PLease Help - Feedback on my investment plan needed!

[Propertynewby]

Just looking for some feedback on my property investment plan:

I?m 22 years old, live at home and have no expenses. With what I currently earn I am only comfortable in borrowing max 200k and put in $50k deposit (I earn $55k per annum.).

I have been researching for months and months and have come up with the following plan:

Purchase a studio apartment in the glebe/ultimo/Broadway (close to unis & colleages) & rent it out. These studios are in my price range and have great rental return (around 8% gross).

Let?s say for arguments sake that my net rental gain is nil (being very conservative here). So my incoming rent covers mortgage repayments plus management, strata & maintenance costs.

Let?s say I live at home for another 6 years (approx.) & pay roughly half my wage into my mortgage.

2014 ? pay additional $22,500 off principal
2015 - pay additional $25,000 off principal
2016 pay additional $27,500 off principal
2017 - pay additional $30,000 off principal
2018 - pay additional $32,500 off principal
2019 - pay additional $35,000 off principal
2020 - pay additional $37,500 off principal

So by 2020 (in 6 years) I will have chipped away at a staggering $210k in principal from my extra repayments (not includes principal in my standard monthly repayment covered by the rental income). The Studio is now PIF and any rental I receive is added to my taxable income ? eg around $400 p/wk ? that?s $20,868 additional income PER year for the rest of my life - not to mention it increasing 2.5% every year ($10 bucks).

The reason this plan will work for me and maybe not a lot of others is my ability to pay down the principal as quickly as possible because I live at home, and will do so till approx. late 20?s, with no expenses/rent.

Taking a step back I understand studios are generally a bad investment (no capital gain, hard to resell) but for my goals I don?t necessarily need capital gain ? that?s a whole other kettle of fish I can look into later in life.

End result and my ultimate goal is by the time I move out I have 250k equity in a property which I can leverage against to buy my PPOR or continue to rent and start saving for another deposit.

Please let me know your thoughts ? it?s been racking my brain for months and months and I?m about to bite the bullet and start making offers on these studios.

Thanks for your thoughts 

 

[Rolf Latham]

studios often have lending restrictions, which means there is a smaller available buyer base which is why the yields are so much higher.

Isnt always the case, but very common

ta
rolf

 

[Corey Batt]

Also, if you have paid the extra payments into the mortgage directly, you are minimising your effective tax usage of the property. As when you draw on the equity for your PPOR, you will have a 105% non deductible PPOR loan, whereas if you put the funds into offset you can draw out the funds for the PPOR deposit, minimise your PPOR loan and maintain maximum tax advantage on the IP.

Personally wouldn't buy a studio apartment though, as Rolf has mentioned there are a lot of downsides to the investment.

Buy a good quality investment which works for you, not just because its in the price range. Keeping the loan low enough to be comfortable for you (I would challenge this also, a common concern for new buyers which more often than not disappears after making their first purchase), you may have to look outside of Sydney metro. There are great investments in regionals, metro Bris and Adelaide in that price range.

 

[Spades]

Hi Propertynewby,

As Rolf Latham pointed out there are lending restrictions on studios and anything under 50sqm's as well.

As an ip,i'd setup an interest only loan with offset attached.

The extra funds your putting in your ip per year can be used for your next ip or ppor.

No need to chip away at the principle,as your ip is tax deductible.

Principle is best knocked off on a ppor.

Cheers Spades.

 

[alexlee]

An alternative plan might result in you at 28 having 4, 5 properties, each with 70-80% loans.

THEN you move onto serious investing.

Can you see why this might be a better situation than your plan of 1 property with low LVR by 28? Your current plan 'ends' at 28, but you don't just stop investing at 28, buy a PPOR and just settle into mediocrity. While it's difficult to imagine, your plan should at least consider what happens when you're 40, 50, 60, death, and then what you want to leave to your family.

Why is 20k income per year so impressive? Why is having 250k or whatever by 28 impressive?

You should be aiming much higher, and being young, no dependents and likely a rising income, you have a better chance than most. Think millions (in TODAY's dollars) in assets, hundreds of thousands in income, and assets to leave to your heirs.

 

[jrc77]

As others have mentioned, most important item here is to setup loan as
interest only with 100% offset account. Put all spare income into the offset account.

At any point in the future you can withdrawal the money from the offset account for any purpose (PPOR purchase for example) and the interest on the original loan amount will be tax deductible.

This gives greatest flexibility for the future.

If you don't understand these - please read more, or ask questions until you do. It can save you a lot of money in the long term.

Regards,

Jason

 

[Propertynewby]

Thanks for all your advice - It seems i was off track.

I guess my first step is to get pre-approval - once i have a dollar figure i am able to borrow it will allow me to then choose which type/what location property to buy.

Thanks

 

[jrc77]

How about instead of getting a pre-approval straight away, you have a talk to a good broker? They will be able to tell you how much you can borrow and how to structure your loans without the associated hit on your credit file.

Then depending on which bank you decide to go with they'll be able to guide you whether or not a pre-approval is useful.

Regards,

Jason

 

[Terry_w]

Just looking for some feedback on my property investment plan:

I?m 22 years old, live at home and have no expenses. With what I currently earn I am only comfortable in borrowing max 200k and put in $50k deposit (I earn $55k per annum.).

I have been researching for months and months and have come up with the following plan:

Purchase a studio apartment in the glebe/ultimo/Broadway (close to unis & colleages) & rent it out. These studios are in my price range and have great rental return (around 8% gross).

Let?s say for arguments sake that my net rental gain is nil (being very conservative here). So my incoming rent covers mortgage repayments plus management, strata & maintenance costs.

Let?s say I live at home for another 6 years (approx.) & pay roughly half my wage into my mortgage.

2014 ? pay additional $22,500 off principal
2015 - pay additional $25,000 off principal
2016 pay additional $27,500 off principal
2017 - pay additional $30,000 off principal
2018 - pay additional $32,500 off principal
2019 - pay additional $35,000 off principal
2020 - pay additional $37,500 off principal

So by 2020 (in 6 years) I will have chipped away at a staggering $210k in principal from my extra repayments (not includes principal in my standard monthly repayment covered by the rental income). The Studio is now PIF and any rental I receive is added to my taxable income ? eg around $400 p/wk ? that?s $20,868 additional income PER year for the rest of my life - not to mention it increasing 2.5% every year ($10 bucks).

The reason this plan will work for me and maybe not a lot of others is my ability to pay down the principal as quickly as possible because I live at home, and will do so till approx. late 20?s, with no expenses/rent.

Taking a step back I understand studios are generally a bad investment (no capital gain, hard to resell) but for my goals I don?t necessarily need capital gain ? that?s a whole other kettle of fish I can look into later in life.

End result and my ultimate goal is by the time I move out I have 250k equity in a property which I can leverage against to buy my PPOR or continue to rent and start saving for another deposit.

Please let me know your thoughts ? it?s been racking my brain for months and months and I?m about to bite the bullet and start making offers on these studios.

Thanks for your thoughts 

My thoughts, without reading any of the other replies are:

Keep researching!

8% return? Is this after the hefty fees associated with these places.
No capital growth? What about putting your money into a high interest savings account
LVR - maybe hard to get 80%

And, why pay it down at all, why not use IO with a 100% offset so you get the same results but with a better tax out come.

 

[alexlee]

Think bigger. Aim higher. Plan longer term.