Any advice for a beginner to investing?

Hi,

I'm new to these boards, and have recently taken a deep interest in property investment.


My biggest problem is that I am only a first year university student, and I lack any starting capital or long-term employment (which most banks require).


I was wondering if anyone has any advice for this situation?


My goal - vaguely stated - is simply to be able to get a loan to purchase an apartment (around $150-$180K or so), and pay off the loan interest with the rental fees, eventually selling the apartment (paying off the bank loan) and earning from the (hopeful) appreciation of the property.


I would appreciate any advice on this.


Thanks,
Luc.

Dear Luc,

Experience and education. The important thing is at your age that you are visiting this forum. Make the most of the advantage of starting at an early age. But remember controlled risk aka SANF (Sleep at night factor). You don't appreciate what you have built up until you don't have it. Learn this from others.

Suggested next steps:

1) Cashflow

Get a part-time job. Yes I shudder at that three letter word but it is one way to build up capital. Do something that is sustainable with your studies and can bring in the maximum amount of regular $$$.

With this money save it and eliminate most of your expenses. The first part of becoming a great investor is to learn how to save and to properly handle money. Being a tight ass in the beginning is necessary to build up dollars.

Living at home helps to reduce your fixed living costs. Put up with it and use it to help build capital.

2) Education

Self-education is vital and critical to your long-term investing goals and aspirations.

a) Research this forum. (This is the best property investment resource in Australia and it is FREE. Read, read, read. Ask questions. Learn, learn, learn.)

b) Get and keep a copy of the Richest Man in Babylon. (TRMIB)
http://www.somersoft.com/forums/showthread.php?s=&threadid=5793

c) Borrow books from the library on property investing topics.

d) Network with others with more knowledge. Part of this can be online in the chat forum. Other parts of this can be joining a property investment group. Suggest for you looking at attending the Melbourne MSN group - MannyB can help you in this area. Again free.

Note: I do NOT advocate spending large amounts of money that you do not have on attending seminars. Any seminar over $1k I do not believe offers value for money.

Education should be a passion. It is more important to myself than playing large amounts of computer games or excessive watching of TV or videos. Think about how valuable your time is.

3) Develop goals

After you have started getting some cashflow in and have done some general reading on property investing (At least having totally read TRMIB) then you will be in a better position to develop some realistic goals. Where do you want to be in six months?; twelves months and three years. You may want a single end goal as well. Goals may involve "how much passive income a week or how much net worth." Property is the way of achieving these goals. Not just the end in itself.

Property investing is not a "get rich quick" scheme. If it is then it will fail.

With your goals in place and ongoing education and cashflow coming through you can then develop the strategies to achieve these goals. Saving money is the first part. The next is getting your money to work for you.

A practical post on how to start is "Teach us how to fish".

http://www.somersoft.com/forums/showthread.php?s=&threadid=859&highlight=to+fish

Then during the course of developing your knowledge about property investing - strategies, negotiation, types of property, value adding, structuring - trusts etc, property selection criteria you can start looking for your first deal.

4) Do it. (Don't be a professional gunna -they do exist)

When you have built up a deposit on the first IP (Investment Property) (including the 5% rule of thumb for the extra purchasing costs) then if you find a good mortgage broker I believe that having a permanent part-time position you will be able to get finance (Even if a lo-doc one). (Make sure that you have read Jan Somers' "More Wealth from Residential Property" which will practically take you throught he DSR and LVR process.)

At this point in time you can look at whether you have enough funds to establish a discretionary trust and company to hold the property and put all your income through. You will find that education on how to reduce tax and utilising companies and trusts will be some of the best education for you long-term. Then Put all your dollars through your company and trust.

Find it. After you have your deposit (At least 20% (preferably higher) deposit for my SANF. Others will have different opinions) it is okay to spend three months actively defining your target area and finding the right deal. However after you have your deposit if you have spent six months trying to find a deal and have not done anything then I consider this "Paralysis by Analysis".

Other parties will advocate getting a loan from your parents or using their equity, flipping or looking at vendor finance. The method that I have outlined is not a get rich quick system. It is practical and sustainable. Having money without money maturity is a fast way to lose it. When you have had to work hard to get it and eliminate expenses you will work even harder to hold onto it with both of your tight fists.

Most lotto winners lose all their money within three years or earlier. Many are actually even in a worse financial position then they were in before they won lotto. Money maturity and education is critical.

Let us know how your journey goes.

Cheers,

Sunstone.

Sunstone,

An excellent response.

I was looking at that same thread yesterday- I thought the response by Nivia (aka "The Wife"- http://www.somersoft.com/forums/showthread.php?postid=4583#post4583 ) was excellent.

I have been wondering myself how I could help my children when they are old enough to make their own decisions.

I don't want to give them money (or even equity via guarantees) to start them off.

My thinking is that the could buy a small country property, in a good growth area, probably with good casflow, for an amount they could afford. I would be prepared to help them with some amount over the FHOG (if that was still available when they're that age).

For Luc- could the FHOG give you a large enough deposit to buy something small in a rural area which still had growth prospects?

Additionally, do you have parents who could act as guarantor for buting such a property? (a hard ask, I know)

Thanks for the advice people. I really appreciate it


Sunstone - I was wondering, how much money would you expect to be required for a down payment? I've been thinking of saving and learning about property investment through the next two years, and maybe try it out in 2005.

So far, I've saved $2000 in the bank (overspent when I was a kid). I should be able to save, with part-time job and youth allowance, an estimated $2000 this year, and $3000 the year after, while allowing for university fees/books/etc.

Would you think $7000 would be enough for a down payment on most suburban property? If the FHOG gives me an additional $7000, that could amount to $14,000. I've also heard there are methods of acquiring property without down payment, and will be exploring those along the way.



Geoffw - I'm not too sure. I checked the website for the FHOG, but I'm not sure if they give grants only to people who intend to live in their homes. Also, is the $7000 a loan or actual grant?

Hi Luc

If your looking at 150K to 180K properties and your not working full time I would think you will need a deposit of 37.5K to 45K based on a 80% lend with 5% costs.

FHOG is a grant not a loan. Applies to owner ocupier only.

Either you have to lower your aims for a first buy, speed up your savings or get equity or cash from somewhere else.

bundy

I just wanted to add that most lenders won't let you use the FHOG as part of the deposit - they want to see a savings record. They'll let ya apply it against the borrowing / purchasing costs tho.

Also, the grant is only avail for PPOR's, not IPs.

Hi Luc,

I have to agree with the others; the posts by Sunstone in this thread (and http://www.somersoft.com/forums/showthread.php?s=&threadid=5793) and The Wife in the http://www.somersoft.com/forums/showthread.php?postid=4583#post4583 thread are invaluable. They offer insights that are truly inspirational.

Another e-book I would highly recommend is ’The Science of Getting Rich’. It is free to download and like TRMIB was written a long time ago (1910) but with a timeless message. The author was Wallace D Wattles and it is well worth a read.

I also agree that you should use this forum regularly. There are many, many great ideas offered by people who give freely of themselves and their time. I don't visit as often as I should, there is a wealth of often-untapped knowledge here - in fact, I haven't visited this forum since its new format and indeed had lost my previous user details I will be taking my own advice on this one... o 0 (Note to self: Check for new topics at somersoft.com daily).

Best of luck with whatever path you choose.

Regards,
David.

Dear Luc,

Bundy is about right on the deposit for this price range.

Something to give you information on prices in VIC is below:
http://www.aussiehome.com/trendCharts/reiv/

When you look at this your initial reaction may potentially be one of being disheartened. However is the cup half empty or is the cup half full?

If prices are going up on a regular basis then this makes it the investment that you want to get involved with.

Melbourne and Sydney prices are as a generalisation more expensive than other cities. The first one is always the hardest.

Possible options:
-Build a bigger deposit

Either through doing it full-time; Changing yourself into a contractor through a company; Finding some other ways to cut costs and increase income.

-Find a partner.

This is good in that it can halve the deposit required however at the same time it can be fraught with danger. Unit trusts are best to be used for non-family partners. With this make sure you additionally get a lawyer to document responsibilities and what to do in the event something goes wrong.

-Find a cheaper area.

Country/regional areas, some of Brisbane and some of Tasmania are areas which can provide cashflow positive properties at a lower entry cost.

-Find a reno property

Traditionally this was a way that you could purchase a run-down property and using your own labour and resources do up the property. A type of "sweat equity". In a heated market however they do not present quite the same type of opportunity. However if you got lucky you may still find one but watch that it does not have structural problems.

-Increase your risk level
-Through using mortgage insurance it is possible to lower the amount of deposit needed sometimes allowing a deposit of only 5-10% instead of a traditional 20%. If it comes down to the only way to get started then it may be considered. However personally I do not advocate this method as there will be fallout when interest rates do rise and decreases one's SANF.

Remember that in 2005/2006 we will not be in the low interest environment that we are today. Whilst interests rates will be lower than the historical average they will be 30-50% higher than what they are today.

No money deals are advocated in the US. In reality in Australia there are much less of them as we do not have assumable loans. If this changed then we would see a lot more no money deals but I do not see this happening tomorrow.

Luc - You have found the right area. Stick with it. Research, save and by asking the right questions you will find the way to make it happen.


Geoff,

I am all for considering regional properties provided the gross yield is high enough, multiple industries to support it and a big enough population to keep the banks happy (I believe this is 10,000+).

FHOG is not practical for regional areas. Maybe if there is a new high speed train out to regional areas this could change things.

Important that your kids have a little bit of hurt money in somewhere. That will help them recognise the value of it and work harder to keep it. Putting in dollar for dollar to match their hurt money deposit may be a reasonable suggestion. A flip slide may be that Luc could suggest such a proposal to his parents.

Cheers,

Sunstone.

Sunstone,

Good sensible advice which means Luc will be in for long term wealth building which is the way to go, not try to get rich (or be bankrupt) in a hurry. as the saying goes: Easy momey is the hardest to make.

btw: Do "no money deals" mean 100% finance?
Are "assumable loans" the same thing?

Ive never heard these terms used.

Dear Brains,

btw: Do "no money deals" mean 100% finance?

Click to expand...

Yes but without using equity from another property etc. So in essence the theory of buying a property 20% below actual value and then getting the bank to agree that because you purchased so well that you already have the 20% equity in it and so they finance 100% of the purchase price. Now how many times have you or I practically done something like that? Theory...... Not practical in the current market.

Are "assumable loans" the same thing?

Click to expand...

From what I have gleened from US websites and books I understand that there are many 30 year principal and interest loans. These are tied with the property. As the average PPOR owner moves house every 7 years they obviously do not need the full 30 years. The loan remains with the property and is "assumed" or taken over by the new owner. Therefore if you didn't want to continue making payments on the 30 year P&I loan then another party would take over this responsibility and the property at the same time.

Any clearer? I'll put up another post in the finance section. Maybe Jeremy (Lawsjs) or Rolf can give more insights on assumable loans.

Cheers,

Sunstone.

G'day Brains,

Do "no money deals" mean 100% finance?

Click to expand...

From what I've read, no they are not the same - think of no money deals as "no deposit required" as opposed to "use equity in another property as your deposit" (the latter is the Aust way - no money, but equity IS involved). The "no money deals" mean that they are structured (in the USA) in such a way that you pay NOTHING (in cash or in equity) as a deposit. Read "Nothing Down" or "Nothing Down for the 90's" by Robert Allen to get an idea of how they do it over there.....

Are "assumable loans" the same thing?

Click to expand...

I suspect this would be one way to get a "nothing down" deal - these are apparently a mortgage that can be "taken over" by a willing buyer - so, essentially, you simply "assume" the mortgagor's responsibility (make the monthly repayments) and take over the property.

But, since there are other ways to do "nothing down" deals, assumable loans are not "the same thing" - just ONE of the ways to accomplish a nothing down deal.

Regards,

HI Brains an (assumable loan) in the USA is just that.
A loan that you takeover,exact details ie(17 years to go @$768/month) on a particular property.

No money down deals over there are deals where the vendor will give you finance on their terms ie (higher int rate)to take over their property.

Been on their forums awhile now and it seems fairly easy to make some bucks with creativity over there,so many options.

Darren

Just wondering, do the majority of banks require a steady, stable full-time income before they lend you money? I spoke to a few last week and it seems they all have that demand.

You have to prove that you are able to repay. This should make enough sense in itself.

As a general rule they take into account 30% of your employment income and 80% of your rental income. Some lenders vary quite a bit around this tho.

Is it possible to put up your purchased property as the "security"? Commonwealth Bank said it might not be possible, but I'm not sure if other institutions allow this.


Also, is there better alternatives to bank loans? I've heard there are financial institutions that give out mortgage loans, but I don't know what they're called.

Dear Luc,

Just wondering, do the majority of banks require a steady, stable full-time income before they lend you money?

Click to expand...

Banks try to put you inside one of their "boxes" if you don't fit that's when they can have difficulties. In more recent times the advent of mortgage brokers and "lo-doc" loans has meant that fitting inside the "box" is not as hard as it used to be. Mortgage brokers have a vested interest in trying to arrange finance in a sustainable way (that is the way that they earn their money. Initial commission paid for by the finance provider (bank or non-bank lender) and then a trailing retainer past that. They do not want you to go ass up as they would lose the trailing retainer.).

Having said that a stable ongoing part-time income and a good deposit certainly makes their life easier. When you get closer to building up your deposit talk to a mortgage broker like Rolf or Simon on this forum. You might be pleasantly surprised.

Is it possible to put up your purchased property as the "security"? Commonwealth Bank said it might not be possible, but I'm not sure if other institutions allow this. Also, is there better alternatives to bank loans? I've heard there are financial institutions that give out mortgage loans, but I don't know what they're called.

Click to expand...

Luc, time for more research on your side. Seriously suggest that you get both TRMIB and Jan Somer's "More Wealth from Residential Property". Cost of TRMIB is about $20 and for Jan's $30. A total investment of $50 at this point in your life that will help you now and for the long-term. Learn the basic fundamentals now that some gullible people spend $15,000 to learn and yet never apply.

Let us know how you go.

Cheers,

Sunstone.

Dear guys,

As a general statement it is always rewarding to get more feedback from others that we help on their journey.

I am sure that when Jan wrote "Story by Story" that there would have been a great deal of self-satisfaction and also encouragement for what She is teaching.

The debate again about Story by Story II .

I am certainly one who believes that feedback is essential and healthly in the Somersoft environment.

How can we encourage more constructive feedback from others and those we have helped/tried to help?

Cheers,

Sunstone.