First time Investor, Melbourne

[Jedi]

Hi,

I had thoughts of investing in real estate in the Melbourne area (living in Melbourne) and after spending a good portion of the week trying to figure out the best way of doing it, I have thourougly confused myself.

I am able to invest up to 500k but have next to no disposable income, basically just have enough income to meet my life needs.

I don't really have a preference on a house or apartment, just really concerned with the best return on the capital that I can get (Who isn't?). But wouldn't be interested in anything too risky either. Safe as houses?

A number of articles I've come across have mentioned West Melbourne or Thornbury as good investment locations but am also aware that there is generally an oversupply of apartments in the CBD and Docklands area. (Although there does seem to be gentrification happening in West Melbourne)

It seems like I could get a decent apartment unit, between 200-350k in West Melbourne, or about 240k in Glen Huntly?

Or should I be looking further out of the CBD, Oakleigh, Clayton? And get a actual house?

Please help a very confused newbie.

Thanks.

 

[The Y-man]

Use the Force to make your decision.....

The Y-man

 

[Peter_Tersteeg]

I started to write an extensive post on parameters around which you might be able to finance a property portfolio, etc. Then I realised that your post is predominately asking where to buy, not really how.

In that case my suggestion is fairly simple. Go to www.residex.com.au and purchase some of their repots, such as their presictions report or best rent reoprt, or something similar. This will give you some guildlines on what to buy and where, as well as some budget parameters.

 

[strongy1986]

Hi,

I had thoughts of investing in real estate in the Melbourne area (living in Melbourne) and after spending a good portion of the week trying to figure out the best way of doing it, I have thourougly confused myself.

I am able to invest up to 500k but have next to no disposable income, basically just have enough income to meet my life needs.

I don't really have a preference on a house or apartment, just really concerned with the best return on the capital that I can get (Who isn't?). But wouldn't be interested in anything too risky either. Safe as houses?

A number of articles I've come across have mentioned West Melbourne or Thornbury as good investment locations but am also aware that there is generally an oversupply of apartments in the CBD and Docklands area. (Although there does seem to be gentrification happening in West Melbourne)

It seems like I could get a decent apartment unit, between 200-350k in West Melbourne, or about 240k in Glen Huntly?

Or should I be looking further out of the CBD, Oakleigh, Clayton? And get a actual house?

Please help a very confused newbie.

Thanks.

If you have next to no disposable income then you really need to focus on the rental yield you can get. 7% would be a minimum if trying to limit what you need to fork out
Unfortunately these yields cant be found in residential property in Melbourne. So you might have to look into another market

This is my opinion only but I would favour land any day - its just hard to get the yield you want with land sometimes.

 

[Aaron_C]

Where to buy? Inner city Melbourne for long-term hold in my view. Depends on your budget of course, 500k is not enough for these areas.

 

[Advoker]

I think that before you look at where to buy, you need to ask yourself, If all your current income funds your lifestyle how you are going to fund The investment? Unless you have a large deposit and intend on using it to reduce the debt to keep it neutrally geared, you may find yourself in a difficult position.

A little bit of planning will go a long way to saving you a lot of stress. Do your numbers and make sure you can manage the expense. Don't forget that aside from mortgage repayments there will be agent fees and body corporate if you purchase an apartment or unit.

What do you expect your out of pocket expenses to be?

 

[Jedi]

I think that before you look at where to buy, you need to ask yourself, If all your current income funds your lifestyle how you are going to fund The investment? Unless you have a large deposit and intend on using it to reduce the debt to keep it neutrally geared, you may find yourself in a difficult position.

A little bit of planning will go a long way to saving you a lot of stress. Do your numbers and make sure you can manage the expense. Don't forget that aside from mortgage repayments there will be agent fees and body corporate if you purchase an apartment or unit.

What do you expect your out of pocket expenses to be?

The 500k is in cash and I don't intend to take on any debt, so I would expect (need to) make an income on the property. Also I expect to qualify for the First Home Owner Grant, this will be my first property purchase.

I am actually living in a share house and keeping my living costs low. The income I can get from a 500k investment will be more than the rent I am personally paying so I think I would come out ahead, as opposed to living in my actual property. Is this insane? Assuming I can get decent tenants, it doesn't seem so.

I am very happy to make a 10-15 year investment. The only figure I am really interested in the end would be the return on the capital for that time period, wouldn't really care how it would be split across rent or capital gains, although having more from rent would feel safer.

One of the bigger questions I have is, house or apartment? From my searching, it appears larger rental returns generally can be accrued from units/apartments?

EDIT:
My total out of pocket expenses cannot exceed 500k, I would have some capital then to be able to handle some, mishaps. Going for a split investment maybe a 400k property and the rest in shares might be more pragmatic.

 

[Deltaberry]

Use the Force to make your decision.....

The Y-man

May the force be with you.

 

[strongy1986]

Maybe I am reading into it wrong but if possible I would buy a house for about 450 - 500
Then I would roll up to the bank and say look at the house I own give me 400k
Then buy another house

If done correctly your out of pocket should be nothing as the net rent on the first property will cover holding costs on the second one

 

[Advoker]

The 500k is in cash and I don't intend to take on any debt, so I would expect (need to) make an income on the property. Also I expect to qualify for the First Home Owner Grant, this will be my first property purchase.

I am actually living in a share house and keeping my living costs low. The income I can get from a 500k investment will be more than the rent I am personally paying so I think I would come out ahead, as opposed to living in my actual property. Is this insane? Assuming I can get decent tenants, it doesn't seem so.

I am very happy to make a 10-15 year investment. The only figure I am really interested in the end would be the return on the capital for that time period, wouldn't really care how it would be split across rent or capital gains, although having more from rent would feel safer.

One of the bigger questions I have is, house or apartment? From my searching, it appears larger rental returns generally can be accrued from units/apartments?

EDIT:
My total out of pocket expenses cannot exceed 500k, I would have some capital then to be able to handle some, mishaps. Going for a split investment maybe a 400k property and the rest in shares might be more pragmatic.

Strongly1986 has a good point. With $500k cash, you have a lot of options, the right courses of action will depend on what you want or need in the next 10, 15, 20 years. You have a great opportunity to set yourself up if you do it the right way. Allocating the majority of your cash into any investment may not be the best long term strategy, there are options to maintain a comfortable cash flow and maximise tax deductions. If you never intend on buying your own home to live in it may not make a difference, but if you do... there should be a lot more you consider.

Your return should include the effects of tax, this could cost you an additional $6,000 a year in tax ($60k in ten years) depending on your tax bracket, if you complete the transaction as suggested.

Things to consider.

 

[Nigel Kibel]

money

Firstly do you have $500,000 in cash or have you been told you can borrow $500,000. Clearly there is a big difference. If you are going to borrow that sort of money clearly your options are very limited in Melbourne. It is very difficult to buy anything that cash flows. Be very careful about buying something that returns 6 or 7%. Generally properties in this range have little capital grow and consider that the average interest rate in the last 20 years is well over 7%.

If you have cash you have a lot more options

 

[Jake Milne]

At $500k it would be best to look at an apartment more so than a house as you can afford to get into higher growth suburbs.

Areas that have been suggested by economists and data houses for reasonable growth (6%+ for units) for the next 5 years include:

Elwood, St Kilda, Prahran, Windsor, Northcote, Alphington, Fairfield, Footscray, Williamstown.

Average gross yields for these areas are around 4%

If you're buying a house at $500k there aren't many suburbs you can afford that will get growth of 5%+. Yield is also lower for houses and will impact your cash flow more than an apartment (unless you get creative).

 

[sanj]

I have to say I disagree with some of the suggestions above. If you have 500k cash you have significantly more options than the average buyer and the opportunity to not shop at the same store/fish in the same pond. Buying a 500k apartment would be a waste imo, especially if youre chasing income. I know you stated you dont want to take on any debt but why is this? I would be looking at a comm property around 800k, getting a 60% LVR which is not too aggressive and keeping the rest as a buffer. It will put money in your pocket and still utilise and your funds wisely

 

[Jake Milne]

An $800k comm property would cost about $350k in cash to buy...

I dont think the OP has that much money sanj; he was saying he could borrow up to $500k

edit: I'm not sure now, Jedi needs to clarify

 

[new2this]

I dont think the OP has that much money sanj; he was saying he could borrow up to $500k

I think he said he has $500k Cash.

 

[Jake Milne]

I've re-read and think you may be right...

Jedi could you please clarify if the 500k is cash to invest or if it's 500k to invest including borrowing?


Sanj has a point if you have $500k cash. Commercial does offer greater yields but one has to be careful as there can risks of long vacancy periods.

A house at say a 50% lend should be a pretty safe bet, but if you've $500k cash I'd seek advice from a financial planner and work property into a portfolio shared with other options like dividend shares, fixed term deposits and managed funds.

 

[Jedi]

Hi and thanks for all the posts so far, do appreciate it.

I realise I am in a rather odd position to have so much capital and low income but there it is. I do have the 500k, right now its in the bank in a high interest earning account and really want to do something more productive with it.

I am also on a scholarship (which is tax free) so actually pay very little tax so I cannot take advantage of any tax break options.

Also, if things go sour, for any reason, because of my current earning potential, it would leave me in a dangerous position as I might not be able to service the loan and as a result would rather avoid borrowing any money. I am new to this so don't really understand the risks so perhaps I am being overly cautious.

So far going for an apartment in one of the areas that Jack Milne has suggested seems like a good idea.

I am taking a long term view here, 10-15 years or so I would be happy with, and would like as much money as possible at the end of that term (that is the goal really isn't it?).

I won't be needing this money for my personal use, purely investment.

 

[Peter_Tersteeg]

I think you're actually approaching this from the wrong direction. You're thinking about where to buy, but have been very light on the question of why you're buying. I agree that real estate is a far better investment than cash in a savings account, but it would perhaps be better to think hard about what your objectives are.

Once you've got some ideas about your objectives, you'll start to get a bit more direction and the question of, "What to buy", will come up as a means to reaching those goals. Answering what you should be buying makes finding the location far easier.

What I'm suggesting is certainly more difficult than simply finding a good area and buying something there, but it will yield far more meaningful long term results.

 

[Deltaberry]

Buy 4 x $600k properties.

At 20% deposit, requires $120k deposit (including stamp duty).
Lock in interest for 2 years at 4.8%

At say 5.5% yield rental income = $132,000
Interest per annum = $92,160
Gross income = $39,840
Council rates, water levies, insurance etc = $8,000?
Profit before tax = $31,840

Return on equity = 6.4%
If properties grow by 3% per annum, after two years, properties are worth $2.55m. At $1.92m debt, your equity is $630,000.

So that means while collecting 6.4% per annum on your money, you've also managed to grow your networth from $500,000 to $630,000 over two years.

Of course I made a number of assumptions. You could have vacancies, you could have unforeseen repairs, the market might drop by 3% rather than rise by 3%, I haven't counted agent fees if you were to sell in two years etc etc. But as I always say, numbers are just numbers. If you believe these assumptions are modest, then maybe there's flexibility.

 

[Jedi]

I think you're actually approaching this from the wrong direction. You're thinking about where to buy, but have been very light on the question of why you're buying. I agree that real estate is a far better investment than cash in a savings account, but it would perhaps be better to think hard about what your objectives are.

I have a certain amount of capital now. In 10-15 years time, I would like that amount of capital to have increased as much as possible. Thats it. I want to get as great a return on that capital as possible, however with low risk. There will be a balance I'm sure.

I haven't ruled out options such as shares, but I don't expect to get advise on shares in an investment property forum.

I am trying to figure out what some of the better options would be for a 500k capital investment with investment property, in melbourne. This may include some borrowing.

It has been suggested, that without borrowing, an apartment might be more appropriate than a house.

There are a lot of open variables here and thats largely because I don't want to unnessarly restrict my options.