I don't see any problem with putting $500k into your first IP, as long as you do all of the necessary due diligence.
First IP Where do I start looking?
- Thread starter gwd72
- Start date
Jake is right on the money (figure of speech, a bit tongue in cheek!).
Do your due diligence to ensure that capital growth rates will be that much more exponential if you purchase the more expensive property and you can manage it for a few years to manufacture growth.
But, buying this higher cost property only works if your ambition is to grow a portfolio. If you are planning to stop at just one property, perhaps reconsider things.
Two scenarios to highlight an example...
Scenario #1:
You buy a $300K property that is easy to hold financially, and in 5 years, it's worth $350K. Congrats, you've manufactured $50K of equity to put down on IP #2. Unless you've saved your money separately for purchase costs; to purchase a second $300K IP and AVOID paying LMI, you'd need a 20% deposit ($60K) plus purchase costs/stamp duty so let's round that out at say $13K. So you'd be all in at $73K, meaning on top of the equity you'd need to kick in $23K of your own money. (But, this may be 'ok' because you would have the $23K saved, due to your 5 years of holding costs being much lower, based on this option).
Scenario #2:
You buy a $500K property that is tougher to hold. You can hold it but not really save much. In 5 years though, it's worth say $590K. You want to buy a second IP, this time around $400K. With $90K equity and to avoid LMI, you could afford $80K of deposit, plus purchase costs including stamp duty of around $16K, meaning you'd only need to kick in $6K of your own money.
In that sense, you'd be better off in scenario #2 because in both situations you'd wind up with 2 IPs; but in the second one, you'd have two higher-worth IP's.
But it all comes down to your risk profile and reliance of income over the next few years of your life.
Do your due diligence to ensure that capital growth rates will be that much more exponential if you purchase the more expensive property and you can manage it for a few years to manufacture growth.
But, buying this higher cost property only works if your ambition is to grow a portfolio. If you are planning to stop at just one property, perhaps reconsider things.
Two scenarios to highlight an example...
Scenario #1:
You buy a $300K property that is easy to hold financially, and in 5 years, it's worth $350K. Congrats, you've manufactured $50K of equity to put down on IP #2. Unless you've saved your money separately for purchase costs; to purchase a second $300K IP and AVOID paying LMI, you'd need a 20% deposit ($60K) plus purchase costs/stamp duty so let's round that out at say $13K. So you'd be all in at $73K, meaning on top of the equity you'd need to kick in $23K of your own money. (But, this may be 'ok' because you would have the $23K saved, due to your 5 years of holding costs being much lower, based on this option).
Scenario #2:
You buy a $500K property that is tougher to hold. You can hold it but not really save much. In 5 years though, it's worth say $590K. You want to buy a second IP, this time around $400K. With $90K equity and to avoid LMI, you could afford $80K of deposit, plus purchase costs including stamp duty of around $16K, meaning you'd only need to kick in $6K of your own money.
In that sense, you'd be better off in scenario #2 because in both situations you'd wind up with 2 IPs; but in the second one, you'd have two higher-worth IP's.
But it all comes down to your risk profile and reliance of income over the next few years of your life.
Yes DD is a must of course. I was just a bit scared by the two different posts both so strongly cautioning against spending this amount as a beginner investor... Really, I am still getting my head around the fact that we are even looking at an IP at the moment because our plans just two months ago were that we would consider it next year but it turns out we can move quicker than expected and now I am just trying to get as much education as possible from books, forums, etc (plus on Thursday we are seeing an accountant to discuss structuring, tax, etc). One place we are now seriously looking at goes to auction on 23rd March so it feels like a bit of a roller coaster at the moment.
My 'scaredness' is turning into 'excitement' but even that scares me because I don't want to get too attached to a particular outcome and overbid on a property. So I guess that comes back to the DD aspect too...
Definitely long term we would like to buy an additional IP every few years (at this stage I am thinking every 2-4 years?). Our risk profile would be leaning heavily on the low side. We are mostly reliant on my partner's income, which far outstrips mine. But we will not be having children so our living costs & incomes won't really be affected unless due to job loss.
Thank you for setting out those two scenarios; examples like this are really helpful and I haven't seen this particular kind of explanation/comparison before.
EG of what we are looking at
This is an example of a property we quite liked but as we'd only just started looking we weren't ready in time for the auction and also we expected it to sell for more than it did. It had been quoted as "700K+ with offers already in the early 7s" so we just expected it to go closer to 800K. The rental expectation was quoted at 650-700/week.
http://www.belleproperty.com/for-sa...ouse/34P0367-24-pearl-street-newtown-nsw-2042
This is an example of a property we quite liked but as we'd only just started looking we weren't ready in time for the auction and also we expected it to sell for more than it did. It had been quoted as "700K+ with offers already in the early 7s" so we just expected it to go closer to 800K. The rental expectation was quoted at 650-700/week.
http://www.belleproperty.com/for-sa...ouse/34P0367-24-pearl-street-newtown-nsw-2042
Liberator, that is exactly the type of property I am looking at (in fact we had our eyes on this one but it is a little out of our price range - max $700K).
Decent price given how well presented and located it is, even if the "parking" is in fact your backyard (seems to be that way with every property advertised with parking in the inner west).
In Newtown, even parking in the backyard is a big plus. I would live in Newtown if it wasn't for the parking. It's a great suburb. A lot of Newtown people who have kids gravitate to Marrickville where there is plenty of parking. I have seen a big increase in 40 year old blokes (trying to look 30) wearing jaunty hats around Marrickville and I know they are refugees from Newtown/Enmore/Erko. There is one particular cafe they like to gather at - refugees find comfort in sticking together.
Haha sorry. As was clarrified by others it is about knowing how to undertake your DD.
Of course the best way to learn is to jump in (with the right team around you). The aim of the game is to make a profit!
A solid strategy will help you go a long way.
Everyone has unique circumstances, so no one strategy works for all.
That is a healthy amount to be able to borrow. Have you considered buying a commercial property instead of residential? Would you have the 40% deposit or so on a 1 mil property?
The disadvantage of your strategy to buy a higher end residential property is that it is most likely to be very negatively geared. This will hinder you from buying further properties - not to mention, tie you to your jobs etc until it becomes neutrally geared. (Which could take years).
The advantage with commercial is that the tenant pays the outgoing costs and yields are stronger. This makes a difference in the long run.
All the best with it.
Regards Jason.
Hi map, yes thinking back we are kind of regretting that we had only just started looking and we feel like we 'missed the boat' with this one. But who knows - we didn't do any building/pest inspections so there may have been something under the surface that kept the price lower than we'd anticipated. There is another one going for auction this weekend that we like but the opens have been so popular it's been a 'one out one in' scenario. So we figure that if someone is looking at it as an owner occupier then they are going to be willing to spend more than we would. (plus we actually still don't have our finance sorted - although I do think we could do this within a week if we get cracking...)
Definitely, as depreciator said, in that area any sort of parking is a bonus. My feeling is, you wouldn't use the whole backyard every day anyway, and if there's a particular day that you're wanting to make full use of it then you can keep an eye out for street parking, move the car out when it's convenient, and have the backyard space available for that time. And if you're close to a park then you can treat that as your 'backyard' without needing to worry about any lawn maintenance!!!
Hehe no need to apologise! I am just on a steep learning curve so I'm sure there are going to be numerous times along the way when I get spooked!
With the aim to be making a profit - this is why we are targeting a popular inner west area, close to transport, schools etc. We personally could never imagine paying $700/week in rent but it seems there are enough people who can and do to make the plan viable... well, if the property sells at the right price that is!
Hi Jason,
interesting suggestion - we haven't really considered commercial property because we are fairly risk averse and I thought it was higher risk? Also - to answer your specific question, we would definitely need to borrow on our PPOR to reach a $400K deposit. Plus, psychologically, the idea of spending over a million dollars just scares us! (I know there's not that much difference really between $800K and $1mill but there's the sleep at night factor to consider and at this stage just knowing we owed a million dollars would freak us out! Maybe 5 years down the track this is something we can consider?)
I wonder what the threshold of 'very' negatively geared would be? The calculations we have done is that the before tax cost of holding a $750K property would be around $110/week before tax benefits are taken into account. We are fairly prudent with our budget, without being overly frugal and feeling deprived, & we feel we can put at least $400/week into an offset account. Plus my partner's bonus of around $10k per year is something we don't include in our regular budget so around 90% of it goes straight into savings/offset. So we feel we can build up the offset by around $25K per year, which hopefully will end up making it neutrally geared relatively quickly? Of course, barring anything major cropping up such as the whole roof needing to be replaced...
Do you have any feedback on whether this approach makes sense?
Something that did cause us to think a bit further is that we met with a great accountant last week and she took us through the scenario if we sold the place in 10 years - after CGT etc etc the net annual profit would have only been 4.22%. But we are not planning on selling, we want a buy & hold strategy, which would lead to a much healthier net return in terms of our equity position. She said 'well you never know what might happen in terms of changes of circumstances' but I figure if we used that as the basis for life then we'd never do anything???
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Just as a matter of interest, loads of investment advisors give the advice of purchasing as close to the median price as possible so that when selling\renting you appeal to the broader community and have a larger level of interest in the given property.
If this was adhered to, you could likely buy 2 properties in close succession with a spread of risk regarding vacancies etc and diversification and likely a higher rental return also.
This is not a reccomendation, as it seems that you have a handle on your area of choice and you are gaining more of an insight every day. It is also often said that you are better off becoming an expert in your chosen area and therefore know a bargain when you see one!
Just thought I'd plant a seed...
If this was adhered to, you could likely buy 2 properties in close succession with a spread of risk regarding vacancies etc and diversification and likely a higher rental return also.
This is not a reccomendation, as it seems that you have a handle on your area of choice and you are gaining more of an insight every day. It is also often said that you are better off becoming an expert in your chosen area and therefore know a bargain when you see one!
Just thought I'd plant a seed...
Hi Liberator,
You need to have a healthy buffer in place before going down the com path. Enough to sustain a prolonged vacancy. (1 yr plus).
I'm not sure what the amount of rent is you will be receiving for the property? Also check to see what similar properties are currently renting for. (You could speak with property managers at a variety of agencies and they should be able to give you a fairly accurate guide).
Have you allowed for outgoings in your calculations (rates, water, insurance, property management fees, repairs etc). $110 per week before tax benefits sounds low?? Not sure what interest rate you may have calculated the payments on and also whether you have calculated the deposit, stamp duty as well in your calculations??
Something that did cause us to think a bit further is that we met with a great accountant last week and she took us through the scenario if we sold the place in 10 years - after CGT etc etc the net annual profit would have only been 4.22%. But we are not planning on selling, we want a buy & hold strategy, which would lead to a much healthier net return in terms of our equity position. She said 'well you never know what might happen in terms of changes of circumstances' but I figure if we used that as the basis for life then we'd never do anything???
I like your accountant's thinking. She is right in at least raising the possibility of a change in circumstances (ie loss of job, children, illness, etc).
If you keep the IP long term, chances are you will be able to draw out equity to invest in further resi IP's, com prop or shares. Selling leads to a large CGT tax bill!
Regards Jason.
http://www.realestate.com.au/property-apartment-qld-kawana+waters-112470715
Just bought a 2 bedroom townhouse off the plan. This property is my second IP. i think the Sunshine Coast is at the bottom of the cycle and with the new hospital precinct i think it will be a good investment in a couple of years.
anyone got any information on Albany in Western Australia? any help would be good.
Just bought a 2 bedroom townhouse off the plan. This property is my second IP. i think the Sunshine Coast is at the bottom of the cycle and with the new hospital precinct i think it will be a good investment in a couple of years.
anyone got any information on Albany in Western Australia? any help would be good.
Hi Jason, we are not really at that stage for a purchase price of over $1million. If it were $800K then we would have a decent buffer but I think we would be pretty despondent if the first IP we bought stood vacant for a year just eating up that buffer!
Here is where that figure derives from:
One of the tools we have used to look at holding costs is from this link (from a website I found here on Somersoft!) http://passgo.com.au/investment-property-analysis-tool.html
In that spreadsheet I put three new figures into the assumption box:
Property value $750K, Deposit $165K, interest 5.5% (although the rate we were quoted was 5.38% I didn't put that in so as to be more conservative?)
(nb I chose the deposit figure so that it makes a loan amount of $600K after the purchasing & borrowing costs are included... I realise that the purchasing costs (which I left unchanged) of $12K are less than the actual stamp duty etc will be but we have all that covered up front so the loan on a $750K purchase would indeed be $600K),
The spreadsheet then calculated property expenses as $9,100 and a before tax weekly cost of holding property as -$109.62.
We have not paid that much attention to the after tax cost because we are still not sure what ownership split to go with in terms of tax benefits. (short term benefit being in my partner's name for negative gearing... long term benefit being in my name for once it is positively geared... maybe we'll just split the difference and go 50/50???).
Yes it's good that she highlighted there being a risk like this but I don't really see how we can truly mitigate for all of that? We feel we have a reasonable coverage against: loss of job... well, my income is not much compared to my partner so it wouldn't make too much difference for it to disappear. My partner has a heap of annual leave & long service leave built up, plus if he's made redundant would get a decent payout from that. Children... definitely furkids only!
Illness... for me, same as re loss of job; for my partner, he has 1,000 hours of sick leave built up. However, we are also considering trauma and income protection insurance for added security in this regard. What else could go wrong...
House prices plummet... only an issue if we have to sell and realise the loss. We have enough buffer for at least a 20% drop.
I guess the big nasty horrible thing that would throw a spanner in the works would be for us to split up
but we have been very happy together for 14 years so hopefully we are looking another happy 14 years at least? Nothing certain but death and taxes but I am definitely hopeful... Yes, fingers crossed that's what actually happens!
It's a great point you make!
Many people do not realize that concept especially when they look towards CF rather than CG.
In both your examples if these properties grow by the same rate, let's say 8%, so after one year IP1 grew to $324K, three years to $378K and five years to $441K. Similarly IP2 in one year grew to $540K, three years to $630K and in 5 years to $736K. The IP2 may permit you to duplicate faster (say enough $equity would be there to duplicate after 2 years) than IP1 would... just because of total $portfolio amount. That's why over time holding worth of good CG $property (not the number of IPs) may allow one to live off the equity....
