Need guidance on getting started?

[jezzi]

Hello,

My husband and I have been researching investing in property for the last 12 months and I think we are almost ready to seriously begin looking for our first IP. We do not currently own any properties.

Background:
My husband is in defence, so we receive very cheap rent and would prefer to continue renting, and invest in property while we have the extra cash to save. The places we cannot buy in are Canberra, Sydney and Brisbane as we may end up living there, and defence would make us to live in the property so we would lose the access to cheap rent and the IP would then be forced to become our PPOR.

Whatever we buy would need to be a set and forget type of investment, as we won't be living close enough to renovate etc.

I plan to only work full time for another two years, have our second child then only work three days a week from that point on, so my goal is to set us up financially as much as possible in this period, and be able to continue saving for additional IP's on my reduced income - which would mean not too much negative gearing.

We met with a financial planner who suggested we purchase a house and land package for around $400,000 in Townsville or Maitland with a 5% deposit. This would be negatively geared, and we would have to contribute around $130 per fortnight after the tax deductions/return.

Having read this fabulous forum in great detail, it seems that purchasing house and land packagges as an IP is not recomended... so what would you do in our situation? We currently have $25,000 in savings, and can now save $1200 per fortnight comfortably.

Many thanks to everyone who reads my post!

 

[Aaron_C]

Come down to Melbourne to buy

With $25,000 though you are a bit stretched in terms of deposits. Even on a 95% lend that takes you to $250,000 including stamp duty. Best to keep saving I would say while researching until the savings build up a bit more.

 

[Shahin_Afarin]

Why can't you buy something in Brisbane for $250k?

Also do yourself a favour and never see your financial planner again. $130 per fortnight is a lot of money to randomly lose. I would look at a better, stronger strategy than that.

Regards

Shahin

 

[investor2009]

I bet it'll be more than $130 pf/n. With all other outgoings unless you're getting abive standard rent from the get_go. My guesstimate is more like $140p/w. Give or take some after tax. Are you able to give us the rental estimate? Low rates will help for sure

 

[nhg]

If you are purchasing investments, consider structuring as well.

If you purchase under a trust, (which I wish I had done for a property or two), land tax thresholds differ.

Yet may open you up to investing wherever is best without it being considered your HOME as such.

 

[jezzi]

Thank you for your responses.

Investor2009 - I agree, I thought the $130 per fortnight (after tax return!) was incredibly high and I wasn't enthused by that - espcially considering we want to buy 3 properties over the next two years - if they were all geared that way I doubt we would get finance for them all.

Shahin - Brisbane is out as my husband could end up being posted there, and we don't want to live in any of these IP's, we want to continue taking advantage of cheap defence rent (less than half market price). Melbourne and major regional areas around Australia are all on the table for consideration though.

I guess my question is more around strategy - ie, by the end of 2014 we should have $100,000 to play with. Should we be focusing more on yield or capital gains, should we purchase with a 5% deposit or 20% to negate LMI (although I am aware it is tax deductible) should we go for brand new houses or older established properties, should we buy lots of cheap properties or less more expensive ones, should we look at houses or units or apartments, city or regional...? Oh, and we are not interested in renovation or subdividing etc at this point.

Although I am constantly reading these forums and the IP mags, I really don't feel that we have a proper strategy or plan in place.

My overgoal is to be have an income stream of around $100,000 after tax within 15 years - I have no concrete idea how to get there, apart from buying and holding properties.... any and all ideas welcome!

Thanks again

There are so many things to consider!

 

[investor2009]

Well, heres something to take a squizz at.


Steve Navra

Member





Join Date: May 2001

Location: Sydney / Canberra / Melbourne / Brisbane

Posts: 994







A LENGTHY reply

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Quote:



Originally posted by Tim & A.L.
Interesting question:

How many properties, or more accurately, what level of gross income, do people think that is a to comfortable to high level to retire on?

Now I’m 35 and want to retire in 10 years on approximately my post-tax income

My goal was/is to use buy and hold IP, and in 10 years generate a net 3% profit

thus if I want to retire on $150K Aussie/year I would need to own a whopping $4.5M worth of property . . . unfortunately difficult to execute



Hi Everyone,

Firstly let us establish the required retirement income:

A.L. would like $150,000 pa in 10 years time and with inflation at say 3% the future dollar amount would need to be: $201,587 pa

I will assume that this is Gross Income, so the net of tax income required will be $105,832 (Reduced by 47.5%)

Two points to digest:

Firstly it is twice as difficult if you are trying to create your income out of a taxable income source, example of this is the rental income you might receive from your properties after expenses. (Strangely enough though this is what most of the books teach you to do.) The result of course is the Whopping $4.5M required, which clearly is very difficult.

Positive income from an asset source, is unfortunately fully taxed. (Hence the difficulty.)

The second point is that structure can allow your dollar to work multiple times simultaneously.

Example: Assume A.L. has over the next ten years managed to build up a property portfolio of $2,200,000 gross value (Less than half of the whopping 4.5M) with an LVR of 63% (Net equity of $814,000)

This is all that is required to give A.L. his $105,832 pa after tax; suddenly NOT so difficult.

So HOW to achieve this???

Buy a property today for $450,000 (Ah YES 25% above the median of the city say Melburne)

Now we know that Melbourne has averaged in excess of 7% capital growth over the last 10 years, BUT hey these are uncertain times and maybe we are at the top of a cycle etc, etc. I am suggesting that if you apply rental reality, you will NOT overpay for the asset and if you follow the correct criteria you will very likely achieve the 7% irrespective of the current cycle position. HOWEVER, for the cynics out there, I will assume that you refuse to follow my criteria, so let us assume a capital growth pa of 5% (If you get a lesser return than this, you are definitely doing something very wrong!)

So at 5% pa growth, this Property will be worth $733,000 at the end of 10 years.

Better than this, is the fact that at the end of 3 years the property will be worth $520,000 (Also at 5% pa growth) which means that you have gained $70,000 in equity, which is enough to cover the deposit and costs to buy property number two for $520,000.

It gets even better, because two years later both these properties should be worth $574,000 (still at 5% pa growth) which is an equity gain of $54,000 X 2 = $108,000:

So with a very self satisfied smile go out and buy property number 3 for $574,000.

Note: This occurs at the end of year 5: Now all you have to do is hold the three properties for the next 5 years and if they continue to grow at 5% pa, you are home and dusted.

3 properties each worth $733,000 = $2,199,000

Total DEBT = 90% of each purchase price: $450,000 + $520,000 + $574,000 X 90% = $1,389,600 (LVR of 63%)

SOLUTION: Approach reputable bank and ask for an 80% LOC facility against your total equity: $2,199,000 X 80% = $1,759,200 Less of course the existing debt of $1,389,600 = $369,600.

Buy an income stream (Cashbond) with the $369,600 for three years:
Will provide an income of $123,200 pa (Capital return tax free)
And interest portion of $3,499 pa interest ( which is taxable) X 47.5% = $1,811 after tax.

Total tax free income: $125,011 (You smiling yet A.L. ??)

However, let us not forget that there is a cost for using the $369,600 at say 6.5% = $23,998 pa

So your net of tax living income will be $125,011 - $23,998 = $101,013
Which is equivalent to $212,658 taxable = $158,23 in today’s dollars (3% inflation)

See it is soooooo EASY!

NOTES:

1) You might be asking what happens at the end of the three years, when you have spent the money?? Well $2,200,000 of property growing at 5% pa = $110,000, which is MORE than you are spending each year, so at the end of the three years your properties will have grown by more than you have spent. You can then draw down the equity and buy yourself a further income stream . . . and eventually it goes to your kids.
2) What about serviceability? The cashbond creates serviceability beyond what you will need to continue this process.
3) What happens if my property grows at less than the 5%: Spend less!
4) What if my properties grow at greater than the 5%: Spend more, or save the extra for a year when it might be lower.
5) If the projected property growth is 7% (Yes you got all the selection criteria correct) your income level will be nearly DOUBLE!!
6) If you ‘Value Add’ with shares for example your income will be nearly TRIPLE!
7) Can you do this?? ONLY if you want to . . .

Hope this is of interest,

Regards,

Steve

 

[investor2009]

Above is not that different to Rixters way of investing.

And heres another (please note, Navra snippets have been copied n pasted from Somersoft and posts are still around today if you can locate them)

Heres another fave success story by Keith J

http://somersoft.com/forums/showthread.php?t=32265

 

[Shahin_Afarin]

I guess my question is more around strategy - ie, by the end of 2014 we should have $100,000 to play with. Should we be focusing more on yield or capital gains, should we purchase with a 5% deposit or 20% to negate LMI (although I am aware it is tax deductible) should we go for brand new houses or older established properties, should we buy lots of cheap properties or less more expensive ones, should we look at houses or units or apartments, city or regional...? Oh, and we are not interested in renovation or subdividing etc at this point.

These are really good questions - I think you are very much on the money. I personally think a 95% lend only works for loans of up to the $300k's mark especially when you are deposit poor or have an aggressive purchase strategy.

Also you are not interested in subdividing or renovation - will you be at a later stage?

Regards

Shahin

 

[K_Raheja]

Hello,

My husband and I have been researching investing in property for the last 12 months and I think we are almost ready to seriously begin looking for our first IP. We do not currently own any properties.

Background:
My husband is in defence, so we receive very cheap rent and would prefer to continue renting, and invest in property while we have the extra cash to save. The places we cannot buy in are Canberra, Sydney and Brisbane as we may end up living there, and defence would make us to live in the property so we would lose the access to cheap rent and the IP would then be forced to become our PPOR.

Whatever we buy would need to be a set and forget type of investment, as we won't be living close enough to renovate etc.

I plan to only work full time for another two years, have our second child then only work three days a week from that point on, so my goal is to set us up financially as much as possible in this period, and be able to continue saving for additional IP's on my reduced income - which would mean not too much negative gearing.

We met with a financial planner who suggested we purchase a house and land package for around $400,000 in Townsville or Maitland with a 5% deposit. This would be negatively geared, and we would have to contribute around $130 per fortnight after the tax deductions/return.

Having read this fabulous forum in great detail, it seems that purchasing house and land packagges as an IP is not recomended... so what would you do in our situation? We currently have $25,000 in savings, and can now save $1200 per fortnight comfortably.

Many thanks to everyone who reads my post!

something to think about.

1. define what is your goal ?
2. also, what happens if you buy now in melbourne and get posted there in future ? do you have to then stay in your IP ? you loose cheap rent
3. I am guessing ..job wise you are more secure than others (non defence) folks....but with growing family ..do you have buffer/emergency $ target.

good luck

 

[investor2009]

I'd also like to add, whichever way you choose to go, you're going to need time (at least 10 years) money, a strong unwaivering will and a cash buffer.
So many options.