment, and then in 2008 I will see what my situation is and whether I want to hold or sell. The idea is that I get a $700,000 apartment on the assumption that the value will increase prior to settlement. This is the only way I can see that I will be able to invest in property at the moment. Terrace road is right on the river, and these apartments would be probably the best location in Perth. There are many developments occuring also at Vic Park and Burswood, but these are really not ideal (all of the apartments being built at Burswood face due West and will cop the howling sea breezes and afternoon sun).
Does anyone have any ideas about Perth apartments in general, and my approach here in terms of buy now, pay later??
Thanks,
Rufus

[bigfella966]

Hello Rufus,

I have PM'ed you

BF :)

[Jamie]

Hi Rufus,

While not a comment on the Perth market in particular, you might find some good responses in the following thread on OTPs in general:

http://www.somersoft.com/forums/showthread.php?t=22372

Jamie.

[asdf]

Wow! $700K for a 2 bedroom apartment. I don't even think they are asking that down at World Square in Syd. The only other place people would pay that kind of crazy cash is up in Surfers. If developers need to sign up media slu*s to flog their developments off, I'd be worried but then again, some have paid off handsomely. A risk however I'm not prepared to take. At $700K, you have to wonder how much loading is included. $64K straight off the bat is for GST. Then are you paying $3 or $4K per m2 for building cost and then $100s thousands for a very small piece of dirt? If you want to take a punt, maybe sign up something less like a townhouse project for under $300K that you know will be able to rent. Ask yourself this, would you pay $800K for it in a couple of years to live in a 2 bedroom apartment in Perth? Or perhaps you could rent it fully furnished as an executive apartment for good yield but you will be competing with the others trying to rent it out. What are the stats on OTP apartments? 70% investors/30% owners? I prefer the other way round but then again no risk = no rewards! Good luck.

[Ausprop]

these places are proving to be popular and its not much compared to what places are selling for in Subiaco, West Perth etc but you need to consider where the predominant demand is, which is obviously more affordable housing hence I prefer to steer towards median priced homes. why do you have to buy such an expensive apartment off the plan just because you don't have much funds? as an example, we sold villas off the plan on $1000 deposit that have gone up from roughly $180k to $220k and are still 6 months from settlement (no we don't have any more and if we did I would buy them!). stocks are at all time lows and these opportunities are hard to find but they are out there. it's the same as land - one example is Capricorn which is working on $3k deposits and land settlement next September... I grabbed one as the land is likely to appreciate signifiantly by the end of next year.

[Pete]

Rufus,

Personally, I would totally avoid such a deal. IMO if that is your only option, you are better off staying out of the market.

Note however that I abhor units as investments - unless you have the entire development. And I'd never buy off the plan if I knew I couldn't afford to pay for it in the future. It is too much like gambling for me - with not enough odds in my favour. I reckon you might just as well go to the racetrack or share market and place a few bets.

Then again, your suggested strategy works for others and might prove very successful for you in this instance. The economy is strong, construction costs are rising, the population growing, etc., etc. You might be on a real winner. There is also the advantage (& danger!) of high leverage.

Best wishes,

[House_Keeper]

I am considering purchasing an apartment off the plan in an apartment development on Terrace Road in Perth. The 2 x 2 I am looking at is $700,000 and settlement will be late 2008. This is one of the main reasons I am looking, and the other reason is that the demand in Perth at the moment and into the forseeable future for apartments is very strong, and most are being bought by baby boomers to live in. This should lead to price growth/stability which I know has been a problem with apartments in other cities.
I have property worth $1.8m now, but no income capacity to borrow money for any more properties at the moment, other than this type of property which I don't need to pay for for nearly 3 years- I have sufficient funds in my line of credit to make the 10% deposit on the apartment, and then in 2008 I will see what my situation is and whether I want to hold or sell. The idea is that I get a $700,000 apartment on the assumption that the value will increase prior to settlement. This is the only way I can see that I will be able to invest in property at the moment. Terrace road is right on the river, and these apartments would be probably the best location in Perth. There are many developments occuring also at Vic Park and Burswood, but these are really not ideal (all of the apartments being built at Burswood face due West and will cop the howling sea breezes and afternoon sun).
Does anyone have any ideas about Perth apartments in general, and my approach here in terms of buy now, pay later??
Thanks,
Rufus


Rufus,

How do you know it is worth $700,000. Can you find similar appartments selling for that price today? How does it compare with the current market?

[intehnet]

st georges tce? or adelaide tce?

[Rufus]

Hi all,
Thanks for your input. Intehnet, it's on Terrace Road, cnr Burt Way. I have always been a fairly conservative investor, and have decided to stay one. I agree with Pete, it is a bit like gambling. If I was planning on living there then my decision might be different. I am conscious that the prices have been climbing particularly over the past 6 months and there's a huge amount of hype about Perth apartments at the moment. Interestingly I have built up a property portfolio of $1.8 million, and become a millionaire recently, and have never paid more than $270K for a property. I think Ausprop's point about buying median priced homes is a good one and is where I have always been at. Thanks again.
Rufus.

[Rixter]

I have property worth $1.8m now, but no income capacity to borrow money for any more properties at the moment, other than this type of property which I don't need to pay for for nearly 3 years- I have sufficient funds in my line of credit to make the 10% deposit on the apartment, and then in 2008 I will see what my situation is and whether I want to hold or sell.

Rufus,

You say this is your only option at the moment to keep increasing your Property Portfolio holdings that at the moment is worth $1.8M with $1M equity.

Have you thought about converting some of your equity in cashflow via Cashbonds etc for increasing your serviceability and also using some of that equity for deposits & investing in lower median price units/houses?? :confused:

It just seems to me going by what you have told us that you definitely have more options other than this OTP one.

Looking forward to your response :)

[<KS>]

I agree totally with Rixters last post. With THAT much equity available to you your options IMHO are boundless.

I mean I am in an identical situation albeit with a smaller portfolio. I have decent properties with about 50% equity - and from where I am I can do LOTS :)

<KS>

[Rufus]

Hi Rixter & KS,
I have to say that I am a novice and my main strategy in buying IP's is to stop wasting money on crap I don't need! I and don't know anything about cash bonds etc, but I am keen to learn. I have $1.8m in property, and about $150K in shares and super. I have a LOC of $1085,000 drawn to $900K. IP expenses are $65k p/a, other loans are $15k p/a, and rental income is $35K. The combined cost out of my pocket per week of my IP's is $200, after tax deductions etc. My income of $75K supports all of this and my household and the buffer in my LOC gives me a margin for error. If I sell any of the IP's the CGT will be severe so I don't want to do this. I don't know any way to utilise my equity to progress with further IP's, but if you could point me in a direction to consider cash bonds etc I will check it out.
Thanks,
Rufus

[<KS>]

Need a few clarification pointers mate:

How much equity do you have AVAILABLE. By this I mean totally uninhibited by any form of borrowing whatsoever. That makes a huge difference to your situation.

If your portfolio is worth 1.8 million, you still owe 800k to the bank and your drawn down on 90% of the equity (the remaining 1 mill) then your situation is grim.

If on the otherhand your in 1 million in debt with 800k equity left to play with then why dont you set up a specific LOC to pay the interest payments on your loans. That way the interest itself is tax deductable on the LOC and you can service your loans better as your equity grows when your properties increase in value. This is what I will do once my personal income can no longer service the shortfall between rents and interest payents in about 2 more properties time.

With a portfolio that size you need to give a lot of information to paint an accurate picture.

Having said that Rixter and many others are more experienced then myself to give advice - with all the usual disclaimers of course ;)

<KS>

[Rufus]

Hi KS,
Thanks for sticking with me. I have my LOC in sub accounts. $686K debt on IP's valued at $1,145,000. Paying interest only. $75K debt on other investments valued at $100K. Paying interest only. $146K debt on PPOR valued at $650K. Not sure how to proceed from there - bank won't give me another penny. I don't understand your point about the increasing equity helping my service my loan, but would love to know what you mean. I'm a numbers guy, not the best creative thinker, but we seem to be in a similar boat - how to get more IP's when our salary income does not service it....how are you planning to get those next 2 IP's?? Will the bank loan you any more money?
Rufus

[Rixter]

Hi Rufus,

Heres a suggestion.

With the $230k available LOC equity against IPs ( $1.145M x 80% = $916k - $686k debt = $230k), purchase a CB for $100k that will be returning you an income of $20k + interest per annum over the next 5 years. Then with remaining $130k use all of it or a portion of it on 20% deposits on another 1 or 2 IP's.

You could even use some of the equity available against your ppor to also increase your CB and fund further IP deposits.

Hope this has given you some food for thought.

Cheers :)

[<KS>]

What Rixter said :)

Rufus I think maybe the bank wont lend you any money because you are just asking the wrong questions. Either that or your bank just isn't very:

a) Helpfull
b) Creative

As Rixter has pointed out you definately have some equity to play with.

Basically a cash bond is the result of borrowing against your equity and turning it into a form of income. Some lending institutions who really want your business will suggest these things and others wont - hence the need to do lots of research.

Keep in mind that this strategy has inherent risks as it increases your LVR - but if you want to be agressive and buy more property it is definately feesable - and is what I will be doing once I hit the wall financially.

<KS>

[Rixter]

Keep in mind that this strategy has inherent risks as it increases your LVR - but if you want to be agressive and buy more property it is definately feesable - and is what I will be doing once I hit the wall financially.

<KS>

KS,Not exactly.

A CB purchased via a LOC will not increase your LVR in the banks eyes because the bank has already accounted for the LOC being fully drawn in the first instance - with or without a CB.

All you have done is you have used the lazy dollars available in your existing LOC to purchase a guarranteed income (ie Cashbond/annuity) for a set term (usually 5 years) and its this guarranteed income that the banks/lender recognise on your incomes side of a loan application and therefore increases your servicability or borrowing capacity.

Where you do increase your LVR is with the new loan for the new IP itself.

Hope this helps :)

[<KS>]

A CB purchased via a LOC will not increase your LVR in the banks eyes because the bank has already accounted for the LOC being fully drawn in the first instance - with or without a CB.

Ah - I was referring to the need to use an LOC in the first place :)

If you own 1 million in property with 400k in equity and you use an LOC to puchase a 100k cashbond - does that not increase your LVR? Because technically if you did not use a LOC to buy the CB then your level of untouched equity is greater.

(I could be way off here because I have never ACTUALLY used a CB, just read up on them and pieced together in my head how they work).

<KS>

[Rixter]

Ah - I was referring to the need to use an LOC in the first place :)

If you own 1 million in property with 400k in equity and you use an LOC to puchase a 100k cashbond - does that not increase your LVR? Because technically if you did not use a LOC to buy the CB then your level of untouched equity is greater.

(I could be way off here because I have never ACTUALLY used a CB, just read up on them and pieced together in my head how they work).

<KS>

KS, sorry I was under the impression that Rufus already had an existing LOC in place by Rufus saying -

"Thanks for sticking with me. I have my LOC in sub accounts. $686K debt on IP's valued at $1,145,000." :)

Like I mentioned earlier if an LOC is already in place the banks/lenders will account for it being fully drawn ( even tho it may not be) when determining LVR. - so if Rufus purchased a CB from this existing LOC it would not effect his LVR as undrawn loc funds were used.

But if theres no existing LOC like you said this will increase LVR with the approval of such in the first instance.

Hope this clears the mix up :)

[<KS>]

Gotcha!

It never occured to me you would be considered fully drawn no matter what - but now I think of it - it seems kind of obvious that the banks would take that approach to cover their bums. Especially since they do the same with anyone who has a credit card - even if they have not used it in the last 6 months etc.

So If Rufus is not already 100% drawn on his LOC then it indeed looks like a CB would help increase his servicability.

This has been an education for more than 1 of us :)

<KS>

[Rufus]

KS & Rixter,
I will investigate cash bonds - the explanation that you have discussed makes sense to me. I have $170K unused on my LOC so should be able to do something. Thanks again for your help.
Rufus.

[Jamie]

KS & Rixter,
I will investigate cash bonds - the explanation that you have discussed makes sense to me. I have $170K unused on my LOC so should be able to do something. Thanks again for your help.
Rufus.

If you decide you have to buy something now, why not use the 170k and get a NoDoc or LoDoc loan at 70% LVR?

Your 170k should easily allow you to buy something around $450k (say 2 X 225k properties) without having to prove serviceability, and this way youre not eating up your equity using a cashbond you probably dont need.

You mentioned that "the bank" has said no - have you tried other lenders, or spoken to a mortgage broker to act on your behalf? When one bank says No, you ask another - and keep asking until you find one that says yes.

Jamie.

[Rixter]

A cashbond is a last resort strategy for overcoming serviceability restriction as it has costs you the difference between your CB interest earned and your interest charges on the borrowings to purchase one.

Thats difference is around 2-3%. Look at it this way -You are effectively purchasing an income to allow you to keep purchasing IP.

The CB creates between 4-5 times the CB purchase in extra aset base holdings to be purchased. ie $150k CB will allow you to increase your aset base approx $600k-$750k in property.

Providing you are purchasing well located good capital growth IP the growth on the extra aset base holding brought about by the CB will more than offset the cost to purchase.

Hope this provides you more info.

[geoffw]

You may find it good to speak to a financial planner who knows about Cashbonds and IPs. Here's a hint: http://www.navra.com.au/

Steve (who is also a member (http://www.somersoft.com/forums/member.php?u=158) of this forum) may suggest that a managed fund (his) may be a good way to convert capital gain into income- and, as distinct from cashbonds, not a "Last Resort" method.