I read the term ?analysis paralysis? on here somewhere on here the other day and seemed pretty apt for where my head is at right now.

I'm a complete novice in this area, although i've been reading as much as I can i'm at the point where I could do with some independent advise in order to gain some clarity around my options.

The story:
My partner and I rent in inner north Brisbane, I?m a full-time employee and am building up my branding /design consultancy on the side (with a view to eventually make it my primary source of income). My partner is 1 year self employed.

1 half of our rental property is solely dedicated to her business which we plan to expand (new premises) early to mid 2016

Because of her self employment status we?re looking to do our first purchase based upon my income and my savings only.

Neither of us have purchased property before. We do not share bank accounts

Savings - 35k
Income - 64k net
Debt - 0

A broker has advised that my with my salary i can purchase up to 430k
and recently they proposed the idea of potentially using using a parental guarantee for the 60% deposit, meaning no money down for me - allowing savings to either go towards the development of the business or towards a 2nd IP. Unfortunately the in-laws are in a phase of consolidating and paying down some debt on their own IPs so its probably back to Plan A.

Plan A:
I've toyed with the idea of coming to outer Brisbane suburbs but feel i don't have enough to play with yet so I like inner Ipswich (inc. coalfalls, woodend, w ipswich) for 10 year growth plus 5.5+ yield

Purchase Price $300k

Deposit $22k
LMI $6600
LVI 92%
Loan $284k
rate 4.69%
stamp duty $8925

Rent $16,640 pa
Rates $1200pa
PM $1300pa (?)

I have two trains of thought that are hampering me: Buying as PPOR and using the first home concession to save me stamp duty and recouping some income through Air BnB on the weekends whilst working on and staying in the property a few nights a week to make improvements. It would also mean I retain more of my savings for future use. plus save 6 months PM fees

However 6months rent = the price of stamp duty anyway and is less hassle.

So i?m wondering what people think of this - am i on the right track? Should I consider different options. Am I missing something.

We're not spenders and we have no debt, but beyond sticking money in a high interest account we haven't been very financially astute to this point.
We're not looking for an easy out, we just want our money to work as hard as we do (just smarter!).

If it helps, aside from the businesses our goal would be to buy land + house or build a PPOR in the Samsonvale, Dayboro belt within 4-5years.

Thanks in advance to anyone who reads this.
 
Firstly congratulations on thinking ahead.

You will need to make up your own mind that suits you both.

If it was me I would buy as the PPOR as you can only claim the FHOG once. Also there is no better tenant than yourself right?

using guarantees I personally wouldn't do it for my kids, not that I believe they would do something wrong but we have worked hard for what we own and I don't want their risk. Cause even if they stuff it up when I die (hopefully a long way away) they will get our portfolio anyway, so they can wait a little longer to purchase.

Re your sums, you forgot to add in your own rent, which if you are paying $250 pw currently you would need to - this off the IP purchase (13k).

Purchase Price $300k

Deposit $22k
LMI $6600
LVI 92%
Loan $284k
rate 4.69%
stamp duty $8925


Rent $16,640 pa
Rates $1200pa
PM $1300pa (?)


Which would mean in theory you would get an income of 16.6k (less PM fees) so 15k but you would need to pay rent of $13k (ahead by 2k).

Not sure what the FHOG in QLD is anymore but 2k p.a. isn't that great when you can live in your own house and make your own improvements! Which is very hard to do when a tenant is living in the property.
 
Hi WeLead, welcome.

I think you need to ask yourself why you are looking to invest, what are your goals and will buying this property move you closer to those goals.

Do you hope this property will grow in value and use the equity for the PPoR in 4-5 years? Or, will you save for the PPoR separately? Just 10 year growth you mentioned? - why? Something else entirely..?

I don't know the area so I can't comment on what the area might or might not achieve. What does your Due Diligence tell you?

For what it is worth I think that there are areas of QLD you can purchase that will beat the pants off a high interest account over the next five years.

The cost of insurance needs to be added to your annual costings too.
 
Thanks for the reply.
The FHOG doesn't exist in QLD for established dwellings anymore - instead there's the stamp duty concession.

The only reason to make it PPOR would be to secure discounts and have time to make cosmetic improvements (which are optional) - I'd hold it for the designated amount of time and then turn it back into an IP. We don't want to leave our current rental until we expand as it is also a place of business, so business effectively pays half the rent.

And true re: the guarantee, I felt awkward even bringing it up so basically quizzed them about their current arrangements and decided not to even bother asking.
 
Hi WeLead, welcome.

For what it is worth I think that there are areas of QLD you can purchase that will beat the pants off a high interest account over the next five years.

The cost of insurance needs to be added to your annual costings too.

Thanks j_p
That's exactly why we're embarking on this journey, to make the most of what we have... and the realisation is that won't happen by letting the money pool in a high interest account.

True i have forgotten about insurances - will add to my list to look into
 
Hi WeLead, welcome.

Do you hope this property will grow in value and use the equity for the PPoR in 4-5 years? Or, will you save for the PPoR separately? Just 10 year growth you mentioned? - why? Something else entirely..?

I don't know the area so I can't comment on what the area might or might not achieve. What does your Due Diligence tell you?

I would hope to negotiate the property to a 6-6.2% yield. As well as use the equity combined with some additional savings to purchase a second in 6 to 8 months time. The expanded business should be up and running in mid 2016 providing more cashflow which we'd reinvest, because by that time my partner would have necessary 2 years of tax returns to be seen more favourably by lenders.

Ideally we repeat (I haven't fully forecast this - it's a tentative plan that needs developing and te maths done, which is not my strength) before aiming to lock in an PPOR.

This is the first time I've vocalised this... am i way off in terms of whats achievable to turn around?
 
I would hope to negotiate the property to a 6-6.2% yield. As well as use the equity combined with some additional savings to purchase a second in 6 to 8 months time. The expanded business should be up and running in mid 2016 providing more cashflow which we'd reinvest, because by that time my partner would have necessary 2 years of tax returns to be seen more favourably by lenders.

Ideally we repeat (I haven't fully forecast this - it's a tentative plan that needs developing and te maths done, which is not my strength) before aiming to lock in an PPOR.

This is the first time I've vocalised this... am i way off in terms of whats achievable to turn around?

People tend to over estimate what they can achieve in the short term and under estimate what they can achieve in the long term.

I think that if your first purchase is at 92% LVR then you will have a tough time using any equity from the first purchase for a second in 6-8 months. Lots of saving might be required if it is your plan to go again so soon. The magic is in compounding growth and returns over the long term. It takes some time (or lots of luck) to get some equity and momentum going.

Good work on putting your goals and ideas out there, talking about them and writing them down helps create the right mentality to work towards them and allows refinement. If your yield is 6%+ and you believe your due diligence shows a good chance of capital growth in the mid term I think it'll be a good investment to get you started towards a deposit for you PPoR or further IPs.

Why are you trying to create wealth through property? Do you have a desired passive income you would like and when?

Answering those questions will help create focus and purposeful action over the long term. It was a long time before I understood that.
 
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Don't forget to factor in the following:
- a small savings buffer sufficient to cover unexpected expenses, $5k is a good amount
- costs of any essential work needed before putting a tenant in ( this will depend on the age and condition of the property you buy )

Try and get along to Brisbane meeting of somersoft members. It will help you a great deal.
 
I think one thing to be mindful of is not stretching yourself too thin.

If you are establishing a business and your partner is self employed for only one year you might be better off focusing on building up those business rather than pulling yourselves in three directions?
 
I think that if your first purchase is at 92% LVR then you will have a tough time using any equity from the first purchase for a second in 6-8 months. Lots of saving might be required if it is your plan to go again so soon. The magic is in compounding growth and returns over the long term. It takes some time (or lots of luck) to get some equity and momentum going.

Thanks again guys. A question about this... how do you calculate possible equity growth in this situation? Are there calculators/equations available that plug in LVR, purchase price, growth rate and time?
 
A spreadsheet will capture this information, I use a software program PIA.

To find out the CG rate compare the last years (say 10) as an average and then take a little off.

E.g. 7.5% growth I would look at 6-6.5% as a figure and average it over 10 years.

The reason I do this is that if the property doesn't perform as well as I had hoped it wont be determental. However if it only works at 7.5% and I work off that and it comes at 5.5% that is a huge difference which would impact my way of live. Going from 6% to 5.5% wouldn't hurt as much.

If you look at the last couple of years the suburb might of just recently had a boom which will skew your numbers.

Also think about what is happening in the suburb/town. E.g. mining towns are huge risk but can also come with huge rewards.

Being Ipswich I wouldn't think is highly risky as people commute from there to Brisbane for work and has it own commercial hub.
 
Thanks again guys. A question about this... how do you calculate possible equity growth in this situation? Are there calculators/equations available that plug in LVR, purchase price, growth rate and time?

There are plenty about so no need to make your own, check out the Somersoft spreadsheets available for download.

Keep in mind that you can't use 100% over CG and that growth often happens in booms and busts.

To answer your question for a compounding growth equation, here it is from Microsoft;

you can use the following formula for this calculation
=PV*(1+R)^N
where PV is present value, R is the interest rate, and N is the number of investment periods.
 
Not sure if growing up in Ipswich has caused some assumptions in my head but I have spent a bit of time recently considering purchasing out there. I ended up deciding against it for a few reasons:

* Growth - There appears to be a strong(er) demand for new housing stock which is in abundance and existing freeholds are seemingly good value by comparison. But for whatever reason, nobody wants them. I've sen well priced homes sit and do nothing for months. Probably something to do with the Radio Rentals type of attitude of a lot of residents. I want it new and I want it now.

* Scarcity - There is land going for miles in every direction. It will be an awful long time until anything gets close to running out. I wouldn't bank on it happening in our lifetimes.

The only thing I could find value in would be short term plays (i.e. development). Ipswich have a reasonable code when it comes to dual occ/duplex so if you could find a good block (1800sqm) and held onto it until you had costs to build a couple of duplexes on the land you might turn a profit.... but that's probably a strategy best done in one hit.
 
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