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From: Mike .


Rent & invest OR buy and invest??
From: Paul
Date: 7/23/00
Time: 11:01:14 PM

Hi there,

Have stumbled upon this forum very recently and found it invaluable so far. Has come at a very fortunate time. If any of the wise heads among you can give us some helpful advice it would be very much appreciated. We are a young family (both students with a young child) therefore we need as much advice as possible. We are all ears.

My wife and I are potential 1st home buyers. We have a deposit of approx 25K and have been attending some "IC" meetings recently. Their plan tells you how to invest and do well without spending any of your own money. The only problem is that we don't have equity, therefore we would be purchasing an IP a long way from home(ie. Brisbane - we are from Melbourne) with our hard earned cash. We are reluctant to go through the club, especially after reading many of the messages posted on this forum. However, we are still keen to invest interstate but more so independently.

Do we: Keep renting at approx 900 month and invest the 25K in an IP in lets say Brisbane.

OR

should we: Purchase a cheap property in far eastern Melbourne for between 90K and 120K and then use the equity in that property to purchase an IP. I assume that if we put down the 25K and receive the 7K 1st home buyers grant, then we would have approx 20 - 25K equity in the home.

Could we purchase an IP soon after purchasing the property?

Like I said, we are all ears. If anyone has better suggestions for us, please feel free to let us know.

If you feel that the information isn't suitable for the forum (eg. too basic etc.) then our email address is:

p.barber@latrobe.edu.au

Cheers, Paul and Sue.
 
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Bob

Reply: 1
From: Mike .


Re: Rent & invest OR buy and invest??
From: Bob
Date: 7/24/00
Time: 1:15:36 PM

If I had 2 pieces of advice they would be this.

1. For all your options, sit down, prepare a spreadsheet and do the numbers.

2. For IP number 1, do it in an area you know - it reduces the number of traps for the unwary.

Without knowing much about you two, it's hard for anyone to offer concrete advice (example: what are your marginal tax rates, borrowing capacities and ambitions?)

Here's another option to consider, though - look at an area where you do think there'll be capital growth in future, but where you can't yet afford to buy. Buy a house there and rent out a proportion of it (the ATO guide tells you how, and I've done this myself) and negatively gear that proportion. There's a zillion other options as well.

Note that if you have a property and you want to use your equity, the banks will typically use the following formula:

([Their valuation] * 80%) - outstanding mortgage

eg they value your house at $200,000 and you owe $165,000 (ie. you have $35,000 equity) they will lend you

200,000 * 80% - 165,000 = 160,000 - 165,000 = -5000 (ie not a sausage).

Also you're a bit stuck since it will be your primary lender who you'll have to deal with (or refinance your house someone else, since the equity lender will want to be the first name on the lease).

Take a lesson from the Wife and negotiate everything. The above represents what the banks will want, but you may be able to get a better deal.
 
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Paul & Sue

Reply: 1.1
From: Mike .


Re: Rent & invest OR buy and invest??
From: Paul & Sue
Date: 7/25/00
Time: 12:23:56 AM

Thanks for the advice Bob,

I just want to know whether you can give me some more advice if I provide you with some more information. Our tax rate is very minimal as I receive tax exempt scholarships and grants to the total of about 25K per year. My wife nets approx 20K per year without paying much tax at all.

Therefore, to purchase an investment property and obtain the tax benefits, we were of the opinion that we would need to purchase the property with my mother (who pays a higher tax rate) in a tenancy in common agreement. I suppose that is our only way around our problem. Tax free money is very nice in most other situations until you want to buy investment properties I suppose.

As far as lending capacity goes, we also receive $300 per f/n from the government - I don't know whether that is taken into account for lending capacity. The answer to your final question is that our ambitions are to become financially independent and not have to worry about money all the time like most people.

I have given your formula some thought (value * 80% - mortgage) and just started to wonder how the wonderful idea of borrowing 106% of the cost of an IP came about in the booklets I have been reading. How does that work??

Just finally, my thoughts about buying a cheap property in the outer suburbs was that we could have minimum payments of $550 (to cover interest) and pay more (eg. $900 per month) as we would if we were renting. That way we would be paying off the house (increasing in equity) and would be able to use that to purchase an IP.

Like I said earlier, we are new to this and we are always learning. I hope we haven't wasted too much of your time.

Any help would be greatly appreciated,

Cheers, Paul & Sue.
 
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Bob

Reply: 1.1.1
From: Mike .


Re: Rent & invest OR buy and invest??
From: Bob
Date: 7/25/00
Time: 8:52:11 AM

I can't really help you with the borrowing side - my circumstances are too different from yours for me to assist - has anyone else struck this situation? Get onto a mortgage broker and see what sort of deal they think they can cut. Your mother will have to be fully involved in this, of course, and family partnerships should always be on a firm business footing.

The 106% borrowing works as follows - bank lends you up to 90% of the investment property and you borrow the rest against the significant equity that you already have in your first house. I realise this isn't what you wanted to hear, of course.

Given your situation - middle income and almost zero tax, I'd be looking at options like

(1)building a deposit through the most effective growth fund I could find or

(2)stock market strategies to build up funds - you'll see the name Peter Spann mentioned several times in the forum. His seminars apparently are of some benefit (disclaimer - never been, don't know first hand) or

(3)Negotiate with a lender for the full loan for a property that's cashflow positive - this will be difficult to find, given the lack of tax benefits available to you, and you can almost guarantee that the capital gain on such a property will be negligible. On negotiation, remember that their refusal of your good proposition costs them, not you. Keep trying.

(4) A lease option (see postings by Darren here and the site http://www.creativerealestate.com.au) may assist you to rapidly build a stake in RE without actually owning a property personally

(5) A thousand other strategies. Read widely and keep going. I wish I'd been thinking your way 20 years ago.

Geoff1, Les, others - any advice you'd like to add?
 
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Gee Cee

Reply: 1.1.1.1
From: Mike .


Re: Rent & invest OR buy and invest??
From: Gee Cee
Date: 7/25/00
Time: 8:24:22 PM

Dear Paul & Sue

I will give you a brief scenario of what I feel you should do if I were in your position.

I have twins that are nearly 1 year old but I have been investing for over twenty years. Therefore I will be somewhat emotional but also logic in this posting.

1) NEVER buy out of state property from wizz bang developers/clubs/agents etc that promise that you are going to get rich real quick if you buy from them.

I have had numerous interstate properties that I purchased myself. Luckily I made money on selling out but the management & stress from such can be a nightmare. Especially to a first time investor.

As you have a young family my first priority would be to get a family home and build up some equity in it.

Look at areas you like and can afford. Visit all the local agents, walk the streets and talk to the locals about what the area is really like to live in. (Don't believe the agents)

Get to know the prices that are being paid and for what type of properties.

Do not get emotional about having to have any certain house. (If you miss out on this one another will appear next month and also the month after etc, etc, etc,)>>>>>>>

Keep educating yourselves and post to the Forum before making any hasty decisions.(I know the agent said you have to make the offer today or you will miss out. I don't know how many times I have heard that! * Many times I ring back a month later offer less $ & just happen to get the deal because the purchaser's aunty's cat died so they had to pull out of the deal.)

You mention that you are both in low tax rate brackets and if you are getting $300 per fortnight family allowance etc then negative gearing losses are not going to be of any help to you at this stage of your life.

Later when you have graduated and start earning $50k + p/yr then the scenario will certainly change.

In brief: Set GOALS of where you are now, where you want to go, and how you hope to get there. Eg a 3 year, 5yr, 10yr scenario.

1) Get yourselves a low cost home in a reasonable area and pay off as much as you can. (Enjoy living there. I remember the first little home we lived in. It was fibro with a old kitchen and bathroom but we gradually painted it out, did up the garden & put in a BBQ. We had so many great times there.We were living in heaven!)

2) Keep improving your knowledge from reading and posting different Forums.

3) As your earning capacity grows and the equity in your home grows look to purchasing a investment property. BUT always do your homework and do not just go with some fancy high talking TWO-TIERED marketing mob.

3a) Get in and do it yourself. You will learn a lot more and certainly get a lot of satisfaction from doing such.

4) If you are buying a investment property or in partnership with mum then the 1st home owners grant of $ 7000 will not be payable.

Therefore I go strongly at getting yourselves your own little bit of heaven to start with. Then build from that. In knowledge, career, wages, $ etc.

Anyway this is a bit longer than planned.

Please come back & let us all know what you decide to do.

Regards, Gee Cee
 
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Paul & Sue

Reply: 1.1.1.1.1
From: Mike .


Re: Rent & invest OR buy and invest??
From: Paul & Sue
Date: 7/25/00
Time: 11:09:03 PM

Thanks Bob and Gee Cee for your invaluable advice. I must admit, from your feedback, we are probably more likely to buy an affordable property in the outer suburbs/inner country as a lifestyle choice and build up some equity in that as you suggested.

We will follow your advice and make plenty of enquiries in the towns that we are looking at.

I just have two questions: what is meant by a two-tiered marketer??

How much equity (%) would we require to purchase an IP following the formula that Bob gave us?

You no doubt will be hearing more from us in the near future.

Cheers, Paul & Sue.
 
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