[Melbourne] Thoughts on apartment as first home/investment?

Discussion in 'Where to Buy' started by 7smurfs, 12th Jan, 2012.

  1. 7smurfs

    7smurfs Member

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    Hi all!

    I'm very new to the housing market however am extremely keen on moving out of home away from my parents for at least 6 months to take advantage of First home buyers grant and the independence in general.

    Now a bit of info about myself, suburbs of interest and budget before I get into my dilemma...

    Nice to haves:
    - I work in the CBD (bourke st) so would like to ideally move as close to the city but not within CBD.
    - Walking distance to modes of transport i.e. train station or tram
    - 1 car parking spot

    Suburbs of interest:
    - Apartment: Richmond, Hawthorn, South Yarra, South Melbourne
    - House: Blackburn, Burwood, Forest hill, Thornbury, Preston

    Budget:
    - $400-500k
    - I currently have an income of $77k p/a salary with approximately $100k in the bank for a deposit.
    - Looking at purchasing my first home/investment this year.


    Now initially I was targeting apartments in the suburbs of interest outlined above however when talking to fellow property investors and co-workers I was advised that it was not a good idea for first purchase and that I am better off purchasing a house/home for significantly greater tax reduction when rented out and capital gains.

    Since the advice was provided I have been looking at suburbs within 10-15kms from the CBD.

    Now I just want to set something straight about the situation from what my colleagues have unanimously said is a bad idea.

    What are your thoughts on an apartment as first home/investment?

    Secondly, I've read about people borrowing a certain amount e.g. 300k from bank and then offsetting this with another 300k. Can anyone explain the negatives of using this 'offset' concept?

    Sorry for basically asking to be spoon-fed information, however I will do my best to attend meet ups and read/research more. The very concept of moving out and owning my own property/apartment is very exciting to me :)

    Thanks
     
  2. Aaron_C

    Aaron_C Finance Broker

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    Hi 7smurfs,

    With that budget you'd probably only be able to get a 2 bedroom apartment in the inner city suburbs you have identified. You certainly won't be able to get a house in Blackburn, Burwood, Forest Hill, Thornbury or Preston unless you increase the budget. You may be able to get a townhouse though.

    As for which one is better, it depends. As a broker, however, I do notice that lenders are becoming a lot more risk-adverse when it comes to lending to apartments. Lots of them won't lend above 80%, which can severely hamper the resell potential - you don't get this problem with landed property. However, they do compensate with generally higher yields.

    Re your question about offset - the offset account is basically a separate account from your loan, and any money in that offset account reduces the loan amount as well, so you save money on interest.
     
  3. Tony3008

    Tony3008 Member

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    As Aaron has just said, the offset account is a separate account from your loan though linked to it, and any money in that offset account reduces the loan amount as well, so you save money on interest. There are two (perhaps more) reasons why you might want to do this:

    1. You might want to take out a larger loan now as you have plans that would impact on your borrowing capacity in the future, e.g. you've been in a good salaried job for several years but are considering going self-employed next year. As long as you have the self discipline not to spend the money, a $300K mortgage and $100K in an offset account leaves the same amount of interest payable as a $200K mortgage, but if at some future point you really need that $100K it's instantly available regardless of your current financial status.
    2. It's an offset against an investment property mortgage. You get tax relief or not based on the purpose of the borrowing. Suppose an aunt leaves you $100K and you apply this to your IP mortgage. If next year you decide to have it back as a redraw to buy a BMW, that's not a qualifying use so you now have $100K of non-qualifying borrowing. If you put your aunt's money in an offset account, it has the same effect as paying down the mortgage, but next year you can spend the offset money leaving you with a fully tax-deductible loan.

    There are no negatives that I know of, though AIUI some of the cheap mortgage deals don't offer offset accounts.
     
  4. 7smurfs

    7smurfs Member

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    Thanks for your responses and clarifying offset accounts!

    A house in Blackburn, Burwood, Forest Hill, Thornbury or Preston would force me to increase my budget up to $600k.

    Now the question is, is it worth borrowing more to purchase that house or whether sticking with an apartment as a first home/investment is a better choice in the long run?
     
  5. Aaron_C

    Aaron_C Finance Broker

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    It all depends on your risk tolerance. Personally, I believe that if you can afford a house, then you should buy one rather than an apartment. However, houses are far more maintenance than an apartment.

    You need to decide for yourself which property is best for you. That might sound like a cop-out but honestly there's no other way to say it.
     
  6. The Y-man

    The Y-man Member

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    Have you considered apartments in Docklands and Southbank? Beware of owners corp fees though.

    The Y-man
     
  7. The Y-man

    The Y-man Member

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    All except one of our 10 IP's was a house - the rest were apartments (1BR and 2BR) and a couple of villa units.

    We did quite well with them, plenty to depreciate, rents easily, and the relative yield (rent vs purchase price) can be better than houses.

    There is a bit more politics involved with the owner's corp, but not much more than the average neighbour of a house....

    My view was that the lower purchase price means you can buy more which was one way of spreading risk for us (i.e. 3 apartments for the price of 2 houses type ratio)

    The Y-man
     
  8. 7smurfs

    7smurfs Member

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    Great advice all round again. Will take it into account and let you all know how I end up :)
     
  9. Aaron_C

    Aaron_C Finance Broker

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    Y-Man - you're joking right?
     
  10. Tony3008

    Tony3008 Member

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    Body Corp levies in my building are certainly high. By compensation, the location and my lifestyle (work from home) mean that I don't need to run a car (am in Flexicar for when I need one) and I rent out my car space for $200 a month. If I worked in the western side of the CBD I would reckon being able to walk to work as a bonus compared with the joys of traffic or trains.
     
  11. zed_kid

    zed_kid Member

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    Nothing wrong with apartments mate, but stay away from towers (docklands etc) also 80% LVR is not such a bad thing your SANF goes up as your LVR goes down :)
     
  12. 7smurfs

    7smurfs Member

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    Sorry can you please clarify on what SANF stands for? I tried googling to no avail :(
     
  13. The Y-man

    The Y-man Member

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    Hey 7smurfs did say wanted close to the CBD :)


    The Y-man
     
  14. The Y-man

    The Y-man Member

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    Sleep At Night Factor....

    The Y-man
     
  15. 7smurfs

    7smurfs Member

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    Mainly looking for investment and a lifestyle change bonus for 6 months while I live in it.
    I'm sticking to the theory that if I want to live in it then it would be attractive for renters as well :)

    There hasn't been good feedback about docklands apartments. I am moreso looking towards Richmond, Hawthorn, South Yarra, South Melbourne areas.
     
  16. The Y-man

    The Y-man Member

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    I guess that's why I mentioned - when people bag a place so much, there can be often a bargain to pick up..... (ASSUMING the fundamentals are ok)

    The Y-man
     
  17. Aaron_C

    Aaron_C Finance Broker

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    Nah I don't think so.....unless you're hoping Docklands gentrifies like a Fitzroy or a Richmond...
     
  18. zed_kid

    zed_kid Member

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    agree with Aaron. the best thing about property is scarcity, no 2 properties are the same... unles you purchase apartment number 1256 in a 50 storey tower
     
  19. johnkerr

    johnkerr Member

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    Out of curiosity what's bad about Southbank? I'm still pretty new to Melbs
     
  20. Aaron_C

    Aaron_C Finance Broker

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    I just find it a bit out of the way. Plus there's new towers coming up every year so there's a lot of supply on the market.