Senario advice - doable or not?

[13910]

Okay, so after months sitting in the background I'm going to lay down my situation for all your thoughts. Basically, I'd like your opinions on whether you think I'm nuts considering buying my first IP.

I'm pretty young, earn about $60,000/year in a very stable job. I have little in the way of savings ($5,000) thanks to my new set of teeth, but I generally save about $1000/month. I bought my first place (currently PPOR) mid last year. I borrowed 100% of the $185,000k I paid - following a quick kitchen renovation (plus repaint, new bits and pieces) and a bit of time it's been revalued at $240,000. I can rent this property for $320/week going off what the identical unit above is currently renting for.

So I'm tempted to do something I've always wanted to do, borrow another $250,000 (I've just been pre-approved for an insane amount much higher than this) to purchase a house in need of major renovation in the Newcastle area. The idea is I'd rent out my current place, move up there for three months while I renovate it, then lease it out and move back to Sydney where I will rent (which works out favourably for tax reasons anyway).

I believe if I buy and renovate smart I can come out with one cash flow neutral and one cash flow positive property. Problem is, my plan is based on tipping an amount of my own cash in to renovating the property then borrowing about $10,000 more after having the place re-valued to finish it off. Is it realistic to think this is possible in the current climate?

Cheers
Greg

 

[Propertunity]

.... purchase a house in need of major renovation in the Newcastle area. The idea is I'd rent out my current place, move up there for three months while I renovate it, then lease it out ....my plan is based on tipping an amount of my own cash in to renovating the property then borrowing about $10,000 more after having the place re-valued to finish it off. Is it realistic to think this is possible in the current climate?

Greg,
At this stage of the property cycle I think this strategy would not only work but work well and also be pretty safe. Every Open for Inspection I go to in areas like Mayfield (which is a personal favourite) is swarming with FHBs and a good number of investors now too. Under $300K is in high demand. However, once you get over $320K - not so much.

I like Mayfield - coffee, shops, transport - and most of all character homes. Choose well and you will do well. Remember most of Mayfield is 1940's so the building reports are scarey reading. Most of all be very careful to get pest report done - lots of old termite damage - but OK if treated and no longer active.

I would not worry about tipping your own cash in. I've done renos on Visa - if you do only reno stuff on it - the interest is a tax ded. (Don't contaminate it with personal stuff) Then get the place revalued and refi and pay off the Card.

Go and check out some of the reovated properties at some Opens to get some good - and some not so good ideas (to avoid).

 

[Rolf Latham]

On teh surface , yes

But dont get caught with a partially finished project and go back to the lender.

Get the place complete in most areas and get a reval done. Then get the extra 10 k and finish off the left overs

ta
rolf

 

[13910]

Thanks for the response guys. I probably should have mentioned that I'm from a family of builders too, so inspections and reno help is covered off pretty well!

Propertunity sounds like you've a bigger Visa than I. Don't think my $3,000 is going to go far enough I'm liking Mayfield a lot too, so I'm inspired by your comments. I've found so far that there's lot of FHB, although many seem to be having financing issues, but also once you get to a place which is in a certain level of disrepair they either seem to be in the too hard basket.

Cheers
Greg

 

[Propertunity]

Propertunity sounds like you've a bigger Visa than I.

Mmmm probably by the sound of it

Don't think my $3,000 is going to go far enough

Yes point taken.

but also once you get to a place which is in a certain level of disrepair they either seem to be in the too hard basket.

absolutely correct - well identified. FHB are mostly Gen Y and want it all now. They are not, for the most part, renovators (few are).

 

[RumpledElf]

absolutely correct - well identified. FHB are mostly Gen Y and want it all now. They are not, for the most part, renovators (few are).

Neither are older people. Houses in my area also just Don't Sell unless they are livable, 'nice' or even better, really nice. You can practically tell which houses are going to sit for sale for a long time based purely on the state of repair, and it doesn't take much (ie, worn carpet and a bad paint job) to put people off.

So who *does* buy the renovator's delights other than cheapie opportunists like ourselves?

 

[joanmc]

sounds like a goer to me, but can you take 3 months off from your job? It may be difficult if you are only renovating on weekends (speaking from agonising experience there)

 

[Alex P Keaton]

I'd like your opinions on whether you think I'm nuts considering buying my first IP.

I'm pretty young, earn about $60,000/year in a very stable job. I have little in the way of savings ($5,000) thanks to my new set of teeth, but I generally save about $1000/month.

So I'm tempted to do something I've always wanted to do, borrow another $250,000


Cheers
Greg

Good work on saving $1000 a month, thats a good effort on $60 K pa. In my opinion I think its too risky for you to buy atm because you only have $5000 in your savings account. I think you need more of a buffer before you do anything. You are going to have all kinds of expenses, and also unexpected expenses come up too.

 

[Lukey13]

Lost wages?

On the surface it sounds like a decent idea.

However, if you're taking 3 months off work I am assuming that you will be losing $15k in wages, which is not insignificant.

Makes me think of a relative who spent their hard-earned long service leave slogging his guts out on renovations which seemed to me to be a very expensive way to do things.

I generally use the rule that if you can get somebody in to do a job who charges less than what your time is worth per hour/day/week or God forbid, month(!) then there's much less point in doing it yourself unless you really, really enjoy it!

 

[Propertunity]

However, if you're taking 3 months off work I am assuming that you will be losing $15k in wages, which is not insignificant.

Mmmm. I must have interpreted his post differently. He did not mention taking time off work - I assumed he was just going to commute from Newcastle to Sydney on his work days - like a lot of other punters.

 

[vbplease]

You may also need to consider how soon your lender is willing to revalue your property to realise the gain in equity?

 

[13910]

However, if you're taking 3 months off work I am assuming that you will be losing $15k in wages, which is not insignificant.

I generally use the rule that if you can get somebody in to do a job who charges less than what your time is worth per hour/day/week or God forbid, month(!) then there's much less point in doing it yourself unless you really, really enjoy it!

Bummer - I tried to cover all the bases in my post but I did miss one. No I won't be losing any wages, got that base covered. Mixture of travel on the days I need to work but the bulk of it I'd be off as in time in lieu and annual leave. And yes, I really, really enjoy it.

think its too risky for you to buy atm because you only have $5000 in your savings account. I think you need more of a buffer before you do anything. You are going to have all kinds of expenses, and also unexpected expenses come up too.

Buffer was my main concern too. However I should have $10,000 by settlement and I've just found out after a chat with the broker that I can borrow an additional $10,000 on top of purchase price/costs from the start.

Thanks
Greg

 

[Alex P Keaton]

Buffer was my main concern too. However I should have $10,000 by settlement and I've just found out after a chat with the broker that I can borrow an additional $10,000 on top of purchase price/costs from the start.

Thanks
Greg

I reckon write up a comprehensive list of all the fixed expenses that you will will have to consider. This would be a good start and weigh it all up. Weigh up the pros and cons.

Also I think everyone should really have at the very least 3 months of buffer to cover living expenses, ip expenses so that you can hold onto your properties if something were to happen, eg you were to lose your job, you got sick, unexpected expenses etc.

As a personal example, I bought my first property in September 2008, and since then some unexpected expenses have occurred. I had to get a new letterbox, $200. I needed some electrical work but didnt realise just how expensive it was going to be, it cost $1300, and I have had out someone to repair my hot water system twice cost me $100 approx each time. A couple of weeks ago it was hot for 2 minutes then went cold and died on me. New hot water system cost me $1250. Oh yeah and the gutters were replaced but they used money from the sinking fund, but this may mean my fees go up.
I was able to cope with all this because I have my buffer. I'm thankful for that. Helps you to SAN too.

Can you wait it out and save for another 6 months? Another $10 K in your account? Hmmm it really depends on your SANF!! Would you be able to take the stress?

Hope things go well for you. Just wanna say dont rush into anything too fast without thinking hard about everything first. You sound really enthusiastic and I think your off to a great start.

Good luck

 

[13910]

I reckon write up a comprehensive list of all the fixed expenses that you will will have to consider. This would be a good start and weigh it all up. Weigh up the pros and cons.

Good idea.

As a personal example, I bought my first property in September 2008, and since then some unexpected expenses have occurred. I had to get a new letterbox, $200. I needed some electrical work but didnt realise just how expensive it was going to be, it cost $1300, and I have had out someone to repair my hot water system twice cost me $100 approx each time. A couple of weeks ago it was hot for 2 minutes then went cold and died on me. New hot water system cost me $1250. Oh yeah and the gutters were replaced but they used money from the sinking fund, but this may mean my fees go up.

Damn, that's a bad run! I'm fortunate in that anything plumbing I can get at cost price which makes things easier, plus any electrical or building issues I've people in the family for.

Can you wait it out and save for another 6 months? Another $10 K in your account? Hmmm it really depends on your SANF!! Would you be able to take the stress?

Unfortunately I can't for this project. I either need to do it within the next six months or delay it indefinitely. I'm planning on being overseas for work from early next year until (well, I don't know when) so I'll have to get propertunity to do all my buying during that time!

Cheers
Greg

 

[RumpledElf]

Just do it. Doesn't hurt. We have no buffer, we're kind of on the edge at the moment (went down to $20 left the other day) but it comes back very fast. No contingency plans to speak of other than just staying home and eating cheap stuff for a while while the budget restabilises. We muddle along quite nicely.

Need a new roof and have a subdivision to pay for but the other house should sell eventually, if it doesn't I guess I'm stuck with it indefinitely and I get to be a landlord and have to *gasp* save up for the fees ... either way, we'll survive.

Our financial issues were caused by buying a house that needed a LOT of work, without planning for it, with a baby in arms, when we still hadn't finished the old one, so we wound up with two concurrent renovations and a $20,000 budget, and unsurprisingly (if you saw what we managed to do to TWO houses on that $20,000) we ran over budget.

 

[Alex P Keaton]

Damn, that's a bad run!

Greg

Well, re: the hot water system because it was a 1980's model I knew when i bought the place I would have to replace it at some stage, it ended up sooner rather than later though thats ok. Ya gonna get that buying older 1960's units, replacing repairing things, but thats cool.

 

[BayView]

absolutely correct - well identified. FHB are mostly Gen Y and want it all now. They are not, for the most part, renovators (few are).

I went around to our Frankston unit the other week to fix a leaking tap washer for our young male tenant.

Nice guy, computer geek, never sees the sun I reckon. pasty and pudgy. But pays his rent, so I love him.

I needed a pair of pliers as I only took one pair with me, and needed two pairs for a fiddly bit. I asked if he had a pair I could borrow. No.

He owned no tools whatsoever in the place.

So, off to Bunnings I go (had to go anyway) and bought another pair for the little job, and left them with him as a gift to start off his tool box.

 

[Alex P Keaton]

As a personal example, I bought my first property in September 2008, and since then some unexpected expenses have occurred.........

lol, another unexpected expense. This time $600 annual water bill. Just came in the mail today. haha newbie to all this.

 

[13910]

I went around to our Frankston unit the other week to fix a leaking tap washer for our young male tenant.

Nice guy, computer geek, never sees the sun I reckon. pasty and pudgy. But pays his rent, so I love him.

I needed a pair of pliers as I only took one pair with me, and needed two pairs for a fiddly bit. I asked if he had a pair I could borrow. No.

He owned no tools whatsoever in the place.

So, off to Bunnings I go (had to go anyway) and bought another pair for the little job, and left them with him as a gift to start off his tool box.

That's good of you BayView! I must confess, it's ironic that all this chatter about Gen Y should happen in the thread started by a 22YO.

I have found a place that would be perfect for my plans, everything stacks up and yet I'm getting cold feet. I've just looked around my house and there's still a (shortish) list of things to do and I don't think I can get it all done in a time frame that would enable me to have this place valued next week if I made an offer on something on Saturday.

I guess there will be other properties.

Cheers
Greg

 

[Propertunity]

I have found a place that would be perfect for my plans, everything stacks up and yet I'm getting cold feet.

http://www.youtube.com/watch?v=GdX9wHtAHd4