Feedback on a newbie investor’s strategy.

[Easton]

Hi guys and gals!

Just getting into the world of IP’s and was hoping to get some feedback from the experienced.

I’m 23 and have been looking to buy my first IP since I was 20 but have procrastinated for too long. Seeing all these people start at 18 I feel guilty having hesitated for the past 3 years.

I have just purchased my first property (signed contract today, exchange happens tomorrow) I’m self employed and going for a low-doc home loan, borrowing $180k on a $281k home. I’ve saved nearly 100k over the years while looking and trying to learn about the property game. I’ve dabbed a little in shares and enjoyed the bubble but never dared playing more than 5% of my savings in it at once. I live at home with the parents so my living expenses are minimal, and although I don’t need to move out of home just yet, moving out in about 2 - 5 years is definitely something I must cater for.

The house is 3 beds / brick’n’tile / 2 car garage / 600sqm / 1 block from primary school and shopping mall / 300pw rent / 281k negotiated purchase price (it took forever to bring that price down, it was 300k asking price). I’m in Newcastle but the suburb of this home I’ve bought doesn’t enjoy as much growth relative to the Newcastle region but enjoys some of the lowest vacancy rates and ok rental yields in the region.

Obviously I’ve opted for a “safe” first IP (brick and tile home in an easy to rent out suburb) to try and kill off this first mortgage and build equity as quickly as possible. I’m going to put everything I earn in the future into a partial offset account (loan is fixed rate for 3 years). I’ve picked safety and rent over growth potential, considering the current market and being my first property. I hope that was the right choice?

I’ve realized there are many different strategies to investing in residential property. But the strategy suggested for my situation was to start purchasing properties based on rent, to manage mortgage(s) as best as possible. If the market heats up again one day, take equity out (or sell) and start focusing on the capital growth properties. But in a relatively stale market in Newcastle (which basically follows whatever Sydney does) and having no previous properties, I’ve been told it’s best to start focusing on rental yields first. (and if value goes up, enjoy it)

My second main question is, after I start hammering this mortgage, when is the best time to move onto property 2? I want to do this safely, since I’m self employed and may move out in the future, however I don’t want to waste big and safe opportunities to make more out of my equity/savings.

If you went back to being 23, owned no properties but have a deposit, would your plans be consistent with what I’m doing? Would you rather spread it out into 20k deposits and buy 5 cheaper properties immediately? Would you rather focus on capital growth propertes? Or would you keep throwing it in the share market that seems to be the flavour of the month at the moment!

p.s i've been lurking on these forums for the past several years, nice to finally say hello to everyone! Although i'm new to you, you're all familiar to me now

Hello
Easton-

 

[quoll]

So many choices.

Your young, in a very small minority and in the long term you will do very well if you do nothing other than buy a house every now and then.

Saying that if you want to progress faster then things get interesting. Shares, options, reno's, developments, etc. Try a few different things but don't stop if things go bad, just change and drop the lemon.

Cheers
quoll

 

[alexlee]

I have just purchased my first property (signed contract today, exchange happens tomorrow) I’m self employed and going for a low-doc home loan, borrowing $180k on a $281k home. I’ve saved nearly 100k over the years while looking and trying to learn about the property game. I’ve dabbed a little in shares and enjoyed the bubble but never dared playing more than 5% of my savings in it at once. I live at home with the parents so my living expenses are minimal, and although I don’t need to move out of home just yet, moving out in about 2 - 5 years is definitely something I must cater for.

You da man! I don't know how the heck you managed to save this much by age 23, but well done.

At your age, it almost doesn't matter what you buy. Seriously. You just need to buy. As long as the cashflow is reasonable, your income is going to rise in the future and all you need to do is buy more and more and wait.

My second main question is, after I start hammering this mortgage, when is the best time to move onto property 2? I want to do this safely, since I’m self employed and may move out in the future, however I don’t want to waste big and safe opportunities to make more out of my equity/savings.

Basically, I would say you buy IP2 when you can afford to. I'm assuming that given your savings you must be earning a decent amount. The only question is, you say you're self-employed. How reliable is the income?

I just wanted to clarify what you're referring to by 'hammering this mortgage'. Are you talking about actually paying it down and then redrawing? Because you also mentioned putting extra savings into the offset and presumably using that for future deposits, which is the right thing to do. Paying down the mortgage and then redrawing may not be. Better to keep your loan limits high and just use offsets.

If you went back to being 23, owned no properties but have a deposit, would your plans be consistent with what I’m doing? Would you rather spread it out into 20k deposits and buy 5 cheaper properties immediately? Would you rather focus on capital growth propertes? Or would you keep throwing it in the share market that seems to be the flavour of the month at the moment!

Growth properties don't have to be expensive, and cheap doesn't mean lower growth. Personally, I did do what you're doing now. Had $50k. Bought 2 Brisbane properties within 9 months of each other. It went from there.

Starting as early as you do, with as much savings as you have (the only concern would be whether the self-employed income is sustainable), you almost can't go too wrong. Just stick to the basics. Watch your spending, buy when you can, and just keep buying average priced properties. If you decide you want to try renos, etc, go ahead, but I would keep a core of buy and hold IPs.

Honestly, if I was in your position I would have gone 80% LVR on this property and used the remaining money to buy IP2 immediately.
Alex

 

[JIT]

I’m 23 and have been looking to buy my first IP since I was 20 but have procrastinated for too long. Seeing all these people start at 18 I feel guilty having hesitated for the past 3 years.

Well done on your purchase. I think these 18 y/o's would still very much be in the minority, so I wouldn't worry about being left behind (it's not a race anyway)!

GSJ

 

[flightcrank]

well done mate. ive saved 50k in 6 years on a 27k p.a income.

so your doing pretty well for yourself. good luck

 

[steveadl]

Tend to agree with Alex. If it was me I would have bought 2 IP's first up, kept the LVR's high and use an offset acc. for extra cash left over until you can afford another one.

This would also depend on how much of your income you can keep contributing to any shortfalls - which I assume you can as you plan to keep putting money in offset?

Having said that, I think you've done a brilliant job so far on saving and finally taking the plunge! I assume at the moment since you only borrowed a smaller amount on IP 1, it is very close to if not already positively geared? If so you could then perhaps save a bit more for another 6 months to a year and buy 2 IP's next year. Maybe next time even look for a future reno or development possibility which you can increase your equity with by spending some of your savings doing it up/sub-dividing etc.

 

[Cherry Pro]

Well done, Easton !

You should be proud of yourself for taking the plunge ! Yesterday, I was talking to a friend who said her brother at 23 could not hold a job for more than 4 months, got a job - stayed there for the first bit, got bored, sat at home for a couple of months with Centrelink payments coming in, then
got pushed out again by Mum to find something else. Bah !

And here you are with the right focus - your strategy will take you far.

I do agree with AlexLee on the LVR though - but you have taken the first
step in the right direction.

Cheers.

 

[Dean1337]

I’m 23 and have been looking to buy my first IP since I was 20 but have procrastinated for too long. Seeing all these people start at 18 I feel guilty having hesitated for the past 3 years.

I'm 28 and I've yet to buy my first IP. I wouldn't feel guilty if I was you, you've done extremely well.

 

[Tizzy]

Easton, you are well on your way. You should be proud that you have achieved so much in your short life. Hats off to your parents too because they've helped you get there by keeping your day to day costs low.

FWIW, I don't think I would spread your deposit at this stage. Mainly because you still need to set yourself up in a home at some point in the next 5 years and you are self employed.

If you get the first year out of the way paying a bit off your first IP, you can reassess the situation and move to purchase the second one. You need to clarify your specific situation with an accountant and a broker but you could possibly do that by setting some of the equity from IP one into a LOC and using that for another deposit and holding costs.

The brokers and accountants here on SS have a great deal of knowledge and are very helpful.

 

[Tizzy]

You can flame me now Alex, but I think its the cautious Mum in me

 

[Bricks & Mortar]

Easton,

congrats on your IP.
I wouldn't be too concerned at 23 that you have entered late into the market
Nor whether you've made the right choice.
You have an abundance of time on your side.
The choice you've made you seem comfortable with and that reassuring.
Sure you could have gone with a capital growth venture but considering that your self employed your current option might be best.
Things change day by day,
and you will change with it.

Enjoy the moment, don't worry about the wrong and rights, or the procrastinations of the past, you've commenced the journey... You will tell yourself what is the best option, thousands will suggest, but utimately its your decision, and if you work through it, your choices will the correct ones.

welcome to the forum

 

[alexlee]

FWIW, I don't think I would spread your deposit at this stage. Mainly because you still need to set yourself up in a home at some point in the next 5 years and you are self employed.

You can flame me now Alex, but I think its the cautious Mum in me

My mum was a bit nervous when I first started buying IPs, too.

In terms of needing money to buy your own home in the future, though..... I'm a bit concerned about the self-employment too (I'm a career worker drone, so I don't know anything about running a business). If Easton's income increases as time goes on, though, given his savings history I think he can always buy the IPs now and when he plans to buy his own place he can save that deposit.

If buying your own place is on the cards soon, Easton, I would still have suggested going 80% LVR on the IP and putting the rest of the cash either in an offset account or into shares or funds or something. Mainly for the deductibility: if you have, say, 50% LVR on your IP and you refinance to get a deposit for your PPOR, it's not deductible.

However, if you keep the IP loan high, and use the money from your offset to buy your PPOR, deductibility is maximised. If you still have a few years to go, putting it into shares / funds should give you a higher return, though it's always riskier to have a short horizon.

Something to consider for your next purchase. Though I started buying around your age and am only now planning to buy my PPOR (30).
Alex

 

[Easton]

Thanks for the reply guys!

I forgot to elaborate on the self-employment issue. It’s meant to imply a significant disadvantage I have doing property because I freelance. Long story short sustainability could be a concern, because consistency is almost non-existent (I work as a photographer for car magazines). But that’s why I forced myself to work only part time so that I finish my engineering degree, which is totally unrelated to my work but is my back up just in case I need a career change. I can’t even plan a week ahead, let alone know how much I’ll earn in the next financial year.

Yes, the first property will likely be slightly positively geared, and I planned on dumping all my income into a linked partial offset account and as much of the mortgage as I can (up to 10k p.a without incurring penalty fees). Is there any reason for/against putting money into the actual mortgage?

On the topic of partial offset accounts, I’m a bit confused about it all actually. Is it always better to put money in the offset instead of paying off the actual mortgage? My broker tells me I can only apply for a partial offset because I’m on a fixed rate loan, and that I’ll be penalized for paying more than 10k into the mortgage as extra payments per annum. I heard partial offset means there is a difference in interest, but my broker tells me this will almost be negligible?

I’m not too sure what I’m going to do yet, but I think I’ll put most of my future income into the offset account and the rest in a bit of shares. Then in 6 months or so time see where I’m at and buy property number 2. But i'm still trying to get all this LVR stuff in my head, when you say 80% LVR you mean that I borrow 80% of the property value and lay only a 20% deposit? Then put everything else in an offset account linked to that loan?

Assuming everything is running smoothly, how many properties would most tend to buy per annum? I’m not sure if that’s the right question to ask, but most people seem more willing to spread their equity out into more properties sooner.