HELP - Investment Plan and Buying First IP

Hi the learned once,

I’ve been reading and analyzing all your expert comments for a while on this forum. Now I need your help with few questions as I’m ready to get my first IP.

The Property:
PPOR – 350,000
Debt on PPOR – 30,000

My Thinking/Plan:

Have regular income in 10 Years from properties.

I am thinking to buy my first property with high yield 6-7% and low debt, So property around 200 k. I would like to pay of my first investment property as soon as possible (3 years time hopefully). After it is paid off from the rent of the first IP, assuming around 10,000 per annum I would buy 2 another properties. The idea is to earn the rent of First IP and put very less out of pocket money to manage second and third IP.

So timeline may look like

2010 First IP
2013 Pay off First IP & Buy Second and Third IP – Rent Income of 10,000/Annum after paying IP 1
2015 Pay off Second IP & Buy Fourth IP - Rent Income of 20,000/Annum after paying IP 1 & 2
2017 Pay off Third IP & Buy Fifth IP - Rent Income of 30,000/Annum after paying IP 1, 2 and 3
2019 Pay Off Fourth IP - Rent Income of 40,000/Annum after paying IP 1, 2, 3 and 4
2020 Pay Off Fifth IP - Rent Income of 50,000/Annum after paying IP 1, 2, 3, 4 and 5

As I am thinking to follow this path – I believe I’ve to go with small mortgages and high yield properties. I know with the equity in the PPOR I can take risk and buy properties with less yield and more capital growth but I’m moderate risk taker and would like to keep my LVR less than 50% all the time if possible to achieve this 10 year plan.

Note: Just to inform my repayment capacity and income - I’ve paid 250,000 mortgage on my PPOR in 3 years.

The first Property:- Thinking to spend around 200k (Maximum 300k) get a studio or 1 bedroom around Melbourne CBD.
- The suburb I’m considering is around Footscray and Parhan.
- I did look at Carlton but it has hundreds of similar properties so will be hard to sell it in the future, I believe.
The Questions:
- Suggestions about the plan – Will it work? Do I need to change anything?
- Suggestions about Suburbs for studios or 1 Bedroom?
- Should I buy a 2 Bedroom around 300k initially?
- Should I go country side for high yield? (Personally not very keen)
- Is the time right to buy as an investor? Should I wait another 2-3 months?
- What are the main expenses I need to consider in an IP? (IP Mgt. Fees, Strata, Body Corp, Insurance, Water, Bank Fees anything else????)

I hope I’ve put in enough details here (may be too much). Please do not hesitate to ask or criticize anything as this is what I’m expecting from you.

Thanks in advance for your help….
 
Hi me melb,

I'll let someone more financially versed than me go through your figures ;) but your ability to repay loans looks amazing!!!

If you're looking around cbd, prahran sounds good, IMO preferable to Footscray at present. However, a lot of money is going to get put into Footscray in coming years so it has piqued my interest somewhat.

Have you considered St Kilda, Elwood etc? (Always my favourites)

In your position I would look to spend your 'max' of $300 & get a 1 or 2br rather than a studio (better capital growth, easier to borrow against later on, better resale etc...again, only IMO). There is a school of thought that says you should borrow the max the bank will lend you, as it allows you to control a bigger asset & you're more effectively using 'OPM' (other peoples' money) to grow your assets...as long as you can service the debt ;)

Could you perhaps borrow more than $300?

Does the capital growth of your prospective properties factor into your plan?

Try & make sure you get one with OSP :)

I'd go against 'country' properties, just my preference for blue chip suburbs with a proven track record ;)

If you're looking at Melb, I believe it's becoming a buyers' market again, but I'd start looking now even if you don't buy for another couple of months.

Regards,
M&M
 
I'd also go the 2 bedder rather than the studio. The market for 1 bedders and studios is smaller due to the following:

- they only have 1 bedroom or are a studio
- lending is stricter on these units. 20%-30% deposit required.
 
Is it possible to pick up a two-bedder, inner Melbourne, yielding 6-7%?

I would've thought the recent growth there would have brought yields down for these properties to around 4%
 
Thanks M&M for your suggestions. I'll expand my search to your suggsted areas.

Could you perhaps borrow more than $300?
I can borrow up to 500K but as I said I am bit conservative so would like to keep the LVR down.

Does the capital growth of your prospective properties factor into your plan?
I have not consider CG as I am more planning to get regular income from properties in 10 years and start working part time after that (life could be a Dream....). CG will cream be on TOP :)

Try & make sure you get one with OSP :)
OSP..HUH?????:confused: not good with acronyms sorry
 
Is it possible to pick up a two-bedder, inner Melbourne, yielding 6-7%?

I would've thought the recent growth there would have brought yields down for these properties to around 4%

Have not looked at two bedders yet but if I find something I will publish...but for studios and one bedder there are heaps.
 
Hi again me melb,

If your income is high & you have the ability to repay debt IO (interest only) on your IP (investment property), I would seriously consider borrowing around 400-450 & going for a 1 or 2br in St Kilda, Sth Yarra, Hawthorn etc.

I believe looking for a place that will give you solid capital gains over cash flow. Ideally you would find something that gives you both.

Capital gains on your property would give you tens of thousands a year in equity gains to borrow against & get more property more quickly .....as opposed to a paltry 10K of income from rent. (Depends on your situation & level of comfort).

eg purchase apartment Hawthorn $400K, possibly slow gains over the next few years, but even if your property 'only' gains 5%, you've made $20K in the 1st year alone...bit better than 10K from rent IMO :D If the gain is more like 10-15%, you're looking at 40Kplus.

So your loan would remain at $400K IO next 25yrs, but in that time, your asset will have grown (eg) to $1M...assuming the tired ol formula of property doubling every 7-10 yrs ;)....food for thought?

These are just my thoughts & feelings, so please don't take them on board without due consideration of your circumstances & comfort levels re debt.:cool:

Regards,
M&M:)
 
My goodness me melb you must have an awesome disposable income.

If I could afford to pay off $70k in mortgage payments a year I'd have 8-9 IPs already.

Kudos to you! :)
 
So your loan would remain at $400K IO next 25yrs, but in that time, your asset will have grown (eg) to $1M...assuming the tired ol formula of property doubling every 7-10 yrs ;)....food for thought?

Got Paper, Pen and Calculator now.....working on this strategy....will post my calculations and new strategy when done..

Thanks again:)
 
My goodness me melb you must have an awesome disposable income.

If I could afford to pay off $70k in mortgage payments a year I'd have 8-9 IPs already.

Kudos to you! :)

LOL....Last few years got few good contracts being an IT Professional...so things worked out well ;)

Hope it keeps going like this...
 
Capital gains on your property would give you tens of thousands a year in equity gains to borrow against & get more property more quickly .....as opposed to a paltry 10K of income from rent. (Depends on your situation & level of comfort).


Hi M & M...after doing the maths I agree that Capital Gains will be more beneficial in long run than running for Cash Flow....

Thanks for your advise....
 
Your investment objective is bit vague.
Are you intending to live off the rent in 10 years' time or do you just want passive income as a supplement to your existing salary?

I see that you have done your analysis to come to the conclusion that capital gain may be a better option for you. Research has shown that high capital growth property will provide a superior total return over high yield properties in the long term provided you have the ability to hold onto them - as high capital growth property may be heavily geared at the start. However, keep in mind that it is possible to have both capital growth and high yield, but you run the risk of missing both markets and opportunities. This is up to you to decide. With your situation, it may be good to consider a combination for balance and diversification. But assuming you are a high income earner, I would be leaning towards capital growth properties. This may be at odds with an objective of “living off the rent” by holding onto high growth properties in 10 years time. If that is your objective, then you will need to consider how to convert the equity into a stream of income for you in 10 years time. You will also need to consider the tax implications at the start – retrospective tax minimisation is difficult. Consult with professionals for appropriate recommendations.

The Questions:
- Suggestions about the plan – Will it work? Do I need to change anything?
Having a plan is a great start – it provides an overall direction of where you should be heading –but you need to be flexible. I haven’t reviewed the figures in detail, but given your ability to reduce 250K debt in 3 years time, and presumably this ability will continue, there is no major flaw in your plan. However, you may not be maximising your capacity by “paying off the mortgage” as you go, especially if you are going with the capital gain path. Don’t mistake this as a recommendation to push beyond your risk aversity and do something that you may be uncomfortable with. However, paying a property off and pulling the equity back out somewhere else to purchase future properties seems inefficient, financially cumbersome and suboptimal from a tax perspective. It may be worthwhile speaking to a tax specialist to understand the financial implications of your investment plan.

- Suggestions about Suburbs for studios or 1 Bedroom?
Melbourne CBD, southbank, st Kilda west, Prahran, South Yarra, Windsor, Hawthorn, Richmond, south Melbourne, east Melbourne, north Melbourne, kensington and surrounding areas
Difficult to achieve with 200K budget anywhere in Melbourne metro unless you are looking at student accommodations, service apartments or retirement homes (which limits the resell value). If you are risk averse, you should look at quality suburbs with quality tenants to ensure long term marketability/demand of your property and people who will keep your property in shape. Footscray is cheaper, but you may like to check out crime rates and see if you are comfortable with it. I personally don’t have an issue with Footscray.

- Should I buy a 2 Bedroom around 300k initially?
If you are looking for capital growth, they may be a better option than studios apartments. You open yourself to a wider market when reselling. If you are risk averse, then you can consider blue chip suburbs within 15-20km of cbd. It should give you a more stable growth (but probably not extra-ordinary growth if you speculate up and coming hot spots) However, I don’t know how realistic it is with 300K in blue chip suburbs in today's market

- Should I go country side for high yield? (Personally not very keen)
Country side is a good option for immediate cash flow positive properties, it is a great way to start for many average income earners. It’s easier to acquire multiple properties and diversify in a relatively short period of time. However, country side properties have historically provided lower capital growth, unless there’s the x factor (e.g. water and mountain view). It is harder to inspect and maintain.

- Is the time right to buy as an investor? Should I wait another 2-3 months?
I am an investor, not a speculator, so I’m afraid I am not going to be of any help. Others may be able to provide more info.
But my 2 cents worth is that leading indicators (e.g. auction clearance, yield, housing finance, affordability, interest rate and others) are suggesting that the Melbourne market has entered into a slow growth period. The level of property market growth in the first half of FY11 is anticipated to be mediocre by several analysts. (you can check RPdata, APM and REIV) I personally think a correction is in the horizon, but I don't anticipate it in the next 2-3 months. In the mean while we should see auction rate gradually decreasing but still maintain above the critical threshold, mortgage rate becomes stagnant with minor increases in interval, yield will gradually improve as growth slows and rent increases on the back of a stablising economy.
So you can wait, or you can make it work for you. It depends how comfortable are you to see your properties' value drop in the short term - which will inevitably happen in your 10 year investment time frame.

- What are the main expenses I need to consider in an IP? (IP Mgt. Fees, Strata, Body Corp, Insurance, Water, Bank Fees anything else????)
Council rates, water rates, land tax, maintenance, etc….

In summary:
- Great financial position and commitment
- Good investment plan - but can be optimised in terms of loan and tax structure
- Superficially optimistic with the 200K 1 bedroom property or 300K 2 bedroom place, if you want to get into quality suburbs like Prahran – need to do further research and revise
- Make decision re capital growth vs high yield
- Narrow down the suburbs and property type
- Always do your own due diligence

IMHO, to be successful in properties, it’s important to take action and avoid analysis paralysis. Opportunities are there for the people who seek it.

Best of luck
Kenny
 
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Kenny, First thing first - Thank you very much for your suggestions and opening my eyes to new things.

Appreciate it.

Are you intending to live off the rent in 10 years' time or do you just want passive income as a supplement to your existing salary?

I'm intending to start working part time in 10 years time not to live off the rent completely. As I think 50K would not be enough to live off in 10 years time;)
 
New Plan :)

After reading M & M's and Kenny’s suggestions and doing my maths...I’ve come to conclusion that CG is the way to go...this is what I feel should be doing.. New Plan (very high level – must have flaws in figures)

2010/2011 - IP 1

Buy property around 400 k - loan Interest only
Rent ~ 20000 PA
Interest ~ 32000 @ 8 % PA
Expenses ~ 6000 PA

Out of Pocket ~ 18000 PA (not really after all the tax benefit on my income - need to speak with my accountant)

CG @ 5% will make the property 2015 ~ 510k and 2020 ~ 650K
If mortgage is paid rental income of 20k

2010/2011 - IP 2

Buy property around 400 k - loan Interest only
Rent ~ 20000 PA
Interest ~ 32000 @ 8 % PA
Expenses ~ 6000 PA

Out of Pocket ~ 18000 PA (not really after all the tax benefit on my income - need to speak with my accountant here)

CG @ 5% will make the property 2015 ~ 510k and 2020 ~ 650K


If mortgage is paid rental income of 40k (1st + 2nd IP)..with assets worth 1.3 million

With this plan I am thinking - I can concentrate to pay of 2 IPs in next 5-6 years and every year keep buying 1 (till 2015). So at the end of 2015 I've 6 properties negatively geared (goot for Tax purpose) but with good CG potential.


One thing which is coming to my mind and wondering about it....

If I buy a brand new apartment/unit/house
- I save on STAMP Duty
- Will not have any issues with maintenance for next few years (i believe builder provides 7 years guarantee)
- Manage the property by myself so no expenses of REA
- depreciation

What do you think about this? Is brand new - good thing?

Comments, suggestions, abuse...everything is welcome
 
IMHO, to be successful in properties, it’s important to take action and avoid analysis paralysis. Opportunities are there for the people who seek it.

Best of luck
Kenny

Love this one Kenny.............. it’s important to take action and avoid analysis paralysis. Opportunities are there for the people who seek it. ;)
 
Note: Just to inform my repayment capacity and income - I’ve paid 250,000 mortgage on my PPOR in 3 years.

I can borrow up to 500K but as I said I am bit conservative so would like to keep the LVR down.

Is that what the bank's willing to lend you? a $500k lend limit implys your gross annual salary is $75,000-90k.

How do you pay $83,333/year towards your mortgage. Don't you pay taxes? :confused:
 
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