First pass at an investment strategy - comments welcome!

Hi everyone,

After lurking around the forums for the last few weeks, I thought I'd take the plunge and make my first post. I'm not sure if this is the best location, but (as you'll see) my query didn't seem to fit neatly into any of the more specific categories.

I'm 25, recently married and in my second year of full time work, so I've been thinking seriously over the last few months about the role of investment in my financial future (although looking at the age of a few of the members on this forum, it seems that I may be a bit late to the party!) Of course, property ownership has been a key part of my considerations.

I've been learning a huge amount from the masses of information available on this site: there is certainly a great deal of knowledge and experience out there that people are very kind in sharing! After a lot of reading though, I thought now might be a good time to put forward my initial thinking and a proposed strategy, to see what advice the wise people of Somersoft might be willing to provide.

So, my current situation: as already noted, I am still at the very beginning of my investment journey. At present, we have no property or other appreciating assets to speak of, apart from super and about $10,000 in inheritance sitting in a frozen mutual fund. We're renting a 2 bdrm apartment ($430 p/w), with my current salary at approximately $65,000 p.a. pre-tax, and my wife's about $58,000 p.a. pre-tax (although there is a bit of short term volatility at the moment as we are about to move interstate). We have about $15000 in an online savings account ($13,000 in emergency and other funds, $2,000 as a meager start on a house deposit), with no outstanding debt. We're saving about $2500 pcm after everyday expenses. We started a serious budget about three months ago, using a personal budgeting program called YNAB (ww.ynab.com), which is helping us to achieve this.

In the medium term: If nothing goes disastrously wrong, I would expect a $2,000-$3,000 average p.a. pay increase over five years ($75,000 to $80,000 p.a. by 2018). My wife is a little harder to predict, but conservatively looking at approx $1,000 increase p.a. ($68,000 p.a. by 2018). There is strong potential of us having kids in the next 4-6 years, meaning my wife would be out of work full time for 2-4 years, with potential for a shared-care arrangement at some point (e.g. me working 4 days a week, she picking up 2 days of work a week, 1 day of day-care).

So, with all of that in mind, on to my proposed strategy. My initial investment research at the beginning of this year was dominated by equities, due to the comparatively high liquidity and low cost of buy-in. Given the strong potential that my wife and I will start a family in the near future though, I have turned my thinking to the purchase of our first PPOR. I am also considering how I can use the purchase of our first home as a pathway into property investment. As I will outline below, I am looking to make use of all of the various incentives available to us as first home buyers, whilst keeping a firm view toward converting our first PPOR into an IP.

As a first move in this strategy, I have opened two First Home Saver Accounts (one for each of us) with ME Bank, currently earning 3% p.a plus gov't co-contributions. I will deposit $1,000 into each account before 30 June this year, then (hopefully) save $12,000 p.a. in order to deposit $6,000 p.a. into each account: this being the maximum amount on which the Cwth Gov't will contribute 17c/$1.00. Any further savings that I can stash away will likely be kept in our existing online savings (earning 4.5%p.a.), in order to maintain flexibility. Ideally, we'd be looking to save a 20% deposit to avoid LMI.

In terms of location, obviously not 100% sure yet, but probably aiming for a hotspot suburb in Geelong, close to a V/Line station and/or other transport (the 2017-18 equivalent of West Geelong, Hamlyn Heights etc). It's highly likely that, at the time of purchase, we will both be working either in Geelong, or in the Melbourne CBD. So our property has to be an appropriate balance between affordability / distance to work on the one hand, and yield / potential cap gains on the other. We would probably be aiming for 2-3 bedrooms (given we will have to live there to begin with), either unit or house, depending on financial outlook of particular property. So looking at a very broad range of $250,000 to $350,000 (possibly $400,000 at a stretch) at today's prices.

The only other incentive-related consideration would be whether the Vic government is still offering a FHOG, and whether established premises are still excluded. Given the relatively small amount of money on offer though, this may not be a major consideration.

Regarding initial purchase arrangements, due to FHSA requirements, the title would have to be in both our names. From my preliminary research on Victorian legislation though, it appears relatively straightforward (and not too expensive) to remove one of us from the title down the track, if required for taxation purposes.

At this point, the important thing to remember is that I will need to structure the finance on the property, as well as our occupation of it, in a way that allows for future conversion from PPOR to IP; with us either purchasing a second PPOR or, if it makes financial sense, back into a rental.

Given this, it appears that the best initial option for a mortgage would be a variable-rate, interest-only loan, including an 100% offset account. This would allow us to reduce our initial repayments to the bank and deposit the savings in repayments into the offset account, while maintaining the principal on the property to maximise negative gearing benefits once the property is converted to IP.

The next question then is how long we live in the property as our PPOR, before converting it to an IP. Due to our use of FHSAs, we will have to live in the property for at least six months within the first twelve months of ownership. After that though, how long we stay will be determined by any lifestyle/convenience considerations (not a good time to move etc), and the best time to move financially. Obviously this will all have to be re-assessed at the time (given it's a number of years away), but the most logical move would seem to be to keep the house as our PPOR until we have enough saved up in our offset account to put a 20% deposit down on a new PPOR.

At this point, we could then take out another interest-only loan on the new PPOR, also with an offset account, and move all of our cash from the IP offset account to the new PPOR offset account. This would maximise any negative gearing benefits on the IP, whilst minimising non-deductible interest repayments on our new PPOR.

Looking into the longer term, I think our ongoing use for the IP would be to either hold the property and work it into a positively geared asset, or sell within the six-year rule (depending on estimated Cap Gains).

So, in summary, I'm looking for the best way to make money by buying a first home and then converting it to an IP. I would love to hear what people think of this proposed strategy. I'm obviously very new to this area, so happy for you to be as honest (and brutal) as you think is necessary!

Some specific questions from me:

Short Term: Is my proposed use of the FHSAs (and potentially FHOG) to finance a future IP a good idea? Or will this result in headaches later down the track when I want to convert to an IP? Specifically, will it be easy to remove one of us off the title if required, or a huge hassle?

Medium term: Is living in the first property until we have saved another 20% deposit (for a 2nd PPOR) the best strategy? If not, what would you recommend?

Long Term: Is it a good idea to convert the first property into an IP, or should we sell it as soon as we're ready to move out? If IP is the answer, how would you structure if financially? Is maintaining the principal on the loan and going for negative gearing a good idea, given our forecast income; or have a missed something that would make this a bad financial move? Going forward, would you sell the property within six years to avoid CG tax, or hold and turn it into a positive income earner?

Other: What are people's thoughts on the Geelong area at this stage? Ford is closing (2016), but the NDIS is opening (2014, with a full workforce by 2018), and the city seems to have relatively good general growth prospects. Will it be a good investment location to buy into in 5 or 6 years?

Finally, any other little glitches / potential pitfalls I should keep in mind?

So...over to you! Thanks in advance for your help!!

Cheers,


Ben
 
are u an engineer?

No, although based on the quote in your signature, I can see why you might think that! :p

I'll admit that I'm probably overengineering this idea and thinking way too far ahead; however I figure it is better to have an ambitious plan that can be changed over time, rather than investing with no clear goals or direction.
 
wow that's some post there ;) I would drop most of it and...

keeping your end goal in mind, brush up on your property knowledge and start researching properties as much as possible in your chosen location.

talk to a broker on here and get some good advice

buy as best value as you can

move in and reno

revalue

choose wether property investing is right for you

once you get past the anxiety of your first purchase and sink your teeth into the guts of it, you will know what it is that you need to do

my 2cents good luck :)
 
Looking into the longer term, I think our ongoing use for the IP would be to either hold the property and work it into a positively geared asset, or sell within the six-year rule (depending on estimated Cap Gains).

Long Term: Is it a good idea to convert the first property into an IP, or should we sell it as soon as we're ready to move out? If IP is the answer, how would you structure if financially? Is maintaining the principal on the loan and going for negative gearing a good idea, given our forecast income; or have a missed something that would make this a bad financial move? Going forward, would you sell the property within six years to avoid CG tax, or hold and turn it into a positive income earner?

This is the key weakness to your plan (and you're burying yourself in too much detail in the short term). Think bigger. Long term, you should be thinking about end goals first (what sort of lifestyle you want, how much income that will require, then what sort of portfolio will achieve this). As you think about it from the end point, you'll realise that it's about MULTIPLE assets (properties, shares, business, whateveR). You're still thinking about 1 IP (hence your thought about the 6 year rule, etc) and that's because you're thinking from the starting point instead of the end goal.
 
Wow! What a post:eek:! I assume you work for the APS with a post like that.;)

If you want to get into real estate you will need to be more concise. Agents, builders, brokers etc. etc. will not even bother reading that much text.

This is what I would do:
• Move into shared accommodation rent a room for 100 – 150 pw. Share all bills etc. with house mates – This will be great for serviceability
• Look for a Reno, and granny flat situation.
• Renovate house – get equity
• Use equity to build granny flat
• Whamo duel income + cash flow and possible equity
• Next deal

Your wife will want to nest. You could then live in granny flat with very low costs.
Does anyone on here have feedback on valuations of granny flats? Are they coming in at cost or above?
 
Don't overthink it too much. You will suffer from analysis paralysis and do nothing. Good to plan but there is a limit to what you can plan without actually doing something.

As for the question about valuation on granny flats - not really stacking up!
 
Your plan so far boils down to:
* You want to buy an IP to start investing
* You don't have much of a deposit

As you've recognised, you need to get a deposit together. The first home saver account is useful, but make sure that you can access your money at will for your first home purchase. I've seen a lot of people dump a lot of money into these accounts quickly, have money for a deposit, only to be told they can't access it for several more years.

The first home owners grant in VIC is ending on the 1/7/13 for established properties, but you'll still be able to get $10k for a newly build property (you have to be the first occupant to qualify for the grant). There will be stamp duty concessions for both types of properties available to first home buyers.

A new property also attracts substantial stamp duty savings (costs less than half of what you'd pay on an established home) so you don't need as much deposit to get started. I see a lot of first home buyers going down this route. Keep in mind that I generally don't think these types of properties make very good investments.

Also keep in mind that if you use the first home owners grant in any capacity, you have to actually live in the property for at least 6 months.


It's also been identified that what you've stated isn't really a strategy. You've expressed a desire to buy an investment property but nothing really beyond that. It's nice to buy an investment property, but it's the stuff between that and the end goal that actually makes the difference. You need to work on this part.

My immediate advice would be to do two things.
1. Save as much as you can. You need funds for your first purchase.
2. Discuss your situation with a broker so you've got a better understanding of what the immediate and longer term hurdles are for your circumstances.

Whilst you're saving, keep researching to determine what sort of strategy is going to work for you and how it will get you closer to your end goals.
 
What do you do for a quid? Don't forget about upskilling along the way to increase your income. I read something on ss once that was along the lines of....it's easier to put your plans into place on 100k than 65k
 
Save for a deposit, buy a place that you can afford to hold if you don't have a tenant. Rent it out and see how you go.

You've started well on your savings, given a lot of thought to your finances and learnt a lot. Try to provide the information to others that they need to know to advise you on your journey, help you act and achieve your next goal, and nothing more. You'll find you get a better response and make more progress.
 
I like that you are saving hard, and thinking ahead - esp regarding converting a PPOR into an IP. The offset account is perfect for this.

Just be careful, though, about the 6 year rule. Doesn't it only apply if you don't get another PPOR in the meantime?

Best of luck - you're on your way.
 
I won't comment on strategy as I am in the planning/ research stage.

But how come all the money is spread everywhere(the money you have access to)

Wouldn't you just need 1 acc to save for a deposit? Then gain from the "high interest" account

John
 
This is the key weakness to your plan (and you're burying yourself in too much detail in the short term). Think bigger. Long term, you should be thinking about end goals first (what sort of lifestyle you want, how much income that will require, then what sort of portfolio will achieve this). As you think about it from the end point, you'll realise that it's about MULTIPLE assets (properties, shares, business, whateveR). You're still thinking about 1 IP (hence your thought about the 6 year rule, etc) and that's because you're thinking from the starting point instead of the end goal.

+1 agree totally with this.

Easier said than done when at 25 you only know what you don't know once you learn that you didn't know it.....

Start with the end goal and work back from there to today.

This will map out the next step you need to take.

I reckon most people underestimate what they can achieve in a 5 year period with the right attitude and appropriate action.
 
I love the amount of work and thought that you have put into your post. I think that it is best to first buy the PPOR, pay it off quickly and then draw on equity to invest. I think it is best to keep it simple. But good on you for thinking about these things at your tender age.
 
Hi all,

Thanks so much for your responses so far.

wow that's some post there ;)

Apologies for my poor forum etiquette! I really should have made more of an effort to scale down my response before posting. My inexperience and excitement clearly got the better of me.

underdev said:
I assume you work for the APS with a post like that.

I'm ashamed it's that obvious! :rolleyes: I promise I'm not this obtuse in a professional context.

alexlee said:
This is the key weakness to your plan (and you're burying yourself in too much detail in the short term). Think bigger. Long term, you should be thinking about end goals first (what sort of lifestyle you want, how much income that will require, then what sort of portfolio will achieve this). As you think about it from the end point, you'll realise that it's about MULTIPLE assets (properties, shares, business, whateveR). You're still thinking about 1 IP (hence your thought about the 6 year rule, etc) and that's because you're thinking from the starting point instead of the end goal.

Apologies again for my "brain-dump" of an initial post. I obviously failed to clearly articulate my intended goal for this process, and also created a bit of confusion about timeframes and where I am up to in the process.

As stated, our “serious thinking” about investment and property ownership has only recently begun. At this stage though, the best way I can describe our overarching goal is: to build enough equity in property (or other assets) to allow us to purchase our ideal family home, by age 35-40, and pay it off as quickly as possible. This “ideal home” would need to be close enough to a capital city to commute (I’m a policy/politics wonk), but would also ideally be in a quiet setting near the beach (think Geelong or Hobart). Structurally, it would be something along the lines of: two stories, four bedrooms, with a large backyard.

Beyond this “primary” target, we would also be interested in exploring long-term opportunities to continue investing in property and generate income. At this stage however, this is an ancillary goal and would need further consideration.

So, as a result of this goal, I have drafted this (long-winded and over-wrought) strategy of:
1. Saving a deposit
2. Using this deposit to buy a relatively affordable 2-3 bedroom property (likely location: Melbourne & surrounds) as a “first home” and living in it for a short while (at least six months)
3. Investigating ways to use this property as equity/leverage to buy our “ideal home”, which could include:
a. Living in the house until we have saved a full 20% deposit in an offset account
b. (after at least six months) moving out of the house into a rental, converting it to an investment property, and using the financial structure/income to accelerate our second deposit
4. Deciding what to do with the house once a second PPOR is purchased (either sell for the CGs, or keep as an IP, with a view to expanding our portfolio).

PT_Bear said:
My immediate advice would be to (...) save as much as you can. You need funds for your first purchase.

Based on this overarching goal and strategy, building our deposit is definitely our sole focus at the moment. As our existing savings are very small, this is likely to take us at least another 3-4 years. We’ll be looking to achieve this by increasing our rate of savings (good budgeting) and looking for opportunities to increase our income (thanks grantwhit). Importantly, we’re also looking for the best non-volatile way to invest our deposit while we save.

Given this timeframe, we clearly don't need to be making any decisions about location, property type, financing etc. until at least 2016-17. I do however want to make sure that the decisions we make today (particularly about investment) do not come back to bite us in the future.

As such, my main concern at the moment is whether using First Home Saver Accounts makes sense for us. In terms of returns, they are very hard to beat: we’ll get 17% from the government on our $12,000 annual deposit; 3% on the total account balance from the bank; and a 15% tax rate. The other state-government subsidies offered on first homes also add incentive.

As noted by PT_Bear though, these accounts and benefits come with a number of constraints, including having to use the whole amount of our savings as a deposit (or surrender it to your super) and having to live in the home for a minimum of six months after purchase.

As far as I can see, none of this is inconsistent with our goals, but do you guys agree? Additionally, is there anything about this savings strategy (FHSAs & state government subsidies) that would constrain my ability to convert the property to an IP after a year or two if I wanted to?


PT_Bear said:
Discuss your situation with a broker so you've got a better understanding of what the immediate and longer term hurdles are for your circumstances.

I have been thinking a lot about whether now is the right time to start seeking professional advice. I have a lot of questions to ask, but as noted above, I have only just started saving a deposit! In your collective opinion, is it too early to start forking out money on advice? I am still very unsure who the best person to speak to would be at this early stage: Is it broker, or should I be looking more toward a financial planner or accountant?

Thanks again everyone for your advice and patience.

Cheers,


Ben
 
I won't comment on strategy as I am in the planning/ research stage.

But how come all the money is spread everywhere(the money you have access to)

Wouldn't you just need 1 acc to save for a deposit? Then gain from the "high interest" account

John

Hi John,

Spreading our money across different accounts certainly doesn't appear to be ideal at face value. I've proposed the structure this way however to maximise the benefits of the First Home Saver Accounts.

Basically, the government will only contribute 0.17/1.00 up to $6,000 per annum. So, if my wife and I save $12,000 p.a., we'll need two accounts to maximise the benefit of the government contribution.

I am planning to put any further savings in a "regular" account however due to the tight restrictions on FHSAs. Once the money is deposited in a FHSA, you can only use it as a downpayment on your first house; otherwise it gets rolled into your super and disappears for four decades :eek:. I think it's a good idea to ensure that at least some of my money remains flexible, in case it is needed for other things.

You can find further information on the ATO website
 
So you are depositing $6k in each of those accounts each year

I didn't choose this way because I knew my first home wouldn't be the one I live in lol, plus all the rules behind the FHOG

John
 
Bigtone I really wish you would fix your signature. :confused:

The saying is "It's not rocket SCIENCE" There is no surgery involved in rockets.

Hey Travel,

I think Bigtone is just cleverly combining the 2 sayings "it's not Rocket science" and "it's not brain surgery" to further drive home the meaning;)

I actually get a kick out o it every time I read it
 
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