Just starting - Advice?

I am just starting on this path and I was hoping someone might steer me in the right direction.

I am fortunate in that I am earning good money ($120K) and paying almost no rent as it is company subsidised. Most of my money is in shares ($40K), and I will leave it there, but I have about $10K in cash for a deposit.

Speaking to a bank, only one so far, I can borrow up to about $350K.

So...what do I do?

1. Do I buy an IP worth ~$100-$130K (I&P loan) and just pay it off quickly to build up security.

2. Do I do the above with an IO loan of ~$70K and a credit line of ~$30-$60K. Assuming I can still borrow up to the amount originally suggested (do banks work like that?), I can use the credit line to get the deposit for another property worth ~$180K and get another IO / credit line loan - so I have two properties instead of one?

3. Do I wait and save up the rest of the deposit and just get one house worth ~$300K?

4. Something else I have not thought of?

There is a unit I am interested in that is only $100K, but I really am unsure just how to start!

Any help would be appreciated.

Dump the shares and buy property.

Buy at least 2-3 places in an area that is still going up in value. Ones that have not YET gone up, or whose value is out of whack with the cities. ie your 100k property if it rents for 140-160/week will be a sure fire 10-20k short term gain. I personally like Cairns, outer areas of Brisbane, parts of SA and Tas.

In two to three years time (ie when everyone says what an awful investment all property is) buy some (2-3 if possible) say 3-400k properties in Sydney CBD, or 5km's of CBD preferably, or Melbourne.

When these go up, use the increased value to buy in outlying areas in Sydney, Melbourne, buying better and better quality properties each time.

Repeat the process ad infinitum.

By that time you will be able to afford to retire, or at the very least get divorced:)
My two cents worth.

1. All things being equal, an IO or LOC will give you better flexibility than a P&I loan. IO loans can have offset accounts attached, so they can "behave" like a P&I loan virtually, and a LOC is like an IO loan plus offset account in one.

1a. Your deposit might be the limiting factor for investment properties. At 80% LVR your $50K is only good for a $250K loan as far as I can tell.

2. Being on a high income suggests there are greater tax benefits to be achieved, but that is not to say to structure your finances purely for the benefits of tax advantages, when the real idea is to be creating wealth. Get familiar with a spreadsheet and start playing around with numbers.

3. The fact that you are not paying off your own home means you have a high disposable income. You are quite capable of buying 2-3 investment properties if they are $100K each such that your own income is quite capable of servicing the debt, even if they were all vacant. If you had more deposit, therefore, you could probably even have 4-5 units at $100K each when you take into account you'd be very unlikely to have > 1 property vacant at any given time.

4. Leverage other people's money to create wealth for yourself. If you believe these units will appreciate in value, then what you are looking for is rental income + capital gain > interest + maintenance + expenses. Note that positive gearing usually means the above equation still holds true when you strip capital gain out of the equation. Negative gearing holds to the above equation but you are gambling on something (capital gain) that you cannot predict.

5. Negative gearing becomes more a question of debt serviceability using that viewpoint. For example, if a property is costing you $2K per annum out of pocket but is appreciating in value by $10K per annum, you're still $2K per annum out of pocket but are earning a paper profit of $8K per annum. If you can get $8K per annum from one property, and you can afford to cover repayments on 2-5 properties, why not get 2-5 lots of $8K per annum instead?

6. Be very aware that Negative Gearing is founded on the hope of achieving a capital gain in the future, in return for a loss today. Positive Gearing is much safer in that you are profiting from day one, but more importantly you *know* you are profiting from day one. The amount of IP's you can have Negatively Geared will always depend on your income - with Postively Geared properties they are self-sustaining and the sky is the limit.

7. Do what you feel comfortable with. You can buy unit for $100K and on your income can probably pay it off in 2-3 years, and own it outright, giving you equity for the next purchase. You could also have IO loan with the extra money in an offset account to purchase the next unit when you have enough cash. I think you need to look at this with a spreadsheet to determine the better strategy, but it will depend on "guess" factors such as potential capital gains, potential rent increases etc.
I would keep the shares as well, nothing wrong with diversity. In your position I would look for a small begining with a unit so you can get a feel for the market and wether you feel comfortable investing in property. I would use LOC loans if possiable as they can be redrawn for further purchaces as your equity improves. A 110% loan may be posiable for you using your shares as a deposit giving you the most tax benifits. Nothing down would often mean your making a negative return through rent and other costs which can be claimed against your taxable income. Over time rents should increase meaning your will start to improve your bottom line. If you get capital gain that will reduce the 110% debt to equity level, a lot of people will keep that level to 80% drawing off the excess to fund more purchases. Less agressive people save a deposit for there purchases letting there capital grow without paying off any of the original loan, it takes longer to get from a to b but it is a safer smoother ride :)
You said:
Speaking to a bank, only one so far, I can borrow up to about $350K.


To get a better feel for what your options and true borrowing capacity may be, make sure you don't just talk to one or two banks. You'll find your borrowing capacity and options vary dramatically between lenders and loan types.

At the risk of using Rolf's line............"see an Independent Mortgage Broker" early on in the process.


The 550k you said you can borrow would depend on the properties you buy. If you got 60-100k ones you would probably be able to borrow double that, depending on the rental return.

One of the most important things I learnt was this:

A bank will tell you if you can do something you ask about. A broker will tell you what you CAN do.

Either Rolf Latham (this forum moderator) or Kellie Dutton 0413-925-943 should be your first port of call. They are both excellent sources of information (and money!). Rolf constantly refuses offers of lunch :), so I have to say due to this (I haven't met him)that Kellie is better looking!
You can't help bad luck! Mind you, I used to live in Adelaide in Seaton Park about 150 years ago. (ha!ha!)
I still have family there. in fact we sailed the River Murray in a luxurious house boat over the Christmas period. All very nice, but that doesn't help you.
Keep in touch with this forum, the contributors have heaps to help you with. You may need to be more specific about what you are asking for. If I can help you at all give us a hoy!