First Home/Investment - St Kilda or Pakenham or Chelsea (VIC)

I am currently in the market for my first home with a budget of $350k

My intention is to occupy it for the first 6-12 months to avoid capital gains, then consider my next step once the time has passed.

I am tossing up between a few suburbs at the moment and it has become clear that certain suburbs yield certain types of growth results:

St Kilda - Tenanted very quickly with the highest yield (will only be able to afford a 1 or 2 br apartment) - Comparatively slow capital growth

Chelsea (bayside) - Steady capital growth with average yield. Many subdivisions have already been completed in this area leaving only small units with no option of larger parcels of land

Pakenham/Cranbourne area - With the Melbourne CBD slowly expanding, these are the next 2 major developments in my area currently underway. For my price range I can purchase a 600 sqm home with 3-4 bedrooms. This will give me average yield with a slower capital growth which will take several years to realise.

At the end of the day, I am looking for some help in determining which of these strategies would best suit me considering the following:
  • This is my first home
  • St Kilda / Chelsea would mean that I am buying a home that I am only living in for 6-12 months whilst Pakenham / Cranbourne would mean that I am buying a home to live in for a long time
  • I am unsure of what should take precedence in such an uncertain market - Yield vs Capital Growth

Thanks for reading and I'm looking forward to any help I can get...
 
Hi gshaheen,

If you want to achieve capital growth, then a house in the paddocks of Cranbourne and Pakenham won't be a good place to start as land is released everyday. Plus it is so very far away from everything...

St Kilda is good because as you pointed out, of the high rental demand. A 2 bedroom apartment would potentially be a good investment - but make sure that it is decently sized, with a car park as a bare minimum. I wouldn't necessarily say growth would be slow - what yield are you expecting?

Chelsea is a nice area. But what is your budget? For your first investment stick to the basics - good location and good position. Subdivision etc is for more experienced investors who understand these planning and zoning rules.

Personally I would go for the St Kilda area for the reasons I have mentioned above. It is always better to buy in places where people want to live - that's property rule #1.
 
Thanks Aaron_C,

I understand your point but wouldn't it be a better idea to capitalise on the weakness of the market by buying a larger block of land rather than an apartment closer to the city.

Obviously the St Kilda home will rent out faster, but I am more trying to figure out whether my first house should be an investment or a home. If I am looking for purely an investment, St Kilda wins hands down... If I am looking for a home, I need to consider Chelsea or somewhere further out...

Be interested to hear your thoughts...
 
Thanks Aaron_C,

I understand your point but wouldn't it be a better idea to capitalise on the weakness of the market by buying a larger block of land rather than an apartment closer to the city.

Obviously the St Kilda home will rent out faster, but I am more trying to figure out whether my first house should be an investment or a home. If I am looking for purely an investment, St Kilda wins hands down... If I am looking for a home, I need to consider Chelsea or somewhere further out...

Be interested to hear your thoughts...

Like I said, it depends on your budget. The problem with larger blocks of land is that your yield will most definitely be lower. Especially those that do have subdivision potential - they may have yields of 2%. Can you sustain a 5% cashflow bleed every year (not including rates, land tax etc)?

In any case, young people want to live near the CBD because it's close to work, they want to get away from the suburbs where their parents live, and it's fun. These is acceptance of apartment living - why does a home have to be a 4br house? You just have to make sure that whatever you buy makes sense financially for your own personal circumstances.
 
I am currently in the market for my first home with a budget of $350k

My intention is to occupy it for the first 6-12 months to avoid capital gains, then consider my next step once the time has passed.

I am tossing up between a few suburbs at the moment and it has become clear that certain suburbs yield certain types of growth results:

St Kilda - Tenanted very quickly with the highest yield (will only be able to afford a 1 or 2 br apartment) - Comparatively slow capital growth

Chelsea (bayside) - Steady capital growth with average yield. Many subdivisions have already been completed in this area leaving only small units with no option of larger parcels of land

Pakenham/Cranbourne area - With the Melbourne CBD slowly expanding, these are the next 2 major developments in my area currently underway. For my price range I can purchase a 600 sqm home with 3-4 bedrooms. This will give me average yield with a slower capital growth which will take several years to realise.

At the end of the day, I am looking for some help in determining which of these strategies would best suit me considering the following:
  • This is my first home
  • St Kilda / Chelsea would mean that I am buying a home that I am only living in for 6-12 months whilst Pakenham / Cranbourne would mean that I am buying a home to live in for a long time
  • I am unsure of what should take precedence in such an uncertain market - Yield vs Capital Growth

Thanks for reading and I'm looking forward to any help I can get...

not pakenham
 
Just my opinion, but I'd most likely go for St Kilda with Chelsea second.

I wouldn't consider Pakenham or Cranbourne becuase the capital growth prospects are limited and very volotile. When interest rates go up, these areas crash. As previously stated they're 'paddock suburbs' where there's plenty of room for further construction (no scarecity of land = plenty of supply).

St Kilda may be underperforming for growth right now but it's location makes it a good long term growth area.

There are some pockets of Chelsea which I'd rate very well and some areas which I wouldn't trouch.
 
I've been helping a friend look for a unit in Elwood, probably a little to exe for your budget but I would suggest St Kilda East, rather than St Kilda central. It can be dangerous at night and depending on your rental market, you will get a larger, nicer, safer and cheaper just a bit further inland. Just my 2c worth.
 
My intention is to occupy it for the first 6-12 months to avoid capital gains, then consider my next step once the time has passed.

most investors like capital gains, rather than trying to avoid them. lol.

i presume you mean capital gains tax (CGT)?

do you know how GCT works? there is myth that all you need to do is live in a property for 6 months to avoid CGT and can accumulate infinite properties CGT free on this basis. it's actually not quite like that.
 
most investors like capital gains, rather than trying to avoid them. lol.

i presume you mean capital gains tax (CGT)?

do you know how GCT works? there is myth that all you need to do is live in a property for 6 months to avoid CGT and can accumulate infinite properties CGT free on this basis. it's actually not quite like that.

Yes, sorry I was referring to Capital Gains Tax. I may not understand the finer details of CGT, but my understanding is that the home needs to be your principle place of residence for at least 6 months to avoid any CGT. Correct me if I'm wrong...?
 
It appears that capital gains tax is a lot more complex than I first thought. Even so, moving into it and living in it for the first year still looks to be the best move.
 
It appears that capital gains tax is a lot more complex than I first thought. Even so, moving into it and living in it for the first year still looks to be the best move.

That is how tax lawyers earn good money :)

But as an investor, concentrate on making money first. Tax is based on profit - so focus on profit first and pay the lawyers/accountants to save you paying too much to the tax man.
 
Just my opinion, but I'd most likely go for St Kilda with Chelsea second.

I wouldn't consider Pakenham or Cranbourne becuase the capital growth prospects are limited and very volotile. When interest rates go up, these areas crash. As previously stated they're 'paddock suburbs' where there's plenty of room for further construction (no scarecity of land = plenty of supply).

St Kilda may be underperforming for growth right now but it's location makes it a good long term growth area.

There are some pockets of Chelsea which I'd rate very well and some areas which I wouldn't trouch.

http://www.realestate.com.au/property-unit-vic-chelsea-108314191

Thanks PT_Bear - What are your thoughts on this property? I know that the closer you go to Bonbeach and Chelsea Heights, the further away you go from the station, quality beaches and quality neighbours (as these areas are mainly tenanted)
 
But as an investor, concentrate on making money first.

That makes sense... I've never understood why there is such a strong emphasis on negative gearing, especially when first entering the market.

If you are buying a property which has a rental income that exceeds the Interest Repayments, isn't this a positive? It is better for cashflow, and at the end of the day, you are making money, not losing money!
 
That makes sense... I've never understood why there is such a strong emphasis on negative gearing, especially when first entering the market.

If you are buying a property which has a rental income that exceeds the Interest Repayments, isn't this a positive? It is better for cashflow, and at the end of the day, you are making money, not losing money!

The emphasis on negative gearing can be explained in many, many words. But the simplest explanation is that in Australia, people have very high wages. As our tax system is progressively punitive (the % of tax paid goes up every $ you earn), the incentive is there for people to minimise their tax by negative gearing. While you are losing money each year, the effect of that loss is mitigated by the tax you save (up to 45%). Further from that argument, cashflow positive investments are taxed at up to 45%, so your incentive to get positive gearing is even further reduced.

But in the long run, the only way to make money from negative gearing is to hope that the capital growth from the investment exceeds the cashflow loss from the negative gearing. This is a lot easier these days because of the capital gains discount of 50% if you hold the investment for more than 1 year.
 
The emphasis on negative gearing can be explained in many, many words. But the simplest explanation is that in Australia, people have very high wages. As our tax system is progressively punitive (the % of tax paid goes up every $ you earn), the incentive is there for people to minimise their tax by negative gearing. While you are losing money each year, the effect of that loss is mitigated by the tax you save (up to 45%).

But in the long run, the only way to make money from negative gearing is to hope that the capital growth from the investment exceeds the cashflow loss from the negative gearing. This is a lot easier these days because of the capital gains discount of 50% if you hold the investment for more than 1 year.

I'm so glad I found this website... Thanks so much Aaron... What are your thoughts on the property I posted?
 
I'm so glad I found this website... Thanks so much Aaron... What are your thoughts on the property I posted?

It looks fine I guess. I'm not too familiar with the Chelsea area but it's good if you can buy near the beach/station as the demographic there is mostly young people who are priced out of St Kilda/Brighton etc. This property seems to tick that box. Also, the price looks quite affordable which is good - what do you think you can rent it out for?
 
It looks fine I guess. I'm not too familiar with the Chelsea area but it's good if you can buy near the beach/station as the demographic there is mostly young people who are priced out of St Kilda/Brighton etc. This property seems to tick that box. Also, the price looks quite affordable which is good - what do you think you can rent it out for?

Going rate seems to be $320-350 in the area for a 2br...

I have a good friend who would like to purchase with me which would mean that we would be looking at something in the vicinity of $500-550k, however I know that this would increase complexity and while it spreads the risk between the two of us... It could come back to bite us in the future if we have disagreements...

The plus side is that we will be able to get a larger block in a better area...

There is a lot to think about...
 
Going rate seems to be $320-350 in the area for a 2br...

I have a good friend who would like to purchase with me which would mean that we would be looking at something in the vicinity of $500-550k, however I know that this would increase complexity and while it spreads the risk between the two of us... It could come back to bite us in the future if we have disagreements...

The plus side is that we will be able to get a larger block in a better area...

There is a lot to think about...

There's not a lot to think about it actually - don't do it. Especially for your first (and only) investment....it will not end well.
 
Back
Top