Looking for advice..

[eagledream]

Hey all,
first post, although have been trawling the boards for a while now. The majority of posters here seem to possess great knowledge with regards to investing and other inexperienced posters have recieved some great advice so i suppose i'll throw my hat into the ring and give you the low down on my current situation.

I'm 21, i completed my degree last year and am paying off a $18,000 HECS debt. I work full time in the Adelaide metro area with an annual income of approximately 60k. I anticipate by mid next year i will have saved approx 40k. I want to buy a property to live in, not as an investment. Depending on where i buy am i likely to find it quiet hard to get into the market? I'm pretty careful with my money but everything with regards to buying a place is so daunting. With my wage what would the banks likely lend me? How much should i lend with the current housing and intrerest rate trends? How big is the struggle likely to be. If i buy in a years time am i going to miss the boat of the current stable market? Any advice would be greatly appreciated, if any other info is required i'll be back and let you know. I'm extremely inexperienced with few information resources available, besides you guys.
Cheers.
P.S - sorry for the long post!

 

[alexlee]

I work full time in the Adelaide metro area with an annual income of approximately 60k. I anticipate by mid next year i will have saved approx 40k.

Very impressive.

I want to buy a property to live in, not as an investment.

May I ask why? At your age, having just started work, can you see a time when you might transfer to another city, or want to work overseas? Or want a different property type than you would currently buy?

Is it because people have been telling you rent is dead money, and that you 'should' own your own home? Are those people who tell you this wealthy? If not, maybe you should challenge the assumptions. You'll find that a lot of successful investors on this forum don't own their own homes, bought their PPORs after buying a couple of IPs, and/or their PPORs is only a small portion of their total assets.

You could buy investment properties (multiple if you can) over time, and rent in the meantime for the flexibility.

I'm pretty careful with my money but everything with regards to buying a place is so daunting. With my wage what would the banks likely lend me? How much should i lend with the current housing and intrerest rate trends?

For that you need a good mortgage broker.

How big is the struggle likely to be. If i buy in a years time am i going to miss the boat of the current stable market? Any advice would be greatly appreciated, if any other info is required i'll be back and let you know. I'm extremely inexperienced with few information resources available, besides you guys.

How much exactly are you saving? As a % of after tax pay. If you manage to save 40k in a year (I'm assuming you're living at home?) I don't think it'll be much of a struggle for you to get a place.

May I suggest reading a couple of property investment books? Jan Somers and Peter Spann to start with. Also read The Richest Man in Babylon and Rich Dad Poor Dad. That'll give you a good grounding.

In all honesty, if I were you, I would buy investment properties. And keep buying. If you need to move out, rent: maybe share with a friend or two. In a few years you may well find that you find a job in another city or go to London for a working holiday. It would be much easier to do this if you have IPs instead of living in your own place. Tax advantages are much better for IPs than PPORs (if you don't sell, and you don't need to sell), and you get into the habit of thinking about property as an investment instead of locking yourself emotionally into 'your' place.

I can only tell you what I did: I bought my first IP the second year after I graduated from uni. Then kept buying. In the meantime I went overseas to work for 6 years, buying more IPs in oz in that time. I only just bought my own place last year, but I still have my IPs. I definitely wouldn't have wanted to buy my own place first.

You're really in a very good place here. Get the starting steps right, you'll be set for life. Do it wrong, you'll still do well anyway given your attitude and age, but it might take a little longer.
Alex

 

[eagledream]

more info

Thanks for your reply Alex. In response to your post.. I am of the impression (basically through others statements) that rent money is dead money. At this point it isn’t a problem for me because I live in an apartment that my parents own. I’m able to save a lot of money because my parents do not charge me rent OR bills. I understand I’m extremely fortunate in that regard but my parents want to give me the best opportunity to get ahead. At this stage, with little debt (my HECS being the only debt I have) I’m able to save approximately 70% of my net pay.

After finishing my degree in November of last year I started full time work in December. After my initial 1 year contract expires next year I may have to work in the country as a way of staying with the company, I’m hoping to remain metro and then purchase a house. If I were to remain in the metro I could continue living at home whilst having someone rent an IP. My parents begin charging rent at the start of next year.

Reading some books on investing in housing may be of benefit to someone who’s as inexperienced as myself. I’m naïve when it comes to housing terminology so books may be the way to go. I also have no idea about the different tax breaks I’d get between IP’s and PPOR’s. My wage should raise by approximately 5-10k by mid next year.

It’s comforting to see others suggest I’m in an ok position at this stage. I’m keen to build my wealth even on an average wage. Any other suggestions or information that people have I’m all ears. Thanks for your response Alex, much appreciated.

 

[alexlee]

Thanks for your reply Alex. In response to your post.. I am of the impression (basically through others statements) that rent money is dead money.

My own observation is that people who say this either don't own property or only own their own home. Most investors, on the other hand, think differently. I for one rented for about 8 years before buying my own place. If I could have held off my nesting instincts any longer, I'd keep renting. I can honestly tell you I now own a PPOR (with a bank loan, of course) that's much better than what I would have bought during those 8 years.

Read those books first and see if your thinking changes. I don't think anyone on this forum thinks rent is dead money, unless you can't save.

At this point it isn’t a problem for me because I live in an apartment that my parents own. I’m able to save a lot of money because my parents do not charge me rent OR bills. I understand I’m extremely fortunate in that regard but my parents want to give me the best opportunity to get ahead. At this stage, with little debt (my HECS being the only debt I have) I’m able to save approximately 70% of my net pay.

Good job. If you assume 30% living expenses (usually) you still have a savings rate of 30-40%.

After finishing my degree in November of last year I started full time work in December. After my initial 1 year contract expires next year I may have to work in the country as a way of staying with the company, I’m hoping to remain metro and then purchase a house.

Working in the country might be interesting, you know. In any case, I certainly wouldn't stay metro just because you want to buy and live in a house you own. I mean, ultimately if you go down the property investing route, you're going to own many properties. How many can you live in? Besides, there are other cities, other countries. Don't tie yourself down to Adelaide metro just because that's where your place is. I guarantee you that even if you buy a place now, you're not going to live there forever.

If I were to remain in the metro I could continue living at home whilst having someone rent an IP. My parents begin charging rent at the start of next year.

To be fair, you really should pay them rent anyway.

Reading some books on investing in housing may be of benefit to someone who’s as inexperienced as myself. I’m naïve when it comes to housing terminology so books may be the way to go. I also have no idea about the different tax breaks I’d get between IP’s and PPOR’s. My wage should raise by approximately 5-10k by mid next year.

None of us started with any knowledge: we just picked it up as we went along. Reading is a great source of the basics, because you have time to think about it. Asking questions on the forum is good too, but be careful of overloading.

You don't have to understand everything now, but keep an open mind. I suspect, like a lot of people, you take advice from people you respect but don't consider whether they have the expertise to give you advice on that subject. For example, you may respect a family friend who gives you advice. They may genuinely have your best interests in mind, but that doesn't mean they know what they're talking about. Say a family friend is a doctor: that doesn't mean they know anything about finance.
Alex

 

[eagledream]

cheers

Many thanks once again. I reckon I might head to the shops tomorrow to invest in a couple of books. Any book in particular by Somers? Does she explain the terminology well? Hopefully i'll get a bit out of reading before i come back to the forums with other queries. You've certainly helped to open me up to a different perspective other than just owning the one PPOR. Many thanks for that!

 

[skater]

If it's books you're after, why not try your local library. Some of the libraries have a lot of investment books & you don't have to spend your hard earned $$.

As to how much you can borrow, the best thing you could do is to contact a good mortgage broker & find out. Look into what the repayments are as well, then when you are ready to buy you know what price range you can look at.

If your parents are giving you free rent, then you really are lucky. Use this wisely as a step up.

When you are ready to buy, you could do as Alex suggests & purchase an investment first, but there is a little trick you can use. If you purchase your first home as a PPOR, you will get the FHOG & stamp duty concessions. If you live in this home for around 6 months, you can move out again & make it an IP. This could be extremely useful as even though it is now an IP, the tax department will treat it as your PPOR for up to 6 years as far as Capital Gains Tax is concerned. This means you can move around & work whereever you wish, but still have an asset growing value that you can sell (if you desire) & not incur CGT.

 

[eagledream]

cheers

Cheers for the reply skater. I've heard about living in the place for 6 months and then moving out so i can claim the FHBG.. Say i was able to save between 40-50k by mid next year and looked to invest, what would my best option be...

1) throw a large chunk of a deposit at one IP and have less mortgage repayments or..

2) try and get more loaned to me from the bank, divide my saved deposit between two properties and go from there...

So many options. I suppose being 21 leaves me in an alright position. Thanks for responses thus far.

 

[troyhunt]

I am of the impression (basically through others statements) that rent money is dead money.

Ask them their perception of non-deductible interest (which usually far exceeds the rent you'd be paying on the same property). You always get "interesting" answers to that one

 

[Perp]

1) throw a large chunk of a deposit at one IP and have less mortgage repayments or..

2) try and get more loaned to me from the bank, divide my saved deposit between two properties and go from there...

Do not put down a large deposit. Put down a small-ish deposit (at your age I wouldn't put in more than 5%), take out a 95% interest-only loan, and put your extra savings/payments into an offset account. Buy more properties whenever you can afford them.

 

[evand]

Thats a fallacy. Rent money is not dead money because most people have to pay to live somewhere and paying a few percent value of a property in rent is pretty good value.

The problem is most people blow the money they save from not having a mortgage and end up with nothing. Then yes, it is dead money.

The reality is renting is a great opportunity to save money as its much cheaper than owning a property. Unfortunately most people don't see it like that.

I am of the impression (basically through others statements) that rent money is dead money. .

 

[eagledream]

thanks for the input

thanks ozperp,
Do other posters agree? would it be best for me to put a smallish deposit on a house and pay an IO loan whilst continuing to save and then buy more as i can afford? It's an interesting consideration, i hadn't thought about it. Cheers

 

[alexlee]

thanks ozperp,
Do other posters agree? would it be best for me to put a smallish deposit on a house and pay an IO loan whilst continuing to save and then buy more as i can afford? It's an interesting consideration, i hadn't thought about it. Cheers

Given your age and savings rate, I'd agree with ozperp. Whether you go for 95% or 90% LVR is a personal choice, but in general the more assets (gross value) you have, the more growth in dollar terms you will have. If you borrow more your gross assets will be higher.

Personally, I went 90% LVR for my first two properties. I could have bought just one property on a 20% deposit, but instead I went with 90% LVR and bought two. That was in 2000, and both properties have performed well, and I've refinanced them to buy more properties.

Obviously borrowing as much as you can to buy as much as you can has its risks, but the younger you are (you have time, your salary will probably go up from here), you can better afford those risks. Your savings rate will also decrease that risk. And the younger you are, the more compounding works in your favour over the long term, assuming you survive the short term. However, note the risks associated with borrowing more: higher interest payments, less available equity as a cushion.

Bet you’re getting a different bunch of ideas here than you usually get.
Alex

 

[skater]

thanks ozperp,
Do other posters agree? would it be best for me to put a smallish deposit on a house and pay an IO loan whilst continuing to save and then buy more as i can afford? It's an interesting consideration, i hadn't thought about it. Cheers

Yes, a very wise decision.

 

[eagledream]

...

all pretty good and valid ideas. Thanks for expanding on the previous point Alex. When you say use savings for 5% deposit and put the rest of my savings into an offset account then buy when i can afford them. At what stage would it be considered being "able to afford" I can see that its dependent on a variety of factors but would it be for example, when i had 5% of another deposit? Or would i have to wait for my first property to increase in value to use the equity to buy again? Thanks.

 

[alexlee]

Very much a personal thing. For example in my case, I bought my first 4 properties with cash deposits (different LVRs). After that, I started refinancing. It just depends on how comfortable you are with your cashflow.
Alex

 

[sparky23]

Hi Eagledream

Well done thats a fantastic start! I definetly agree with the small deposit strategy and would suggest that you also look at Michael Yardneys website www.propertyupdate.com.au and purchase his book 'How to Grow a Multi Million Dollar Property Portfolio - in your spare time' this will help you to get your head around a lot of stuff that you need to learn in simple language.

Good Luck!

 

[boomtown]

Great points people.

Just one thing to add - I understand that you need to stay in the property 6 months to get the stamp duty concession but you need to stay 12 months to retain First Homebuyers Grant.

 

[propertylover80]

Great points people.

Just one thing to add - I understand that you need to stay in the property 6 months to get the stamp duty concession but you need to stay 12 months to retain First Homebuyers Grant.

Hi Boomtown,

I am utilized the FHOG grant in March last year. The ruling is, in order to retain the FHOG you need to live in your place for 6 Months within the first 12months of ownership.

For example, I settled on my place in June 2007. It was tenanted out until March 2008. Now I am in there and renovating. In October this year I can legally move out and re-rent it and retain the FHOG.

I am in VIC though, however I think this ruling is for all of the states, but seek further clarification just to be sure.

I haven't heard of a Stamp duty concession for First Home Buyers, is this just a QLD thing? I would love to get some money back from our government!!!

Cheers,

PL80

 

[Jackie1966]

If you buy an investment property rather than a PPOR, you will get a lot of tax advantages (especially if you buy brand new). You can lodge a variation on your tax so that you actually have the tax saving each week rather than waiting until tax time to get a return. If you set up a line of credit and pour everything into your investment property (including that extra money in your pay each week), you will reduce the loan a lot quicker.

You know, I bought my first house when I was 19 years old but it was my PPOR. If I knew then what I know now, I would have bought an investment property first. I think it's a great idea.

Jacqueline