New starter, needing help and advice

[Guest]

Hi there!

After reading so many posts from other new people seeking help from this forum, I’ve decided to throw my hat into the ring, and see if I can get some pointers from those that have done it before me. There’s just too much information out there, I’m hoping to focus my thinking to get the maximum benefit out of these forums.

My goals:
1) Develop a good savings habit.
2) Be in a position to own a family home reasonably close by to the city in either Perth, Canberra or Melbourne, which will give me a place to live near where I’ll work yet get me enough equity to achieve the next goal...
3) Purchase investment properties in the future.

My situation:
I moved to Canberra in early 2010 from Melbourne to start a government department graduate program. As you can imagine, my living expenses are thus very high, even though I live in a share house. I know that I am not going to remain in Canberra for more than the next four or five years before moving to either Melbourne (where I am from), or to Perth (where my parents and my girlfriend lives).

To be more precise, my after-tax pay is approximately $42,700 pa. The most I can save this year (after budgeting for the Graduate Diploma of Legal Practice) is $12,000. I have made the conscious choice to pursue the Graduate Diploma of Legal Practice this year and next year just to increase my job opportunities for when I move back to Melbourne or Perth. It’s my “plan B”. Once I’ve saved up all the money I need for the GDLP, I should be able to save $20,000 per year starting from next year.

Wherever I end up buying, I’m thinking that I need to live close to the CBD, or at least be working towards finally settling close to the CBD. I am a white-collar worker, and see myself having to work in the city. I’d rather not drive into the city if I can, because parking fees are a killer and not necessary where there is a viable public transport option. I’m not really fussy. I am happy with owning a 3-4 bedroom house and leasing out the other rooms to tenants/uni students if necessary. By the same token, I don’t mind living in a “shoebox” apartment for some time in order to build up enough equity to achieve objective (2) and (3). Whatever works.

Unfortunately, I am not that handy around the house, however, like most people, I’m pretty keen to learn. I’m from Melbourne, and am in Canberra now, so would obviously be more comfortable purchasing properties in Victoria and the ACT. On the plus side, being a law student and working in a solicitor’s office for a couple of years means that I’m confident that I can manage tenants myself.

What strategy should I pursue?
So forumites, what strategy would you give me on how to go about achieving my objectives, especially (2) and (3)? I’m assuming I should be targeting areas with good capital growth in Canberra, Melbourne and Perth.

I know that my situation is more fortunate than some of the others on the forum (living the single lifestyle, and not having any kids), but I have no idea where to start. I am very keen to learn. I’m ready to soak up as much information as I can. Getting over the hurdle to buy the first property is the hardest. Is it possible for someone in my situation to buy and invest in property that will bring me further to my goals? If so, which states and which suburbs would you suggest that I look, what types of properties, and at what prices?


Regards,
Guest.

 

[alexlee]

2) Be in a position to own a family home reasonably close by to the city in either Perth, Canberra or Melbourne, which will give me a place to live near where I’ll work yet get me enough equity to achieve the next goal...
3) Purchase investment properties in the future.

So forumites, what strategy would you give me on how to go about achieving my objectives, especially (2) and (3)?

Consider flipping 2 and 3 around. IPs first, and THEN the PPOR.

 

[mary&mat]

Hi Guest,

welcome

Where are your savings at the moment? Could you put them into a high interest earning term deposit? Could you put them into a managed fund or shares & make regular monthly deposits? Just trying to work out how to maximise what you have now.

Agree with alexlee too...purchase an IP first, then you won't be so much behind the 8 ball trying to pay off a PPOR as well.

 

[softmonkey]

Just off the cuff based on your post, have you looked into the WA satellite towns eg Mandurah, Bunbury, etc for affordable areas with solid industries and future growth? Don't limit yourself to capital cities if you can still check in on the IP regularly - even if you end up in Melbourne I assume you'll still visit the West. It's only one idea, there are a hundred ways to skin the cat.

The other thing I noted is that your expenses are still high (nearly $3000 a month!) even in a share house. Are there ways to trim this further or pick up extra income?

 

[alexlee]

purchase an IP first, then you won't be so much behind the 8 ball trying to pay off a PPOR as well.

Note I did not say 'an IP'. I said 'IPs'. Think multiple. IF you believe that property prices will go up over time, you should try to get as many IPs as you can before buying the PPOR.

 

[investor2009]

Agree whole-hartedly Alex.

Despite what the Somers books said this is usually a smarter way to get ahead and makes more sense fianancially. Don't get me wrong I like these books but re-reading the other day I got a sense that these were written with only 1 plan in mind and that is paying down debt. Jan recommended buying PPOR first, paying down and then leveraging while I would recommend the other way around because there are more tax deductions and then you have at least one busy bee working for you, adding towards what YOU can humanly save each month. Pkus, you can always just move right on in should you wish.

Note I did not say 'an IP'. I said 'IPs'. Think multiple. IF you believe that property prices will go up over time, you should try to get as many IPs as you can before buying the PPOR.

 

[Rickardo]

Welcome Guest,

You are definitely on the right track with having a vision of what you’re trying to achieve. Now what you need to do is work out some of the finer details to help you along the way. You are asking a lot of specific location questions, I think you need to backtrack a little before getting to this and consider some of the following:

How much do you currently have as a deposit?

If saving 12-20k pa, how long will it take you to accumulate enough to buy a property at a particular price? What if it costs 300k? What about 500k?

Given your deposit and amount you can save, are your short and medium term goals realistic? I would suggest if you’re looking for an apartment in a capital city (even 1BR) you’re probably looking at 400k, but it depends on what you’re willing to compromise on. A 3-4BR inner city house is probably not achievable without some innovative thinking (unless you have a large deposit).

if you can’t afford what you want straight up, you may consider what others have suggested and start with a more affordable IP first?

 

[alexlee]

Despite what the Somers books said this is usually a smarter way to get ahead and makes more sense fianancially. Don't get me wrong I like these books but re-reading the other day I got a sense that these were written with only 1 plan in mind and that is paying down debt. Jan recommended buying PPOR first, paying down and then leveraging while I would recommend the other way around because there are more tax deductions and then you have at least one busy bee working for you, adding towards what YOU can humanly save each month. Pkus, you can always just move right on in should you wish.

How many properties can you move into? When you have multiple properties this logic falls apart.

It's not just for the tax deductions. My two main arguments are:
1) It's easier to hold a property if you get rent and can deduct expenses, and
2) The larger your asset base, the more ($ terms) they grow. e.g. your dream home is $1m now. If you own 500k in property, your dream home will always be 2x your assets. If you own 1m in property, it tracks. If you own more than 1m in property, your dream home gets cheaper as time goes on.

This, of course, assumes property prices go up.

The PPOR first strategy makes sense for most people, because most people start off with buying their own place and don't think about investing until their 40s or older. At that point, there is usually plenty of equity in the PPOR to fund IPs.

When you start early, but with nothing, there is more flexibility.

 

[investor2009]

Yep, I agree with that also. We're on a roll now Alex!

In regard to reason 1, it depends if the rent you pay while you're renting the investment or potential PPOR is worth it. Where it usually is well worth doing so, sometimes paying $400p/w in rent and a further $100 to hold the investment might not be worth renting out. But it usually is, I agree.

And the 2nd answer, HELL YEA. I'm a leverage man if ever you've known one.

How many properties can you move into? When you have multiple properties this logic falls apart.

It's not just for the tax deductions. My two main arguments are:
1) It's easier to hold a property if you get rent and can deduct expenses, and
2) The larger your asset base, the more ($ terms) they grow. e.g. your dream home is $1m now. If you own 500k in property, your dream home will always be 2x your assets. If you own 1m in property, it tracks. If you own more than 1m in property, your dream home gets cheaper as time goes on.

This, of course, assumes property prices go up.

The PPOR first strategy makes sense for most people, because most people start off with buying their own place and don't think about investing until their 40s or older. At that point, there is usually plenty of equity in the PPOR to fund IPs.

When you start early, but with nothing, there is more flexibility.

 

[alexlee]

Yep, I agree with that also. We're on a roll now Alex!

In regard to reason 1, it depends if the rent you pay while you're renting the investment or potential PPOR is worth it. Where it usually is well worth doing so, sometimes paying $400p/w in rent and a further $100 to hold the investment might not be worth renting out. But it usually is, I agree.

As soon as you have more than 1 IP, the renting v moving in idea is irrelevant, because you can't move into 2 properties.

I don't really care if the first IP is cheaper or not to live in yourself. The point is to think of multiple IPs. The number game is not in the live in or rent somewhere else concept, it's in the 'how much in IPs can I accumulate'.

 

[investor2009]

I see where you're coming from, but disagree in this instance.

Our home has been our best performing assett to date.
Why? Because we rented it out for 11 months, received $15,000 stamp duty concession and $14,000 FHOGB. We've lived there for 1 year 'rent free' because of this, and has gone up $100,000 in the time of ownership. Also remember we claimed some depreciation and negative gearing aswell so maybe a further $2500 cash-flow for the year.

If we think of the 'how many IP's can I get under my belt' scenario, (which is good) the bank refused to lend any more funds to us at that time because this property (now PPOR) was costing us money included with our rent we were paying. We moved out of the rental and into the PPOR and were able to borrow once more. I see this puts a hole in your particular theory in this instance.

So just because yopu 'don't really care' if the first IP is cheaper or not to live in, it might restirct your asset base. Case by case.

As soon as you have more than 1 IP, the renting v moving in idea is irrelevant, because you can't move into 2 properties.

I don't really care if the first IP is cheaper or not to live in yourself. The point is to think of multiple IPs. The number game is not in the live in or rent somewhere else concept, it's in the 'how much in IPs can I accumulate'.

 

[Guest]

hello everybody

Thanks for your replies so far, please keep it rolling.

Alexlee: Thanks for the advice, owning an IP before a PPOR is definitely on the cards because I'm still not sure where I'm going to be in four years' time. At any rate, my salary/expenses will probably exclude me from buying a PPOR type of dwelling near the city (where I'll most probably work at).

Mary&Matt, Softmonkey: I think I'll need to review my savings, see where I can trim off excess expenses. I note that one of my friends saved up around $30000 last year or the year before on a graduate wage, so it's definitely possible. You guys have raised the interesting point of looking for a second job/income stream, and I will investigate that further.

Ricardo: Thank you for your kind words, but in my foolish youth, I've only saved up about $5000 so far. However, I'm nearly 27 and ready to knuckle down and make sacrifices so that I can own my own property (or properties?). I understand that some of my plans are unrealistic right now, I'm here to learn that's all!

---

Having not spoken to the bank yet, I'm thinking that I'll only be able to find a loan approximately $300000. I now have a few more queries:

1) Whereabouts can I look for IPs in the state of ACT, Vic, or WA for around that price of $300000, which will (hopefully) have capital gains so I can buy more in the future? What about for say... $400000 if I can convince my brother/dad to invest with me?

2) Are there any threads you can point me to which deals with how to figure out what is a good investment/what is a bad investment with regards to figures (ie number crunching threads). This will allow me to do my own calculations and get familiar with analysing properties.

3) If I can save up $20000 a year (renting a room in a sharehouse), wouldn't it then be possible to own an IP which is cf- to the tune of $5000-$12000? This seems too easy - are there any holes in my logic? Interest payments which I haven't calculated? I do understand that I'm relying on the properties to have capital gains or else I'll lose money on the investment.
---

Thanks to all so far for your replies.

Regards,
Guest

 

[alexlee]

Alexlee: Thanks for the advice, owning an IP before a PPOR is definitely on the cards because I'm still not sure where I'm going to be in four years' time. At any rate, my salary/expenses will probably exclude me from buying a PPOR type of dwelling near the city (where I'll most probably work at).

Even more of a reason why IPs (note not one, but many, if you can. I know it's hard to imagine now but keep it in mind. If you can't imagine the possibility, you won't ever achieve it.) is preferrable to a PPOR. Because you don't know where you'll be. If you buy a PPOR you like, then have to move for a job, what then? IPs can be purchased anywhere and rent out no matter where you yourself are.

 

[dog]

Let's start with some background so that you understand why some are telling you to start with the IP first....
You're currently sharing and by most people's take's on the $ situation, if you're serious you could save a heap more (obvoiusly I don't know your personal circumstances other that what you have disclosed already - however, I raise a family on less than you live on after all expenses are considered).
If you got a 30 year loan and double the repayments for 7 years, it would be paid off - I assume you cannot do that with a PPOR given that there is only 'your' income and none from tennants.
If you buy a new or very close to new home as an investment, you will have very good depreciation benefits to claim on and it would be worth getting a PAYG variation form filled out and submitted to the ATO by your accountant to ensure that you receive the tax benefits on a weekly basis to help your week to week cash flow. (PAYG forms can be submitted for any investment to better the cash flow position and allow your tax return to effectively be given to you on a reduced but weekly basis - as opposed to receiving it at the end of the tax year).
The better your cash flow, the more properties you can afford, and the more exposed to the market you are - for better or for worse.

I don't advocate specifically new or old homes, just letting you know that newer is better for cash flow so you can afford more properties and get more exposure for your money - it is also possible to so with older properties under certain circumstances however you'r entry point $$$ would be very restrictive.
An example is a single bed flat/apartment in say Hawthorn, Kew, Elwood, Williamstown etc for $320k (appx - unless you find a bargain).

Might be a bit basic depending on your existing knowlege - however it may be helpful if you didn't know.
Also, if you want to know about growth rates and possible future growth, check out the statistics in the rear of Australian Property Investor Magazine for those, rental returns, vacancy rates and the list goes on.
Once you find figures you like, research the area and see if there's infrastructure etc and a positive push to drive growth or existing amenity such as the suburbs I've already mentioned (IMO) to allow for future growth.

 

[investor2009]

1/ Frankston North, VIC would be a good place. Bearing in mind that almost any suburb located in a growing hub will do well long term, time IN the market.


2/ Have a good squizz around, heres one for you.
Purchase price (in total inc stamp duty and legals) $320,000 (lets pretend you borrow 100%)
Rental income $400p/w = $20,800p/a - 6% management fees = $19,552 - 2 weeks rent p/a = $18,752

Outgoings = $320,000 x 7.2% interest rate (Interest only loan) = $23,040p/a + $3,000 insurance, rates, repairs = total of $$26,040p/a - rental income of $18,752 = $ 7,288 = negative gearing tax benefits & depreciation p/a (approx $3000p/a) = $4,288p/a to hold.
Theres the calculations you will require to crunch numbers.

3/ Yes, the sky's the limit. You should have no worries with getting a loan for the deal shown above.

Good luck!

hello everybody

Thanks for your replies so far, please keep it rolling.

Alexlee: Thanks for the advice, owning an IP before a PPOR is definitely on the cards because I'm still not sure where I'm going to be in four years' time. At any rate, my salary/expenses will probably exclude me from buying a PPOR type of dwelling near the city (where I'll most probably work at).

Mary&Matt, Softmonkey: I think I'll need to review my savings, see where I can trim off excess expenses. I note that one of my friends saved up around $30000 last year or the year before on a graduate wage, so it's definitely possible. You guys have raised the interesting point of looking for a second job/income stream, and I will investigate that further.

Ricardo: Thank you for your kind words, but in my foolish youth, I've only saved up about $5000 so far. However, I'm nearly 27 and ready to knuckle down and make sacrifices so that I can own my own property (or properties?). I understand that some of my plans are unrealistic right now, I'm here to learn that's all!

---

Having not spoken to the bank yet, I'm thinking that I'll only be able to find a loan approximately $300000. I now have a few more queries:

1) Whereabouts can I look for IPs in the state of ACT, Vic, or WA for around that price of $300000, which will (hopefully) have capital gains so I can buy more in the future? What about for say... $400000 if I can convince my brother/dad to invest with me?

2) Are there any threads you can point me to which deals with how to figure out what is a good investment/what is a bad investment with regards to figures (ie number crunching threads). This will allow me to do my own calculations and get familiar with analysing properties.

3) If I can save up $20000 a year (renting a room in a sharehouse), wouldn't it then be possible to own an IP which is cf- to the tune of $5000-$12000? This seems too easy - are there any holes in my logic? Interest payments which I haven't calculated? I do understand that I'm relying on the properties to have capital gains or else I'll lose money on the investment.
---

Thanks to all so far for your replies.

Regards,
Guest

 

[MrJK]

Found an article which is quite interesting and agrees with suggestions above:

http://news.domain.com.au/domain/ho...pping-stone-to-first-home-20110118-19uws.html

Hope it helps.

I am currently renting and was thinking to buy my first home as PPOR. Now my thinking is changing towards IP first.

 

[mpgrewal]

Some good advice has been given here also of what NOT to do
http://www.apimagazine.com.au/blog/2011/01/three-surefire-ways-to-lose-money-in-property-in-2011/

 

[propertyVIC]

Share-housing is much cheaper!

We bought our first house then promptly rented it out and kept living in (separate but close) share houses... If I were young now I would:

- Buy PPOR and get grants
- Live in it for the minimum amount of time
- Move back into share housing and turn former PPOR into IP
- Make any extra payments into IP mortgage into an offset account for maximum flexibility - I made the mistake of being hell-bent on paying off first home which then was tax-disadvantaged when we - having lived in it for a while - turned it back into an IP... but with no debt on it.

Egads, even then I knew it didn't make sense in theory, but for my sense of security I felt I needed to do it.

PS. While you might be legally qualified, I would reconsider managing your own properties. Time probably better invested in being wholehearted at work, fool for a client etc.

And, yep, decide what you want to save... then spend the rest. Don't spend what you spend and save the rest. It makes all the difference especially early on. Just pretend you're still a student!