Investment Strategy

Hi all,

I am just about to get permanent residence and I want to get in the market. I have done a reasonable amount of research and narrowed down 4 options. for the investment strategy focusing on long term (over next 10 years) wealth creation. Scenarios drawn below only relate to first year or two.

Quick Facts:
- $60k in savings
- > $120k combined net income
- First Home Buyer Grant eligible

Scenario 1:
First step: Buy a property around $500k (+/- 25k) and live in it - e.g FHBG.
Second step: Acquire 2-3 investment properties in the price range ~$200k
Note: It will be hard in the area we are looking to find a place for $500k but we would benefit from the FHBG and would have the cash at hand to get IP quicker.

Scenario 2:
First step: Buy a property around $650k mark and live in it
Second step: Acquire 2 investment properties in the price range ~$200k
Note: $650 is more in the range of properties we would like to live in but we would miss out on the FHBG and would need to save a little while before we have the cash to get more IPs

Scenario 3:
First step: Buy a property around $600k mark and rent it out. Would result in rental return of ~$550/week and hence negative gearing + tax "benefits". We would still rent a place for ~$550-$600/week.
Second step: Acquire 2 investment properties in the price range ~$200k
Note: Would miss out on the FHBG, would benefit from tax reductions due negative gearing and increase cash flow - I am not sure about the exact numbers.

Scenario 4:
First step: Buy a property around $500k mark (+/- $25k) and live in it for 6 month, then rent it out (~$500/week) while going back to rent for ~$550 to $600 a week.
Second step: Acquire 2-3 investment properties in the price range ~$200k
Note: Mix out of 1 and 3

For all scenarios I would add an 100% offset account to the first property in step 1.

I would appreciate if someone could provide advise which scenario would be the smartest and quickest considering wealth creating as priority. Please include reasons in your answer or point me to a post where something similar has been discussed - I did not see one yet.

Thank you very much - any comments are welcome and I will provide more details if necessary :)

Mike :cool:
 
I would appreciate if someone could provide advise which scenario would be the smartest and quickest considering wealth creating as priority. Please include reasons in your answer or point me to a post where something similar has been discussed - I did not see one yet.

The first home owners grant (the 7k) doesn't have a price limit, I think? The stamp duty exemptions do.

Buying your PPOR first, and a relatively expensive one at that based on your income and asset level (i.e. none), is actually not the smartest and quickest way to build wealth. The interest is non-deductible, and it savages your borrowing capacity. A 650k ppor, with 60k savings would require a 90-95% LVR loan. LMI would take a bite , and your repayments would be something like 40k a year IO, plus costs, none of which is deductible. The same property, I'm guessing, would rent for 500pw, or about 26k a year.

Buying IPs first and renting cheaply makes sense if yields are relatively low (as they are now). However, if you're going for scenario 3, why do you have to buy a 500-600k IP? You're clearly willing to go for cheaper IPs. Why not just rent wherever, and buy cheaper IPs? Cheaper IPs often have higher yields.

Option 4 needs more number crunching. While you get the 7k fhog, you miss out on 6 months of interest, expense and depreciation deductions. On a property with about 450k in debt, that's about 14k in interest in 6 months, another k or two of expenses, and a couple of k in depreciation, at least. So the 'benefit' of the fhog pretty much offsets the tax deductions etc you lose, though of course you have to consider the rent you save as well. People seem to think they don't want to 'miss out' on the fhog, but I would also consider the loss of tax benefits while you live in the place.

Buying a property as an ip only gives you more freedom to choose areas, because you don't have to want to live in it yourself.
 
Hiya Mike

As a first step I would suggest u stick to +_ 500 k for the PPOR

at 500 k the stamps are zero as FHB at 600 they are 22.5 k

Given that ur least resource right now is equity or cash,that may be step one ?

ta
rolf
 
Hi Mike and welcome!


I think you have forgotten to include LMI into your scenario.

With a 60k deposit you cannot afford a purchase of 600k. The best loan scenario would be a 95% lend where you would actually need Approx 80k.

Even at 550k Purchase your LMI is approx 25k bringing you up and over 95% LMI which might be okay with a lender that will Cap LMI. A long stretch though.

I think 500k is much more realistic.

I wonder why you plan to acquire two more IP's. I am not saying this is impossible, only querying why 2? The price range does not matter, only that 200k is fairly low if you wish to acquire more. (Capital Growth Versus Rental Yield)

You also say you have more cash at hand to buy an IP? More than 60k?

What is your goal? :)

Regards JO
 
Scenario 4. I agree with the other posters:
- Stick to a 500k property
- Rent it out & then you lease a property yourselves. If your aim is to build wealth as quickly as possible, try to cut down on your rental expenses. Can you live somewhere where the rent is less than $550-$600? Paying $600/wk will negatively impact your servicing capacity for IPs.
Suggest you work through these scenarios with a good broker who can start with the end in mind & show you the impact of these choices.
 
Thanks all for your feedback. Much appreciated.

Alex:
The FHOW only applies for properties up to $750k afaik. The stamp duty excemptions are staggered between $500 & $600k for NSW.

Re your other points. We would like to have the option to move into the IP if required and we are not willing to move to far away from where we are atm - hence the high price on the IP and also why the rent that we pay is reasonably high.

Your comments on Option 4 is very good - I am not necessarly keen to get the FHBG as I am aware of that fact. I just need to refine the "numbers game" a bit more :)

Rolf:
Thanks - I am starting to tend towards that option.

Jo:
I did not exclude the LMI yet. I am aware that it will make it very tight and I have been is discussions with banks already to see if it is feasible. In the worst case we have to wait another month or two the have the necessary savings. I am looking to get two more IPs as a goal for this year. Assuming option 1 or 2 this is entirely possible. I could access some other $20-30k in funds if necessary. My goal is to build up wealth as quickly as possible while not cutting back on my life style (e.g. area where I live). Owning our first own home has second priority and tax benefits are third. Does that help?

Ms Jade:
Thanks - I will look for a good broker - any suggestions? Renting somewhere where it is cheaper is not really an option due to several reasons.


Thank you again for all your feedback - please let me know you have any other thoughts or hints on what to do - also directions to a good broker/accountant would be appreciated - I am in the Sydney area.
 
Alex:
The FHOW only applies for properties up to $750k afaik. The stamp duty excemptions are staggered between $500 & $600k for NSW.

At the 750k sort of level, how much impact would the first home buyers grant have anyway? 1% of your purchase price?

Re your other points. We would like to have the option to move into the IP if required and we are not willing to move to far away from where we are atm - hence the high price on the IP and also why the rent that we pay is reasonably high.

The general strategy I'm outlining is to focus on IPs only, and not consider the possibility that one day you'll move into any of them. If you want to live in a particular area, keep renting until your portfolio grows to the point where you can buy the ppor you want AND keep investing. I rented and bought IPs for 8 years before buying my PPOR in an area that I was happy with.

If you're going for the 'many ips' strategy, how many places can you live in yourself? Why does one of them have to be in a place you want to live in? Why not just get IPs, when buy the PPOR later?
 
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hi maikeru,

You will need to buy in a good growth area.

Based on your information, I think you ought to forget scenario 2 and 3 as you have not enough deposit for these amounts.

That leaves 1 and 4 and I also say Option 4.

Option 4.

If you purchase your OO - you not only get the FHOBG, but you will also be able to claim the Capital Tax Exemption for your OO.

You can still rent out your property and STILL claim the exemption for 6 years- you should seek advice from an accountant.

I say that the CGT Exemption rules out the downside of not being able to claim deductions. Especially if the possibility for Capital Growth is strong in your area.:)

Regards JO
 
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