I'm looking at buying my first IP - need advice!

[kristy77]

Read the book "more wealth", and got all excited! Started looking into buying my first IP, and now just not so sure! My husband earns a steady $92,000 pa (working for the mines), and I get approx $12,000 pa for Family Tax Payment (stay at home mum and Homeschool). We have no properties, and we are renting at only $55/week before tax (mines house) and don't intend on moving for quite a while. We have a car loan with $37,000 still owing on it and the car is worth $27,000 MV, our house contents are $45,000. We have a credit card at $5,000 limit, and a p.loan now down to $6,000.
I have been to three mortgage brokers who all have the "best deal" for us. We haven't yet done the pre approval yet, but believe it will be fine. We have no savings (we pay an extra couple hundred on our loans to pay them off quicker), but I don't take my Family tax payment weekly - therefore will receive $12,000 in August/ September.
We are looking at a house for about $160,000 to rent out, and believe we can get the mortgage. But my worry is all the extras that come with it in the long term (ie; maintainence, council rates etc). In the book it says after tenant and taxman, we would only have to pay about $50/ week - where does Maintainence, council rates etc come into this???

Sorry about the lengthy post!

Kristy

 

[alexlee]

You should have enough income to make up any shortfall from a property worth $160k. May I also suggest getting rid of that car loan and personal loan first?

If you're concerned about the shortfall, do a budget first. See how much money you have left / can spare.
Alex

 

[kristy77]

Thankyou.
Would you be able to give me some idea as to how much we should keep aside for the extra costs/ month?
We will have a couple hundred dollars spare/ pfn but we were hoping to use that to pay off debts quicker/ pay extra on home loan.

 

[Pablo]

Kristy,

We are in exactly the situation regarding income and family yet we manage to put $450 a week towards paying off our mortgage and funding our investments (could be $500 if we tightened the belt a bit more). Maybe you should have a close look at your families spending habits and eliminate or reduce some of the nice to have items.

I agree with Alex on reducing your personal debt and then save some money for a deposit.

With regard to how much an investment property will cost you look at paying between $3k and $5k per year for maintenance, rates etc.
But the main expense will be interest on the money you borrow to buy the property which will vary depending on the deposit you pay.

for example if you borrow 85% on a $160K property.

You will need to put in approx $24K + $8K in buying costs giving you a total of $32K that you will need.

Therefore you will borrow $136K and pay roughly $11K in interest per year. with your other costs that will bring your yearly costs to around $15K.
So weekly costs will equal approx. $288 and if you rent your IP for say $190 you could expect to see a weekly shortfall of $98. This is not taking into consideration tax and depreciation so based on what you want to do Jan's estimate of a cost of $50 would be about right.

Hope this helps.

 

[alexlee]

Thankyou.
Would you be able to give me some idea as to how much we should keep aside for the extra costs/ month?
We will have a couple hundred dollars spare/ pfn but we were hoping to use that to pay off debts quicker/ pay extra on home loan.

That's a very personal thing. I mean, I used to save around 40% of my net when I was single (or when my fiance was working). Now that she's not working my savings rate is dropping.
Alex

 

[dcarr]

In the book it says after tenant and taxman, we would only have to pay about $50/ week - where does Maintainence, council rates etc come into this???

Hi Kristy, be really careful relying on figures from "More Wealth from Residential Property" as it was published in 2001, a fact that is conveniently not mentioned on most websites where the book is sold.

The content is still worthwhile (I have several Somers books) just make sure you update the figures and projections to reflect the current market in your area.

EDIT: I had a quick peek online at Blackwater, assuming thats the area you wish to buy, looks like plenty of 3x1s at the $160-250k range, and asking rents seem to be upwards of $300, some at $450/wk. With the right property you could be CF+ (cash flow positive).

Mining towns are unusual, so its even more important to factor in the local market rent, future prospects for capital growth, AND the vacancy rate.

 

[kristy77]

We're looking at buying in Melton, Vic with houses around the $160000 mark. Houses in Blackwater stay on the market forever here in Blackwater, as do rental properties. The mines provide housing for only $50/ week rent, so noone wants to buy here (99% of people here work for the mines). We have friends here who have bought two IP's and one has been vacant for almost 4 months now, and the other they are trying to sell - still no offers after a couple months.
Thanks for everyone's advice.

What are people's thoughts on 100% loans???

 

[Alanna]

I personally don't do 100% loans, using a LOC to pay 20% deposit and finance 80% which gets me out of mortgage insurance.
I would agree with Alex and say get rid of the car loan, currently you owe around 25% more than the car is actually worth by your calculations. Spend a few months knocking your personal debt on the head in a big way and your servicability will increase accordingly.

Regards
Alanna

 

[yo yo ma]

You should have enough income to make up any shortfall from a property worth $160k. May I also suggest getting rid of that car loan and personal loan first?

Hi Kristy
Please take the above advice... It is really, really important. Here is a link (to a post by Simon) that you should read on how to do this. If you can really concentrate on getting rid of these other loans, then you can really get ahead. Let me know what you think of the link. I think it is one of the top 5 ever posted on this forum. I rated it 5 stars... anyone else?

Have you done a budget to see where you are spending the money each week? Do you think you can put a bit more off each loan? Do you know what the interest rate is on each of the loans?
http://www.somersoft.com/forums/showthread.php?t=24892
Steve

 

[alexlee]

On your income your after tax pay is probably around 65, 70k? Assuming a 'normal' living cost of 30%. That's 20k. You're only paying $55pw, so that should be around $17k you can save compared to someone with the same income but have to rent at normal rates.

Further, assume you save another 20% after tax. That's another $13k.

In other words, with a bit of budgeting you should comfortably save $30k AFTER tax a year.

Save more aggressively (40%, say) and you can save around $43k a year. That means you can kill off the personal loan and car loan in a year.
Alex

 

[Alanna]

Hi Alanna
Please take the above advice... It is really, really important. Here is a link (to a post by Simon) that you should read on how to do this. If you can really concentrate on getting rid of these other loans, then you can really get ahead. Let me know what you think of the link. I think it is one of the top 5 ever posted on this forum. I rated it 5 stars... anyone else?

Have you done a budget to see where you are spending the money each week? Do you think you can put a bit more off each loan? Do you know what the interest rate is on each of the loans?
http://www.somersoft.com/forums/showthread.php?t=24892
Steve

Hi Steve
I am guessing that this is meant for Kristy? I don't have a car loan, by the way But I had a look at the thread anyway and I agree, it does contain great advice.

Regards
Alanna

 

[yo yo ma]

I had even checked whether it was one "n" or two in Alanna... Fixed it up now
Steve

 

[kristy77]

Thankyou "Yo Yo Ma". Very good advice, and I also learnt alot. It's definately put my hubby off of buying a house yet.
Unfortunately I have problems with allowing my emotions to control my decisions...
We were in the process of adopting, and after spending alot of time and money (and after being told we would have a child by the end of this year) we got told we don't have enough money to raise another child. When I asked them to elaborate, they said they have only accepted applicants who have a home - even if there is no equity yet. So our original plans of paying off our debts and adopting, THEN buying a house have been turned upside down. Basically, if we don't have a house in the next 6-9 months, then we have to start the adoption process from the beginning again (meaning another 2 years, more stress, and ALOT more money - the money we've already put into it would no longer be valid).
So in the meantime we are going to pay off our credit card (and lower it to $2000), and our P.loan v. quickly (in the next two months alone we can get it down from $6000 to $3990), and hoping to get an IP as well. Not sure if I'm totally dreaming! But hoping there's some way around this.
This is why I had wondered about the 100% loan, so that after fees etc we would have enough money left over (from the Family Tax) to pay off what's left of our P.loan.- Anyway, just a thought.
Any other ideas???

Kristy

 

[Alanna]

Kristy
I have never received family payment, so not sure how it works from your end, but I have had tenants pay their rent through it direct. Perhaps you could commence a Centrepay order to deposit your payments directly into your credit card or loan account. This way, you wouldn't even miss it (?) as you wouldn't have to physically withdraw it from your account and transfer it.

Money and emotions don't go together - they must be separated if you are going to invest successfully. Perhaps some reading in the investor psychology thread might be helpful to you, to develop the mindset of where you want to be. You definitely need to reduce the bad debt, fast and hard and then you will be able to seriously get in amongst it.

Personally, not having a mortgage or car loan, credit card debt etc, means that all money can be made to work for you. But my husband wouldn't agree, because I still have a serious love-love relationship with shopping!

Good luck
Alanna

 

[yo yo ma]

Basically, if we don't have a house in the next 6-9 months, then we have to start the adoption process from the beginning again (meaning another 2 years, more stress, and ALOT more money - the money we've already put into it would no longer be valid).
So in the meantime we are going to pay off our credit card (and lower it to $2000), and our P.loan v. quickly (in the next two months alone we can get it down from $6000 to $3990), and hoping to get an IP as well. Not sure if I'm totally dreaming! But hoping there's some way around this.
This is why I had wondered about the 100% loan, so that after fees etc we would have enough money left over (from the Family Tax) to pay off what's left of our P.loan.

Hi Kristy
I can see the urgency needed in your situation. I have heard the adoption process is a long, expensive one (I know a lady who adopted from overseas... it took nearly 4 years & cost $20k). I don't know if you can ask to have the application put on hold for a year?? Just a thought but they seem to do things strictly "by the book", so that may not be an option. It is a shame they didn't let you know about "only accepting applicants who have a home" before you had paid for it. Maybe let them know that this is the reason you want to put the application on hold?

When you get your $12k family tax benefit paid, you should pay it off the personal loan & the credit card (& yes, reduce the limit to $2k). The rest should be paid off the car loan. Then concentrate on getting rid of the car loan. These things will greatly help you, in being able to get a home or investment loan. If the lender can see you are working to pay off your debt, this should help.

Also, as Alanna has said, you could look at getting the family tax payment paid weekly, straight off the loan. This would be a great way of having it work for you, without you really noticing.

Remember, Rome wasn't built in a day... You have a lot of big & important goals set but maybe just slow down & you can work at achieving them. Good luck with everything.
Maybe you could print Simon's post out & have another read, so it sinks in.
My ideas only & I am not in the finance industry. Hope they help you a bit.
Let us know how you go with it.
Steve

 

[kristy77]

Thankyou.
The application is on hold, but next June it will have been two years since we have done our medicals, referrals, courses, and Lifestories, and after two years it all has to be done again (which is where the costs come back in).
So I guess I was hoping we may be able to get an IP, and still pay what ever xtra we can on our loans. Anyway, not sure what we'll do now - probably leaning more towards paying off most of our debts first.

Kristy

P.S. Just an idea - what are your thoughts on buying say 1000m2 land and putting IP on one, and subdividing then selling the other block when prices rise (we're looking in area where land prices are already rising quits quickly).
Would this be downright crazy, or doable? (Of course thinking of paying off remainder of debts with land sale).

 

[yo yo ma]

Thankyou.
The application is on hold, but next June it will have been two years since we have done our medicals, referrals, courses, and Lifestories, and after two years it all has to be done again (which is where the costs come back in).
So I guess I was hoping we may be able to get an IP, and still pay what ever xtra we can on our loans. Anyway, not sure what we'll do now - probably leaning more towards paying off most of our debts first

Don't just go with what we write on a forum... If your broker can get you pre-approval & that is what you want to do... then go for it. It may be a booming area & you could do really well out of it... most importantly, you will have the house & be able to adopt. I am just advising that you think about it before going with the IP now because if the area does not do so well & you do get behind & the place gets repossessed, then you will be much worse off.

You don't want to get the place but then be really struggling to pay the rates or repairs or having no tenant or something else that comes up. If you paid down most of the high interest loans (personal/ credit card) then you are going to be a lot more comfortable, when these other things do appear.

For the land, you need to have a look at the figures. It may be possible but you need to put the figures on paper & work out how much you will be out of pocket each week. You have to include stamp duty, loan repayments, rates, property management fees, lenders mortgage insurance, repairs, insurance (building, contents, landlords), interest rate rises etc etc.

Then look at whether you can afford this. Sounds like it could be possible but you have to be realistic with the figures, so you don't get into so much debt, that you can't service the loan. If for example, the interest rate on your new loan is 8% & the interest rate on the personal loans/ credit cards are 18%, it is a significant saving to pay those loans off first. This will give you a "buffer" for when other expenses come up.

I am not saying don't buy the IP, I just think it would be better to reduce/ eliminate the other loans first. I understand the need to get the place quickly for the adoption but it may be better to wait?

Alex wrote earlier that you could be able to pay your loans off in a year. Maybe it will take 18 months but if you really get stuck into them & pay them out, then you will have so much extra cashflow. Maybe then reapply & pay again for the adoption process. It is not ideal & would cost you ?a few thousand, but you will then be in a much stronger financial position.
Just some ideas to think about
Steve