I have a situation with my partner where I am trying to provide some advice which I feel is sound yet I would like to validate.
The background
1. He is elligible for FHOG
2. I am not elligible for FHOG as I own a PPOR and three IP's
3. We are buying a place together next year (after 5 years of being a couple and never living together) and I will need to sell PPOR to provide lion's share of the deposit and to be able to service my share of the loan (with my other IP's)
4. He currently lives with his parents as he has had a lot of difficulty finding somewhere and someone to rent with for a 6 month period until we buy
5. We cannot buy now due to financial, emotional and numerous other reasons and I won't sell my place just yet for numerous reasons
6. His parents have asked him to move out as they have relatives coming from overseas so he is now in a bit of an awkward position
7. He can't live with me as I have a 1 bedroom apartment and if we lived in it together, relationship would be too strained.
His current thoughts
He wants to buy a place so that he can address his current "have to move out" situation, and then keep property as an IP after the required FHOG 6 month living in it rule. As we are in Sydney and based on where he wants to live i.e. close to rail and family/friends on North Shore, all he could afford is a 1 bedroom apartment for around the $300K mark. This will allow him to fund 1 bedder as IP eventually and buy a place with me next year. He sees the FHOG as free money as on a $300K place it will equate to around $17K with stamp duty exemption.
My thoughts
Whilst it is "free" money, I personally feel he would be better off finding somewhere temporary to live (or bunking down in the billiards room of his parents) for a short period of time and if he really wants an IP then look at other areas to invest i.e. interstate that are geting better returns, particularly as I am not sure if he wants a long term investment strategy right now. It will leave him with next to no money each month. I am suggesting that he is better off saving the $17K himself and buying a 3 bedroom house in another area and having a pure IP (i.e. no living in it and getting FHOG) than buying a short term fix to a living situation. If he sold a property say 3-5 years down the track I feel that he would get better CG elsewhere on say a house in a suburb with good growth than a unit in Sydney, which has been flat for years.
I did a 3 year comparison on a 1 bedroom unit in Sydney with a generous 2% compound growth year on year and a 3 bedroom house in Brisbane with 10% compound growth year on year (based on a real suburb assessment). I factored similar costs and similar interest loans payment for the purposes of the exercise and took into account the upfront costs for Brisbane and minimal costs for Sydney with FHOG. Brisbane came out miles ahead of course in terms of profit (not taking off the overall costs over that time).
All of this is personal I know as everyone invests in a different location and there is no right or wrong place to invest and growth percentages cannot be predicted. It's all up to timing and other factors. I'm just after some thoughts on whether my general thinking is right or wrong. I feel he is after a short term solution without doing the sums and working out whether the FHOG will really give him a benefit. If he was buying it to live in long term i.e. as a PPOR, I would have no problem with the concept. However the largest property he can buy on his own is a 2 bedroom apartment and everything that I have looked at over the last 6 months is actually smaller than my current property. It may have an extra room but has no outdoor area (mine is massive) and I have two garages and most two bedders have one. I can't go backwards. We really want to buy a house and to do that we need to do it together and therefore he sacrifices FHOG.
The background
1. He is elligible for FHOG
2. I am not elligible for FHOG as I own a PPOR and three IP's
3. We are buying a place together next year (after 5 years of being a couple and never living together) and I will need to sell PPOR to provide lion's share of the deposit and to be able to service my share of the loan (with my other IP's)
4. He currently lives with his parents as he has had a lot of difficulty finding somewhere and someone to rent with for a 6 month period until we buy
5. We cannot buy now due to financial, emotional and numerous other reasons and I won't sell my place just yet for numerous reasons
6. His parents have asked him to move out as they have relatives coming from overseas so he is now in a bit of an awkward position
7. He can't live with me as I have a 1 bedroom apartment and if we lived in it together, relationship would be too strained.
His current thoughts
He wants to buy a place so that he can address his current "have to move out" situation, and then keep property as an IP after the required FHOG 6 month living in it rule. As we are in Sydney and based on where he wants to live i.e. close to rail and family/friends on North Shore, all he could afford is a 1 bedroom apartment for around the $300K mark. This will allow him to fund 1 bedder as IP eventually and buy a place with me next year. He sees the FHOG as free money as on a $300K place it will equate to around $17K with stamp duty exemption.
My thoughts
Whilst it is "free" money, I personally feel he would be better off finding somewhere temporary to live (or bunking down in the billiards room of his parents) for a short period of time and if he really wants an IP then look at other areas to invest i.e. interstate that are geting better returns, particularly as I am not sure if he wants a long term investment strategy right now. It will leave him with next to no money each month. I am suggesting that he is better off saving the $17K himself and buying a 3 bedroom house in another area and having a pure IP (i.e. no living in it and getting FHOG) than buying a short term fix to a living situation. If he sold a property say 3-5 years down the track I feel that he would get better CG elsewhere on say a house in a suburb with good growth than a unit in Sydney, which has been flat for years.
I did a 3 year comparison on a 1 bedroom unit in Sydney with a generous 2% compound growth year on year and a 3 bedroom house in Brisbane with 10% compound growth year on year (based on a real suburb assessment). I factored similar costs and similar interest loans payment for the purposes of the exercise and took into account the upfront costs for Brisbane and minimal costs for Sydney with FHOG. Brisbane came out miles ahead of course in terms of profit (not taking off the overall costs over that time).
All of this is personal I know as everyone invests in a different location and there is no right or wrong place to invest and growth percentages cannot be predicted. It's all up to timing and other factors. I'm just after some thoughts on whether my general thinking is right or wrong. I feel he is after a short term solution without doing the sums and working out whether the FHOG will really give him a benefit. If he was buying it to live in long term i.e. as a PPOR, I would have no problem with the concept. However the largest property he can buy on his own is a 2 bedroom apartment and everything that I have looked at over the last 6 months is actually smaller than my current property. It may have an extra room but has no outdoor area (mine is massive) and I have two garages and most two bedders have one. I can't go backwards. We really want to buy a house and to do that we need to do it together and therefore he sacrifices FHOG.