Right frame of mind for a beginner?..

Hey Guys,

I have been reading this forum for quite some time now, going over every post I can relate back to me, but this is my first post.

I am a 23yo living in Ballarat (VIC) and would like to enter the IP market by the end of the year, preferably buying into my own region for my first experience.

I am on approx $45,000 a year which I expect to increase over the next few years due to me only starting my position about 2 months ago. The average housing costs in Ballarat at the moment are around $195,000-$210,000.

By the end of the year I would hopefully have saved around $15,000-$20,000, by putting away between 40-50% of my wage each week, and I may even get a nice bonus tax return due to me starting the position halfway through the financial year, but paying tax based on my annual figures.

I have been reading Jan Somers book lately (almost complete) and would like to try and find a property in the 3-5 range based on her book, but am unsure what option would be best for me? I am unsure whether it would be better for me to buy a property for say $175,000-$180,000, then use the first home buyers grant for the first 6 months to make improvements etc, or whether it would be better to 'give up' this grant, buy a property at the average cost and rent it out straight away?

I am currenty renting at the moment with some mates and besides bills/general living expenses, I have no other debt etc. My goal is to continue renting, whilst I attempt to build my IP portfolio over the next few years before reassessing where I am at in 5 years time (ie. partner, wage etc). I would prefer at this stage to buy higher yielding properties as it allows me to purchase more properties at a quicker rate. This would mean if I do buy one buy the end of this year, then I could be looking for another at the same stage the following year. My ultimate goal is to be able to retire within 15 years, but I know this depends on a lot of factors such as work (which is a secure job at the moment), partner (which I have at the moment, but she plans to travel this year), family etc. I am determined to strive for this goal, as I have seen enough of the world at this stage to be content and would really like to set up my retirement/future family by acting now.

I apologise if you're sick of seeing similar posts appear each day, but I really would like to get some of your opinions as to which way I should go, especially in regards to the first home buyers grant (whether its worth taking or putting tennants in straight away)?

Thanks in advance, and I know I have probably left out some important details (which I cant quite think of right now)..

Never get sick sick of these types of posts Aus.

Good for you for getting the mindset.

Being a renter with mates, I guess there is not a lot of stuff to move, so it may be better to move in at the start and get the FHOG, do what is needed then move back out again when you are permitted. It's free money; may as well take advantage.

I guess the decider would be if putting tenants in now would be more cost effective than foregoing the Grant. I don't know enough about the Grant to suggest what to do, but I would be surprised if it was not worth going for it.

I would suggest you buy something that will maximise as many factors as you can;

1.look for something that is old enough that it needs a basic renovation to help increase cap value and increase rental demand and yield, say 10 years old, maybe less.

2. As per point 1, make sure it is built after 1987 to maximise depreciation on the building, fixtures and fittings. The renos are depreciable as well.

3. Look for a larger block that can be, or has potential for subdivision later.

Thanks for the reply LA.

Is it possible for me to say I am living at the property, but in reality stay at the rental I am in now, and have someone I know well (sister for example) to move into my property and pay me rent in cash for the first 6 months? How tight are they with the checks to make sure you actually are living there in those months where the grant exists?

Your plan sounds pretty good to me AA. Sounds like you have your head screwed on right.

As far as renting straight away vs. moving in - should be a pretty straight forward calculation as to which works out better financially. Be careful about moving friends/family in there and then getting them out again after 6 months. Investments and family often don't mix well, and you don't want any relationships to go sour.

Marc made some very good points about possibly buying a house to do up a bit (then you'd probably move in yourself for the first 6 months to do it all), and buying a house with big land content for future possibilites.

Also, I'm not familiar with the Ballarat market, but as a fairly standard rule - try and buy as close to the centre of town as you can in your price bracket.

Good to see your savings rate on your income. When you get the pay rises you hope to - ensure you keep the savings ratio the same, don't spend all the extra.

Thanks Steve.

That has been my goal in regards to % of wage that I will put aside and continue to do so with pay increases (fingers crossed they're not far away). For the past couple of months I have done this and if there is any left over by the time the next pay arrives I either put it into there as well, or put it into another online account which I have devoted to larger annual bills - car rego, car insurance (so I'm ready for them when they come)!!..

In regards to the renting with family members, I understand this is a general rule in IP or any investment for that matter and I would try and steer clear of it.. But the fact is that I don't really want to get out of the rental I am currently in (its my parents, and even though its run through an agent, rent is less likely to jump as much over the years as an independent landlord). They have fully paid it off, and I dont expect them to keep it at the same price forever, but I know they'll want me to get myself up and going before they start breaking my back with higher rents.

I guess the reason I posted was for someone to come on here and really give a definative reason why its going to be better in the long run if I take the home-buyers grant and move out for 6 months, which in turn means I will not have the option to go back to my parents rental afterwards? That along with the various opinions of what I should be looking for in a first property with the idea to continue buying every 12-18 months after this purchase? I am definately in the market to buy houses, maybe townhouses, but not units. From what I can gather (with my untrained eye) units wouldnt be as good of a choice for building equity in Ballarat, to start off my portfolio anyway.

Thanks again guys for any advice.

Dont have any good suggestions, too far away, and the ones that jump to mind have already jumped into faster minds.
Have to applaud the intention, and wish you fortune,
dont want to coach my kids a little do you?

AA,

Why not call up Steve McKnight and try and have a chat with him.

He's been a successful property hunter in your neck of the woods.

He might say "Go away".....but then again....he might not.

Just make sure you have your ducks in a row and your questions succinct as possible so you don't muck him around.

AlmostBob said:

Dont have any good suggestions, too far away, and the ones that jump to mind have already jumped into faster minds.
Have to applaud the intention, and wish you fortune,
dont want to coach my kids a little do you?

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Haha. Up until this point of my life I have saved my money fairly well to go on holidays around the world while I completed my degree. I think for the time being I have seen my fair share of places and want to set myself for later in life when I can go and do all that again.

I have certainly wasted alot of money on social festivities over the years, and I wish to continue these, but downscale them a little. One of my biggest wastes of money is when I go out of a weekend, but lately I have found that I can have as much fun, if not more by still enjoying the beverages, but in the comfort of the lounge room with mates, and not having to waste an extra $50-150 by going to the clubs each week. It certainly helps now that winter is fast approaching and the footy is coming back on, which should keep me inside even more! Although I have set my goals for 15 years, I want to make sure I am not a hermit all this time and cannot actually get out and do things.

I think the hardest thing will be seeing that I have $10,000 or something like that in my bank and holding back from booking a holiday! On the other hand I have never really been into owning the hottest car in the group, so that is something in my favour and should keep me out of depreciating debt. I am happy to keep driving the old panelvan that is 7 years older than me!

Dazzling said:

AA,

Why not call up Steve McKnight and try and have a chat with him.

He's been a successful property hunter in your neck of the woods.

He might say "Go away".....but then again....he might not.

Just make sure you have your ducks in a row and your questions succinct as possible so you don't muck him around.

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Would I ring now when I am still approx away from buying an IP and ask for some guidance, or wait until around that time when the market indications would be closer to what I am actually going to buy into?

As a rough guide - if you get the $7k FHOG and lose rental income for 6 months:

$7k / 26 = $269pw

If you are paying rent of $80pw now in the shares place??

Then the difference comes to $269 - $80 = $189pw

If the place rents for more than $189pw, then you'll be better off. If it's about the same - is it really worth moving out? If it's much less rent than that, then perhaps it's worth it.

Remember this doesn't take into account a multitude of other factors such as moving costs, inconvenience, paying full electricity and gas bills yourself for 6 months, finding another place to rent after 6 months, the benefit of being able to be in there yourself if you do want to make some renovations etc etc etc

(I'm hoping someone can point out if I've made an obvious mistake in the above calculations, my brain has pretty much switched off for the day )

steveadl said:

As a rough guide - if you get the $7k FHOG and lose rental income for 6 months:

$7k / 26 = $269pw

If you are paying rent of $80pw now in the shares place??

Then the difference comes to $269 - $80 = $189pw

If the place rents for more than $189pw, then you'll be better off. If it's about the same - is it really worth moving out? If it's much less rent than that, then perhaps it's worth it.

Remember this doesn't take into account a multitude of other factors such as moving costs, inconvenience, paying full electricity and gas bills yourself for 6 months, finding another place to rent after 6 months, the benefit of being able to be in there yourself if you do want to make some renovations etc etc etc

(I'm hoping someone can point out if I've made an obvious mistake in the above calculations, my brain has pretty much switched off for the day )

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Thanks Steve again.

Thats seems as though its in its most simplest form, which is the best way for me to take it all in at the moment.

We actually pay $60 a week rent at the moment each so on your calcs that makes it $209 a week is what I would be hoping my IP that I purchase rents for, give or take $10.

This means for me at the moment in the position I am in, it would be better to buy a house that doesn't need much TLC at all and get the tenants in ASAP, while forgetting all about the FHBG.

Each night after work all I can think about is getting a house. I have been spending hours on end looking at all the posts on here and what all you guys have achieved, and it makes me more eager! Not to mention staring at real estate windows for half of my lunch break most days.. I'm addicted already

Good on ya mate! Keep reading SS and books (although be careful not to get analysis paralysis), you'll have any question about property you could possibly have answered to help you on your path.

Getting into property at your age, you'll do very well for yourself.

Amazing isn't it - there are 20 something yo's that have their heads screwed on right! Good to see! Quick, someone call Today Tonight!

Aussie Assault said:

I am unsure whether it would be better for me to buy a property for say $175,000-$180,000, then use the first home buyers grant for the first 6 months to make improvements etc, or whether it would be better to 'give up' this grant, buy a property at the average cost and rent it out straight away?

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I vote do both. Get your self an IP now, and then in a few years time get yourself a 'home' and use the FHOG (provided the FHOG is still around).

I was tossing up the the same question to begin with and then found out you can do both. Now have a few properties under my belt and a FHOG waiting to be used

Cheers

Hi Aussie,

I bought my first place when I had just turned 25. I was in a similar position to what you are now, I earned 42K and bought a property for 145K. I lived there for about one year before I bought a place closer to the city using the equity.

If you move in yourself, you can buy something that needs work and slowly work on it as time and money allows it. If you stay there for 6 months to satisfy the FHOG, the work you do on the place will increase the value, the increased equity you can then use to buy something else. If you buy as an IP, the only time you can improve it is when it is vacant, so it is unlikely that you will be able to do as much work to it and as cheaply as if you were living there. While it is cheaper for you to not move in, you would not build so much equity to use for your next property purchase.

As for getting away with FHOG, I know that the inspectors do come to visit at some stage, so to have someone else living there may be risky. Think of an "out" after the six months, eg, moving in with partner and need a bigger house, can't afford repayments so have to move back home, too far from work and so you need to move. This will legally get you out of your place.

two other things ..

I ran the numbers on getting the FHOG or not for us, and it was much better to take the FHOG, put up with moving etc - but that's a couple who already pay all their own utilities etc. I would really recommend putting together a spreadsheet with a year of each scenario. Might make it a really obvious decision?

And, I'm fairly certain that if you buy investment properties you can still claim the FHOG later. You should ring the SRO to confirm, but the relevant bits from their website (http://www.sro.vic.gov.au/sro/SROWebSite.nsf/rebates_fhog.htm#3) are:

* You and your spouse/partner must not have owned residential property, either jointly, separately or with some other person prior to 1 July 2000, in any State or Territory of Australia

* You and your spouse/partner must not have occupied for a continuous period of at least 6 months, a residential property in which either of you acquired a relevant interest on or after 1 July 2000 in any State or Territory of Australia.

So as long as you didn't own property before 1 July 2000, and haven't lived for 6 months in any of your investment properties, you should still be eligible down the track.

Yes, you'll still be eligible for FHOG but you might lose the stamp duty exemptions.

Thinking about it from a longer term point of view, I think it's better to buy IPs first. I'd almost say forget the FHOG and just focus on buying IPs. To me the calculation is not about buying PPOR now or buying an IP now and PPOR later. It's about the potential for MANY IPs before you buy your PPOR. I think buying a PPOR means you get attached to it, and it's harder to develop the mindset that treats properties like an investment.

i.e. if you buy an IP first, you're more likely to be an investor first and a homeowner second.
Alex

When you start getting into property investment, there's a couple of mindsets that I recommend. Think:
1) Get Rich Slow - these things take time, and don't be afraid to live simply for a few years to get started. It's worth it!
2) Think Big - capital growth, leverage and compounding are very powerful tools. I think there's a lot more to the IP story than simply buy, hold, sell. As Alex said, work out your plan to buy a number of IPs. After the first couple, it gets easier.

Have fun and enjoy the trip. Starting from scratch (which is where I began) I reckon it takes between 10 and 20 years to build a portfolio that will let you live like a king for the rest of you life without working.

Quick question about Ballarat -
Are they building a train station in Wendouree?

You will probably want to get near the station because you'll have demand from commuters who, working in Melbourne, will have more income to pay higher rents, and demand will always be higher from a CG point of view.

At around $200k I think Ballarat is massively undervalued. I believe it is economically quite a strong place, and with the growth of the Melbourne boundaries and faster trains, it may become a commuter city in the future like Geelong is now.

tubs said:

Quick question about Ballarat -
Are they building a train station in Wendouree?

You will probably want to get near the station because you'll have demand from commuters who, working in Melbourne, will have more income to pay higher rents, and demand will always be higher from a CG point of view.

At around $200k I think Ballarat is massively undervalued. I believe it is economically quite a strong place, and with the growth of the Melbourne boundaries and faster trains, it may become a commuter city in the future like Geelong is now.

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Thanks again for the comments. Keep them coming. I love hearing different points of view.

Yeah 99% sure that there is a 2nd station being built here Tubs.

People always describe Ballarat as that cold place where its always wet and 4-5 degrees colder than Melbourne. The fact is though it is the largest inland city in Australia and is an hours drive from Melbourne with property prices only a fraction of what Melbourne is currently. The way we're going it won't be long until we are called an outer suberb of Melbourne !!

BTW I have sent an email through to the SRO for some clarification as to what my exact options are, in regards to if I can still claim the FHOG after purchasing 1 or 2 or 10 IP's. Thanks Murtagh..

VYBerlina I have used some of the calculators/spreadsheets found on here and worked out that I should be able to purchase an IP in 12 months, and providing that interest rates dont jump to 11-12%, I can then purchase another within 12-18 months of purchasing my 1st one. After this time I should have a better understanding of the hidden costs that are involved in IP's, as well as having some sort of wage increase, to be able to keep the investment train rolling.

Finally just on your comments Alex, that was one of my main worries about moving in for 6 months and doing reno's etc.. I could easily see myself become attached to the property and overstay my goals, or even use it as my PPOR (which for the life of me I cant figure out what stands for?? Private Place of Residence??)..

Principal Place Of Residence