how much is too much for an IP?

hi. first of all been 'advised' to only post 'focused' questions on this forum so we've decided to break up my previous long posting into several short ones starting with this.

my partner and i are now undecided about whether the first property that we've decided to get should be our PPOR or an IP. it's a land (200K) which we're planning to build a house on (230K).

question is, after spending around 430K on the property, is it a good plan to make it an IP or is it too expensive that we should really only use it as PPOR?

have read some related threads on this (btw, was also 'advised' to read all ---yes, ALL --- the threads in this forum;)) and most people are saying that an IP shouldn't cost too much. as to how much is too much, not really sure too.

really new to this so appreciate any helpful comments/suggestions/tips.

thanks in advance!
 
Taking into full account all of your details, your partner's details, your individual risk profiles and your future goals and aspirations, it looks like a good plan. Go for it.
 
The cost of the IP is only relevant when compared against the rent that is achievable and the pool of available tenants willing to pay that rent.

How much do similar houses in the same area rent for right now? Eg what yield would you get if you rented it.
 
The cost of the IP is only relevant when compared against the rent that is achievable and the pool of available tenants willing to pay that rent.

Agreed, As is said on this forum from time to time, we are in the business of providing accommodation. So its all supply and demand. If there are sufficient tenants wanting to rent your property at the price you need them to pay, then it is a IP opportunity. If not, its a bad business decision.
 
thanks for all the responses! the rental rates are somewhere around 300-400/wk range for a house similar in size to the one we're planning to build.

need to get an accountant to do actual computations for us, but at the end of the day we really don't mind if it becomes negatively geared initially.
 
So you'll spend $430K+ to build a house.
It's hard for anyone to say whether you should live in it or rent it out.
Are you eligible for the FHOG?
If you rent it out, it's going to be negatively geared. That means you're anticipating some capital growth pretty soon? You would have done research on this.
Have you looked at the price of near new completed homes in the area?
 
You dont need an accountant for a couple quick sums. Taking $350 as the middle number of your $300 - $400 range for rent.

$350 x 52 weeks = $18,200

Less management fees of say 8% = $22,360 x 0.92 = $16,744

Less maintenance ($1k) and rates ($2k) = $16,744 - 3k = $13,744.

Less 1 weeks vacancy = $13,744 - 350 = $13,394

Less letting fee (1 weeks rent) = $13,394 - 350 = $13,044 pa net or a net yield of 3.03%. Thats a pretty crap net yield

Interest expense on $430,000 at 0.88% (variable rate) = $37,840

Shortfall = $37,840 - $13,044 = $24,796 or $2066 shortfall per month (pre tax).

PS do your own maths - I did this in about 10 seconds and it may have mistakes in it.
 
:eek: @ turning a nice interest earning deposit into a $24k a year loss

Thats more than just negatively geared at first, that's going to take a long long long long long time of rent rises to get that to neutral.

So ... why?
 
To be strictly fair I havent added back in depreciation and negative gearing which should halve that figure for a high income earner. But its still going to take a very long time to go CF+ off that yield.
 
Nothing is too much

Nothing is too much as long as the yield is there and you have enough deposit.

Example:
If you buy a $1M IP with a $200K deposit and you are getting $1,000 per week rent - then that is roughly 5% and all good if you are comparing it to other IPs getting 5%.

A couple of cons with this strategy:
1. Vacancies of any kind will impact cash flow severely
2. Need good CG - no spread of risk
3. All your eggs in one basket
A couple of pros:
1. Only 1 IP to maintain
2. Only 1 lot of transaction costs to buy
3. Only 1 property manager to deal with

API Mag recently (a couple of months ago) did an article on this very Q.
 
:eek: @ turning a nice interest earning deposit into a $24k a year loss

Thats more than just negatively geared at first, that's going to take a long long long long long time of rent rises to get that to neutral.

So ... why?

For the capital gain. If it continues at the long term average capital gain of 7% then it will be increasing at over $30k/year in the first year.

Wouldn't be the first property in the red by that much and wont be the last. There's more to it than cash flow. More risk too but that comes with the territory.
 
question is, after spending around 430K on the property, is it a good plan to make it an IP or is it too expensive that we should really only use it as PPOR?

I'm of the opinion that $430K is a lot more of an expense for a non-deductible PPOR debt than it is for a negatively-geared IP.

I've gone the strategy of cheap(ish) PPOR (purchased for $267K, current value $400K) to provide my wife and I with a high cashflow for lifestyle and a little extra to be thrown at my "hobby" of property-investing ($318K IP1 and hopefully another IP at $400K soon).

I also think that with an IP what's more important than price are things like rental yield, capital growth prospects and ultimately holding costs which are the bottom line. For instance, I've seen heaps of "cheap" IPs (in my area, less than $300K) which would actually cost more out of pocket than ones twice the price due to things such as rental yield and the tax benefits of depreciation.

Good luck! ;)
 
These big numbers just boggle me. My PPoR was $25k (plus same again in reno) and our IP will have about $30k owing on it once it is divided, with a rental return of $150-200pw when we've got a plumber out.

That much going out just for capital gains sometime in the dim, distant future just seems so wrong. You've still got the big loan in the meantime.
 
question is, after spending around 430K on the property, is it a good plan to make it an IP or is it too expensive that we should really only use it as PPOR?
The formula for this is:
House value = $500 k
Rent wk = $350
3.64% (yeild) = (350 (rent) x 52 (weeks)) \ 500,000 (house price)

So for the suburb / area the house is in do the other houses get around 3.64% yeild? If most other houses get a higher yeild making yours an IP is a bad idea, if most others are similar might be OK, if most others are lower then good idea.

You can also look at capital gain, is your house going to appreciate faster / at the same rate / slower than other houses in the suburb?

So compare properties within a suburb / area, use common sense to work out where your comparison properties are.

Don't compare the esplanade to 1km inland. You need to compare like for like, NOT exact but similar.

You also have opportunity cost, what else could I do? If you can get a better return somewhere else do it.

Now the curve ball you can also consider capital gain in this equation! But that makes it a different equation, different usage.

Spreadsheets are your friend. (notice I didn't say Microsoft Excel, there are many spreadsheet programs not just the MS one).

Gotta do some work, still got 2 hours to go.

Cheers
Graeme:D
 
These big numbers just boggle me. My PPoR was $25k (plus same again in reno) and our IP will have about $30k owing on it once it is divided, with a rental return of $150-200pw when we've got a plumber out.

That much going out just for capital gains sometime in the dim, distant future just seems so wrong. You've still got the big loan in the meantime.

RumpledElf, you're very lucky (as are most others) who bought at times when prices were so low compared to today (either that or you've bought in very remote places that most others don't wish to buy in). Indeed median values today look very different.

In my case $317K might seem like a lot for a first IP, however the rental yield (7%) is so good that along with some nice depreciation current holding costs are less than $5K p.a. which isn't too bad for most prospective IPs in the current market.
 
I bought three months ago in a growing, thriving area with a median of $200k, many houses around $500k and virtually nothing under $100k. We just got lucky.

I'm still of the opinion the house took so long to sell because it was priced too low.
 
You dont need an accountant for a couple quick sums. Taking $350 as the middle number of your $300 - $400 range for rent.

$350 x 52 weeks = $18,200

Less management fees of say 8% = $22,360 x 0.92 = $16,744

Less maintenance ($1k) and rates ($2k) = $16,744 - 3k = $13,744.

Less 1 weeks vacancy = $13,744 - 350 = $13,394

Less letting fee (1 weeks rent) = $13,394 - 350 = $13,044 pa net or a net yield of 3.03%. Thats a pretty crap net yield

Interest expense on $430,000 at 0.88% (variable rate) = $37,840

Shortfall = $37,840 - $13,044 = $24,796 or $2066 shortfall per month (pre tax).

PS do your own maths - I did this in about 10 seconds and it may have mistakes in it.

as we mentioned:

"...really new to this..."

in other words, we're trying to learn thus our decision to join this forum.

so unfortunately, we can't do our own maths yet at this point. appreciate you doing it for us though;)
 
The formula for this is:
House value = $500 k
Rent wk = $350
3.64% (yeild) = (350 (rent) x 52 (weeks)) \ 500,000 (house price)

So for the suburb / area the house is in do the other houses get around 3.64% yeild? If most other houses get a higher yeild making yours an IP is a bad idea, if most others are similar might be OK, if most others are lower then good idea.

You can also look at capital gain, is your house going to appreciate faster / at the same rate / slower than other houses in the suburb?

So compare properties within a suburb / area, use common sense to work out where your comparison properties are.

Don't compare the esplanade to 1km inland. You need to compare like for like, NOT exact but similar.

You also have opportunity cost, what else could I do? If you can get a better return somewhere else do it.

Now the curve ball you can also consider capital gain in this equation! But that makes it a different equation, different usage.

Spreadsheets are your friend. (notice I didn't say Microsoft Excel, there are many spreadsheet programs not just the MS one).

Gotta do some work, still got 2 hours to go.

Cheers
Graeme:D

thanks graeme!!! newbies like us appreciate well-meant inputs.

based on this, what would you say is a good yield to have? 7%? that means the rental rates would really have to be high.

also, why do you say if others are in the same yield rate or less that it would be a good idea?
 
Top