First time buyer HELP needed! 250k, what to do?

I desperately need your help. I am looking to purchase my first property but am unsure what exactly to do.

I currently have a sum of $250k cash to get into the property market. With the market cooling off recently, I am hoping to purchase a property by the end of the year.
At the moment, I am very confused as to exactly how to best invest this amount of money and would like to seek your advice. As a bit of a background, I am 24 years old and just this year started in my first full time position after uni. I am currently on 45k pa which is not a large amount by any means, but my salary gets reviewed per year and I am aiming to get it to 60k next year, with marginal increases after that. My job also gives out bonuses (10k+) per year based on profit. I live at home at the moment and don’t have high expenses. Since starting my job, I have managed to put aside $2000 per pay cycle and based on this, I think I can manage $500 per week in mortgage repayments.

My long term goal is to have one primary place of residence in inner Melbourne suburbs and then two smaller units/houses in either regional VIC or outer burbs which will be CF+ in say, 10 years and which I hope will eventually bring in rent as income when I am 40/50. In the long run, I will ideally like to have my PPOR in inner east Hawthorn/Camberwell/Mont Albert surroundings or inner CBD like Fitzroy/Richmond etc.

Option 1: Initially the plan was to put the entire $250k into a PPOR townhouse/uni/small house in either of the above locations of around $650-$750k, of either a 2 bedroom that can potentially be turned into a 3 bedder. That would mean my mortgage would be $450-$500k, however for the first three years I plan to continue to live at home, rent out the property entirely ($450 - $550) and pay the remainder, which would be $200ish a week. Based on this plan I can also afford an additional $300 per week repayment on top of the $200 I would have to pay, and whatever bonuses I get per year I will put as a lump sum amount into the loan. The idea is that by living at home for the next three years and paying additional, I will hopefully have reduced my loan term and repayments considerably. I also hope that my salary will have increased in three years time to afford the repayments. As the property is located inner city, in the event of difficulty I think it will be easy to rent out a bedroom to bring in some extra income. This scenario is based on the assumption that I will be purchasing my “lifetime” PPOR now, and most likely will not look to upgrade for a few decades. Hopefully during the next five years, I can save up another two deposits for smaller IPs. The issue with this is that the inner city properties generally all have rental yield of 3% and will not likely be CF+ for many, many years.

Option 2: My other thought was to split the money into two parts. $200k will go towards a slightly cheaper apartment $500 -550k max with mortgage repayment of $500 pw, and I can therefore move into it directly or alternatively rent it out and have it almost positive geared. In this scenario, I will eventually have to upgrade to a larger house within 5 or so years and I fear that as apartments have low capital gain so I may not be able to buy back into the above areas in the form of a townhouse or house. The other $50k will be put towards a regional house that will only ne neg geared $100 or so per week which I can afford to keep on the side. I’m not overly keen on this scenario as I don’t like apartments in general and the thought process is that for only 100k more, I can get something with land value (ie. Townhouse/unit).

Another option 3: Spit the $250k into two, and purchase two IPs in out burbs (Boronia/Ringwood) close to train lines worth around $400k each. As my deposit will be quite large, both properties will only result in an additional $200 pw combined out of pocket mortgage payment. I will then rent in my desired area, sharehouse with partner or friend at $200 per week. Hopefully I will save up another deposit and use equity to purchase my own PPOR in five years time. In this scenario, I am concerned that I will not have the same opportunity to buy back into inner city Melbourne and will have to settle for something more out or smaller.

Based on the above, what are your thoughts as how to invest most wisely with my money? I am not looking to have a huge portfolio – my main goal is to be able to get a PPOR in my desired suburb in the long run, with two smaller investments on the side as a bonus. In that regard, is it best to go with the first option, tough it out for the next 5 – 7 years and do it backwards from there?

Any advice will be much appreciated.
 
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Hi

Very enviable situation you're in!

Cash is king! Especially in a flat market like now. I find it hard to think of being gifted $250k to invest and then be out of pocket $200pw. You could even consider buying outright with strong yield. If you find the right vendor, it gives you a huge negotiating advantage (like offer a 7 day settlement).

Your taxable income could increase by ~$18k pa which could, coupled with your savings, have you a considerable deposit in 12 months time for another place.

Anyway you get the point. When you have the cash you have the options.

Also, it looks like you don't have huge aspirations like 50 properties or anything so you don't need to be taking big risks for the sake of capital gains the whole time. The provisions are there to have considerable cash flow straight away so why wait. CG will come anyway :)

Hope this helps.
 
Have you worked out how much you can afford? I think you have got too much debt for your start position and haven't taken into account the capital gains tax for non PPORs, the first home buyers grant, the 6 year CGT rule for PPOR, and the rate of capital appreciation for inner city/inner east Melb.

I'm traditional- I used capital growth, which meant rent was less, on my PPOR, to achieve this goal. I didn't stay there all the time.
 
Option 2: The other $50k will be put towards a regional house that will only ne neg geared $100 or so per week.


Don't like the sound of this. Plenty of positive geared property in rural areas. If I want to burn $100/week I'll do it in one of the capital cities with decent CG prospects.

Option 3 sounds the best. Spreading your risk of vacancy and seperating over two different areas so all eggs are not in one basket. That's why I don't like Option 1 as an investor.

Gools
 
If you go with the buy IP's and rent scenario, put as little into the loans as possible and set up with 100% offset, especially if you plan to buy a PPOR in the near future.
You can then move the money into your PPOR and claim the interest on the IP's vs the rent. If you put in the loans and redraw for PPOR, the interest on the principal you withdraw is not deductable.

In summary, talk to an accountant first before you buy anything!
 
Hi guys, thanks for all the responses. I pretty much knew most people would advise me against option 1, but am surrpised more aren't for option 2.

Gools - I was considering an IP in Ballarat (less than $250k) and I doubt I'd find a CF+ one in that area. If I went further out, Horsham, for example, I probably will. But I think Ballarat is a nice middleground and when it's been paid off I can even use it as a holiday house of some sorts.

myoung - Thanks for your suggestions. I hadn't considered the offset account and your idea is an excellent one.

The only issue with option 3 at the moment is that I am worried about ever getting back into my "desired" area if I don't do so now. Also, I always figure the properties under 500k would have fierce competition regardless of how bad the market is, however when the market is shoddy (like now), it's the properties over the value of $800k+ that drop considerably in price. So I'm wondering if it's more feasible to purchase big now?

In option 3, say I had two CF+ properties in Ringwood, I could probably save $150k in four/five years time as a deposit for my PPOR. However, I am not confident if I can still get a two/three bedroom house or townhouse in a inner CBD/east suburb for under $800k. On the other hand, if I were to purchase this now, then I can save $50k in five years time and still purchase regional with high yield. Ballarat prices might have grown too high for me by then but as these properties are purely IP then I can go further out as location won't really matter. Whereas my PPOR, I will have to consider suburb/close to work/amenities etc etc.
 
Just stretch and get a PPOR where you want in inner east. If ***** hits the fan your parents will bail you out. Think of it as you’re the wall st IB and your parents are the US tax payer. Take on as much risk as you can, take the reward, handball the liability.
 
Firstly, good luck with your decision!

Secondly, consider a movement of 10% on the median price of the inner east vs the middle ring. Take the average price in each area and think about the difference you need to climb- thats also not taking into account tax.

My guess is you aren't going to end up where you want to be under options 2 & 3, particularly if these are NOT PPOR.

This article has some errors, but overall reflects the price trend.

http://theage.domain.com.au/real-estate-news/beware-the-suburban-divide-20110313-1bsvy.html
 
I live in the area you are targetting- the price has softened by 5-10% dependent on suburb. Its still a fall off a big median price and if there's still competition in the 1M-1.5M brackets, I'm unclear why there would be less in the 8s?
 
If I were you...

Use 200k towards purchase of your preferred PPOR (in Option 1).
Use 50k to buy a CF neutral or close to it property in the suburbs.
 
With an income of $45kpa, the borrowing capacity, even if initally bought as an IP, is not going to be enough to afford a PPOR in the area suggested.

So its either of options 2 or 3.

Its good to have goals and dreams, its then a matter of breaking them down into manageable bites.

If the outcome is a home in the inner burbs valued at roughly $750k to $1mil in todays dollars, what are the steps involved in getting there?

I suggest leverage, while young, live at home, put all spare cash either into one negatively geared property, or a couple of regional neuatrally geared properties and build from there.

Will the area be unaffordable in years to come? Who knows? What will put you in the best position when those years come to be able to afford the inner burbs?

Putting the cash in hte bank and waiting for a pay rise wont. Putting the cash into property might if the capital gain percentages are similar to the desired suburb, and you use gearing to take on a similar value rental portfolio.
 
Whereas my PPOR, I will have to consider suburb/close to work/amenities etc etc.

what sort of work do you do? is it the sort of work that is mostly only available in the inner? in other words, why do you want a ppor in the inner areas? is it for proximity to work or proximity to fun? if it's proximity to fun, you will find as you age that there are things more important than the fun the inner city provides.
 
what sort of work do you do? is it the sort of work that is mostly only available in the inner? in other words, why do you want a ppor in the inner areas? is it for proximity to work or proximity to fun? if it's proximity to fun, you will find as you age that there are things more important than the fun the inner city provides.

I work in CBD at the moment and I want a PPOR in around the inner burbs as I've grown up around the area/like it/used to my surroundings. It's sort of a familiarity thing. My friends/family are all based around here and like you said, I am young and therefore I like to socialise.

It's a personal preference and I feel that I would be happy making other sacrifices (eg. not having a holiday every year/ not having the latest gadgets etc) in order to live where I want to live.
 
Option 4: How about putting the entire $250k into a balanced shares portfolio, and using the approx $13,000 per year yield to pay your rent or save? Work on your career for a few years, and keep saving. During this time your shares portfolio will rise in value, while continuing to pay you yield, and your savings will build also. There's no desperate rush to buy, as plenty of properties won't be rising in value for the next few years. Don't try to day trade your shares, just get good value and hold on.

Once you see how your career is panning out, you can work out where you might want to buy. You have a substantial asset that can be used to assist you (I'd encourage you to borrow for a PPOR or IP and let the yield from the shares support the mortgage repayments, at least in part). If you end up selling any shares, you'll only pay discounted CGT on the gains.

You have a fantastic opportunity here - well done for applying brain power.

(And on the 30% payrise thing, it's quite possible from graduate salary at most big consulting firms).
 
Reality, i dont really think you can go too wrong with any option to be honest.

If i had to choose i would recommend something like option 2 or 3, start smaller and build your way up, not all your eggs in one basket so to speak. I bought in Sydney in 2008, had 100K deposit and with the inflated sydney market was constrained to buy a 2bdr unit as a PPOR but it was a great buy in a growth suburb and it was the best decision i have ever made! Now i am looking at an investment property with the equity i have three years on and a pay rise its not a question of if , but when and where for me.

The nice place in the suburbs may be a few good investment decisions away, not just a quick buy in your twenties.

I think the share buying option is good advice too, a couple of investment properties a balance portfolio of shares and some debt repayment on the PPOR. I'm not entirely sure i would borrow to buy shares but thats just me a little bit risk averse when it comes to anything other than bricks and mortar. Good luck!
 
Thanks guys for the replies. With the share buying scheme, wouldn't that essentially mean that I'd be cash rich but asset poor? With inflation and the cost of living increasing year to year, $250k would probably be worth less in say, five years time compared to now. I mean, having an additional $13k per year yield that would cover any rent would be great! I'd almost be housed completely free. However, that's pretty low growth. It's almost the same as putting the entire money in the bank and living off the interest.

It's something to consider though. I guess I am just anxious to get a foot into the property market. I suppose in that scenario, I can save an additional $100k in three years time if my rent was covered by any profit from shares.

To be honest, the idea of having such a huge mortgage at such a young age scares me. However, I just think if I tough it out for the next 5 - 7 years, I will be better off in the long run. Firstly as I'm young, I can still live at home for another 3 years or so and put as much as I can into the home loan - not really something I can do when I'm 35 years old. I also don't have family or kids and have a few more years up my sleeve to amass some assets before that huge liability come around.

I'm leaning towards option 2, maybe a nice apartment or an older unit with land in inner suburbs worth $600k max, then a small unit/house in Ballarat worth $200k. That's doable, right?
 
Thanks guys for the replies. With the share buying scheme, wouldn't that essentially mean that I'd be cash rich but asset poor? With inflation and the cost of living increasing year to year, $250k would probably be worth less in say, five years time compared to now. I mean, having an additional $13k per year yield that would cover any rent would be great! I'd almost be housed completely free. However, that's pretty low growth. It's almost the same as putting the entire money in the bank and living off the interest.

It's something to consider though. I guess I am just anxious to get a foot into the property market. I suppose in that scenario, I can save an additional $100k in three years time if my rent was covered by any profit from shares.

To be honest, the idea of having such a huge mortgage at such a young age scares me. However, I just think if I tough it out for the next 5 - 7 years, I will be better off in the long run. Firstly as I'm young, I can still live at home for another 3 years or so and put as much as I can into the home loan - not really something I can do when I'm 35 years old. I also don't have family or kids and have a few more years up my sleeve to amass some assets before that huge liability come around.

I'm leaning towards option 2, maybe a nice apartment or an older unit with land in inner suburbs worth $600k max, then a small unit/house in Ballarat worth $200k. That's doable, right?

Hi Reality 22

The yield you get from a shares portfolio is only half the story. If you are getting 5.2% yield (my guesstimate), then you should ALSO be getting a similar amount of capital growth in the portfolio. Although some years will do better than others, your shares portfolio should grow comfortably more than CPI each year. So not only will you get the benefit of the yield (which will, on average, increase every year), but the underlying asset grows also.

That's why I suggested shares rather than cash deposits.

If you were keen, you could reinvest the yield automatically and have a $250k asset compounding up at an average of around 10% p.a. I have a shares portfolio (through a managed fund) that I do this with in addition to owning property.
 
If it was my money I would go in hard and leverage up at 95% for as much as possible.

Should be able to see maybe 6x 250k properties at 95% with 50k buffer left over. Buying as close to cash-flow neutral as possible.

Then once those are bought I would rent in your suburb of choice where rental yields are low.

Hold tight for a few years with your 1.5mil in properties and wait for cash-flow and equity to come up before investing again.

Not sure if you would get the finance approved though to do this due to serviceability issues.
 
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