My situation / strategy / rant

[Compleks]

Greetings all.

This thread is really just for me to get some of my thoughts down in writing. If you have a few minutes it would be great if you could have a read and lend some input.

Soooo.
I bought my first ip nearly a year ago. A 3br house in Bendigo (cost $272k from memory) Currently leased for $300pw. It has been ticking over without any trouble since.

My current situation: I have $40k saved up and sitting in the offset account. I still live at home, so have been able to save this deposit reasonably quickly.
Now, I'm looking to move out and buy a place of my own. I have pre-approval on a purchase price up to $350k (5% deposit). I'm looking at 1 bedrrom apartments around St. Kilda. I like this area a lot, and spend a fair bit of time there.

At this price I can only afford small places, which is okay for me. I see myself probably living in this potential property for 3-5 years before outgrowing it.
I want something that would also make a reasonable investment, as it's likely that I will rent it out and upgrade when the time comes.

A few thoughts/idea I have had.
If I buy a place now, I will probably have $10k left of savings. I will have another $5k (bit of a guess) in tax return shortly. I will also have the option of drawing a further $15k (guesstimate) from the loan against my first ip. That will give me another $30k reasonably quickly which I could then use to buy a second ip fairly quickly.

Alternatively, I have seen some places which would require some renovations. So I could buy a property with the intention of adding value. This would take $15 - $30k depending on the property and work I could do. This would also leave me with very little savings, and once I'm out of home my ability to save will be significantly decreased obviously, so I might be stuck and unable to proceed until I moved out of that property I guess.


Anyway, enough of my ramblings. At this stage my main priority is to move out of home. I have also considered buying a second ip and then renting a place for myself. But I do prefer the idea of owning my own place to be honest.

So, any words of wisdom and advice, input would really be appreciated. I'm just a bit back and forwards in deciding the best way forward for me.

Thanks for any advice. If you need more details on anything just ask.
Cheers

 

[Aaron_C]

Try the Adelaide Bank secured visa product for the $20,000 extra that you can use for your renovations and value-add.

 

[Richard Feynman]

My only input is that, were I in your situation, I'd be opting to buy another investment and move out into a rental. That should help you grab #3 sooner..and #4 etc.

 

[HiEquity]

If you're only going to be living in a place that long then I would strongly suggest a cheap rental arrangement instead. Different if it was going to be a long term family home.

You would be able to make all your debt tax deductible and it would allow you to take on more exposure as well as buy higher yielding ips in more suitable locations for investing.

Having your own place is nice but it costs you a lot over the years when you add up all the opportunity costs and with a small base the cost of lost opportunities is quite high indeed.

I only wish someone had pointed this out to me at your age - the results would have been very different. ..

 

[strongy1986]

If you're only going to be living in a place that long then I would strongly suggest a cheap rental arrangement instead. Different if it was going to be a long term family home.

You would be able to make all your debt tax deductible and it would allow you to take on more exposure as well as buy higher yielding ips in more suitable locations for investing.

Having your own place is nice but it costs you a lot over the years when you add up all the opportunity costs and with a small base the cost of lost opportunities is quite high indeed.

I only wish someone had pointed this out to me at your age - the results would have been very different. ..

I often point that out to people I know. You always get the same answers. 'yeah I know, but....'
I don't think they really do know. I would like to buy a ppor but am holding off for a few years because I have sat down and done the numbers and your about twice as well off buying IPs first up, not to mention the compound effect that comes from this.

 

[kathryn d]

I usually offer the same answers.

If you want your own home, and still be able to save aggressively, 'live for free'.
Buy or rent something with more bedrooms, and take in roommates/boarders.
Don't split the bills, just charge them a room rental...and make it attractive for renters.

People will pay a bit more for the ability to sign short term..one week and longer.They could be on job probation, vacationing, looking for work etc.

Offer basic breakfast supplies to be included. Costs about $5-10 for a loaf of bread, margarine,jam, tea,coffee and milk.

Yes, it may be a hassle..but you make the rules.

 

[ZOMG]

I often point that out to people I know. You always get the same answers. 'yeah I know, but....'
I don't think they really do know. I would like to buy a ppor but am holding off for a few years because I have sat down and done the numbers and your about twice as well off buying IPs first up, not to mention the compound effect that comes from this.

Can you tell me more about this concept? (Don't mean to hijack your thread OP)

I've bought a PPOR but haven't moved in yet due to tenants contract. I am currently renting with my partner. For simplicity's sake-

Rent (outgoing): $500 p/w
Rent (incoming from PPOR): $500 p/w

My costs appears to be still the same whether I kept renting or moved into the PPOR. The PPOR also has bonuses such as being lot closer to work (2min drive vs current 30 minute drive) and is more "luxurious".

 

[Peter_Tersteeg]

Rent (outgoing): $500 p/w
Rent (incoming from PPOR): $500 p/w

My costs appears to be still the same whether I kept renting or moved into the PPOR. The PPOR also has bonuses such as being lot closer to work (2min drive vs current 30 minute drive) and is more "luxurious".

You're describing a scenario where you rent yourself for the same amount of money that your property generates in rent, so on both sides of the equation the figures balance.

The difference is that in this scenario (compared to living in your property), all of the holding costs of the property are tax deductible. Maintenance, rates, utilities, interest, etc. Depending on your income, this will put you a little ahead, or even quite a bit.



Conversely from a bank serviceability point of view, the figures usually stack up for you to be better off by living in your property. Lenders affordability calculations don't consider rates and maintenance, but they only take 80% of the rental income. If you live in the property there is no consideration in the lenders calculations.



Another argument in Complex's situation is that if he lives in the property he does get benefits from it being his PPOR. Stamp duty is significantly lower so he needs less deposit. He's also got access to capital gains exemptions should he sell in the future. There is a good argument for him to purchase this property as his PPOR, live there for at least 6 months, then move back with his parents or rent with friends. I've seen this strategy employed very successfully by young single investors.

Also keep in mind that Complex has been in the property game for less than 12 months. 2 purchases within that time frame is actually quite a good effort. Most people don't go from nothing at all to 2 properties anywhere near this quickly.

Moving forward a renovation strategy for the next purchase might be a useful one. If you're going to live there for 6 months, that's plenty of time to get some painting done, lay new carpet and do some other odd jobs. A very basic cosmetic renovation can cost next to nothing (my last one cost $4k and I didn't do any of the work) but it can change the entire feel of the property. After 6 months the property can be revalued (and Melbourne is a rising market at the moment) and this can create enough equity to perhaps leverage you into the next IP.

 

[Compleks]

Thanks Peter.

Thanks everyone else who took time to respond. I'm definitely taking everything on board at this stage.

I'm still leaning towards the idea of buying a place for myself and renovating. Whether I stay there for 6 months or 6 years, I don't know. I have enough time that I can do a lot of the work myself, plus a few handy connections which should save me money on any trades etc...

If I end up liking the place a lot, then I can always stay on and hopefully draw on some equity to get me the next property. If I feel like moving on, then I could repeat the process and carry on forwards. Or crawl back to the parentals and save more cash (haha, preferably not this option).

In the meantime I'm just looking at properties and weighing up my options.

Thanks again to you all.

 

[Compleks]

Also, keep in mind that I'm not particularly motivated by money. I live a simple life, have few expenses and love my job. I will work for another 30 years at least, and even then they will probably have to kick me out. I have access to the ESSS superanuation fund, and will retire one day with a healthy pay out.

My interest in investing is more to do with security. I like to know that I won't ever have to struggle financially, and that one day I will be able to provide for someone or leave money to a worthy person/cause. In the meantime, it would be nice if I could just manage myself well enough that I can maintain a comfortable lifestyle and afford to travel once a year.

 

[sanj]

If you're only going to be living in a place that long then I would strongly suggest a cheap rental arrangement instead. Different if it was going to be a long term family home.

You would be able to make all your debt tax deductible and it would allow you to take on more exposure as well as buy higher yielding ips in more suitable locations for investing.

Having your own place is nice but it costs you a lot over the years when you add up all the opportunity costs and with a small base the cost of lost opportunities is quite high indeed.

I only wish someone had pointed this out to me at your age - the results would have been very different. ..

I often point that out to people I know. You always get the same answers. 'yeah I know, but....'
I don't think they really do know. I would like to buy a ppor but am holding off for a few years because I have sat down and done the numbers and your about twice as well off buying IPs first up, not to mention the compound effect that comes from this.

agree with both of you

im currently developing 7 units, have other non property investments and also another long term site, all while renting. if i had bought a PPOR i definitely wouldnt hav been able to do as much.

 

[type_one]

If it were me i would definitely buy the propoerty and then move in, but for no longer than 6 months. Move out and rent it out. Go rent yourself, move back home, move in with a mate, live on the street (okay maybe not that one).

You then get the benefit of someone else paying off your place and the benefit of not paying CGT for 6 years. Its win win. I will caveat that with if you meet someone and fall in love blah blah blah and they also have a PPOR residence you are now in toruble, sort of, as a couple can not have two PPOR. It would be time to sell one or hold it with the knwoledge that oneday you'll be paying CGT of some form on it.

Until you want to settle down and have family or just be stable then renting is your friend. Of course that is just my personal opinion. Some others might disagree of course, but in effect if you rent for less than you are getting across your property portfolio in rent, financially you are way better off. Of course mentally that could be a differnet story. some people just love being in their own house.

 

[strongy1986]

Can you tell me more about this concept? (Don't mean to hijack your thread OP)

I've bought a PPOR but haven't moved in yet due to tenants contract. I am currently renting with my partner. For simplicity's sake-

Rent (outgoing): $500 p/w
Rent (incoming from PPOR): $500 p/w

My costs appears to be still the same whether I kept renting or moved into the PPOR. The PPOR also has bonuses such as being lot closer to work (2min drive vs current 30 minute drive) and is more "luxurious".

The obvious benefit is depreciation

But you need to think outside the square a bit. Different areas have different yields. Your assuming that your investment is just around the corner, it doesn't have to be as you won't live there. You can take advantage of high yields in other markets and even rent in low yield expensive markets

Here's an example

Where i live in Melbourne (outer bayside) you can rent a 2 bed unit for between 300 - 350 but it would cost you 500k to buy
You could buy a unit in say Brisbane or Adelaide - pretty comparable areas to where I live for about 250. But they would rent for 300

So would you buy the unit to live in for 500k

Or would you buy two units for 500k, continue renting for say 320 a week but receiving rent of 600 a week.