managed fund for first deposit?

[VCDenton]

Hi, I am a new graduate. I already asked a few dumb questions(sure you all are familiar with..)

SInce then I have been learning from the forum. It seems to me that it will be a great time to buy during the next 2-3yrs.

I am saving aggresively since starting my job early this year but only managed to save a mere $10k, and I ddoubt I can save more than 40k by the end of next year.

So I am actually looking at investment with lower entering threshold like managed fund. However, given the current global turmoil;

1: do you reckon that I should just stick with the high interest saving like the bankwest?
2 any idea on selectionof managed fund besides morning star/stnadard & poor rating?
3: despite the predictable temperoary fall in property values, I doubt I can affoard to buy a unit in those well established high growth history suburbs. So pretty much I am stuck with the outer suburbs, which really don't give me much confident as every book I read says you should buy in those well established area...
4: do you think it is more safer to have at least 20% deposit instead of 10% under this kind of gloomy environment? as I have noticed several forumites mentioned that it's not a good time to outstreatch yourself.

Not sure whether I should post this thread to here, feel free to move it Admin.

THx for your replies in advance.

 

[alexlee]

1: do you reckon that I should just stick with the high interest saving like the bankwest?

Depends how long you plan on holding the fund. If your objective is only to save for your first deposit, better stick to the high interest account because you won’t be holding it for long enough to smooth out the volatility. I wouldn’t go for the fund (or shares) unless you’re going to keep the money there for at least a few years.

3: despite the predictable temperoary fall in property values, I doubt I can affoard to buy a unit in those well established high growth history suburbs. So pretty much I am stuck with the outer suburbs, which really don't give me much confident as every book I read says you should buy in those well established area...

And I can find you books (as well as plenty of investors in Somersoft) that have made great returns from outer suburbs. See the threads on Melton, Frankston, etc. In any case, how to you think established areas got that way? They didn’t spring up from the ground. What you consider a well established area now would have been way out in the sticks 30 years ago.

Though if you really don’t have confidence in what you’re buying, you probably won’t hold it. You could save more and buy in an area you believe in.

4: do you think it is more safer to have at least 20% deposit instead of 10% under this kind of gloomy environment? as I have noticed several forumites mentioned that it's not a good time to outstreatch yourself.

I would view overstretching from a CASHFLOW point of view. Nothing necessarily wrong with high LVR if it can be comfortably met from your salary, for example. Also think tactically. Say you have a 20% deposit. It might make more sense to put in a 10% deposit and leave the remaining 8% or so (since you have to pay LMI) in an offset account. The main issue at the moment is that it’s harder to refinance, so access to equity may be an issue.
Alex

 

[VCDenton]

THx for ur advice Alex, they are specific. So actually I may have enough deposit for some outer suburbs by the beginning of next year with lettle help from my parent. In this case do u reckon I should stay out of the market until like 2010 in order to avoid buying in the way down to the bottom of the cycle?

Anyway, despite your fast typing skill, I still think you could actaully be a AI instead of a real human, whom I don't think can reply that fast and with content specific like this.

 

[alexlee]

THx for ur advice Alex, they are specific. So actually I may have enough deposit for some outer suburbs by the beginning of next year with lettle help from my parent. In this case do u reckon I should stay out of the market until like 2010 in order to avoid buying in the way down to the bottom of the cycle?

I’m not you, so I can’t suggest specifics. Personally, I would buy below my means. I actually prefer cheaper properties. But the key is to hold for the long term, and in this market, it’s likely that you’ll buy and the market will keep dropping. I would buy a cheap place but because I believe in cheap properties, I’ll keep holding it even if it fell further. If you don’t believe in it, then you won’t keep holding it.

Forget about timing the cycle. You won’t succeed.
Alex

 

[monster24]

Hi VC,

I can just tell what we did ..but you have to determine what's best for you.
Put in a considerably amount of money into managed funds. Great...we checked morning star rating etc. The best performing fund within the last 5 (!!!!) years was bringing in 25%+....fantastic we thought. We watched our fund growing for the first weeks - than suddenly the fell... minus 15% (!!) within a few weeks. I watched and they fell further ...so we pulled the rescue line....We took the money completely out of this funds that really brought us some sleepless nights. Not with me...(and you think share market is not safe). So, what can we do with the money? Property... We put a desposit on nice block of land and developed a one house dwelling. Handover will be Friday (jipee) and tenants are already waiting to get in. In total we paid ~$290K with help of our pulled fund money and houses in our area with a similar land and quality home are on the market for $470K ...So, it was well worth it and I think it was the best decision we have made...

I am sure, people have some better experience with funds..but I wouldn't rely on the morningstar rating anymore...

Wish you luck
Thomas

 

[The Y-man]

So pretty much I am stuck with the outer suburbs, which really don't give me much confident as every book I read says you should buy in those well established area...
.

Have a look at the threads regarding Frankston.... and a man named Harris

Cheers,

The Y-man

 

[The Y-man]

any idea on selectionof managed fund besides morning star/stnadard & poor rating?
.

Morningstar is probably not a bad guide - but I'll stick my neck out here and suggest you sit back with the high interest bank deposits for now - until volatility dies down a bit (i.e. could be 12 months + from now).

Cheers,

The Y-man

 

[Belu]

I would also be aware of the maximum you can borrow. I can only borrow $xxxk amount so I have restrictions already (see my other threads).

I am in a similar position and with FHOG have enough now to purchase. $250k purchase, 5% deposit ($12.5k) and $10k costs (thank-you FHOG) plus a bit left over.

Look at what you can borrow and then look to your options. It is all personal but to me I dont see the point in putting a 10% deposit when the extra $12.5k doesnt really change my ability to purchase. Eg: what I can buy for $250k and what I can buy for $265k are relatively the same and the extra 8 months it would take me to save that wouldnt be worth it.

 

[VCDenton]

Cool looks like I should hold my fund back to the high interest account.

I have just picked up the book from Peter Spann(how u could build a 10 million property portfolio in just 10yrs), I personally think it is quite resourceful one(but I don't like the way it is presented like telling kids tale).

I have got a question, Peter mentioned that the way you pick a suburb is by identifing one with at least 10 yrs history of above average national growth and then buy in those suburbs with the previous two years growth rate being flat/similar. Did anyone of you actually go to the valuer general office for it? is it accessible for the public like me? Also I was wondering when I read this part that all these suburbs with such a long history of above average growth should be well beyond my purchasing power, and well established...is it true???

I will look at Harris as well

 

[boomtown]

You may be able to buy now depending on your income. I assume you are going to buy and hold (otherwise you wouldnt be on this forum). I bought my first property with only 11k (stamp duty and legals) and 102% LVR. And I fixed so my interest payments are now well below standard variable.

I would be inclined to max out your LVR just make sure you are well within comfortable limits on cashflow.

If however there is a chance you will sell up in the next couple of years thats not a wise strategy as the market could take a dump and you would be into negative equity. If you hold for the long term even negative equity will pass.

 

[alexlee]

You may be able to buy now depending on your income. I assume you are going to buy and hold (otherwise you wouldnt be on this forum). I bought my first property with only 11k (stamp duty and legals) and 102% LVR. And I fixed so my interest payments are now well below standard variable.

Boomtown, in what year did you buy your first property? What was the yield and interest rates then?
Alex

 

[Belu]

I have been looking lately, best I can do is $16k down, $10k FHOG all at 95% LVR with LMI added back on top.

 

[The Y-man]

Did anyone of you actually go to the valuer general office for it? is it accessible for the public like me?

You can buy it from:
http://www.bookshop.vic.gov.au/gov_...alues&Location=&Letter=&keyword=&Department=0

$30.00 for great info.

Cheers,

The Y-man

 

[boomtown]

Boomtown, in what year did you buy your first property? What was the yield and interest rates then?
Alex

First property 20 January 2007. Locked at 7.35% for 3 years - comes off Jan 2010.

Yield at time of purchase was 5.89%. Just did gross yield calculation 6.98% (bugger I thought it was 7.3% must have messed it up last time). Please note this is furnished. I have also spent $1300 upgrading the couches.

Minimum capital gain estimated at 17.3% over the past 15 odd months (realtor valued it at 25% but she would have just been trying to get the listing and I have no intention of selling). I have assumed that the market has gone completely flat since March - this may be overly conservative.

Yes Im a noob with a big mouth

 

[alexlee]

And your second property was purchased in...........
Alex

 

[Bradsdad]

I have been looking lately, best I can do is $16k down, $10k FHOG all at 95% LVR with LMI added back on top.

That would bring you to around 97%. You should be able to get 100% incl of LMI. This should give you a touch more to play with at reasonable rates. If you need a little more have a look behind the couch



Regards
Steve

 

[boomtown]

And your second property was purchased in...........
Alex

Second property was May 2008. 6.24% gross yield on purchase. Off shore financing so its CF+ but highly exposed to downward movements in AUD (but the AUD has climbed hard since early May especially in the last few days so there is a bit of a buffer). Third planned for June 2008 (on shore financing). Then probably a 12 - 18 month pause to consolidate.

I also have a 19% interest in a property purchased in 2005 with family but its a dog in terms of return so doesnt count. Frankly I want out but family is family.

But seeing as you asked the strategy is to try to negatively correlate with inflation. By fixing rates I am looking for inflation to rise and drive rental yields pushing the onshore financed IPs +CF. The offshore financed IP is already +CF and dependent on inflation to hold interest rates steady (which holds the AUD high and maintains the LVR). The strategy is self hedging to a limited extent in that if inflation suddenly falls through the floor interest rates *should* follow and we swing into an era of capital gains - I dont mind taking a hit on a slightly high fixed rate - particularly if earlier rental growth have already driven the property cash flow neutral. The offshore financed property is much more exposed to a downturn in inflation but can be rolled into a AUD denominated mortgage on the 17th of any month so the exposure does have an exit strategy (it all depends how hard you think the AUD can drop in 30 days without prior warning).

 

[alexlee]

So you have two properties and a 1/5 share in another one with family, and you've owned property for a year and a bit. May I ask how old you are?

How fast can the AUD move? That's pretty much what I see every day: I do the accounting for a FX trading desk. My answer: too fast for me to be comfortable with offshore loans.
Alex

 

[Belu]

What would happen if the dollar dropped to 80cents?

 

[alexlee]

What would happen if the dollar dropped to 80cents?

If you borrow say 50m yen to buy a AUD $500k property in Oz (when the exchange rate is $A to 100 yen), and the AUD devalues to 80 yen, then your mortgage liability is now 50m / 80 = AUD 625k.

When I was in Tokyo from 03 - 05, the AUD/JPY rate moved from around 65 to 80 or so. So if you'd borrowed then, you would be doing very well because the appreciating AUD against JPY would work for you. One does note that the AUD is at historic highs against the USD and JPY.
Alex