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
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