Is this too much too fast?

[aw1]

Hi All

Allow me to introduce myself, I am a 27yo software developer and property investor from Darwin, NT. I have owned a few properties together with my father - thus far we have always invested together (except for our PPORs).

My situation is currently this:
* I pay myself a salary of $85k pa through my company. I might be able to increase this a little (maybe to $90k, or $95k at a stretch) but I'm quite lazy and don't want to work more hours
* I am paying off my PPOR, a 3+study in Durack, NT. Paid $430k overall for land, build, landscaping, pool etc. Value is ~$490 - $510k. Owe $360k.
* Have an investment property also in Durack, NT. I snapped it up the minute it came up - DHA was selling it and it was a striking bargain. Bought it in September 2006. It is a 4+study, ground level 369m2, pool, lakefront. Paid $485k and recently had it revalued at $620k, although I think even this is a little pessimistic (recent sales suggest $650k-$680k). Dad and I owe $510k on this. The poor rental return is a major factor in us wanting to hold on to this -
as it may affect the sale price. We are getting $440pw. I was on holiday when the rental valuation came and I could not object within the mandatory timeframe. I had plenty of evidence that this was well below market rent. In the new year I am expecting rent will go to $500pw.
* Dad owns his home, and has nothing else secured against it, and would prefer to keep it this way (I don't have anything additional secured to mine either and would like this to stay the same also).
* Dad also owns a block of land worth $250k and owes nothing on it. Our IP in Durack is secured against this.. this is really what got us a leg up in starting to invest. Generally I do all the work - research, getting the loans, and management where applicable.

So our overall gearing on the two cross-securitised properties (IP in Durack and block of land) is a touch under 60% (dependent on new valuations). I am quite comfortable with this. I am personally exposed to the loans on my PPOR and the IP in Durack so guess I have a debt exposure of $870K.

I have now found another potential IP - in a set of townhouses that I have been waiting for someone to sell for quite some time. It is $320K and we would borrow 100% + costs as we did with the first .. for a total of $335K. Our LVR on the three cross-securitised properties would still be well under 80%, but affordability is a much closer thing. Rent would be $320-340pw. Bank says it is affordable - dad is also on roughly $85k pa but may retire in the next 5 years.

This is where it gets a bit difficult.. I can't imagine these properties will be anything but very negatively geared in the next 5 years. This poses a problem for dad as he will have no income in his retirement to offset the property losses against.

So after this on our investment property overall we would have $845K owing on roughly $1.2 million worth of property. I feel comfortable with this.. but others I approach (perhaps those more risk-averse) seem to think this would be a scary and undesirable situation. What do you guys feel?

I would like to go ahead and buy this as I have been waiting for one in this complex for some time and didn't expect it to be anywhere near this cheap. Another is for sale private sale and they are asking $387K. Also, I do know of a duplex pair that just went up around the corner that are renting for $440pw each and they are ground level. They are newer, but smaller. Also a townhouse block has just sold at such a price that there is no way the townhouses will come on the market at less than $450K. So I feel at $320K I am buying in at the right price, even though it is older (built in 1998 I believe).

Appreciate any thoughts.

Regards
Adam

 

[karina]

Adam if you believe the deal on the townhouse is so good then buy it. What is the worst thing that could happen, you sell it for a profit (sounds like it is being sold undervalued by what you are describing). As long as you can afford to hold onto it for the medium term I don´t see why you shouldn´t buy it. Your LVR would still be acceptable under 80%.

Is it the numbers that are scaring you, the $ amount of debt? Can you afford the negative gearing on it? Would you kick yourself if you don´t buy it? Could you make a quick profit if you bought it and onsold it? Just a few things to think about, at the end of the day its your decision as you will need to meet the mortgage repayments each and every week.

 

[want2bewealthy]

Ohhh finally, another Darwinite!
good to see.

 

[kissfan]

Hi aw1.

Without even looking closely at your figures, your selection criteria, etc etc etc, as long as you are looking long term and you can afford to buy comfortably, I would say buy as often as you can and let the beauty of compounding do it's magic.

Regards
Marty

 

[BV]

Hi Adam,

I am not an expert on Darwin but considering that these properties are very negativelly geared,
it makes me think that their prices could stagnate for a while if not fall.

We also live in uncertain economic times so we should be careful not to overstretch ourselves.

Additionally, have you got an exit plan?
i.e. have you got some money ($50-100K) left over in an offset account for a rainy day in case something went terribly wrong? ( lost job, got injured, sky fell down...etc etc)

Have you got the right loan structure?

Good luck.

 

[want2bewealthy]

Funnily enough, I was listening to a local radio broadcast in the car the other day and they were talking about how expensive rents are in Darwin compared to all other states, very high rents compared to any other capital city.

 

[quintets]

Hi Adam,

Taking your loan towards 80% is a relatively aggressive strategy. Do you have a plan for working that down in the next five years? In particular, where do you want the debt levels when your father retires? Have you done some cashflow projections to make sure you'll be able to service the debt.

I don't now how Darwin is going, but if you think the townhouse is undervalued, then you probably should buy. You just need to be willing have clear criteria on whether it's a dog and then sell if your assumptions about the market staying level of rising turn out to be false.

Otherwise, congrats for achieving this at such a young age. I wish I had done that much when I was 27.

Jireh

 

[aw1]

Hi guys

Thanks for the replies.

I am definitely looking to the long term myself, and dad has plenty in super for his retirement, so I would suggest he is looking long term too. I certainly agree that Darwin is no longer a rising market.. some parts are still going well.. but overall sales volume is down heavily. Coincidentally I was a software developer on the local Land Information System (Title System etc.) and thats actually where my interest in property investment started - I saw bargains!

My strategy (from what I have figured out so far) seems to be, buy undervalued where possible (hard to do unless you know a market intimately) - gaining some instant equity, but going for the long term. One thing I have missed is diversifying.. I feel like I should be looking elsewhere as well.. such as some of the slowly ramping up areas of Brisbane. I am somewhat attracted to the rental yields here, but I really did start at the wrong phase of the cycle - my relatively good income is the only thing that helps me here. I feel the area I live in (and where my current IP is, and where the new townhouse also is!) still has a long way to go. The lifestyle here in this suburb is just so much better than I've experienced anywhere else in Darwin - everything is well planned, lots of infrastructure, bike/walking paths throughout, lakes and a golf course and none of the things that cause problems (local shops selling grog etc. - a huge problem here). It's a Delfin estate that has just finished (started in 1996 and I believe they have shut up shop here just recently).

I like that I am getting balanced opinions here - certainly I would kick myself if I missed out on up to $50k instant equity, but as BV mentioned, a buffer sitting somewhere would be nice and I really haven't done that yet. I should probably also look at my insurance arrangements as I do not currently have any income protection insurance.

It's really the numbers that scare me, I can afford the loans - I wouldn't say 100% comfortably, but in normal times with plenty of work on and good health I always have the opportunity to work enough to earn enough to afford all my commitments. I am quite a fan of the lifestyle though and generally try to limit my hours.

I forgot to mention, we did have some success recently where we purchased a block of land for $270K (an acreage) and resold it a year later for $335K (we waited for the 50% CGT exemption). But selling a block of land in that price range - even though it was desirable - was a hard slog. Was it worth all the worry, I'm not sure?

Rents are very high here.. I believe the median for units is $300 a week and houses $400 a week. You can certainly get some decent ones at the cheaper end of the market though, I think much of it is that people are wanting to rent new houses. There are a lot of new houses on the rental market here asking $450-$600 a week but they also cost $450-$600k to build! I tend to feel I would set my rents a little higher than market rent, in the hope of finding a good tenant, look after them (respond promptly when there are problems etc.) and hopefully they do the same for me. It also sets a precedent, as I would generally (even if for psychological reasons) not reduce my rents.

ps/ All my loans and other business are currently with BankSA. They have looked after me thus far, but only to the extent of being responsive and helpful and waiving application fees. My home loan is on the professional package rate of 7.62% variable, and the current IP is on a 7.1% fixed rate (love that now in hindsight!!). The new one would be @ 7.8%. These are no better than any other consumer could get walking in to the branch though - should I be pushing for more? I would actually prefer to be using homepath for all my loans as I do not need much in the way of handholding (and i know their service can be terrible), but they do not allow vacant land as security

Adam

 

[granev]

adam
how do you think that asking above the market rate will get you a better tennant - my theory is asking slightly below the asking rate will give you a few to choose from , and with the help of refrences , help you to get a good tennant - i would have thought that critical in darwin

dont ever underestimate what a good tennant is worth

and as for bank SA - shop around and quote figures - what do you have to lose /

 

[BV]

and as for bank SA - shop around and quote figures - what do you have to lose /

Actually, I would stick to the major banks for now.
That way you will be buffered from any sub-prime surprises...
Cheers

 

[granev]

Actually, I would stick to the major banks for now.
That way you will be buffered from any sub-prime surprises...
Cheers

so would i , but that doesnt mean you wont get a better deal from one of them - i had a home loan with bank sa once , but then i got a better deal from anz - it costs nothing to ask the question

 

[aw1]

I'm actually going to go with a fixed rate - I will avoid the fringe lenders generally in any case.

I have decided to go ahead and buy the property. I am 100% sure that the property is underpriced and I am going to run with 'whats the worst that could happen.. I could sell it for a profit down the track..'

I feel confident in this end of the market, and think it is great value, at a time when people (even locals) are buying $800,000 apartments off the plan in the expectation they will be able to resell it for more when construction completes. Madness!

Adam

 

[BV]

I'm actually going to go with a fixed rate - I will avoid the fringe lenders generally in any case.

I have decided to go ahead and buy the property. I am 100% sure that the property is underpriced and I am going to run with 'whats the worst that could happen.. I could sell it for a profit down the track..'

I feel confident in this end of the market, and think it is great value, at a time when people (even locals) are buying $800,000 apartments off the plan in the expectation they will be able to resell it for more when construction completes. Madness!

Adam

Hi Adam,
Don't be too confident that the townhouse is undervalued.
I don't know the location but sometimes prices are adjusting downwards
and properties that were selling for more $ 12 months ago could be seen as cheap now.

Anyway, try to negotiate the price further if possible.
I am guessing that you will be in your 30% tax bracket for this one
so you won't be getting back much from tax.

Good luck

 

[alexlee]

I feel confident in this end of the market, and think it is great value, at a time when people (even locals) are buying $800,000 apartments off the plan in the expectation they will be able to resell it for more when construction completes. Madness!

Adam

This is interesting. $800k is a lot of money even in Sydney. If there are people buying $800k apartments expecting to resell it before completion for even more...... I would NOT be confident about the market because it doesn't seem rational.
Alex

 

[aw1]

This is interesting. $800k is a lot of money even in Sydney. If there are people buying $800k apartments expecting to resell it before completion for even more...... I would NOT be confident about the market because it doesn't seem rational.
Alex

Yes, I am certainly NOT confident in the $800k apartment market. I am, however, confident in the end of the market I'm looking at.. low 300's. In fact, I do expect the high-end apartment market to falter big time, but I cant see that having anything but a positive effect on the lower end... and 300k really is the low end in Darwin.

 

[aw1]

Got a contract today for $312,500 which I was really happy about, and also managed to push for a good deal on the finance. BankSA/StGeorge gave me a discount on their 3 year fixed rate from 7.8% to 7.59%.

Thanks for all the advice. I am now considering whether to manage it myself or concentrate on other things.

 

[alexlee]

Ask yourself, do you want to be a property manager or a property investor?
Alex

 

[GoAnna!]

Ask yourself, do you want to be a property manager or a property investor?
Alex

alexlee...... just curious......have you ever self managed?

 

[alexlee]

alexlee...... just curious......have you ever self managed?

No, it's something that I prefer to hire someone to do. Like mortgage broking. To be honest I've never had the opportunity to since all of my properties are not in NSW and I'd been overseas. Even now self-managing interstate properties wouldn't be effective, IMHO.
Alex

 

[want2bewealthy]

AW1,
Just a short note to let you know that I asked Australian Property Investor magazine a few questions regarding Darwin's current issues and future prospects last month, they wrote back to let me know that they will be answered in the October edition if you're interested.