how much is too much for an IP?

[1c3m@n]

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?

yes, we're eligible for FHOG.

one of the things why we say we don't mind negatively geared is we're aware it would allow us to reduce our taxable income. not sure yet about all the computations since we haven't discussed with an accountant yet, but in the past few years, we've always ended up paying ATO during tax time or getting a really small return.

the prices of near new/new homes in the area are about the same as ours.

 

[1c3m@n]

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!

thanks!

that's partly why we're considering to use it as an IP instead of PPOR.

 

[Minx]

I think it really depends on what you are trying to achieve.
We have been looking at places worth around 800k to a mill, however our goals are a little different than that of most somersofters and the prices of the properties we have been looking at reflects that.

As I said it really depends on what you want and what you are trying to achieve.

 

[boomtown]

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

Thats fine hopefully you know how to do it now though ! Let me know if you want me to explain it.

If you can get a 5% gross yield for a house or a 6% gross yield for a unit you are doing well. I think you should reconsider your current plan and try to find a better deal if you are going to use it for an IP.

 

[Dazz]

We have been looking at places worth around 800k to a mill, however our goals are a little different than that of most somersofters and the prices of the properties we have been looking at reflects that.

Do you wish to describe the details of the differences ??

What do most SSers have for goals ??

 

[Minx]

Do you wish to describe the details of the differences ??

What do most SSers have for goals ??

Well most SSers buy investment properties and run with that as a business. Thats fine, that is only 1 part of what my family do.

The other part, which is what we are concentrating more on is the business of building and construction (which is what our companies are). Our aim is not to build and hold, ours is to build and sell and make this profit. Throw in a bit of small scale residential developing and that is what we want to do. The prices of sites we are looking at reflect that also.

As I said it really depends on what a persons goal is. Can I get into the business of developing high rise commercial buildings and is it a goal? For us it is not as we are not commercial builders. In saying that we are still young and perhaps one day my partner may obtain his commercial builders license and with enough cash and capital we may achieve that. For now though have no interest in buying residential properties and holding.

Now i don't know what each individual SSer has as a goal. From browsing the posts on this forum it appears that most SSer wishes to build up a successful portfolio etc. There are a few exceptions of those who are into the whole development thing and pay a builder to construct them. Then I have observed that there are others who prefer to deal with commercial projects also. The responses to this thread and some others indicate to me that a majority buy and hold, or even build and hold.

 

[quoll]

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?

It's the old "you've got to compare apples to apples" thing, it's no good looking at one area where the average yeild is 2.5% and comparing a property there to one in an area where the average yield is 7%, so if you found a property with a yeild of 5% it would be a good rental yield in the 2.5% area and a bad rental yield in the 7% area. The suburbs I target are floating around the 5% mark, so if I find things which I think can get 7% in a nice part of the suburb then it's a goer.

Generally the higher the rental yield the better as theat mean you are putting less of your money into holding the property each month. But when you calculate capital gain you can find that you make more cash on the lower yielding higher growth property than you do on the higher yield lower growth property.

The math thing, it's like everything else you need to learn where the numbers go and what gets added / multiplied or divided to get the results as this is your measuring stick.

Cheers
Graeme

 

[social hero]

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.

and people wonder why less than around 6% of residential property investors buy more than one investment property. It's because they just cant afford to buy any more after looking at this scenario.

cheers

Social Hero