Investment Advice Needed - Melbourne

[DinoJess]

My partner and I are looking to purchase an investment property together. Our finances have been approved to the value of 700k for the purchase itself.

Our immediate plan is to purchase a house (ideally minimum 3 BR) on a block of at least 600sqm. Our medium term goals will be to renovate the existing property and subdivide the block. Like everyone else we are trying to capitalise as much as possible on CG but also build our equity over time through the subdivision process.

Our question is (and this is probably the question everyone is asking) what is a good area to invest in for this price range, considering the future plans we have for this property?

So far based on the research we have done, our potential target suburbs are in the Bayside and Eastern suburbs, they include:
- Cheltenham
- Mentone
- Moorabbin (likely just out of our range)
- Forest Hill
- Vermont
- Heathmont
- Ringwood North
- Ringwood

We particularly like Cheltenham, Heathmont and Ringwood North.

Cheltenham seems to be following similar trends of neighbouring suburbs like Highett, Bentleigh East and Moorabbin, which have all done quite well in terms of CG. It also offers quite good rental return - upward of $460 generally which is a reasonably good yield we believe. I have also been advised by multiple people in the industry that Cheltenham is a good option.

Ringwood North and Heathmont seem to be surrounded by a lot of new developments, freeway access, offer great sized blocks, are good family zones (which we think will add to rental security), good local facilities (Eastland, transport etc) and offer good rental yields (particularly in Ringwood north $450+ p/w).

Any advice on the areas we have highlighted and also suggestions of other possible areas that we have overlooked and would suit our criteria would be greatly appreciated!

Thank you in advance!!

 

[strongy1986]

So your going to spend 700 and your happy with 460 rent?

I would hope your subdivision strategy is very aggressive

 

[DinoJess]

We are prepared for a negative geared property (calculated to be about -$400 to 500 a month between 2 of us based on our interest rates), which we see as serviceable and worth it in the long run.

We are hoping to undergo the subdivision within 12 months of the purchase but that is really dependent on local councils and how quickly we can get things over the line. Ideally to have the subdivision and construction of the second dwelling complete in 2 years from purchase date (which equates to about $12,000-15,000 in interest alone over the period based on our current rates and predicted increases over that term). We see this as manageable between the two us and well worth the investment.

 

[strongy1986]

Well with the figures you have provided you would be out more like 1300 a month on 100% finance
So I'm assuming you have a couple of hundred k deposit which will make it feel less cash flow negative

I only say that because of opportunity cost

Not saying you won't make a bundle though

 

[Jake Milne]

Hi DinoJess,

Couple of quick questions before we talk about areas...

How many properties do you currently hold (including home)?
Have you any experience with sub-divs and/or building?
Will your strategy be to sell the units or to hold?
Have you set any goals as far as profit is concerned?

Feel free to PM me if you don't want to openly divulge this info.

 

[DinoJess]

Thanks for your reply.

We've worked it out based on a $690,000 loan at 4.27 - 4.77% (current rate is 4.27 with consideration of a rate increase or two along the way) and a rental income of $460. The rental income may be more or less but we are prepared for the monthly servicing costs if it is less - really dependent on the location we choose.

We have additional funds to cover other purchase costs including stamp duty, legal fees etc.

We are open to other suggestions as to what people would do in our situation. This was just one idea we had but as we mentioned we are relatively new to the game and would love to hear some advice from other more experienced investors out there.

I guess for us at this stage, location is heavy on our mind as we really want to maximise capital growth over the next few years to capitalise on the subdivision we intend to do.

 

[roypropertyinv]

You cant squeeze an extra $50k and buy 3 in Frankston North on 600m2 blocks for $250k each?

You'll get around 5% rental yield, there's subdivision potential and you'll reduce the 400-500 monthly holding costs.

 

[The Y-man]

We are open to other suggestions as to what people would do in our situation.

This is the main problem jake was alluding to - very difficult to give views without knowing what your situation is.

Your combined household pre tax income, current liquid assets etc

The Y-man

 

[DinoJess]

Thank you all for your responses!

Jake,

Currently we have 2 properties.
Nil practical experience with sub-divisions.
We plan to sell both or possibly hold onto one depending on our circumstances at the time. We are keeping this decision flexible depending on market conditions and our own financial situation at that stage.
In turn, our profit goals are dependent on which way we decide to go with it when the time comes.

Y-man,

Without going into too much more detail about what we earn we have set our borrowing capacity at $700k, utilising most of the equity we can in our existing properties.

roypropertyinv

That doesn't sound like too bad of an idea but we are not really interested in Frankston, we feel it's a bit too far for us and not what we are looking for.



So in reality we are in the market below $700k. After attending a couple of auctions today in the Forest Hill and Vermont areas we are fast learning these locations may be well out of our reach. We also attended one in Ringwood North, which ended up going at $690 for a old run down 3br on a 800sqm block. Ringwood, Ringwood North and even Heathmont are feeling like good potential options for us. Thoughts?

Would love to hear opinions on these areas or any other that fall in a similar bracket.

Thanks!

 

[Jess Peletier]

If your $700k borrowing limit includes all your available equity, do you have separate funds to pay for the subdivision?

And is the $700k limit just for this purchase, rather than your total borrowing capacity? You'll want to be sure you have enough serviceability to allow you to borrow more for the build too.

 

[DinoJess]

If your $700k borrowing limit includes all your available equity, do you have separate funds to pay for the subdivision?

And is the $700k limit just for this purchase, rather than your total borrowing capacity? You'll want to be sure you have enough serviceability to allow you to borrow more for the build too.

Hi Jess,

I still have some available equity as well as a share portfolio that I plan to covert into a deposit to finance the subdivision when the time comes.

The $700k is just for this purchase.

We are projecting somewhere around the $350-400k mark for the subdivision costs including construction of a two storey 3br townhouse but this likely won't happen for at least 12 months after the initial purchase.

 

[Jess Peletier]

Just bear in mind that the actual sub division costs won't be able to be funded as part of the construction, so you'll need to have enough equity in a LOC (or cash) to pay for those costs.

 

[DinoJess]

Just bear in mind that the actual sub division costs won't be able to be funded as part of the construction, so you'll need to have enough equity in a LOC (or cash) to pay for those costs.

Okay thanks Jess

 

[DinoJess]

We have decided it would be best to talk with a financial advisor to review our plans and discuss other possible options for our investment strategy. Can anyone suggest a good one in Melbourne in the mid to outer south eastern suburbs?

Thank you

 

[strongy1986]

How did you calculate 500 a month
I think your calculator is broken

 

[DinoJess]

How did you calculate 500 a month
I think your calculator is broken

$690,000 x 4.27% / 12 months = $2455 per month interest

$460 rental income x 52 weeks / 12 months = $1993 per month income

I know we haven't taken into consideration additional holding costs but this was just a rough calculation to begin with. Financially we are able to service the loan comfortably up to $800 a month out of pocket so there is room there for us to manage additional costs and the possibility of increasing interest rates along the way.

 

[Peter_Tersteeg]

Lenders generally assume the holding costs outside of interest are 20% of the rental income, so you'll probably only see about $1600 a month from the rent. Your out of pocket based on your other assumptions (which are also optimistic) leaves you with out of pocket expenses somewhere between $800 - $900 per month.

Experience tells me that this is reasonably normal for Melbourne properties at the moment.

 

[DinoJess]

Lenders generally assume the holding costs outside of interest are 20% of the rental income, so you'll probably only see about $1600 a month from the rent. Your out of pocket based on your other assumptions (which are also optimistic) leaves you with out of pocket expenses somewhere between $800 - $900 per month.

Experience tells me that this is reasonably normal for Melbourne properties at the moment.

Thanks Peter, that's good feedback. We plan to see a financial advisor so we can crunch our numbers more accurately. We are still in the very early stages as you can see.

 

[DinoJess]

We are still very interested to get some feedback of good areas n Melbourne (leaning toward the outer East and Bayside areas), areas where steady capital growth will be achievable and relatively good rental yields. We are shopping in the $600-700k bracket so areas in this range would be ideal.

We are considering Ringwood, Ringwood North and Heathmont as possible options. Thoughts?

Thanks guys!

 

[Beanie Girl]

Hey DinoJess, have you considered Pascoe Vale and Pascoe Vale South suburbs (north-west) particularly some houses in the above 2 suburbs where it is zoned for Strathmore Secondary College, a good government school. I think I see brick/weatherboard houses with land within the 620-740 range, Cheers.