Old cheap unit in expensive area- Melbourne

[lachlan]

I am currently thinking of buying an old unit in a wealthy area near parklands, private schools and public transport.

However I have a few doubts and I am hoping you can help me sort through the pros and cons.

Pros:

- Great area near parklands, private schools, public transport and shops.
- Perhaps good capital growth

Cons:

- I am struggling to find out who the target audience is for this property. It is surrounded by large houses and mansions although the unit itself is old. I am not sure it would be highly sought after by wealthy people as they would prefer the mansion.

- Old square brick unit, needs renovating.

- Although the area is wealthy it is not exactly trendy. Renting it out would be unlikely to attract young professionals unless they worked in the area or had kids who attended the private school. (however if they could afford their kid going to private school i think they could also afford to buy their own property instead).

- Rental in neighbouring areas is higher.



This will be my first property purchase if i decide to get it, I think overall it may have slightly higher capital growth than neighbouring areas but I will recieve less rental return.

Your thoughts would be appreciated.

Lachlan

 

[BuildingBlocks]

How much will it cost you to keep?

How does this fit in with your overall strategy?

 

[b simpson]

Very often people rent in wealthy areas, as well as lease expensive cars, wear expensive clothes but have no disposable income and buy home brand food, etc. They do all this so they can put on an impressive front. People who want to pretent their are rich.

There used to be quite a few in double Bay in Sydney when I worked there some years ago.

 

[lachlan]

I have a large deposit, about 70% of the total price. Its likely that I would live in it for at least a year and then perhaps rent it out.

Repayments would be less or equal to what I am paying now whilst renting. It is certainly affordable for me but so are other units/apartments in neighbouring areas, which are less wealthy although likely to have a higher rental yield but *perhaps* less capital growth.

My overall strategy is to own multiple IP's as I get older. Perhaps the slightly lower rental yield may make it more difficult to purchase the next IP.

 

[lachlan]

Interesting,

Thanks B Simpson

 

[Peter Parker]

I have a large deposit, about 70% of the total price. Its likely that I would live in it for at least a year and then perhaps rent it out.

Repayments would be less or equal to what I am paying now whilst renting. It is certainly affordable for me but so are other units/apartments in neighbouring areas, which are less wealthy although likely to have a higher rental yield but *perhaps* less capital growth.

My overall strategy is to own multiple IP's as I get older. Perhaps the slightly lower rental yield may make it more difficult to purchase the next IP.

Assuming this is your first home, wouldn't it make more sense to only pay (say) a 20% deposit and leave the rest for later given the intention to rent it out?

While the negative cashflow of this will be higher, there are some advantages, eg:

1. You have a buffer
2. You have a deposit for your next couple of properties
3. Tax deduction of interest for when you do make the first place an IP will be higher
4. Assuming your second or third place will be a primary place of residence you will have a larger deposit for it. This reduces the loan you'll need for it.
5. Tax deduction laws favour those who borrow for IPs compared to their own home as interest is deductible on the former not the latter. Hence assuming the same debt in both cases, the person who has large mortgages on their IPs & small (or no) mortgages on their PPOR is better off than someone with the reverse. The savings can be several thousand dollars per year.

 

[lachlan]

Good questions spiderman. My main reasons are listed below.

I am not a high income earner at the moment. (bank is only willing to lend 250k)
The deposit is mainly from inheritance.

I plan on doing some travelling in the near future. Perhaps for a year. I would like to be in a position where the property pays for itself whilst I am away.

When the time comes to buy my next property, can I not borrow against my existing equity and put that into my next home?

This way, instead of struggling to make repayments, I can live comfortably for now whilst saving to travel. Whilst my money is invested in property rather than the bank which should overall be more beneficial. Then when the time comes I can use my equity to invest in more property.

Is this a bad way to do it?

Lachlan

 

[wobbycarly]

Good questions spiderman. My main reasons are listed below.

I am not a high income earner at the moment. (bank is only willing to lend 250k)
The deposit is mainly from inheritance.

I plan on doing some travelling in the near future. Perhaps for a year. I would like to be in a position where the property pays for itself whilst I am away.

When the time comes to buy my next property, can I not borrow against my existing equity and put that into my next home?

It is the purpose of the borrowings - in this case a PPOR - not the security that dictates the deductability. So any additional borrowings would not be tax-deductible if you were to use the equity to purchase a place to live in.

This way, instead of struggling to make repayments, I can live comfortably for now whilst saving to travel. Whilst my money is invested in property rather than the bank which should overall be more beneficial. Then when the time comes I can use my equity to invest in more property.

Is this a bad way to do it?

Lachlan

Yes, this is a bad way to do it. While logic suggest otherwise, the tax laws are not all logical.

 

[lachlan]

It is the purpose of the borrowings - in this case a PPOR - not the security that dictates the deductability. So any additional borrowings would not be tax-deductible if you were to use the equity to purchase a place to live in.



Yes, this is a bad way to do it. While logic suggest otherwise, the tax laws are not all logical.

I'm a little confused here.

It might make more sense to me if I use an example.

Case scenario #1, *assuming* prices double in 7 years.

- Buy IP $600,000. Loan of $200,000
- 7 years later- Buy PPOR for $ 1,000,000. Use $500,000 equity from IP worth 1,200,00.

Overall IP = 1,200,000, owing around 700,000
PPOR = 1,000,000 Owing around 500,000.

Net worth = 1,000,000

Case scenario #2

-Buy IP $ 400,000, loan of $250,000. Still have $300,000 left over.
- 7 years later buy PPOR for $1,000,000. Use $300,000 for deposit.

Overall IP = 800,000. Owing around 250,000
PPOR = 1,000,000. Owing 700,000.

Net worth = 850,000

What would the difference be in tax deductions between the two case scenarios.

Obviously I would end up paying alot more interest in scenario 2. However from the sounds of it, it will be tax deductable.

 

[Rolf Latham]

Danger Danger Will Robinson

I have a large deposit, about 70% of the total price. Its likely that I would live in it for at least a year and then perhaps rent it out.

Only those of us that are a little older will understand the title


Possible financial boo boo coming up

Borrow to 80 % LVR if your income allows with an IO loan and place the left overs in a 100 % offset account.

Then when you let the place as an IP your cash savings are available to do with as you feekl fit AND you get a nice chunky tax dedn agains the income from the old unit.

Now, this is VERY general advice and may not suit at all, but on the surface looks like it might fit


ta
rolf

 

[Peter Parker]

Obviously I would end up paying alot more interest in scenario 2. However from the sounds of it, it will be tax deductable.

No, it's only interest incurred due to the purchase of an income producing asset (eg IP) that's deductible.

Given limited income it's your serviceability that determines how much you can borrow and how many houses you can buy before the bank says no.

Serviceability requires reasonably high rental yields on properties purchased and tax effective structures like not having any non-deductible debt (even though your marginal tax rate might not be high it all helps).

Therefore financially you're better off to buy rental properties so all your interest is deductible and rent where you want to live. This also gives flexibilty as to location of rental properties, which may mean higher yields - further improving serviceability.

Although getting FHOG and living in the place for a year, moving out and making it an IP isn't a bad idea either.

 

[Intrinsic_Value]

I am currently thinking of buying an old unit in a wealthy area near parklands, private schools and public transport.

However I have a few doubts and I am hoping you can help me sort through the pros and cons.

Pros:

- Great area near parklands, private schools, public transport and shops.
- Perhaps good capital growth

Cons:

- I am struggling to find out who the target audience is for this property. It is surrounded by large houses and mansions although the unit itself is old. I am not sure it would be highly sought after by wealthy people as they would prefer the mansion.

- Old square brick unit, needs renovating.

- Although the area is wealthy it is not exactly trendy. Renting it out would be unlikely to attract young professionals unless they worked in the area or had kids who attended the private school. (however if they could afford their kid going to private school i think they could also afford to buy their own property instead).

- Rental in neighbouring areas is higher.



This will be my first property purchase if i decide to get it, I think overall it may have slightly higher capital growth than neighbouring areas but I will recieve less rental return.

Your thoughts would be appreciated.

Lachlan

Welcome to the forum.

Firstly may i know which suburb?

Secondly you are worried about your target audience?
are there many units available in the suburb or are they scarce? if they are scarce then althogh the target market might be limited, there could be opportunity due to the limited number of units available.

Also how is the condition of the overal block of units, is it attractive on the outside, well maintained etc (ie not the internal part of the apartment).

You are right the wealthy would prefer the mansion, but they will need to cough up significantly more money than for a unit. But what about in the future someone wanting to downsize? maybe an elderly couple?
Not every property is good just for 'renting', sometimes it good to buy a property, renovate, rent for a while, build capital, then at a point in time, renovate nicely for the purposes of selling the property to an owner occupier.

 

[lachlan]

So if i borrow against my own equity for the IP to pay a deposit for the PPOR, the extra money that I will owe on the IP due to this is not tax deductable?

 

[Bigtone]

So if i borrow against my own equity for the IP to pay a deposit for the PPOR, the extra money that I will owe on the IP due to this is not tax deductable?

that is right it is the purpose that counts not what security is used for loan.


borrow as high a % as possible on the first purchase and place extra funds in offset account to keep your options open for the future

 

[lachlan]

Welcome to the forum.

Firstly may i know which suburb?

Secondly you are worried about your target audience?
are there many units available in the suburb or are they scarce? if they are scarce then althogh the target market might be limited, there could be opportunity due to the limited number of units available.

Also how is the condition of the overal block of units, is it attractive on the outside, well maintained etc (ie not the internal part of the apartment).

You are right the wealthy would prefer the mansion, but they will need to cough up significantly more money than for a unit. But what about in the future someone wanting to downsize? maybe an elderly couple?
Not every property is good just for 'renting', sometimes it good to buy a property, renovate, rent for a while, build capital, then at a point in time, renovate nicely for the purposes of selling the property to an owner occupier.

There are a limited number of units in the area. The block of units are well kept althogh they are not very attractive from the outside.

You may be right about the elderly.

If I were to be waiting 7 years before buying a PPOR. Would it be better to sell the unit in 7 years time, use the majority of that money to buy a PPOR and use the remainder to buy a new IP?


Glad I decided to post on this forum. Already learnt alot

 

[BuildingBlocks]

If I were to be waiting 7 years before buying a PPOR. Would it be better to sell the unit in 7 years time, use the majority of that money to buy a PPOR and use the remainder to buy a new IP?

Every time you buy or sell you incur costs.

Your scenario is assuming significant growth over the 7 years.

20% down and the rest in the offset will allow you to buy the same property, so that if CG is slow over the next 7 years you will still have the cash on demand.

Also, have you looked in any other areas or was this the easiest option, so you chose it? The cheapest house in the most expensive suburb is not necessarily the best bet, or a source of guaranteed CG.

 

[lachlan]

Building Blocks, yes I have looked at other areas (and still are)

I am just looking in to an interest only loan now. Would the bank let me lend more on an interest only loan compared to an interest and principle loan if they knew I was placing my savings in an offset account and the loan was for investment purposes?

I see not being able to loan enough as being a big problem in me using an interest only loan.

Thanks

 

[Ladyhawk]

Cons:

- I am struggling to find out who the target audience is for this property. It is surrounded by large houses and mansions although the unit itself is old. I am not sure it would be highly sought after by wealthy people as they would prefer the mansion.

Lachlan

It sounds like a good buy Lachlan...however I am no expert...merely a beginner myself.

If the unit is near good schools, your target market might be families or single parents looking to send their children to one of these schools but unable to afford to buy in the area...

 

[propertyVIC]

Use offsets rather than paying back more than you have to... so borrow the most the bank will lend, then use offsets.

Downsizers and, assuming enough bedrooms, ambitious parents who can't really afford the school fees but value the education might be tenants. Also divorced people. Or perhaps a school teacher...

Try talking to lots of real estate agents in the area about demand for that sort of property.

And do a body corp check to see that you are not about to be landed in a heap of maintenance bills...