My 1st IP and Needing Advice

Sorry for the long first post, please skip it and read the second post, for this is the portion where I hope to get help from. The questions are under the heading "Questions" towards the end of the second post


This thread is inspired by Kim5’s thread . The first part of this thread is about my first IP. By describing my current financial situation in the second part, I earnestly hope to get good investment suggestions and strategies from fellow property investors. I was somewhat hesitant in creating this thread because firstly I don’t know whether it is wise to disclose your financial situation in a public forum and secondly I don’t know what the responses will be. But I guess I would need to provide the details in order for others to help me.

I bought my first IP in Hoppers Crossing (Vic) for 300K (listed 275-295K) through private sales 6 weeks ago and the property settled on 21 Dec.

This is an old double-storey brick veneer house, in pretty good condition.
Upstairs – 3 bedrooms (2 with BIRs), 1 bath, 1 toilet
Downstairs – renovated kitchen/meal area/lounge, 2 lounges (converted to bedrooms, both with doors, 1 with BIR), study or bedroom, bathroom with toilet


Pros


1. Good location
- 7 min walk to Werribee Plaza (this will double in size to reach scale of Highpoint S.C.)
- 6 min walk to Wyndham Leisure & Events Centre (has indoor swimming pool, spa, gym, conference rooms & auditorium)
- 20 min walk to Hoppers Crossing Train Station
- 1 min walk to a bus stop
- has a primary school nearby
- close to Corey High School, a select-entry high school located in Werribee Technology Precinct, scheduled for completion in 2011. This will be one of 4 select-entry high schools in Melbourne.

2. Compared to other outer suburbs, commuting time to Melbourne CBD is not bad – 33 mins by car (based on Google Maps direction tool) and 32-43 mins by train (from Hoppers Crossing to Flinders St Station).

3. Many rooms – 6 bedrooms (2 converted from lounges)

4. Very bright, north-east facing house -previous owner says that the house is well-lit at all times of the day. There are 2 light wells in the kitchen and front lounge that we had mistaken for a lamp and tried to find the switch for.

5. The street appears to be a quiet one. Other houses in this street look pretty nice too.

6. Bargain?
- There appears to be intense buying interest for this house. The house is open for first inspection on a Sat and the agent decided to close the sale by Tues due to the overwhelming response. I arrived at the house near the end of the inspection so I could not gather how many people had inspected before us. There were about 4-5 other groups of people at that time, including one Chinese from Sydney who told me the houses in Wyndham Vale are newer but the location of this house is very good. When I put in my offer on Tues, the agent showed me a SMS from China asking for an appointment to inspect the house the following week upon his return from China. Later that evening, the agent told me someone had put in a conditional offer of 302K. I was also aware of an unconditional offer of close to 300K. However, I think the real reason for this early close of-sale is that the previous owner needs the money urgently. The previous owner purchased this house 1 year ago when he first arrived from China. As his parents are coming over soon, he bought a better house, closer to the train station, 2 months ago. I believe he had paid in cash for this house as my conveyancer told me he possesses the title and does not owe any loan so I need to pay for his lawyer to come to the city to do the settlement. When I collected the keys from the agent’s office, the receptionist told me I got a bargain. But this may be biased since she is a staff. When I got someone to steam vacuum the carpet, he told me if he had known the house is so large, he would have charged me much more. He thinks that I pay a good price for this house. His words may be more reliable since he has many years of experience cleaning houses all over Melbourne.


Cons

1. Land area is 531 sq metres; will prefer it to be more than 600 sq metres.

2. No garage; only a single carport. The carpet upstairs and on the staircase is very old. Some walls need a coat of new paint. As an IP, I will not bother with these.

3. Still a considerable walking distance to the train station; will prefer it to be 10 minutes or less.

4. The agent told me the median price for Hoppers Crossing is 285K so 300K is higher than the median. I heard from others in this forum that you should try to buy something below market price.

5. The gross rental yield is not great – 5.2% and it is a CF negative investment.

6. Hoppers Crossing/Werribee are among the cheapest suburbs in Melbourne. The capital growth for the last 10 years has not been spectacular. However, there is nothing wrong with the fundamentals – facilities, demographics, personal safety, distance to the city, etc. It does suffer from an image problem in that a considerable number of people (particularly those who have never visited it) perceive the suburb to be inferior compared to other suburbs (this is what I inferred from discussion in this forum). IMO, it possesses growth potential and population growth/gentrification will change people’s perceptions towards this suburb. I made this investment decision mainly based on my affordability/serviceability and inadvertently, faced risk of slow capital gains. It is good news that Sash mentioned that hotspotting.com.au has recently included Wyndham in its hotspots areas.

7. There is ample land in the surrounding growth suburbs (Tarneit, Truganina, Williams Landing, Wyndham Vale, Point Cook) so this may explain the poor capital gains. These suburbs suffer from lack of public transport and shopping facilities. Only Williams Landing will be close to a new train station. Hoppers Crossing is mostly built-up and by itself is a very large suburb so price differentiation within the suburb will occur with homes nearer the train station and shopping becoming dearer than those further away. In this respect, it is fortunate that this IP is located near Werribee Plaza and not too far away from the train station.


I will give my financial situation in the next post. Here are some pics of this house.

The kitchen and the meals area are large enough to put a sofa (was used as the lounge).



The kitchen



Bathrooms




 
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My managing agent called me today to tell me that he had found a tenant - a 50-years old couple from Country Victoria who rented out their house and moved to Melbourne for work. They will move in a few days later. I am so happy :)

My agent said that he hopes to find someone to move in soon after settlement (21 Dec). This did not happen. Then he said by the end of the year. This did not happen and I began to get worried, wondering whether it will be easy to get tenants or not. Now that this uncertainty is over, I am so relieved. :)
 
Is natural to worry a lot.

Sounds like you have bought well.
looks like an easily rented home.

Good luck :)
 
I'm not sure what the questions are and I did skim over your first post. You might find that members don't always respond to large posts that don't have clear questions. I have found it's better to just keep threads simple with not too much information.

So I'm not sure what to say but just enjoy your purchase and don't worry now as you have bought the place so just be happy you have got it settled quickly as others like me started the buying process way back in September and are still waiting for the settlement.

It looks a nice house and lot's of room.
 
Nothing wrong with moving fast. We had been studiously ignoring the ad for our house for over a year, but one day had lunch at a cafe and someone had left the local property guide on the table. Sure enough, same house was STILL for sale so we went and had a look at it next day and put in an insultingly low offer the day we went to see it. And then went on a mad rush trying to get a loan for it.

I still blame sleep deprivation for the snap decision. The baby was about 6 months old at the time and is still keeping us awake at night. I'm hoping to make all the important decisions about our build this year before the next one is born or I might end up with a puce house with yellow trim, 4 bathrooms and only 2 bedrooms.
 
so just be happy you have got it settled quickly as others like me started the buying process way back in September and are still waiting for the settlement.

I will actually prefer the settlement to be as late as possible. You only start paying loan repayment after settlement. Imagine if the settlement is 6 months later, the house price may have already moved upwards during the 6 months so in a sense, you are getting the house cheaper. The rent may also has gone up during this period. As my settlement period is very short (1 month), I was constantly worried whether the bank can process my loan in time for settlement.
 
151 views and not a single advice/suggestion offered?

Really hope that my request for help does not end in vain.:(

It just means you:

A. have thought things through carefully
B. actually KNOW the answers already

The questions you ask can not be answered by others (unless they knew much more than you financials - it needs knowledge of your mindest, personality, etc....)


So with this in mind, my response to your questions:

1. Can I afford another IP or should I wait for my salary to increase to a higher level?


Wait unless you find a stupendous bargain.


2. Can someone show me how to calculate my overall LVR and equity? What other measures should I calculate?

Why do you need to know?

FYI, as I undertsand it

Equity = (value of all your assets) - (all your loans)

LVR = (all you loans) / (value of all your assets)

3. When should I start looking for the next IP?

Right now - in case there's a stupendous bargain. You *never* stop looking - even if you are not in a position to buy.

4. Suggestions for the next IP?
- where (which suburbs)?
- price range?
- property type (house, unit, apartment)?
- CG/CF type?


Up to you. :) Nobody should tell you this one - I think that'd be outright irresponsible if they did.

If you were *really* honest to yourself, don't you think you are simply looking for (a) someone to confirm your belief; or (b) someone you can fall back on to blame later in case it doesn't work out

At the end of the day, there is no one size fits all answer. In your current position, if I told you that I think you should go the path of CF+ commercial property unit trusts, what would you say?


5. How much interest rate increase and over what timeframe should I factor in? Can someone teach me how to calculate my PPOR monthly repayment (P+I) due to an increased interest rate? I don’t know how to do this because of the 100% offset.

I personally assume (perhaps wrongly!!) that the banks have a pretty good idea on this - so I use their fixed rates to forecast interest for the next 3/5/10 years.

As for calculating, there are online calculators on the net - way too hard for my simple brain to do on excel.

Cheers,

The Y-man
 
It just means you:
FYI, as I undertsand it

Equity = (value of all your assets) - (all your loans)

LVR = (all you loans) / (value of all your assets)
I don't know whether I should use "Outstanding Balance (Loan - Offset)" to compute my loan.
If I use this, my equity will be 546K and my overall LVR will be 32.6%.

If you were *really* honest to yourself, don't you think you are simply looking for (a) someone to confirm your belief; or (b) someone you can fall back on to blame later in case it doesn't work out
I am actually considering buying another IP but don't have the confidence to do so. I will be able to put in a 20% deposit by drawing from my offset and ahead (total 161K). However, I am worried about monthly serviceability.

It may be possible that procrastination means that I will never be able to afford buying another IP if house price continues to go up rapidly. So there exists this desperation and dilemma.

I welcome all suggestions which I will analyze and filter to help formulate my decision-making. Why would I blame anyone if this does not work? It will be ultimately my own decision.

At the end of the day, there is no one size fits all answer. In your current position, if I told you that I think you should go the path of CF+ commercial property unit trusts, what would you say?
I understand there will be all sorts of answers and opinions. I am not looking for the perfect/ideal answer. I don't know anything about unit trusts. Neither do I invest in shares.

As for calculating, there are online calculators on the net - way too hard for my simple brain to do on excel.
I can't find one that allows you to calculate the monthly repayment based on a certain offset amount. The more in the offset account, the lower will be the interest.

Also run into problem when calculating the principal repayment. I thought that for a 240K loan on 30 years term, the monthly repayment for principal will be 240K/30/12 but this doesn't seem to be the case. This greatly puzzles me :confused:
 
I don't know anything about unit trusts. Neither do I invest in shares.

Quite simple - it's where a trust is set up to buys a CF+ property, and the money is raised by selling "shares" in it - know as "units".

A PM collects the rent, takes out expenses and a management fee, and then sends the portion of rent to you accroding to the number of units you own.

For example, if a property was bought for $500,000 the trustee might split the project into 500,000 x $1 units.

If you invested $5,000 in this (i.e. 5,000 units), you would get 1% of the net rent (after expenses etc) since $5,000 is 1% of the original $500,000 purchase price of the property.

If you look at the Kmart distribution centre at Hoppers Crossing, I own a tiny tiny proportion of it in this way - so I also get a tiny tiny portion of the rent that Kmart pays to the trust.

Hoping this makes sense and gives you some addtional ideas.

The Y-man
 
. I thought that for a 240K loan on 30 years term, the monthly repayment for principal will be 240K/30/12 but this doesn't seem to be the case. This greatly puzzles me :confused:

It's iterative, not linear.
As you pay off principal, the interest payment also decreases - yet your repayment stays the same, your princial reduces more :confused:. This is why you need a fancier formula.

Cheers,

the Y-man
 
Our family income may be similar to yours. Do you have any suggestions to offer regarding the second post?
Similar only if we rent our current house and include FTA/B, otherwise about $20k lower than your base. So no - we're down in the dark dismal 60% lo-doc end of things, not the nice happy full-doc world, and are restricted to much smaller numbers accordingly. Big numbers scare me. We're actually hoping for 3 properties and a rental income enough to live on with a mere $200k debt, which most new investors couldn't even dream of.

You're actually in a very good position, you've got loads of equity, spare money in offsets and thus no need to pay LMI, and a decent but not high income. You're just here to get validation on whether or not to buy again :p

You're obviously risk averse. So like Y-man said, don't buy unless you see that stupendous bargain. No rush.
 
You're just here to get validation on whether or not to buy again :p
Yes, that is my intention.

You're obviously risk averse.
You are right. Otherwise, I will not have waited 2 years after PPOR to purchase this IP and chosen a lower-priced IP, although there is sufficient cash in the offset to fund the deposit much earlier

So like Y-man said, don't buy unless you see that stupendous bargain. No rush.
On hindsight, I had made a lot of mistakes due to procrastination.

if I had purchased my PPOR in 2006 instead of 2007, I would have saved a lot of money. I purchased my PPOR in 2007 for 390K and it is probably worth 510-520K now. So if I have dilly-dally until 2009 to purchase this same PPOR, I would have forked out 120-130K more.

If I had purchased this first IP in early-2009 instead of now, I may have saved 50-60K.

Hence, I don't wish to repeat this mistake and regret later.

Everyone wants to buy a bargain. The problem is spotting one. I believe that there must be quite many people who haggle so much after the price that they end up buying none and they lose out eventually.

I feel that house price will go up in the short term (due to housing stock not enough to meet increased migrant demand) but I am not sure of the scenario after 3 years. Wouldn't it be better and less risky to buy at the beginning? Any comments on this?
 
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I feel that house price will go up in the short term (due to housing stock not enough to meet increased migrant demand) but I am not sure of the scenario after 3 years. Wouldn't it be better and less risky to buy at the beginning? Any comments on this?
You need a crystal ball for that one. There's plenty of people out there who think houses are going to go *down* in the next 3 years ...

Research research research, then you'll be able to see something that is a good deal, and only buy it if you can afford it and all the numbers stack up.
 
You need a crystal ball for that one. There's plenty of people out there who think houses are going to go *down* in the next 3 years ...
Yes, I am also very frightened of a real estate bubble :(
If the market is predominantly owner-occupiers, then there is less risk of this happening. If there are a lot of investors/speculators driving the market, then it will be ominous.

What are your perceptions of the market? Do you think the price will go up or down and if it is going up, at what stage will the price plateaus, decreases or plummets?



Research research research, then you'll be able to see something that is a good deal, and only buy it if you can afford it and all the numbers stack up.
I will heed your good advice. :)
 
Quite simple - it's where a trust is set up to buys a CF+ property, and the money is raised by selling "shares" in it - know as "units".

A PM collects the rent, takes out expenses and a management fee, and then sends the portion of rent to you accroding to the number of units you own.

For example, if a property was bought for $500,000 the trustee might split the project into 500,000 x $1 units.

If you invested $5,000 in this (i.e. 5,000 units), you would get 1% of the net rent (after expenses etc) since $5,000 is 1% of the original $500,000 purchase price of the property.

If you look at the Kmart distribution centre at Hoppers Crossing, I own a tiny tiny proportion of it in this way - so I also get a tiny tiny portion of the rent that Kmart pays to the trust.

Hoping this makes sense and gives you some addtional ideas.

The Y-man

Does it mean that you are just earning rents and not reaping benefits of capital gains?

For this to be worthwhile, does it mean that the rate of return needs to be higher than the mortgage interest rate plus income tax rate, since I will be using the money that will otherwise be put into the offset account and I need to pay tax on this net rent?
 
What are your perceptions of the market? Do you think the price will go up or down and if it is going up, at what stage will the price plateaus, decreases or plummets?
Your market? No clue.

My market? House prices are lower than surrounding areas and old stock is getting replaced by new as well as lots of new being built (all by OOs not speculators), so prices will go up for a while playing catchup. Rents are obscenely high and will probably stay that way until the wind farm is done. Then I'm predicting a major drop in rents unless something else comes along to keep them up. Considering they found a large coal seam just up the road late last year, and they keep investigating putting in more wind farms, that'd do it.

Market my parents are in? Overpriced in every sense of the word, big oversupply, and liable for a nasty correction downwards in the not-so-distant future. Crawling with speculators.

I only really watch 3 or 4 markets. The 4th (mid ring north-eastern Adelaide) I watch very half-heartedly.

Know thy market ;)
 
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