Help! First IP. Ongoing Costs???

[queenisis]

Hi! Grab yourself a coffee, this is a long one....

I desperately need some reinsurance from everyone that my husband and I can afford to buy our first IP. Being a novice at this, I am very nervous about taking the leap! I have done a lot of research on the net, read books and spoken to other people but there seems to be so much information to get my head around. Please help!

Here's the details of my situation:

Combined income: $120k
Existing Mortgage: $300k
Equity in House: $350k
No other debts.

Looking at purchasing First IP in Brisbane outer suburbs.

Borrowing Capacity for First IP: $470k, but we only want to spend a max of about $300k for our first IP. Repayments would be approx $1100k/fortnight or $26400/year. I would expect a rental yield of about 5% or just under, that's approx $500/fortnight or $13000/year. So, we'd be paying $600/fortnight out of our pockets for mortgage repayments. BUT, my husband insists that we shouldn't totally rely on the expected rental income just incase we have occupancy problems.

Also, in respect to the loan, should we look at IO or P&I loan??? What are the pros and cons of both?

We have set aside $20k in savings for initial set-up costs of IP loan (ie, stamp duty, legal fees etc). I read somewhere that the initial set-up costs equal about 5% of the purchase price of the property. Could someone please break these initial costs down for me? Thanks.

Here are my rough estimates for ongoing costs of having an IP, I really need some more advice (eg, estimates) on these, please:

Property management (up to 10% of rent + letting fee) $25/wk? More?
Landlord insurance $500/year
Rent insurance???
Council rates???
Water rates???
Maintenance costs???
Water supply consumption???
Land tax? Property tax?

I read a post on these forums that said many consider up to 30% of rent received is a rough guide to your ongoing expenses. What do you think?

Could someone please also explain (in layman terms) tax variation and investment property income loss for me? ie, reducing one partner's tax payments every fortnight (when pay is received) to take the pressure off finances instead of waiting for the end of year tax return?

I've also been reading up on CGT. I understand that you need to keep your IP for at least one year or you'll be slogged a lot of money at tax time. Are my CGT calcs correct?

IP cost $300k
Set up costs $15k (eg, stamp duty, legal fees etc)
We pay CGT on $315k minus sale price
IP might be worth $480k in 5 yrs time (based on 10% growth per year)
So, we pay CGT on $165k. Claim 50% concession, so $82.5k is added to my taxable income for the year (I earn less than my husband). Meaning I pay more tax back to the ATO at that time. About $26k? Have I got this right?

Are there any other costs, esp ongoing costs, that I've missed?

IN REALITY, CAN WE REALLY AFFORD TO DO THIS????!!!!!! I hope so, it would be a dream come true.

Sorry for the looooooooong post!

Thanks in advance,

QI

 

[alexlee]

Why are you already thinking of selling?

 

[Bandita]

IN REALITY, CAN WE REALLY AFFORD TO DO THIS????!!!!!! I hope so, it would be a dream come true.

Hi queenis,

Yes, it looks like you really can do it!!

Firstly, look at all the equity in you PPOR - you can use that for your setup and deposit costs and keep that 20k for emergency's (actually, I'd just stick it into an offset account against your own home). The interest you pay on the equity you use will be tax deductible (get a good mortgage broker and get it setup right from the beginning or you may be in for a world of pain at tax time).

I would definitly go Interest Only on the IP loan. There are numerous threads here on the pros or cons - I'll try and find you some links.

Since you're looking at the relatively lower end of the market (which I think is a good thing, take away some of the risk in case things go wrong and be able to sleep at night!!). I think you'll probably find that you could buy more than one in the under 300k bracket - using the equity from you home - but that's another topic.

Onto some of your other questions - I've put my answers in red bold

Property management (up to 10% of rent + letting fee) $25/wk? More? we pay between 5.5-6.6% PM fees, letting fee is between 1-2 weeks rent - you need to negotiate this
Landlord insurance $500/year that's pretty high, we pay just under $300 I think
Rent insurance??? covered in landlord insurance
Council rates??? depends on the IP - much cheaper for units obviously
Water rates??? depends on the type of IP and location - for instance, in VIC - landlords of units with no seperate meters (most units) pay all water - landlords of houses pay none, the tenants do
Maintenance costs??? again, depends on the IP- whether you buy a low maintenance or high maintenance unit - I don't think we've yet had to pay more than $100, insurance would cover many things as well
Water supply consumption??? covered in water rates
Land tax? Property tax? covered in council rates

OK,

IP cost $300k
Set up costs $15k (eg, stamp duty, legal fees etc)
We pay CGT on $315k minus sale price
IP might be worth $480k in 5 yrs time (based on 10% growth per year)
So, we pay CGT on $165k. Claim 50% concession, so $82.5k is added to my taxable income for the year (I earn less than my husband). Meaning I pay more tax back to the ATO at that time. About $26k? Have I got this right? i haven't done the exact calcs - but yes, if you put the property in YOUR name - but I wouldn't think this would be the best idea as you'll lose the great tax benefits while you're holding the property - by putting the property in your husband's name, or both names, you'll recieve much more tax benefits while holding the property (remember that all those expenses, including interest - not principle, hence why I suggest Interest Only - is tax deductible)

I'll see if I can find that link to IO loans, has some other great stuff on IP investing as well.....

Cheers,
Jen

 

[Bandita]

Ok - have a read of these threads regading pros and cons of IO and P&I loans:

http://www.somersoft.com/forums/showthread.php?t=27945

http://www.somersoft.com/forums/showthread.php?t=27572

Cheers,
Jen

 

[want2bewealthy]

On a 120k PA combined income, I laugh at your queary, I do what youre about to do on 1/3rd of that income,
Ofcourse youll be o.k!

the tennant and tax refund will be paying around 70%

Go for it!
this is a classic example of "cold feet" just jump i the deep end, youll be laughing at this too in a few months.

 

[twobobsworth]

I'm not sure why you want to use some of you own savings with that much equity. Sounds like $20K would make a good rainy day fund.

 

[sailor]

There's nothing like the actual (or close to) numbers sitting in front of you on a spread sheet, to provide reassurance. There are a number of spread sheets on this forum you could download, or even buy the PIA software from SS to do the calcs for you. Plugging in the actual numbers is not so difficult. Rates can be sourced from the local council...they will give you an idea. LL insurance can be sourced from the net...or here on SS. I pay about $400 pa on average. I also pay about 7.5% for property management.

I'm curious as to why you are thinking of selling and CGT at this stage of your IP journey? I don't even think of CGT, as I'm not intending to sell any of my IP's until I'm really really really old and need to sell to live off the money.

Having said all that...your figures so far stack up in terms of affordability. Rather than buy at the high end of the market...stick to something at the lower end in reasonable condition, and minimise your repairs and maint costs that way.

Good luck with it, and keep us informed...happy to help you work through the numbers.

 

[queenisis]

You are all so helpful!

Thank you so much for your responses so far! They've been really helpful and enlightening. This forum is fantastic!

I'm at work right now and don't have time to look over everyone's posts in detail. But, I'll get on the net tonight and get back to everyone then.

Thanks, again!

QI

 

[1974Angela]

Having just done our tax, we find you need to allow closer to 20% of rental income for costs and vacancies. Hope that helps, good luck you will be fine.

 

[jasperjue]

Yes you can afford it. spend a bit of time with the numbers though and do grab one of the spreadsheets and plug in the numbers for all your incoming/outgoings and you will easily see how the numbers stack up.

You must get proficient with the spreadsheet so that you can easily run different scenarios and projections to get your own level of comfort. Everyone is willing to help but you will only excel if you take the time and energy to learn it as well.

don't forget the tax variation you can do to help your cashflow and minimise real out of pocket expenses.

also

Margaret Lomas books are a must read where positive cashflow is explained further and how to calculate it. This will give you some comfort for end of year claiming and put the daily cashflow experience into perspective.

also

remember claiming depreciation will help with your cashflow as well.

also

expect the hot water system to blow up in the first 3 months. seems like all mine do.

 

[mfranks]

Ongoing Costs

Hi ,
I have just finished reading a book on buying IP's and it has completely turned around my beliefs.
The book is by Ed Chan and it is called ' How to Achieve Wealth for life'

In a nutshell he gives examples of cashflow when buying your first IP - with a twist. that twist is to throw away the idea of having a P & I loan on your PPOR. He advocates having all interest only loans, using the additional capital to finance your second IP in a shorter timeframe. He also gives examples of living off the generated equity and NEVER selling.

This guy is an accountant and he knows all of the wrinkles of the tax system (all perfectly legal).

Visit the website - its worth reading. I personally have booked him for a finance health check so I can get my assets protected and setup so my kids can inherit without the dreaded CGT

Here is the website




All the best in your investing - My first IP was scary too

Michael

 

[snowy]

Go for it!

QI,

Go for it lovey, you will excel and become addicted in no time. I have just started investing again, we are on very similar wages and have slightly less equity than you and we have just taken the leap. I spend alot of time on this forum and I have gained so much knowledge and most importantly advice and confidence.

I recently re read Jan Somers Building Wealth, story by story as I love to read the individual achievements of people as this gives me great confidence and courage to know that I too can create real wealth for my family by investing in properties.

Also, we are very lucky with respect to our wages and I count my blessings each day. Sure we have both actively gained more skills/education over the years to be able to achieve good wages for our family combined with the fact that we have both work for the same government department for the past 21 years.

Goodluck and go for it!

Regards
Lisa

 

[queenisis]

Okay, I am convinced! I have arranged our pre-approval with the bank and the only thing left to do now is find a property! After looking at our budget again, we will definitely have to tighten the belt of course (goodbyyyyye Foxtel ), but it is do-able. Hubby has also agreed to cut down on his wine intake if I stop buying shoes!

JenD - Thank you for your detailed response and encouragement! The loan links were really helpful, too.

We'll probably go with the IO loan, after reading everyone's comments. It makes total sense! We've also decided to keep the $20k for a rainy day, as you suggested, twobobsworth, rather than use it for set-up costs.

Sailor - Thanks for the idea of using a spreadsheet off this site, I'm looking into that now. Great idea!

mfranks - Ed Chan sounds useful, I'll check out his site tonight. Thanks for the link.

jasperjue - Tax variation is all new to me. I'll be speaking to the ATO about it next week... And thanks for the heads up about the hot water system!!!

And to everyone who I haven't addressed personally, thanks for your help and encouragement and useful tips. Thanks for letting me pick your brains! I'm really excited about purchasing our first IP!

Let the hunt begin!!!!!

QI

 

[sailor]

Let the hunt begin!!!!!

QI

I find this the most exciting part....
What do I want to buy: a house, a unit, a 1/2 duplex?
Do I want something to renovate (or just a quick paint job), or something in good nick? If I'm renovating I want to ensure the money I put in will add value to the property. And I want something with low maintenance.

Here are some rough generalisations:

Houses have greater GC.
Units and duplexes have greater CF.

Where do I want to buy?
For a first IP I would want a locality that would rent easily, close to shops, schools and transport.
Interstate or close to where I live now? (SS forumites differ on this one, some even buy sight unseen.) Me I like to be able to drive by and take a peek now and again...so maybe something in your city.

What rental market am I aiming at?
SINK
DINK
SMWK
Family
Students

Shopping around on-line? Here's a website where you can search to your heart's content, and get a feel for what you can get for your dollars:
http://www.realestate.com.au/

Live shopping? Contact real estate agents in the locality you're interested in. Tell them what you are looking for. Check out the local papers and go look at what is for sale. After you've looked at about 20-30 properties, you will know when you look at a place, about how much it's worth.

Check out these tips for buying property:
http://www.gatherumgoss.com/Property Buying Tips From A Fellow Investor.pdf

http://www.gatherumgoss.com/Property Buying Tips From A Former RE Agent.pdf

And continue to ask lots of questions on this forum...plenty of experience for you to learn from here.

Happy shopping!

 

[timmyboy]

spreadsheets of use

Hello QI,

Might save you some time, here is a collection of helpful spreadsheets kindly donated by many on this forum.
JamessGG pointed me to this thread a couple of months ago and I am happy to be able to pass on to you....

http://www.somersoft.com/forums/showthread.php?t=26452

Also, this sheet is one of the ones I find I continually refer back to:
I thought I'd gotton it from the somersoft page above, but couldn't see it when I had a quick look thru just now.

Good luck and enjoy the adventure.

Tim