Dilemma - My first IP...

[WebBoard]

From: Lan Diep


Hi All

I have a dilemma.
I have two choices.

1. Buy my first IP house in my area ($200K) which is an outer city suburb. Of which I will need to put in an extra $100-200p/m for mortgage repayments. As rentals for houses in my area is about $800-1000p/m.

OR
2. Buy my first IP house in an inner city suburb area (within 15k of CBD) for $300-$350. This will mean I will need to put in $500-800 p/m on top of the monthly rental to make the interest only repayments.

Option 1 - allows me to safely purchase an IP property without too much financial commitments.

Option 2 - allows me greater capital growth however puts a strain on my cashflow.

After all my expenses are taken out of my salary I usually have around $1000 -$1500 left for savings.

Please help! It's always the first purchase that is hard to make...

Lan

 

[Rolf Latham]

Reply: 1
From: Rolf Latham


Hi Lan

Gee, only two choices thats an absolutely great start.

The decision is largely an emotional one.


in your case Larger lend = larger negative geared component therefore more "cost" out of your pocket.

If your income is "secure" and you are sure of the investment and you can take a fixed rate, then I would suggest the larger purchase.

Borrow money while you can BUT manage ALL the managebale risks - rent, income, interest rates etc.

Please note this does not constiture advice from a tax, financial planning or related point of view.

ta

Rolf

 

[paulzag]

Reply: 1.1
From: Paul Zagoridis


Rolf's answered your question while I was composing this opus)

So you have the choice of losing $200 or $1000 per month. But you manage to save $1000-$1500 per month out of your salary. Aside: Are those really your only choices?

If you take option 2 and bet on growth, you are cutting it close should you get a vacancy (or other trouble). I would not like to be $1000 in the hole every month. Can you really afford a whole month vacant? Sounds risky but you might like it given your age and circumstances.

Option 1: you bet on long term growth across the city and can sleep at night if something goes wrong. Sounds safer and more prudent. But you might not like your returns over the next 10 years.

However past returns are no guarantee of future returns. How would you feel in either option if you got only 20% price growth over the next 5 years? This happens to people all the time. What is your exit or holding strategy if your expected growth doesn't happen? I buy from people in this position whenever I get the chance -- classic "don't wanters".

That is the biggest risk with a money drain, you part with known dollars for unknown rewards. That is called speculation. Nothing wrong with it providing you know you're doing it.

What happens if you can't work for six months? Now if you had a portfolio of investments spinning off cash, you could do a couple of these deals and not be eaten alive.

Disclosure: I used negative cashflow strategies between 1988 and 1991 made a lot of money. Lost a lot more when my bridging finance got too expensive at the same time as a cashflow crunch hit.

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz

 

[WebBoard]

Reply: 1.1.1
From: Kevin Forster



I think if you are looking at the outer suburbs for an investment property you should be looking at a positive cash flow property. You will still get some capital growth. Most of the outer suburbs tick along at 3-5%per year capital growth with the odd year of 10-20%. If you getting low capital growth you should be getting high yield to make it worthwhile.

You won't go broke if you're making a profit.

Kevin

 

[WebBoard]

Reply: 2
From: Alan Meagher


Hi my friend,
Capital growth is KING, make no mistake. Stretch yourself now, you will reap the rewards later. In todays market, not much later either.
Enjoy Life
Alan