Not sure where i'm heading or what i'm doing..

[The Red Baron]

Hi everyone

I'm a 25yr old guy a bit confused with everything going on at the moment. Interest rates, subprime, credit crunch ahhhh.. think i've made a bit of a mistake and not sure what to do about it.

I had been saving a few years for a deposit, dabbled in the sharemarket, term deposits, managed funds and inturn missed the Perth property boom and ended up behind the 8 ball.

6 months ago went 50km north of perth with a friend that had just purchased a block of land. Despite the long drive I was quite impressed with his block. Elevated block, ocean views, 400m from the beach, it was a nice new estate. I thought one day i'd really like to be able to live there. A month later I purchased a block right near my friend for $229,000. Buying on emotion

The $55,000 deposit I had didn't get me very far just scraping in to avoid paying Mortgage Insurance. I now had a block of land and debt of $183,000.

I had a look at a few apartments that I could afford but was turned off at the old, tiny, shoeboxes and the strata fees. Although now looking back it would have been a better move to rent out and reduce my tax. After now reading the forum I understand the land is bad debt the IP would have been good debt.

The loan I have is Interest only of $275 a week, but I have been adding $400 a week the past 2-3 months due to working a second job to reduce the loan to $179,000.

I have just been told the block is now valued at $250,000, however looking around I think $240,000 is more realistic.

Do I just keep putting the $400 a week to reduce the loan that i'm paying 8% on?

What options do I have? I feel like i'm getting no where at the moment.

Thanks

Dan

 

[redsquash]

if your intention is to build an investment property on the land then interest and associated costs is a tax deduction.
Problem solved.
Not generating income from the land is not good

 

[The Red Baron]

Thanks for that.

I would like to build on the land, whether to live in or as an investment property. However there is a building restriction on the block that it must be a two storey house. At the moment can't afford to build a two storey house.

 

[The Y-man]

. After now reading the forum I understand the land is bad debt the IP would have been good debt.

While the capital may have been better utilised (and then again maybe not! who knows), I don't necessarily think it was a bad move as such. Put it this way - you could have done a lot worse!

So here is a question for you: do you believe the land will grow in value at a rate exceeding you interest payments? If it does, then you have zip to worry about

Cheers,

The Y-man

 

[The Red Baron]

While the capital may have been better utilised (and then again maybe not! who knows), I don't necessarily think it was a bad move as such. Put it this way - you could have done a lot worse!

So here is a question for you: do you believe the land will grow in value at a rate exceeding you interest payments? If it does, then you have zip to worry about

Cheers,

The Y-man

I guess I could have went out and spent my deposit on a new car and that would have been worse use of capital.

The last year of saving I just had my money in an online savings account getting 7% but I was over getting a tax bill every year for saving money.

I hope the block goes up more than $14k a year, i'm not expecting huge captial gains. Would just like to build up a bit of equity the next 3-5 years and feel I can get back into the market again.

 

[shuggy]

The loan I have is Interest only of $275 a week, but I have been adding $400 a week the past 2-3 months due to working a second job to reduce the loan to $179,000.

Do I just keep putting the $400 a week to reduce the loan that i'm paying 8% on?

What options do I have? I feel like i'm getting no where at the moment.

Thanks

Dan

Hi Dan,

I think you've done a great job by taking action and getting your foot in the door.

Instead of using the $400pw to pay off the loan principal, perhaps you can open a 100% offset account linked to your loan and put the cash in there.

Check if your lender has this facility... that way you can access your cash quicker and not have to make a redraw if you need the cash.

Also, if you build your residence, you won't have future problems if you want to convert it to an IP.

 

[Francesca C]

Hi Red Baron

Congratulations for having this mind set in your mid 20's.

W.A. is so beautiful, and in Perth we have so much water.

Just wondering, where is the land you purchased?

Can you build and use this property as a holiday rental for bigger returns?

 

[BayView]

Owning a block of land, especially one that has already gone up in value a little bit, is NOT a bad thing, and the debt on it is not bad debt.

Think of it as an investment, and the money could have been simply blown on "stuff".

Keep plugging away on that loan, get it down a bit more and in another year or so you will be in a good position to maybe build on it.

 

[evand]

Did you know you needed to build a 2 story house before you purchased? Even tho you couldn't afford to build one.

I'm not sure buying a car with the deposit would have been worse. You wouldn't be paying huge monthly payments on a loan with no income, no tax deductions and doubtful cap growth going forward.

I have made money on land purchases previously but i knew the market was trending upwards quickly. And i paid cash so i didn't mind the no income, deductions, depreciation etc as i had no interest payments, management etc. (I would never take a loan on land only)

When will you be in a financial position to build a 2 story house? I guess the payments on the land will make that possibility even further away. If you have no idea you might be better to cut your losses as it might cost you a hell of a lot of money before you can make money with it. Not to mention the opportunity cost.

Possibly you could do a JV with a family member, friend or builder. Where they pay for/build the house and sell and split the profit. (if any)

I think you're in a tricky position and maybe you should do some forward cash flow projections and possibly sell and buy an IP for now and come back to the land at a later date when you're in a bit healthier financial position. Theres much easier and less painful to start your investing career.

Good luck with whatever decision you make.

 

[Perp]

When you say that you can't afford to build a double-storey home, do you mean that you couldn't get a loan to build? Have you checked with a mortgage broker?

If that's definitely the case, then you'd best come up with a strategy for remedying this situation. If you don't think you'll be able to afford to build within 2 or 3 years, then you may be better off considering selling and getting into an asset that does generate an income. Alternatively, find an investment partner who can borrow to build, do it together and split profits.

And as others have said, be kind to yourself - you absolutely could have done a lot worse.

 

[lizzie]

no tax deductions

this is not quite right - if the intention upon purchase is to build an investment property on the land then the baron can claim the interest repayments against his tax.

i think there might be a time limit on when you then actually have to build (or sell) before the deductability runs out - but i might be wrong - so check with your accountant.

it is all about the "intent" of the use of the loan - so if the baron confirms in his mind that it is just an investment property, then he can claim on this point and then apply for a tax adjustment so that his paye tax is reduced each week.

i agree - put the extra payments in an offset account rather than paying direct. then, in a year or so, you may be able to use this money as the deposit for your building ... but check with a mortgage broker to see if you can possibly borrow now as the $400/wk extra would cover the mortgage of actually building, and then you could start renting it out for some income.

not all is lost - i am sure we have all made mistakes along the way, and most of us have recovered. the secret is to not give up. the first couple of properties will be such a massive learning curve that you brain feels like it's going to explode with information overload - but that learning is invaluable and it gets easier and easier with each subsequent purchase.

i don't understand those who do the massive learning of the first (and maybe second) property, and then give up claiming it's all to hard ... it gets easier.

and the lessons learnt best as those that cost us in the hip pocket ... i bet you make a wiser choice on your next purchase.

 

[lizzie]

p.s. probably time to do some serious ip reading and set yourself some goals.

 

[evand]

Hi, thanks for the correction. Could someone add some further detail on the time limit and/or requirements?

I have only ever bought land to sell at a later date so was unaware of this.

Would be interesting if claiming deductions and circumstances change (or they just changed their mind) at a later date and a person didn't build. Would have to lodge an amended return, no?

Regardless, he would need a decent income to benefit from the deduction tho.

this is not quite right - if the intention upon purchase is to build an investment property on the land then the baron can claim the interest repayments against his tax.

 

[Kamak]

Where do you buy??? Im surprised that you have seen no capital growth 50kms from Perth.

 

[steveadl]

I wouldn't sell. Keep plugging extra into the loan like you're doing (& look into the offset as others have said), which will decrease the amount. You never know, after another year of reducing the loan and a bit of capital growth - your position may look a lot better and you have enough equity to start the build.

Also talk to a good accountant about the tax deductibility. If you plan to start building in say 2yrs - which to me seems reasonable with your principle payments and hopefully some cap growth - as others have said you may be able to claim the interest, and that would be a crucial benefit to you.

I also like the idea someone mentioned of making it a holiday rental - good rental for you as an IP (hopefully), and one day you can move in yourself to a large double story house overlooking the beach that has moved relatively closer to Perth as well.

If this is the worst mistake you make, then you'll be fine!

 

[redsquash]

Thanks for that.

I would like to build on the land, whether to live in or as an investment property. However there is a building restriction on the block that it must be a two storey house. At the moment can't afford to build a two storey house.

Bummer.

Often you need to build within 1 or 2 years of purchase. Is this the case with your block.
If you do build what is the market for rentals on this new estate?
Not knowing that could be fatal.
Can you pay off interest only instead of the capital to ease any future burden
Keep all receipts and log travel costs would also be my advise

 

[Shane Port]

Does your block enjoy seaviews, if so the CG should be there, also two storey does not have to mean big, if covenant does not state minimum square meters than investigate small footprint, mediteranean style house. Just keep in mind that if you build, can your view be built out by blocks in front of you. We bought seaview block and built on it as PPoR and although it cost us more at the time we have enjoyed good CG which has put us in good position to further invest. And the emotion is still there, theres nothing like having morning coffe or sundowner watching tides turn.
Shane

 

[Shane Port]

Does your block enjoy seaviews, if so the CG should be there, also two storey does not have to mean big, if covenant does not state minimum square meters than investigate small footprint, mediteranean style house. Just keep in mind that if you build, can your view be built out by blocks in front of you. We bought seaview block and built on it as PPoR and although it cost us more at the time we have enjoyed good CG which has put us in good position to further invest. And the emotion is still there, theres nothing like having morning coffe or sundowner watching tides turn.
Shane

 

[The Red Baron]

Hi Red Baron

Congratulations for having this mind set in your mid 20's.

W.A. is so beautiful, and in Perth we have so much water.

Just wondering, where is the land you purchased?

Can you build and use this property as a holiday rental for bigger returns?

Hi Francesca

I was looking anywhere between Mandurah and Two Rocks (50kms from Perth) as close to the beach as possible, 400m maximum walk from water.

Of course suburbs where my family lives were out of my range with my single modest income. Marmion $800k a block, Hillarys $600k.. went further north Iluka $500k.. Jindalee $400k.. Yanchep $350k.. Two Rocks $229k yep

 

[The Red Baron]

Did you know you needed to build a 2 story house before you purchased? Even tho you couldn't afford to build one.

I'm not sure buying a car with the deposit would have been worse. You wouldn't be paying huge monthly payments on a loan with no income, no tax deductions and doubtful cap growth going forward.

I have made money on land purchases previously but i knew the market was trending upwards quickly. And i paid cash so i didn't mind the no income, deductions, depreciation etc as i had no interest payments, management etc. (I would never take a loan on land only)

When will you be in a financial position to build a 2 story house? I guess the payments on the land will make that possibility even further away. If you have no idea you might be better to cut your losses as it might cost you a hell of a lot of money before you can make money with it. Not to mention the opportunity cost.

Possibly you could do a JV with a family member, friend or builder. Where they pay for/build the house and sell and split the profit. (if any)

I think you're in a tricky position and maybe you should do some forward cash flow projections and possibly sell and buy an IP for now and come back to the land at a later date when you're in a bit healthier financial position. Theres much easier and less painful to start your investing career.

Good luck with whatever decision you make.

I had the choice of two blocks both were $229k. One 400m2, 400m from the beach, must be 2 storey. The other was 520m2, 1km from the beach, single storey permitted.

I chose the smaller block as it was elevated, street level has 2 parking bays for guests and limestone stairs leading up to a gate to the block, opposite a park with ocean views and a proposed boardwalk going to the beach.

The larger block was more traditional and opposite a water catchment. However it would have been easier for me to build a cheap one storey home on the block.

I just thought at the time the smaller block was more rare and unique and I was impressed by the 2 storey house being built next door.

I could do a JV with my parents. I still live at home with them and I actually booked them into a PI seminar back in 2000. They now have a few IP properties in Perth an another in SE QLD. I'd rather do it myself and learn from the experience and my mistakes. But I might have to swallow my pride and have a meeting with my parents mortgage broker and accountant and see whats possible.

Cheers

Dan