First IP Investment Strategy?

[Lukey13]

Hello forum-goers and fellow property investors,

As a newcomer to property investment, I would appreciate any general or specific comments regarding the following potential strategy:

My current PPOR is valued at approximately $400K with useable equity (at 80% LVR) of $320K minus $250K loan = $70K.

Using a $70K LOC against PPOR, this allows for a deposit on a $330K-$340K property (plus purchase costs) once again at 80% LVR.

Thus my loans would be:
$250K fixed loan at 6.5% – PPOR (partially tax-deductible through salary packaging)
$70K variable LOC on PPOR tax-deductible as IP deposit
$270K fixed loan on IP

DSR on these three loans would be very comfortable even with my wife likely going on 12 months maternity leave (6 months on half pay, 6 months unpaid).

Another option would be to forget the 80% LVR, bite the bullet and pay LMI in order to borrow enough for the IP and maybe $20K extra for improvements to our PPOR to make it more comfortable. Afterall, our decision to stay in our current PPOR favours a long term investment strategy rather than opting for “comfort now” and getting the huge PPOR mortgage for a trendy McMansion. We also know that we couldn’t stay in our current PPOR for more than 5-10 years due to family plans.

So I suppose other options would be to convert our current PPOR into an IP (which probably wouldn’t be far off being neutrally geared) and once again get a huge PPOR mortgage on another “nicer” place.

However, I’m much keener on spending $20K or so “value-adding” to our current PPOR in order to make it more comfortable for us before we end up selling or converting it to an IP, while putting our money right now into purchasing our first IP.

So, what I’m thinking of for an investment property option is an off-the-plan unit right in the CBD of Townsville in a very strong performing suburb (although not in the nicest street!) at around the $335K mark. The developer is a very well-respected one and most of their similar developments have sold very quickly with considerable “mark-up” with on-selling. However, it wouldn’t be our intention to on-sell before settlement unless we had very good reasons to do so.

The unit would be 2 bedroom, 2 bathroom with 86m2 living space plus (or maybe including???) a 23m2 terrace/deck. A larger 3 bedroom one could be had for a little bit more.

My brief calculations are: (please note these are very rough!)

Rental Income: $17K (after agent deductions – by the way my friend’s reputable agency will manage it)

Costs:
Body Corp: $5K
Rates: $2K
Depreciation: $14K? (maybe we could put in some furniture also?)
Interest at 7.5%: $25K
Actual costs = $17K – $32K = $15K – tax deduction ($29K @ 30% = $8.7K) = $6.3K or around $120/week

My main question is, does this sound even close to being on track and being a sound investment strategy?

My long term strategy is to accumulate a decent IP every 6-24 months, depending on conditions and variables. I also wish to upgrade our PPOR within the next 5 years or so.

Any suggestions or advice? For instance, should go back to my original idea of getting something cheaper for about $250-$300K with a lower return?

Kind thanks

Luke

 

[Rolf Latham]

Hiya

Quick comment

OTP can be great.............or very very bad

Much depends on the market when u are looking to settle.

In general. much more than 6 to 12 mths out and you are addiing normally excluded risks such as financing risk to credit squeezes, and market risk due to a lack of demand or an oversupply.

Most of my clients that look at OTP, once having assessed all the risks vs the benefits , in many cases go for house and land instead

ta
rolf

 

[Lukey13]

Hey Rolf

Thanks for your comments regarding OTP investments.

Predicting the market in 12 months or so certainly is a risk worth considering. Although, here in Townsville there is virtually no rental vacancy and it would seem with the massive ongoing population growth that this is not likely to change for quite some time. Developments all seem to be heading way out of town (in Townsville that would be 25 to 40 minutes out of the CBD), so anything that is located within one of the four central CBD suburbs seems fairly predictable in terms of demand. But like you say, massive things could happen in the market in the next year.

The other problem might be the next two or three (or more!) interest rate rises in that time. Is it possible to lock in a fixed rate so far before settlement????????????? Also, would it be worthwhile getting lenders approval now or at settlement time at which point my wife will probably be on maternity leave.

Another thing regarding opting for the "house and land" as many of your clients have done is the rental yield difference. Here in Townsville, if I were to spend the same money on a house away from the CBD, the rental returns would be far less than a brand new CBD apartment. Also, wouldn't the depreciation benefits be far higher on a brand new apartment than on an older house.

One disadvantage I see of brand new is that there is very little room for cheap capital improvements to improve rental yield. However, you could say that a brand new place already has that in place and is already getting a higher rental yield.

Perhaps I need to understand more about depreciation schedules for houses versus units. Are there any good examples of such????

 

[alexlee]

CBD apartments have body corp, maybe high body corp if you have facilities.
Alex

 

[Lukey13]

CBD apartments have body corp, maybe high body corp if you have facilities.
Alex

Indeed they do! This place is fairly typical for such developments with body corp fees getting close to the $5K pa mark.

Even with this taken into account though, rental yield still looks really favourable compared to other properties of the same value.