Possible first buy for 19yo. What does it sounds like?

Hi all,

This is my first post after reading the forums for quite some time. I chose my user name because both I and my 19yo daughter are completely new to PI'ing, and are hoping to benefit from the wisdom of all the 'old hands'! :) Also, you know how babies babble on? Well, that's me! I have never been able to perfect the art of saying what I want in fewer words!

So, the story is that I'm helping my daughter get into property while she is young. She is keen, but needs a helping hand, and I've always thought that property would be a good idea, and have talked to my kids from early teens about all the kinds of things that are possible if they have their head screwed on the right way, and the importance of saving etc. You might wonder why I'm not doing something myself, but as a SAHM (Stay at home mum) for all their childhood years, I'm only now just getting a little business going where I can earn some money. My husband is not a risk-taker by any means, and doesn't see property as stable enough to invest in. We just have different ideas, and I'm a can-do type person (perhaps too much so!), so I believe it's quite a do-able wealth creation method, and even more ideal when one is young!

Bit of background: We live in a smallish 4-5K country town, and daughter has just started a business (with lots of mum's help!), so we need for it to go ahead quite well (done our research, and there's no reason why it won't), and quite soon, so that she can have something concrete to show the bank in 3-4mo time, and hopefully get finance. Her projected earnings before tax will be around 1K/week, increasing hopefully to around $1400 by about 6mo.
Daughter has had her little fling, had part-time work, and spent as much as she's earned (except savings of about $1500), and is now seeing that she should be doing sensible things with her money, and buckling down to working hard to get somewhere.

So seeing as she's keen, we've started to look around town for possibilities. There is this nice little house/block in town close to school and hospital, about 2900m2 with a little oldish brick/tin roof 2bdrm cottage on it. It's been on the market for nearly 2yrs. They started off wanting over 200K for it, then have dropped it several time and now asking 160K. The owners don't live there, they bought it at a time when cheap properties were being snapped up by investors. The RE agent said it hadn't turned out too well for them. They haven't even bothered renting it - no idea why (we check out the inside this afternoon, so might have more idea then?), and they just come from the city to tidy up the garden every so often. They are getting tired of doing that, so just want to be quit of it, apparently.

So, at her projected income, in 3mo time, daughter should be able to borrow that amount (we will be able to be guarantor for her), and will receive the FHOG of $5K (that's the current figure for established homes?). She can live in the house for 6mo, then rent it out (about $200/wk), and shift back home. Then when she has a little more cash, she can subdivide it into 2 or 3?? blocks (haven't looked into the costs of this yet in our town). Obviously then value would increase - probably only marginally, though(similar long narrow block of 1200m2 sold for $60K a few days ago), and she would have a little more equity, and hopefully a little more in savings.

The plan would then be to hopefully get finance to build duplex/triplex (probably transportable/kit style - there are a few of these around town, and they look great) on each of the blocks. Then sell what will easily go, and rent the rest, and use one for her PPOR.
If she can't get finance for the homes, she can keep the house/block as-is as long as she needs, as rent will almost cover bank loan.

I know this all sounds pretty general, and not really specific, but as it is, how does it hit you? Can you see glaring flaws or troubles that I haven't thought of?
 
Two things spring to mind for me:

1. She may have trouble getting finance based on just three months of running a business. Banks would probably want a much longer time period. Sometimes banks also want to see genuine savings- something substantial and no just a contribution from parents or a guarantee.

2. Subdividing may be a problem in a small town where there's a lot of land around.
 
Daughter has had her little fling, had part-time work, and spent as much as she's earned (except savings of about $1500), and is now seeing that she should be doing sensible things with her money, and buckling down to working hard to get somewhere.

Might be worth waiting until she's actually proven that she can save.

Wanting to save / invest is not the same as having the discipline to do so.

If you push her into a property before she has proven herself in being able to manage money, the next interest rate increase or broken toilet will sink her.
 
GeoffW - I guess that's possible...she thought about a loan for a car before, and when she was opening her business accounts, she asked about the possibility. They said they'd need to see 3mo of financials before they thought about it. That was for a personal loan, so you're possibly right that for a home loan they'd want to see longer records. I anticipate by 3-4mo time, she could have about 10k of savings, so that might help?

Can the councils refuse permission to subdivide based on land availability? In actual fact, there doesn't seem to be lots of blocks of land available. I just thought to subdivide, because obviously to put more that 3 homes/units on the big block would get me into 'commercial' territory as far as loans go.

Alexlee - yes, you could be right. She seems very keen, and is already showing discipline by saving, and I think if she can show the same discipline over the next 3 months, it's probably a good sign, but again, as you say, I don't want to push. That's the tricky part - I want to help her out without pushing, but not getting too excited along with her that we don't think it through thoroughly.
 
Have you actually spoken to a bank or broker? Assuming that you qualify for a home loan based on a car loan enquiry is a very bad way to start. You've stated that your daughter recently started a business and she should be able to get finance in a few months. The reality is that as she's self employed, most lenders want to see 2 full years of profitable tax returns to prove income. If she started her business recently this means she'd qualify for finance in the second half of 2015.

Your daughter also needs to save more of a deposit (or you could help her in various ways). For a purchase of $160k, she'll need to save at least $8k on her own. Combine that with the FHOG and she might have enough cash to qualify for a loan (but it would be close). Also consider that subdivisions generally need to be paid for with cash. That part alone would likely be in excess of $30k.

In the even that she does qualify for finance sooner, I'd be asking why the existing owners haven't been able to make this property work as an investment and why it's been on the market for 2+ years. This really worries me and you don't want to be put in the same position.

Often in small towns, the rents look like they exceed the loan repayments. What many people fail to account for is the cost of property management and ownership. Small town rates are often dispraportionaly high which can eat up a lot of the cashflow. The figures you've quoted indicate a rental return of 6.5%. Whilst lending rates are currently much lower than that, this is not cashflow positive when you consider all the true holding costs.

I like that you're thinking ahead on ways to improve this property by subdividing and developing. This can be a great way to increase equity and cashflow. Make sure that you've done the numbers and due dilligence in advance on this. Do council regulations actually allow you to develop in the way you're thinking? What's the costing to do it all? Also your daughter may be able to borrow enough to purchase the property, but will she qualify to actually build the rest of it?

The best advice I can give is to call one of the brokers on the forum to discuss the specifics of the deal and your daughter's circumstances. We're all happy to do business over the phone and you'll get some practical advice to determine if she can qualify for a loan, for both the immediate purchase and the longer term plans.

You also need to crunch the numbers and ask yourself, is this property and location really suitable? What makes this a good investment? Why hasn't it worked for the previous owner?
 
Peter - yes, your question about the previous owners is one that stumps me, too. And I don't know how to find out properly. I asked the RE agent, and he said it really boggles his mind why it hasn't sold, and why the current owners aren't renting it, etc. etc. I'm not sure how much he would tell me, though. I guess they want to sell, so not going to tell you if there's a massive problem. Obviously, as I said, I will walk through it today and may be able to tell more then.

Gosh - 2 yrs of financials. Yes, I will have to talk to bank and see about what's possible, and what is not. I hesitate to, because I'm not sure whether we should go through local bank, or a broker. We have a good relationship with the staff at the bank here, but the bigger boss (that says yea or nay) doesn't live local, so maybe not much difference to go out of town, except that they know mine and husband's accounts & history.

Haven't looked much into the costings of building, but will certainly do that before committing to the block. It's a longer term thing, but yes, need to get the figures a little more certain before going much further.
 
sounds a bit too risky as a first step towards investment

* regional town, rental demand / CG is heavily influenced by population/industry
* property requiring lots of maintenance
* difficult to get finance as banks tend to favor people with stable ordinary job
* no proven track record of savings habit

I would think investing the money in term deposit or index fund is a more gentle introduction to investment. This way your daughter can see the immediate benefit of investment while not taking too much risk
 
Felix - thank you, advice noted. Will have to look into index funds. I have no idea what they are. Term deposits - I kind of thought that a high interest acc (Ubank, which is what she has for savings) is just as much interest with your money not being locked away? I'll have to look into that, too. Good to hear the different opinions.

Rental market here is actually quite strong, as a lot of migrants coming in, and a biggish industry in town. A 3bd/2 bath duplex just went on the rental market for $360/wk and has only been on 2 weeks and is gone. This is the kind of thing we'd put on the block down the track (if we go ahead with it :) )
 
good to hear that the town is buzzing, thats a definite plus :)

term deposit is usually higher interest plus teaches the concept that investment gains are long term, something you should protect unless emergency. In any case I don't recommend having term deposit more than 12 months.

here is a somewhat outdated guide on index funds, basically low fee well diversified share investing. Its probably the safest way to get into shares (obvious shares as an asset class is still way more risky comparatively)

http://www.choice.com.au/reviews-and-tests/money/investing/products/index funds.aspx
 
Gosh - 2 yrs of financials. Yes, I will have to talk to bank and see about what's possible, and what is not. I hesitate to, because I'm not sure whether we should go through local bank, or a broker. We have a good relationship with the staff at the bank here, but the bigger boss (that says yea or nay) doesn't live local, so maybe not much difference to go out of town, except that they know mine and husband's accounts & history.

There are a few lenders who will only want 1 years financials, ANZ comes to mind but they are quite conservative in rural areas. Almost all lenders require 2 years of financials, which must demonstrate consistant profit margins to afford the loan.

Yours and your husbands account history doesn't count for anything as you're not applying for the loan. You can't help your daughter in demonstrating that she can afford the loan, it's all on her.

The bigger boss isn't the one who approves the loan (the bank staff just tell you that). Most lenders have centralised credit departments who are the ones who approve or decline loans. Your relationship with the people in the branch is unlikely to help.
 
I think while ANZ, and a couple of other lenders only require the most recent years financials, they still require the business to have been running for more than 2 years? Or have I got that mixed up?
 
I think while ANZ, and a couple of other lenders only require the most recent years financials, they still require the business to have been running for more than 2 years? Or have I got that mixed up?

St George requires 2 years financials but only assesses on the most recent year.

You may be correct about ANZ, but I did get away with an ANZ deal last year where a co-applicant had only been self emlpoyed for 20 months. This was clearly disclosed.
 
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