Affording first IP - Strategy?

[bene313]

I've been lurking around here for a while now and have come to the conclusion that I can afford an investment property, but at the same time can't afford one. Let me go into a little detail...

First of all, I'm a student so my income is around 10-15k pa (note I currently live at home so my expenses are relatively low). After running some numbers I'm reasonably confident that I can afford the -ve cashflows of a property with sufficient growth prospects. So making up the little differences between rent and total ongoing costs doesn't bother me (I have some good areas in mind which I'm confident will experience growth).

Now the first problem lies with the LVR. Unfortunately I have no cash for a deposit, but am in the process of cutting a deal with my folks which should help the situation. Still I'm not sure they've got the 20% needed available for me - I think it'll affect their SANF to much - but 10% or even 15% is probably doable. Is this gonna work? I mean, will I be able to secure a loan and MI on a 90 or 85% LVR, given my low income status?

If not... Any other creative ideas on where the deposit might come from? We're talking say 40k for a 200k (inclusive of costs) IP. I don't see saving this amount reasonable seeing as my gross income next year will be 38k, and I'll be out of home by then (it's not an option to stay living at home).

The other option I've considered is buying a cheap unit somewhere as PPOR, using FHOG, and doing some reno work while paying off as much of the principal as possible to create some equity. Personally I don't like this idea at all. I'll be very strapped for cash servicing the P/I loan until starting full-time work in March '06 and for my own lifestyle reasons I'd prefer it to be living elsewhere. The advantage is I make use of the FHOG and would learn a little about doing renovations.

I'd appreciate thoughts, suggestions, ideas on my situation.

Cheers,
Ben

 

[alexlee]

My own view: you're young, you haven't really started earning money yet, and you might make lifestyle changes soon. Not really the best time to buy investment property, especially given the market now (flat) and your lack of resources.

My suggestion: build up your knowledge first. You don't need to buy anything to look at properties and read books. Then build yourself up financially: in short, increase your earning power (do uni, enter a profession, whatever) and save. You're young enough to spend a few years learning and building good money habits and still have tons of opportunities. Buying property isn't as important as buying the RIGHT property. Buying the wrong property too soon will hurt your long-term plans.
Alex

 

[Merovingian]

If not... Any other creative ideas on where the deposit might come from? We're talking say 40k for a 200k (inclusive of costs) IP.

Remember that almost anything reasonable can be written into a contract of sale. Therefore, you might be lucky to find a vendor/seller who may be willing to leave say, 5% or 10% in the deal, thus contributing to a deposit. So, you put in your saved cash, as well as the vendor's 5%-10%, and get a loan for the rest. Then, the money lent to you from the vendor you could agree to pay back incrementally at 8% interest over 5 years, for example, (which would be stated in the contract).

If you find a vendor willing to do this, it's a win-win situation.

Hope that helps.

 

[quoll]

What about a share house?
Not sure if this is doable with FHOG.
Would you be comfortable renting rooms out?
It's a sacrifice but it might help you get the deposit you need, down the track you can move out and rent the whole house.

Might work

cheers
quoll

 

[skater]

Sorry to be the bearer of bad news, but if you are earning $10 - 15k now & not saving anything, how do you think you will be able to afford a neg geared property? How will you handle it if you can't get a tenant for a few weeks? What will you do if maintenance is required? My own teenage daughter earns probably 1/2 of your income & saves at least 1/2 of all she earns. She is only 15 & wants to buy an IP when she is 18. In my opinion you should be doing the same. Time is on your side, start saving. You not only need a deposit, but you also need an emergency fund, because if you are not prepared for bad things to happen, that is exactly when they will happen. Unless you have enough put aside to cover the unforseen, you are not ready to have an IP. If you are diligent in your saving, it won't be long before you are ready.

 

[TheBacon]

Sorry to be the bearer of bad news, but if you are earning $10 - 15k now & not saving anything, how do you think you will be able to afford a neg geared property?

Skater - this person has $200-$300 per week to look after themselves in the world. Being a little harsh arent we? Considering we have no idea of the overall financial situation...

On a side note, if one buys a property as an IP, does this affect FHOG when looking to buy PPOR?

Good luck.

TheBacon

 

[Jamie]

On a side note, if one buys a property as an IP, does this affect FHOG when looking to buy PPOR?
TheBacon

You can buy as many investment properties as you like and still be eligible for the FHOG, provided you do not reside in any of these properties (the caveat to this is that all investment properties have to have been purchased after July 2000 to be eligible).

The other option I've considered is buying a cheap unit somewhere as PPOR, using FHOG, and doing some reno work while paying off as much of the principal as possible to create some equity. Personally I don't like this idea at all. I'll be very strapped for cash servicing the P/I loan until starting full-time work in March '06 and for my own lifestyle reasons I'd prefer it to be living elsewhere. The advantage is I make use of the FHOG and would learn a little about doing renovations.

Theres no reason why you cant have the best of both worlds. Buy the property and claim the FHOG, then put tenants into it until March next year. In March you move in, having done so within 12 months (the FHOG requirement) and youre now on a higher income to service the debt on your own.

This isnt to say what you propose is the best course of action. With no savings and a minimal income, perhaps the best course of action might be waiting until you start earning an increased salary, and in the meantime arming yourself with the knowledge to make a good investment decision once youre in a stronger position to invest.

Have you investigated all the downsides of buying a property now? What if you can't find a tenant for a protracted period of time - can you service the entire debt on your own?
What happens if you have urgent building repairs - do you have the savings to complete them? These are just a couple of the questions you have to be able to answer...

Also, the fact that allowing you access to their equity might cause problems for your parents would be ringing alarm bells for me - Im sure the last thing you want is to be causing your parents sleepless nights.

You're asking all the right questions, so hopefully you'll be able to make an informed decision based on some of the responses you get here.

All the best,

Jamie.

 

[geoffw]

You may be able to afford the property- but many lenders will not look at you if you do not have genuine savings over a period of time.

 

[bene313]

Thanks guys! I really appreciate all your responses.

I guess I'll have to revert back to my original plan and wait 'til I'm earning a full-time income before making a purchase. Until then I'll just continue saving and checking properties.

Ben

 

[Bricks & Mortar]

Ben,

You were considering borrowing from the folks.

Would a partnership with the folks be a possibility (It will affect the govt. grants though!)

If it affects their pension, perhaps operate through a trust.

As Suggested previously, U could move into a PPR with a group of students
Instead of paying rent, perhaps they could pay for the materials to enhance the property, for the food, for the electricity/phone etc. and not actually pay 'rent'
(I'd double check which are allowable first)

Failing that, Keep reading, stay inspired and commit at a later date when you'll feel comfortable to enter the market... Your age gives you plenty of time and properties aren't spirally up out of control at the moment, your 'purchase price' might even be lower when you start work in 06

But I'm with Geoff, lenders will want to see 'savings over a period of time', and also a 'consistant job over severals months' as well.


LOL

Timm

 

[bene313]

Ben,
You were considering borrowing from the folks.

Would a partnership with the folks be a possibility (It will affect the govt. grants though!)

Tim,

This was the idea I had going with them. They provide some cash up front, but then instead of it being an advance to me, they'd hold equity (say 20%) in the property. I think it's a good idea in theory, but then we're back to the problem...

But I'm with Geoff, lenders will want to see 'savings over a period of time', and also a 'consistant job over severals months' as well.

My current employer I've been with for almost 2 years, and my savings are around 2k. I had problems saving in the past due to setting up a part-time business - thankfully that's now breaking even and occassionally turning a profit, making saving a much easier task.

Cheers,
Ben

 

[bene313]

Have you investigated all the downsides of buying a property now? What if you can't find a tenant for a protracted period of time - can you service the entire debt on your own?
What happens if you have urgent building repairs - do you have the savings to complete them? These are just a couple of the questions you have to be able to answer...

Yeah I see what you mean Jamie.

I don't think servicing the debt will be a problem if the place has times without a tenant - but only for a short period of time. As to urgent building repairs... that could be a problem and has been one which makes me wary of proceeding without at least 5k put away.