First IP. Should I get into the market at all costs?

[jkeysers]

Hi all. Been lurking here for a few weeks now, thought it was about time to make my mark.

I hope this post is in the right spot. If it's not, can a mod please move it?

The Mrs and I are keen to become property investors. We've read a few articles, visited a few websites, spoken to a few investors and lenders, discussed it with each other at length, but really we are just at the beginning of the process.

A little bit about us...

We are married with a 1 year old boy, both 26 years old and live in a smallish house in Pakenham, Vic. We bought this house about 4 years ago new as a house and land package, and finally finished it off recently. Man it was a lot of work, but we got there. We owe just under $200K on our mortgage, and based on prices in my street I estimate our house is worth about $270-280K at the moment (I haven't had an official evaluation done). Our combined income is around $70-75K, I work locally and earn 75% of that total, the Mrs is self employed, works from home part time and looks after our son. We only have the 1 car (I don't need one as I work close to home), but that car has about $20K owing on it. We also have about another $8K of credit card debt, a lot of which was spent improving our house.

I know one of the things standing in our way for any potential investing is those smaller debts. The credit cards don't worry me particularly. 8 grand can be covered off fairly quickly (6-8 months). The $20K car loan is another matter. I know the simple thing would be to sell, but I spent a fair bit of money converting it to LPG and putting new tyres on it so I am very reluctant to sell. I purchased it as a long term car, and would like to keep it if I can.

I've reached a point in my working life where my earning potential has probably peaked. I work for a small firm as a draftsman, but have no formal qualifications. I enjoy the work and the proximity to home, but am worried I will be "left behind". 55K a year is great when you are in your early 20s, but I don't fancy sitting back and watching all my friends surpass me as the years go by. Due to our financial situation, it's difficult for me to study as we rely heavily on my income. So I decided that investing in IPs might be a better way to create wealth.

We have recently been approached by a building mob (Mega Homes), asking us if we were interested in a house and land package. I was quite reluctant to deal with a company that came and found us (in my experience you have to go out and find the good deals yourself), but having been thinking about IPs and income a lot lately, I scheduled an appointment which we had on Saturday. I was expecting a pushy sales pitch which was why I was surprised when it was simply a casual chat with a really nice bloke. Even more surprising was that the deal sounded quite good. Guaranteed tenants (you start paying your mortgage when the tenants move in). Compatitive finance (despite our current debts). Find your own land. That's not to say I will go with them, but it did help me to realise that it's not impossible to get into property investing.

He even said it was possible for us to our roll our current debts (credit cards and car loan) in with it. This got me thinking. Logic would say that it's best to reduce those debts as quickly as possible. But in the time we are doing that, the property market will probly have increased in value, making it harder to get in. We're thinking of investing somewhere in or around Pakenham. It seems to be a decent place for investment. Based on some basic sums i've done, I estimate that shortfall for the mortgage would be $150-200 per week. Obviously we can't afford that as things stand now, but if we were to roll our other debts into one of the mortgages, then that would change. That is pretty much what I am paying on the car.

I know our combined income is relatively low. How much of a bearing does that have on getting into investing? Will lenders even consider us in our current position? I'm yet to speak to any, and quite frankly i'm a little scared of being laughed out the door

Which road would you take? Knuckle down and pay off debts? Or throw everything in the ring and get in the IP market ASAP?



From what i've read so far, there seems to be a lot of smart people around here, so i'm looking forward to seeing what people make of my situation. Don't pull any punches. For the sake of my son, I want to get us into as strong a position as I can. I've pretty much missed the boat when it comes to a big earning career, so hopefully IPs can provide us with some wealth...

Thanks guys!

 

[LynnH]

jkeysers

Welcome to the forum - and congratulations on taking the first step to ensure your family's financial future!!!

You did say "don't pull any punches" , so I'll start with a few comments about Mega Homes (have never heard of them, but that means zip) - and, for that matter, other companies with a similar approach:
1. Wouldn't go with any company that found me - do your research and choose one based on your own DD.
2. Rental guarantees are ALWAYS - repeat, ALWAYS - built into the price of the home. Usually what happens is when the 'rental guarantee' runs out, you are faced with dropping your rent considerably to meet the market.
3. Dont use their finance company - they will probably be getting some sort of 'benefit' out of arranging your finance. Always seek your own valuation, your own solicitor and your own bank/finance broker. If you can read anything about two-tier marketing in Queensland, you'll find out why!!!
4. Don't roll your current debts into a home loan - do you want to be paying off your car in 30 or 40 years time? Because that is effectively what you will be doing.

If I were in your situation, I would be clearing your CC debt as soon as you can (as it is usually the one with the highest interest rate), then work on clearing your car loan. There is a good thread on this topic at:

http://www.somersoft.com/forums/showthread.php?t=24892

In the meantime, may I suggest you read lots of books/articles on property - see this thread for some suggestions:

http://www.somersoft.com/forums/showthread.php?t=9652

And, of course, become addicted to this forum - like the rest of us - there is some amazing knowledge on SS!! I firmly believe that your biggest asset when approaching investments of any type is your KNOWLEDGE.

Above all, enjoy your investing journey!

Cheers
LynnH

 

[The Y-man]

Don't roll your current debts into a home loan - do you want to be paying off your car in 30 or 40 years time? Because that is effectively what you will be doing.

Could create an accounting nightmare in terms of your tax deductibility too.

Cheers,

The Y-man

 

[yo yo ma]

Rental guarantees are ALWAYS - repeat, ALWAYS - built into the price of the home. Usually what happens is when the 'rental guarantee' runs out, you are faced with dropping your rent considerably to meet the market.

Dont use their finance company - they will probably be getting some sort of 'benefit' out of arranging your finance. Always seek your own valuation, your own solicitor and your own bank/finance broker. If you can read anything about two-tier marketing in Queensland, you'll find out why!!!

Don't roll your current debts into a home loan - do you want to be paying off your car in 30 or 40 years time? Because that is effectively what you will be doing.

If I were in your situation, I would be clearing your CC debt as soon as you can (as it is usually the one with the highest interest rate), then work on clearing your car loan.

jkeysers
Please read these four points carefully... I was going to write them but they have been expressed so well by LynnH (kudos).

The credit cards don't worry me particularly. 8 grand can be covered off fairly quickly (6-8 months).

Try and get rid of this debt before venturing into an IP; it will assist you in being able to budget for when you have unexpected expenses with an IP.

 

[yo yo ma]

He even said it was possible for us to our roll our current debts (credit cards and car loan) in with it.

Also, you should never mix personal debt with debt used for investments... As Y-man said, it makes an accounting nightmare. Whoever gave you this advice might have been "a really nice bloke" but he shouldn't be giving financial advice!

 

[BV]

Jkeysers

IMO you sould concentrate on paying down CCard debt, the car loan and the PPOR loan in that order.

Don't rush and buy property now.
You are both very young and have plenty of time to invest in more properties.

People forget that our best investment is our PPOR because it's CGT free.
Concentrate on paying that loan off and don't worry, prices won't be going anywhere for a while.

Cheers

 

[jkeysers]

Thanks for the advice guys. You told me pretty much what I knew, but didn't want to believe. I guess that's the 8 year old in me coming out, wanting to do everything right now.


You've certainly opened my eyes to some things I hadn't considered. Such as the tax issues of putting other debts in with a IP.

And you've also reassured my first thought about going with a mob that seeked us out. I may be a noob, but i'm not stupid.

Jkeysers
Don't rush and buy property now.
You are both very young and have plenty of time to invest in more properties.

Cheers for that one. I guess I might have been mislead by some people I have spoken to. I had a word with 2 guys, both millionaires a few times over through property, and they were both of the opinion that the sooner you get into the market the better. To be fair, they probly weren't aware of our "bad" debts (credit cards, car loan etc).

Another question (although I suspect i know the answer)...

Currently we are paying $800 per fortnight to our mortgage and $300pf to the car loan and putting any remaining funds to the credit cards (probly an average of $300pf, but it varies).

Is it worth considering increasing our mortgage to $230K and putting it all together, and simply paying the entire $1400pf on that, say for 2-3 years? I know this method takes extreme discipline, but is it worth considering for the reduced interest?

 

[LynnH]

jkeysers

Short answer - NO, for the reason I mentioned in my first post.

IMHO, the best way to go about reducing your debts is:

!. Pay minimum amounts on PPOR loan and car loan, and put minimum monthly CC payment and all spare cash towards paying down CC debt.
2. When CC debt is paid off, keep paying minimum on PPOR loan and put car payment, CC payment and all spare cash towards paying car loan.
3, When car loan is cleared, put all previous car and CC payments and all spare cash towards paying down your PPOR, if that is what you want to do. Suggested alternative is to arrange a 100% offset account against your PPOR loan and put this money into the offset account. This will reduce the amount of interest you pay on your PPOR loan and leave the cash available for a deposit on a new PPOR or on an IP etc.

As the guys have pointed out - keep your personal loans and any investment loans completely separate - or you'll end up with an expensive accounting nightmare in order to sort out what is deductible and what is not.

Cheers
LynnH

 

[twobobsworth]

Suggest reading this post about debt. One of the best

http://www.somersoft.com/forums/showthread.php?t=24892

 

[jingo]

Which road would you take? Knuckle down and pay off debts? Or throw everything in the ring and get in the IP market ASAP?

Hi jkeysers,

I enjoyed reading your first post. A lot of thought has gone into your current financial situation and you are in a great position to move forward.

I believe the research that you have undertaken by consulting with the builder who contacted you has been invaluable. The consultant has detailed a number of possibilities that are available to you.

You mentioned that the property consultant was attached to a company that has made many millions in property. The consultant also mentioned that gaining significant exposure to the market is beneficial. I agree, but would caution that now is probably a good time to sit back and watch what is happening with the economy.

We have just had a boom period and up until recently asset prices have risen sharply. It is most likely that there will be a significant period of stagnant property prices and probably falling prices in many areas.

As others have mentioned, now could be the best time to:

1) Pay off your credit card

2) Pay off your car loan

3) Pay off your house loan


Doing these three things will put you into a very strong financial position, and from there you could launch into other forms of investment. Whether it be shares or property.


Regards Jason.

 

[BV]

Is it worth considering increasing our mortgage to $230K and putting it all together, and simply paying the entire $1400pf on that, say for 2-3 years? I know this method takes extreme discipline, but is it worth considering for the reduced interest?

It's worth investigating your options with your current lender.
If they will let you increase your existing loan without a big cost then it's not a bad option.

I'd concentrate on paying down the CC debt first.
Banks often offer 0% interest for 6 months on credit card transfers.
check out this option. Open up a new CC, move the debt over and pay it off withing the free period. You can then concentrate on paying off the car loan.
Or see if you can consolidate the car loan into your existing mortgage.

Cheers

 

[josko]

Hi Jkeysers,

Welcome!

I can't really add much, as you have some pretty good advice on this thread already.

What LynnH says in her first thread is pretty spot on. I can't emphasize enough that you need to do your own due dilligence and not rely on big companies that can afford loads of money to advertise how great they and their projects are.

I started by doing exactly that: Buying into some big developers yarn and falling for the great hype of advertising. I can honestly speak from my own experience that I would love to have had the advice you are now receiving.

As you have mentioned, Your CC debt and Personal Loan can be rolled over into your mortgage and your repayments will probably be alot less. If you have done the numbers and can afford a property now with your current level of debt, then this may be another option for you. Important: Do your own numbers and get used to it! Don't rely on someone who has their own motives to tell you it is affordable.

As BV mentioned, don't rush in, there is plenty of time and PLENTY of bargains out there.

Regards JO

 

[Bill.L]

Hi all,

Great advice BV, that is what I would do if in their situation.

In fact there has been great advice so far. The only thing I could add is that you could take up a course part-time (at home at night) to gain qualifications for your future. This could be the best investment for you now as you gain qualifications while paying off debt.

Then in 5-7 years time, when your debts are lower and your income higher (hopefully with the education), then you will be in a much superior position to invest, with less downside risk.

There is no rush, especially as we are at the back of a large property boom. Grab yourself a copy of Jan Somers books and have a read.

bye

 

[AdamP]

Removing the bad debt

One thing I have learnt about debt reduction is to leave all your debts as is. Cut up any credit cards or debts that can be withdrawn on.

Pay the minimum monthly repayment on each debt. On your smallest debt pay a set amount more. You should be able to calculate this now as I need $600 per week to pay off debts (including the mortgage). And you must now live off just the rest of your income.

Then once the smallest debt is paid off, move all of the money per week you were putting into it, to the next smallest debt. Keep going until all your debts are paid.

Some say once all your debts except your mortgage are gone, its time to invest.

Your friends are right in terms of the earlier you get in the better as property prices in the long term are always going up. But the disclaimer on that is do it only if you can manage the cash flow in the worst or close to worst case scenario.

For example you lose your job and don't find one for a few months, your IP is untenanted for 6 months and interest rates go up. As I have learnt, if you hold on to a property you will always make money, you just need to manage your cash flow to hang on to your properties.

 

[jkeysers]

Thanks guys!

That was all great advice. I think for the time being, we've decided to heed your advice. With another rate cut on the horizon, and the market seeming to be slowing down, I think we will spend the next 3 or 4 months getting rid of the Credit Cards, and then the following 4-6 months getting stuck into the car loan. After that time we wil re-assess. Hopefully with things quieting down we can reduce our bad debt without really missing out on too many potential gains. Ie. Hopefully (for my sake at least), things don't move up too much in the next year or so.

I'm sure plenty of you hope the opposite though!

In the meantime, I guess I will just try to educate myself as much as possible on all thing IP, so that when the time comes, i'll be ready!

 

[fatboy4]

Thought I'd share some of our experiences when we were young(er). Similar scenario to yours.

Our early investing years were tougher than they could have been as we started at the end of the 89 boom.

We were hampered by personal debt and no or low capital growth in our investment properties.

We funded 4 negatively geared IP's for quite a few years through the 90's but it was servicing our personal debts that held us back/hurt the most (had to have that huge 51cm telly etc ((no baby bonus plasmas back then)). -Yields were much better than what you would get now too

I remember going to banks and trying to get the 30k personal debts refinanced using the equity in the houses (as there was insufficient equity- no dice)

There's story/anecdote about having two hours to chop down a big tree. Most people want to begin chopping right away- the smart person sharpens their axe first.

As an aside: Don't focus too much on your lack of formal qualifications. As a former teacher, I certainly believe in the benefits of education but there are many ways of building on your skills without necessarily attaining a dip/bach something. And there is plenty of time to get them later.

 

[jkeysers]

There's story/anecdote about having two hours to chop down a big tree. Most people want to begin chopping right away- the smart person sharpens their axe first.

I like this story. Makes good sense. Definitely advice I will follow.

As an aside: Don't focus too much on your lack of formal qualifications. As a former teacher, I certainly believe in the benefits of education but there are many ways of building on your skills without necessarily attaining a dip/bach something. And there is plenty of time to get them later.

Thanks mate. I guess I worry about falling behind a bit. I started doing IT when I got out of high school, but it wasnt for me, so I quit. I worked full time at Coles for a bit to save money to go to Europe. After I got back, I found a new job, my current one, which pays well, so then we started saving for our first house. Then it was the wedding. Now we have a baby! So here I am at 26 with not many future prospects. It's a little scary. But there is still time I guess.

Thanks for the advice!

 

[Bill.L]

Hi all,

fatboy,

There's story/anecdote about having two hours to chop down a big tree. Most people want to begin chopping right away- the smart person sharpens their axe first.

Interesting reading that this morning, there was a tree down across our driveway today, due to the storms last night. It was discovered as my missus was heading off to work.

Job to do, limited time. Did I sharpen the axe first??

















No!!
























Just grabbed the chainsaw and cleared a path in 10 minutes.


Knowing what tools to use is as important as sharpening them.

bye

 

[Bill.L]

Jkeysers,

So here I am at 26 with not many future prospects.

You have got to be kidding!!!

At 26 the world is your oyster. You have time, you have family, you are living in the lucky country, you have food ,you have shelter, you have freedom.

What more is there to have???

bye

 

[Propagate]

I like this story. Makes good sense. Definitely advice I will follow.



Thanks mate. I guess I worry about falling behind a bit. I started doing IT when I got out of high school, but it wasnt for me, so I quit. I worked full time at Coles for a bit to save money to go to Europe. After I got back, I found a new job, my current one, which pays well, so then we started saving for our first house. Then it was the wedding. Now we have a baby! So here I am at 26 with not many future prospects. It's a little scary. But there is still time I guess.

Thanks for the advice!

Hi,

Can't help with the IP advice, (I'll be looking for that myself over the next couple of years).

But, I am lead draftsman for one of the biggest shop detailers in Melbourne. We are always on the look out for good, hard working drafters and you seem to have a great attitude from your posts.

I can't say we have any openings at the moment, but please feel free to PM me a little bit of info about what you do, who you currently work for, what software you use and the kind of projects you have drafted. A CV would be great if you have one.

Don't do yourself down as a draftsman, it is a great career and I know of companies in Melbourne that pay $100k plus for top drafters if they can drive the right software and have the right experience. It's also a job that can take you all over the world if you so wish, (it got me here from the UK).

So, as I say, if you're intersted in seeing what else is out here as far as job prospects go, then PM me some more detalis about yourself.

If you're not interested, no worries. Good luck in your future endeavors.

Tone.