Lots of Equity, Ready to buy! Thoughts anyone?

[Valar]

Hi Everyone,

I’ve popped by these forums a few times over the last several months and found the people here to be very friendly and knowledgeable, so before I start, I’d like to thank everyone on behalf of all the lurkers out there for the information you’ve provided us with.

Now, to the point: after much reading on various investment approaches, as well as finally being in a slightly more ‘settled’ position in my life, I am finally ready to bite the bullet and get into investment properties. The following is a breakdown of my assets:

Shares/Funds: 160K
Cash: 180K (This will shortly also be moving into shares bit by bit over the next 12 months)
Property: 350K (where I currently live, owned outright)
Home Contents/Car: 30K
Total: 720K

Earnings: ~75K pa

Debt: no loans of any kind, just 1 credit card with a 12K limit

I am 24 years of age, live in Sydney, and I don’t have any dependants.

I have pretty much decided on apartments due to the comparative ease (for the most part) in servicing them. Also the ones I’m mainly looking at are either new, or off the plan –thus hopefully preventing Costello from taking all my hard earned money via tax deductions!

I will be talking to the bank later this week simply to find out my max borrowing limit (not doing a pre-approval just yet!), but am leaning toward soon getting a Line of Credit, at 7.2% variable, with no establishment/monthly fees. At a “guesstimate” I can likely borrow approximately 800k. Over the long term, I hope to simply pay the interest off on these properties, and redrawing when enough equity has built up to make further purchases. In 20 years or so, I may then perhaps cash out and pay off the loans.

Now that that’s out of the way, let me re-iterate that I am very keen to purchase something soon. I believe that I have learned all I can from sitting on the sidelines and the next step in my investment education involves me actually diving in and buying something.

I currently have an opportunity to get a pre-release property developed by Mirvac in Chatswood
(http://www.mirvac.com.au/forsale/NSW/pacific_place/cambridge.htm).One bedders range from 440-500k. Quite steep for a one bedder in my view, but the mirvac factor is a strong incentive, given their general holding of value and good reputation.

Another pre-release offer on the table by Stockland over at Balgowlah
(http://www.stockland.com.au/Apartments/NSW/Balgowlah/TheVillage/About/)
One bedders ranging from 370-420.

Aside from these 2 specific properties, I also have an interest in purchasing around North Sydney, St Leonards, Chatswood, and the City-ish area (cbd, Pyrmont, etc)

Should I consider the 2 developments mentioned above? Should I look at others? Can you recommend?

Do the wise sages of this forum have any other advice for this padowan? All input and thoughts are welcome.

P.S: I am very much aware that I have time on my side, and subscribe whole heartedly to the getting rich slowly philosophy.

 

[JIT]

Welcome to the forum.

I'm sure you will get some great advice here.

You are just 24, with no dependents, on a reasonable salary of 75K pa, drive a modestly priced car, but already have a net worth of 720K!

Nice work!

Just curious, how did you manage to do that??? Shares, business, inheritance, film star or athlete in a previous life???

GSJ

 

[WashingtonBrown]

Hi

I have pretty much decided on apartments due to the comparative ease (for the most part) in servicing them. Also the ones I’m mainly looking at are either new, or off the plan –thus hopefully preventing Costello from taking all my hard earned money via tax deductions!.

Can i suggest that the "easey" route in the property market generally yields the least return.

With the two developers you have mentioned..i would think you would have more chance of making money from their house and land packages.

The "easy" route rarely makes money, has a low land content - but yes high deductions.

The market you are entering relies more on timing.

The market you want to enter is all about gearing and using that gearing to your advantage.

In summary - There is NO point gearing heavily unless you can achieve capital growth and lots of it.!! This applies to all markets


Regards

 

[Valar]

Thanks GSJ, another thing I like about this forum is the friendliness of all the participants. Cheers.

The assets were primarily from an inheritance. It was a couple of years ago, but before jumping into anything I first wanted to read up and be confident about investing to get away from the “leave money in the bank because it’s safe!” mentality I was conditioned with as a child.

Since I had the property which I now live in I decided to diversify a little bit by going into shares slowly (the process which is at around the half way mark at present). I found myself a trustworthy planner and got underway. Now that that’s in gear, it’s time for phase II - IPs.

P.S it may be worth noting that my cash has pretty much been sitting in ING earning 5.whatever% interest over the entire time.

 

[Valar]

Hi WashingtonBrown. You have a valid point.

I do realise that long term yield may be better through certain other avenues. However, I do have other higher-returning non-tangible investment options. For instance, I am aware that at the end of the day, it is income and career that will fuel my capacity to borrow and therefore invest. As such at *this* stage of the game I’d just like to get my feet wet into the IP market, being able to afford a couple of hundred a week in terms of repayments. This way I will also be able to save for and begin my masters (which I consider an investment), without worrying too much about where my next meal will come from. Once I advance further in my career, and am able to afford significantly more I’ll spread out into houses, and perhaps commercial properties.

 

[WashingtonBrown]

Hi WashingtonBrown. You have a valid point.

I do realise that long term yield may be better through certain other avenues. However, I do have other higher-returning non-tangible investment options. For instance, I am aware that at the end of the day, it is income and career that will fuel my capacity to borrow and therefore invest. As such at *this* stage of the game I’d just like to get my feet wet into the IP market, being able to afford a couple of hundred a week in terms of repayments. This way I will also be able to save for and begin my masters (which I consider an investment), without worrying too much about where my next meal will come from. Once I advance further in my career, and am able to afford significantly more I’ll spread out into houses, and perhaps commercial properties.

Thats my point...invariably a one beeder costing $500k will endup costing you more than a couple of hundred a week.

However, at 24, i can tell you are way ahead of the pack and will do well.

Just dont blow it via an easy option.

My advice, do the research - go to 25 auction nights in areas of good location.. and wait for the auction where no one else is interested.

At least you then know what the market value is - not the developers value.

Regards

 

[Valar]

Thanks for that WashingtonBrown.

I'll certainly take your advice and put it into play over coming weeks.

 

[see_change]

I see no need to rush in at the moment. You might want to buy in the next year or so , but IMHO there's no need to rush in for " pre-release property ". I don't see developments selling of quickly , and you may even find that later down the line there may be better bargains if that's the route you want to go.

If you've spent time working out that you want to invest in property , I think it's worthwhile spending the time to work out exactly which types of property and where might give you the best return. The information you pick up will help you in the future. After you send some time looking at areas / Properties , reading the forum , talking to agents and property managers ( they'll tell you what is actually in demand as rentals ) you'll get a better idea of what makes a good IP , and after a while you won't need to ask whether xyz is a good investment.

In reality , should you really take advice from a bunch of strangers on the net over what makes a good investment . You don't know which companies they have shares in ....

See Change

 

[WashingtonBrown]

In reality , should you really take advice from a bunch of strangers on the net over what makes a good investment . You don't know which companies they have shares in ....

See Change

I agree totally with this statement, generally, but how does is relate to this thread?

Regards

 

[Bandita]

Hi Valar,

First of all, congrats on getting to the point where you are at your age!! Even if it's from inheritance, you've obviously decided to be smart with your funds and you will do quite well!

Based on what you said, I would not go for the 2 (or any) off the plan units. They are priced at a premium, meaning your capital growth will be quite low. You can afford to buy whatever you like it appears, so why not go for apartments that are already established, and you can determine their growth, or at least determine if one is undervalued so you can scoop it up? You can still buy into newer developments to get the depreciation, but at least ones that aren't selling at a premium, so you'll have a better chance at getting some great capital gains while still getting some pretty decent rental returns.

There is a multitude of posts here about off the plan units, and there's a pretty strong consensus to stay away from them. There's a very good reason for that. They are priced at a premium. There are so many other opportunities that are out there! Especially with the Sydney market being the way it is (I'm presuming you're considering buying in Sydney - because a 1-bedder in Chatwood, Melbourne for $400K is the most ridiculous thing I've ever heard!!) So get your feet dirty, pound the pavements - go to open to inspections, go to auctions - see what's out there, see when a bargain comes up, and grab it!

You obviously are a great saver and spend your money wisely, so I'm sure you'll do fine! And always ask as many questions as you can on this forum, because you won't find any place with so much experience and knowledge!

Cheers,
Jen

 

[WashingtonBrown]

You can still buy into newer developments to get the depreciation, but at least ones that aren't selling at a premium, so you'll have a better chance at getting some great capital gains while still getting some pretty decent rental returns.

This is a very valid point...in fact have a read of this article i wrote on the very topic!

http://www.washingtonbrown.com.au/news_story_depreciation_for_profit.htm

This difference between a year old property and brand new is very minimal.


Regards

 

[see_change]

I agree totally with this statement, generally, but how does is relate to this thread?

Regards

Volar came in and asked for advice . I thought the gist of my answer to him ( or her ) was that they had enough time to sit back and study the market and get to the point where they didn't need to ask people on the forum whether the property they were thinking of buying was a good investment or not .

wb if you in someway thought my comments were aimed at you , you are mistaken. I have made similar comments in the past (or at least once that I can remember ) and it has been in the context of someone coming to the forum with a healthy financial situation and asking advice on what to invest in.

See Change

 

[Valar]

In reality , should you really take advice from a bunch of strangers on the net over what makes a good investment . You don't know which companies they have shares in ....

See Change

That made be laugh See Change, but it is very true, I never considered that aspect of things!

JenD,

Cheers for that. I think that is precisely what I will do: i.e, look at newer units, which are not off the plan. As both WashingtonBrown and yourself have mentioned, I think it’s time I hit the pavement!

I very much appreciate all the advice given to me, and I’ll be sure to look over any related threads!

Thanks to one and all!

 

[Les]

G'day Valar,

For one so young, you seem to have your head screwed on firmly !! As others have said, well done.

Re "what to buy" do take a look at this post (and do click on the whole thread too, for context - look at top right)
http://www.somersoft.com/forums/showpost.php?p=61687&postcount=7

This is a gem I picked up from one of the seminars I attended - and I've never forgotten it. But then, I haven't checked back either - have FIRB relaxed their rules recently? I don't know - so I could be wrong. But I've continued to buy "house and land" to side-step a possible problem area.

As others have said, there is a wealth of information in this forum (or fora...) - read and enjoy,

Regards,

 

[Twitch]

Land is the key.

The capital growth of a boring house on a boring block of land in a boring suburb will run rings around a swanky 1 bedder in a upmarket suburb bought off the plan.

If you have the spare income then why not go for the maximum capital growth? A house on a well located block of land is going to be low risk, high growth (and low income which you can afford in your position).

Good luck.

 

[Valar]

I think I see the light!...kind of.

Clearly for me now, "off the plan" is "out the window"! Also, I realise that claiming depreciation on newer buildings is of no consequence, as I'd eventually end up paying for it via CGT anyway! I'm being won over by the house and land vs apartment thing, but working on sorting that out in my head. There's of course also the positive cash flow + growth vs pure growth targets to muddle over.

Truly you are all a fountain of knowledge in here.

 

[alexlee]

Also, I realise that claiming depreciation on newer buildings is of no consequence, as I'd eventually end up paying for it via CGT anyway! I'm being won over by the house and land vs apartment thing, but working on sorting that out in my head. There's of course also the positive cash flow + growth vs pure growth targets to muddle over.

Not quite. Depreciation DOES have benefits because you will be deducting NOW at your marginal rate (say 35%) and in all likelihood paying CGT at 17.5% years into the future. Just don't buy a property just because the depreciation is good.
Alex

 

[Simone]

I also agree with not purchasing off the plan units - I don't think this is where the money is. House and land would be the better option in up and coming areas.

 

[grossreal]

hi Valar
you have the equity and at your age you should have alook at two things
one is commercial with a 5 x 5 year lease
it will take you a while to understand the dynamics of the comm market but its where you use equity to its best advantage.
the comm market does not change the same as resi and you will get 10 to 11% returns
I don't have the same draw back as others with regards to off the plans sales and for me its simple.
an off the plan now on a say a unit in a 100 to 150 units development will take about 2 years to complete from start to key
that puts your purchase being end 2008 and if you crystal ball the pundits are saying 2008 the market changes so if you were to invest in comm and have a return 3% to 4% and you put down on that off the plan as long as you put it into a development that you think will have growth then I maybe the fish swimming the wrong way or I am the surfer trying to catch that wave.
you need to work out your own figures(this is my view of sydney).
equity used in the right hands is a very powerfull tool.
you need to learn that boards have lots of people here that come from lots of different points of view and not everyone will catch that waveyou just like I have to work out when that wave will come.
I am looking at early to mid 2008 for sydney and so far the banks I have spoken to here are telling me the same.
unit against house against comm they arte all very different markets and have there own little problems from you post what to do with the equity this is my .002