New Adelaidean - pls help with strategy

[Zincsilv]

Hi everyone,

First of all, I apologise for the long post.

I have been reading this forum sporadically and have only recently registered. It has been a very informative and great resource so far and I have really been inspired by many members on here!

I thought I'd better introduce myself before doing too much else. My name is Jen and I'm a 25 y.o. lawyer with a commerce degree. Hopefully that will assist with property investing.

I bought my first PPOR in September 2009 and currently own shares, but am looking to purchase my very first IP in the next few months (once I receive the results of my performance review, of course).

Given the amount of information, I'm not quite sure where to even start. It seems that the more I read, the more I realise how little I know! Quite a humbling experience. I have a few questions specific to my circumstances. They are as follows:

1. I approached my current lender in Oct 2010 and was advised that I can only borrow approx $150k. Only interested in houses at this stage. Obviously not much I can get for $150k. I have the possible option of investing with my mum and/or partner. Should I invest with them, or save up more and buy something by myself later?
2. I want to purchase an IP sooner rather than later. If I invest by myself, I would be forced to look at houses either far north or far south. Is that advisable given potential dodgy tenants, and being such an extreme newbie?
3. Have most people bought IPs in their own names, or through a company for tax benefits?

I should probably start with a good mortgage broker in Adelaide to determine how much equity I have built up in my PPOR since Oct 2010, so I definitely welcome any suggestions.

Thanks for taking the time to read! I am very interested to hear what you all have to say.

 

[IFBB]

Welcome Jen.

Like yourself, im new to this (23), and keen to try and get as many under my belt as quickly as i can.

From what i have learned over the past few years reading about property investing, is that time is on your side, especially in the current market.

What i suggest to do is find yourself some target suburbs/markets, and keep an eye on them over the coming months to see how quickly they sell, if there are any price reductions etc. Prices are not going up in the near future in Adelaide, so wait it out, get your capacity a little higher and in the meantime read a little and try to gather as much usual information as you can.

 

[MFG]

Welcome,

i am into this not long as well.

the start up structure is important.

try not to tied on the PPOR and IP into one loan -> messy in later.

Lawyer -> can get sued just like docs? -> IP in name of trust? -> no negative gearing applied to your income if in Trust name.

is your PPOR fully paid? car loan?
clear off the "bad debt" fast -> pay off the PPOR/car loan as soon as u can. hit the loan with the highest interest rate which is non-tax dect.

above are just some points that i can think off.

cheers,
Scott

 

[Jacktej]

Hi Jen
I would go with IFBBs suggestion as the market in adelaide is not expected to anything for sometime, but it also means if you buy now you could strike some bargains. Aside from this, my own experience is that if you combine with someone as you mentioned, you will be able to buy a quality property which will make your effort worthwhile. The key in such an arrangement is how well the other owner understands the economic compulsions of holding a property for a minimum period of time. The worst is not as bad as it is often made out to be.
Cheers
Jack

 

[Zincsilv]

Hi IFBB, thanks for your post. I have been reading as much as I can and I'm on here every day. That's what I need to realise, is there is still plenty of time. I keep feeling like I'm way behind other people who are younger than me and have already bought a few IPs! I think I am keen to buy asap BECAUSE of the current market, from what I hear from agents, many houses are simply on hold on the market and remaining stagnant and not selling. This is the best time to negotiate a better price.

Hi MFG, thanks for your suggestions. I was going to have a separate loan for IP... Yes lawyers can get sued, but Im not a sole practitioner or a partner, so I am covered by my firm's insurance. No bad debt at all apart from mortgage for PPOR and I'm making extra repayments each time.

Hi Jack, yes I was concentrating more on the 2nd part of your first sentence, in that I was hoping to strike a bargain. There are so many houses on the market though, its slightly overwhelming!! Yes, I'm almost fairly certain I'll be investing with someone but wasn't sure what people thought of that, and if they had any bad experiences. But seems like the best/only way to go for me.

You've hit the nail on the head with your last statement. My mum is currently investing with my bro, and he wants to sell right now, but mum knows the market is down and its not the ideal time to sell. He doesn't seem to understand!

Thanks for all your comments! I shall take them all into consideration

 

[Corey Batt]

Something you have to remember is that even though you may get good deals now, for all you know the market could well be stagnant for 5+ years, in which if you buy now you'll lose your money effectively. However, if you were to pay off house/invest in other ways until you believe there is sufficient reason for the market to go up, that way you can buy cheaply and actually get capital gains, instead of real loses.

I believe it would be unwise to think that the market is in for a upswing any time soon, so getting in 'for a good deal' isn't so if all you're buying is stagnation and losses.

 

[Zincsilv]

However, if you were to pay off house/invest in other ways until you believe there is sufficient reason for the market to go up, that way you can buy cheaply and actually get capital gains, instead of real loses.

Thats a really good point. What are the ways to tell whether the market is going up or not (without speculating)? Where should I be looking to find that reason?

 

[newbyinvestor]

Call me the eternal optimist but I am in buying mode if the deal is right and right for me means near enough to cash flow neutral if not positive.
I don't disagree that generally prices have softened and the outlook for the next year or so isn't brilliant but one thing that hasn't deflated is rent, so if the rent pays the bills I'm not losing money.

 

[Corey Batt]

Thats a really good point. What are the ways to tell whether the market is going up or not (without speculating)? Where should I be looking to find that reason?

Housing has gone through a large boom in the last two decades and despite what permabulls may think, prices can only grow by so much before there needs to be a correction, whether by stagnation or bubble bursting. Think about it, if wages go up 3-4%, whilst property goes up 8-10%, property would eventually be leagues ahead of wages, thus making it impossible to afford properties. However the market is what it is, a market. What people can afford dictates prices, with high leveraging skewing the picture somewhat. If the general population can't afford to extend themselves substantially, property cannot make those great gains of the last two decades.

If you look at the last two decades growth, it was also conventially the time wherein lending restrictings have eased, allowing people to borrow far more than they previously could. This bolsters up demand, allowing prices to go where they have today.

Look at the economy, we're perched on entering a recession (IMO) later this year, the global economy is slipping backwards and debt is through the roof. The previous reasons for growth are not able to play into the housing market right now, and arguably for a fair few years (5+ perhaps). In essence, prices grow for a reason, if there isn't the money supply, sufficient constraints stopping development, large population growth, there will not be growth.

Personally, I am not touching property right now with a ten foot pole. I can easily afford to buy a property each year for the next ten years, however with these conditions, I think this would reduce my wealth in the short and long term, by inhibiting potential growth.

If we do enter a recession, prices stagnate over 3+ years whilst rents increase, I'll consider making a handful of purchases, primarily those for development. But given a choice between residential property investment and shares? Property has no chance what with its limited growth potential, high upkeep costs compared to shares, speculative growth etc.

Sorry to be a rainy cloud but this is just my view of the market.

 

[Comper100]

Call me the eternal optimist but I am in buying mode if the deal is right and right for me means near enough to cash flow neutral if not positive.
.

Have to agree with this statement myself, i take the same view. I'm always in buy mode if the deal is right.....ie pos cashflow.

 

[mmmggg]

IMO - buy even with $150000

It is not timing the market but time in the market. Or buy when you can afford to. I love ppl who say they can buy so much property and then give you a host of reasons why they don't. There's a dreamer in all of us. Love it.

 

[Corey Batt]

It is not timing the market but time in the market. Or buy when you can afford to. I love ppl who say they can buy so much property and then give you a host of reasons why they don't. There's a dreamer in all of us. Love it.

Great advice, except when you have declining and or stagnating prices for any reasonable amount of time, then you're kinda losing money.

I don't think it is wise to suggest to people that "don't worry about buying when you will actually make money, just cop losses on the chin and one day you'll probably make something, even if the return is less than just sticking your money into a term deposit!". It is such a financially naive view.

There are just some times where its best to hold your chips and wait for conditions to show signs of improvement.

 

[ssimpson2003]

CJ - What you say make sense in terms of growth however, we shouldn't purely look at standard CG (ie set and forget CG) as the only way propety can perform well as an investment.

I actually agree with you and believe we will see soft CG on average over the next 10 years when looking at the Austalian property overall and if using the last 20 years as a benchmark. However, I also believe we will see significant increases in rental yields due to steady population growth, first home buyers priced out of the market and no 'real' solution to address the housing shortage in the cities.

If people aren't buying houses, then then they are renting them. Demand for rental property attracts investors, which keeps CG ticking along albeit at a slower rate than over the last 20 years. All the while, rent will be rising as supply and demand kicks in. Higher yields in turn makes property more attractive as an investment, investors purchase again and the cycle continues. Eventually when it becomes more economical to buy property than to rent, first home buyers will return to the market and so on.

I firmly believe that while the gov't does nothing substantial to address the housing shortage, we will continue to see higher demand for outer suburban and regional housing, and growth in capital and rental yields in these areas will outperform other more traditionally attractive property investments and will contiunue to be competitive with other asset classes, with significantly less risk in many cases.

if people cant afford property close to the CBD's then they move further out, if they cant afford to live in the outer suburbs they move to regional centres - or anywhere they can work and put a roof over their heads. The gov't have also indicated that part of their solution to housing shortage is to invest in and around satellite cities and regional centres, and we have started to see evidence of this occuring already, and many more plans on the drawing board.

Some state and local govt's are bucking that trend such as in Adelaide who favour increasing the housing density, and as such land values will almost certainly increase significantly as the population grows. This to me makes it a very attractive investment right now, if you buy subdividable land with good transport links to the city and/or new employment prospects.

I think the overall trend over the next 10 years will be that investors will dominate the market place in most areas of Australia, and we will start to see more of a social divide. Those with equity now can ensure they are part of the "haves" group. When wages finally catch up with cost of buying a house, and solid growth returns, these people will be in an outstanding financial position.

With all the above in mind, I believe that the next 2-3 years is the perfect time to invest and I will be looking to expand my residential portfolio in Adelaide outer suburbs and select regional centres in other states that have stong prospects for employment growth and diverse industries.

 

[ssimpson2003]

Back to Jen's original post....

Hi Jen as you indicated you should definitely speak with a broker to work out your current borrowing capacity. Do anything you can to boost this up. Reduce your credit card limit as much as possible, and make sure the broker knows you are prepared to reduce or remove any redraw facility you may have on the current loan structure. Basically ask the broker to help you maximise your borrowing capacity.

Once you have a figure that is your starting point - Remember to take purchase costs into account...again probably best to ask your broker "what is the maximum price I can offer on a property" and work backwards from there.

Personally I would not invest with family members/friends etc for a multitude of reasons. Wife/husband would be as far as i would go in a joint investment. A quick google or search around this site will tell you all you need to know about this topic. Even if you have still only have 150k after assessing your borrowing capacity, you can still find perfectly good investments in Australia right now for that price.

There are a million views about where the right place is to buy however as you can see by my post above i think you live in a fantastic city to start your search. With regard to your comment "I would be forced to look at houses either far north or far south." I personally think that’s exactly where you should be looking. If you employ a good property manager and have a good insurance policy there should be no need to worry about who you rent to. Also the demographic of these areas are slowly changing and are becoming more desirable and affordable places to live and commute to the city. If you visit the SA Gov't website, have a look where they are investing their money.

I would also suggest buying something with subdividable land if you are sticking to Adelaide for now. (other areas might require a different strategy) Even if you don’t subdivide it yourself down the track, the land component of the investment will become a premium in Ade suburbs in the coming years which gives you many options. Dont get sucked into buying a unit or apartment closer to the city. This may well work, however i think you have a much better chance of making it a successful investment by focusing on property that is as close to cash flow neutral/positive as you can get it, while still having a block that is subdividable.

As an example and to put my money where my mouth is....i just bought a property in Christies Beach for $245,000. This is on an 700sqm block that is subdividable, within 5 min walk of beach, 1 min walk to primary school 3 min walk to supermarket and a 5 min drive to Noarlunga Centre. With a small amount of work on the current property ie <10k - with all work contracted out ie: me not lifting a finger, i am confident i can rent this out for between $290-310 per week. In around 5 years time, i plan on building 2 x 3 bed, 2 story townhouses on the block, both of which will have sea views.

Given i was looking so recently, i can assure you that there are still some excellent investment opportunities down there.

Good luck with your search!