Am I in a Position to Buy?

[azzae89]

First time poster and 100% noob to RE investment.

Just need some advice from experienced investors as to whether i'm ready to buy or not. Here is my current situation:

I am 23 and live at home.
I have $12,000 in savings.
I have $2,500 credit card debt - 5K limit (will cut up when paid off).
I still owe $9,000 on my car loan (been paying it off for 3.5 years - will be fully paid off end of June this year).
I have $14,400 HECS education debt.

My question is this:

I am on $85,000 p.a. salary so clear around $1,300 net per week. I am ITCHING to get my foot into the property market in the Sutherland Shire. I'd like to buy just a one bedder around cronulla for around $270K - $320K.

Given that I still owe money on my car and credit card (not too worried about HECS) - do you think I'm in a position to buy yet or not?

Alternatively, if I keep saving the way I am, I should have around $20,000 saved, no credit card debt and my car fully paid off too (which is a 2009 Jeep Patriot valued around $21,000) - by the end of June this year.

My strategy is to have a tenant pay my mortgage off while I throw all I can at it into an offset account. In around 5 years it should be completely paid off and I'll occupy it and use the equity in it to purchase a 2nd IP and continue to build my portfolio. (I have no problem moving out late 20's - my brother just moved out he's 27).

Anyway - thoughts? Do I clear all my debts over the next 5-6 months and have $20,000 in savings first? Or do you think my car and my salary will instill enough confidence in a lender, and I can have a tenant start paying off an IP for me now?

Cheers!

 

[Burnar]

Or do you think my car... will instill enough confidence in a lender...?

"I'm not sure if I should approve this loan, oh wait, he drives a Jeep, of course I should"

 

[Aaron_C]

I would talk to a bank/broker to work out what you can/can't afford. As a general rule I would pay off the car loan first as it impacts servicing the most.

 

[Shahin_Afarin]

You are young and have a high income which is excellent. However you are deposit/savings poor.

Couple of random points:

1. If you want to purchase a property for say $270k then you will need at least $23k in deposit.
2. Why a one bedroom unit? Is this part of your longer term strategy or it is because you just want to get into the market and like the area? If its the later than I would recommend you work backwards and figure out your IP strategy.
3. You are young, your income is great and you have limited liabilities. You don't have good equity so does it makes sense buying something that a hit from a cashflow perspective but good opportunity to get equity so you can purchase more properties? Im not giving you an answer but you need to research what it is you want.
4. Your banker or broker should be able to give you an idea of your servicing and what is required for that particular lender.

Regards

Shahin

 

[Mick C]

"I'm not sure if I should approve this loan, oh wait, he drives a Jeep, of course I should"

^Hahah that sure made me laugh

I have $12,000 in savings.
like to buy just a one bedder around cronulla for around $270K - $320K.

Given that I still owe money on my car and credit card (not too worried about HECS) - do you think I'm in a position to buy yet or not?

General advice only, as need more info...but i would be more incline to make min payment towards the car loan....save up a larger deposit if possible- your borrowing capacity/servicing looks fine; so no need to pay out the car loan early etc....it's really your savings/deposit that will be a concern.

You need to balance out the cost of
- Stamp duty
- LMI (80-90% and 90-95%)

The lower the LVR the easier it is to get your loan approved and at a better rate/set up cost ( LMI etc.)

My strategy is to have a tenant pay my mortgage off while I throw all I can at it into an offset account. In around 5 years it should be completely paid off and I'll occupy it and use the equity in it to purchase a 2nd IP and continue to build my portfolio. (I have no problem moving out late 20's - my brother just moved out he's 27).

Hate to shoot you in the foot...realistic speaking you most likely won't pay even half of the mortgage off in 5 years time on your income. Interest is cal daily- compounded.

Anyway - thoughts? Do I clear all my debts over the next 5-6 months and have $20,000 in savings first? Or do you think my car and my salary will instill enough confidence in a lender, and I can have a tenant start paying off an IP for me now?
Cheers!

Step 1; Determine your borrowing capacity FIRST
Step 2: if based on your current debt level you can borrow the amount your after, then don't pay down your debt yet...try to save up for a larger deposit first.

Step 3: if in doubt...ask questions and seek help, don't presume.

Regards
Michael

 

[azzae89]

"I'm not sure if I should approve this loan, oh wait, he drives a Jeep, of course I should"

No need to be a dick about it.. I stated i was a noob to RE investment.. Geeze first post on here and only minutes later a sarcastic jab..

I wasn't sure whether the car could be used as collateral.. My credit rating with Esanda (ANZ) is at 5 Stars Excellent without a missed payment over 3.5 years.. As a lender this would be information worth considering no?

Thanks to the others who have responded with some actual help. I appreciate it.

 

[Jamie M]

Hi Azzae89

Welcome aboard.

Paying off the car first seems like a reasonable option - but it also means that it will prolong your first IP purchase.

Based on the limited info above, your borrowing capacity for the type of purchase you've mentioned is likely to be ok even with the car debt.

It all comes down to what you feel comfortable with. If you're risk adverse and want to limit your exposure to consumer debt then get rid of it before buying an IP. If you're "itching" to get started and can manage your liabilities then you're already half way there in terms of your current savings being used as a deposit on your first IP.

Cheers

Jamie

 

[alexlee]

and I can have a tenant start paying off an IP for me now?

Would it surprise you to know that your tenant might not be paying you enough rent to cover the mortgage and all the costs? Does that change your enthusiasm to get a property ASAP?

The car means nothing to lenders. It's a consumer good.

 

[azzae89]

Would it surprise you to know that your tenant might not be paying you enough rent to cover the mortgage and all the costs? Does that change your enthusiasm to get a property ASAP?

The car means nothing to lenders. It's a consumer good.

No I understand that. About 65% of my weekly pay is disposable income so I could manage it.

And Jamie thanks a lot for the advice. It's nice to know I still may be able to borrow despite the car loan.

Based on everyones input here, i might just hold out for the next 5 - 6 months and come up with around 30K (~10% deposit).. Chip away at the loan until its gone.

Thanks again guys, and can anyone point me to a glossary of RE investment terms. Seeing loads of abbreviations and such like PPOR and what not and am having trouble following.

Cheers!

 

[Marty McDonald]

Hi,

You are doing well to be starting on this so early congrats.

re Paying the car loan on time, this is not considered anything but the minimum requirement. So isn't going to get you any real brownie points.

My advice would be to cut up the card but don't cancel it, pay just above the minimum or even set up a regular payment of $200 / m or whatever. Then direct all available savings equally to your savings account and the car loan Or something like that so by the time you have the minimum deposit amount saved you will also have no car loan left.

 

[8fold]

Hi Azzae89,
Well done with starting so early wish I had, I also wish I had given much more weight to my future finance considerations when considering what type of property I purchased. This has held me up more than any other factor and I would urge you to speak to a broker not only about borrowing limits etc but also what sort of yield/capital growth mix you should aim for to move on to the next investment. For example he may advise you should look for a slightly higher yield when early in the accumulation phase etc etc and maybe a one bedder in Cronulla is not in your best interest.

Well done you are on the path early.

 

[BMW]

If this were me I would
- Pay off all the bad debts today using the existing savings
- If you can get $21000 for the Jeep, sell it, you can buy something mechanically sound for 10k.
- Skimp like crazy for 6-12 month while educating oneself before purchasing.
Then again thinking of myself as a 23 year old I don’t think I could do the above.

 

[7smurfs]

Thanks again guys, and can anyone point me to a glossary of RE investment terms. Seeing loads of abbreviations and such like PPOR and what not and am having trouble following.

Cheers!

Just keep reading and reading - lots of investment lingos will eventually become second nature to you.
A simple google also helps as part of self-learning except for some terms such as SANF (sleep at night factor) in my case lol.

As you may be already aware, majority of investors are older and do not like to spoon feed those from our generation (I admit we are used to), so don't take those non-constructive jokes about your post too hard.

Basically the message to take from those jokes is, do your own due diligence and research and then ask if you still yet to find the answer.

Back OT, best for you to contact a broker to understand exactly how much you can borrow before you start hunting. Look into options such as family pledge which can boost your affordability and keep cash liquid into an offset account to start

 

[locko24]

"I'm not sure if I should approve this loan, oh wait, he drives a Jeep, of course I should"

I would have thought driving a Jeep would count against him!

 

[DaveM]

With a salary of $85k, where is your $1300 per week going to? With a decent chunk of cash like that each week you shouldnt have $2500 cc interest accruing at 20%, and 12k is also not a high amount for a deposit.

Track every dollar you spend for a fortnight in a spreadsheet, see where your money is leaking away.

 

[chindonly]

PPOR = Principal Place of Residence

Buy one of the investment magazines from a newsagent, or a few good books on the subject (there are some threads here on the topic) and they will have a glossary and definitions included.

 

[Corey Batt]

As mentioned, you are low on the savings side for a purchase, however you're doing quite well in the income for your age. Decide whether you want save whilst chipping away at your personal debt (this debt won't cause too many problems with your serviceability). Alternatively focus on removing that personal debt and then back onto a strong savings pattern.

Consider the current market and whether you think there is going to be significant movement in the next 5-6 months. If not and the property is still going to be slightly negatively geared, it might pay to go for the latter option and 'invest' in increasing your investment knowledge at the same time.

 

[allegria]

I'm guessing you haven't been at your current job very long? (3 years+).. That will account for the low savings. However lenders ask how long you have been with your current employer and might be reluctant to lend to you if you are still a relative newbie to the firm.

 

[alexlee]

I'm guessing you haven't been at your current job very long? (3 years+).. That will account for the low savings. However lenders ask how long you have been with your current employer and might be reluctant to lend to you if you are still a relative newbie to the firm.

3 years is a relative newbie?

 

[Mick C]

95% + LMI is not easy...but as long as you tick the boxes, it be fine...

- Solid employment ( over 2 years same company, preferred)
- Solid working history
- Strong serviceability
- Low consumers debt ( especially credit cards)
- No unsecured personal loans outstanding (preferred )
- Haven't missed any payments
- Saving account in good working order/history ( no overdraw)
- Low activity on credit file for the last 12-18 month
- Clean credit
- Low movement in terms of residence ( ie stable residential history)
- Good security.
- Genuine savings preferred, but some lenders can over look this.