Thinking about getting an investment property

[menty]

Hi guys,

This is my first post so please be easy on me. I dont know much about investment properties and all.

In the past few days I have been thinking about buying a house. Let me explain my background. I am 23, earn 70K per annum (after tax and HECS this is about 55K, 2K per fornitght roughly) and have been steadily putting money in a first home savers account. The account has accumulated 20K, with about 5K in government payments.
Mum is willing to give me 200K to put into a house.

As to qualify for the FHOG, I need to live in the house for 6 months. This is my plan, and then I will rent it out after this.

Is this a good idea?

I also am not sure how much I should be actually spending for a first home. Ideally I would like to be positvely geared, having the rental income cover the payments. I had a quick look on the mortgage websites for a loan of 300K, and it seems that it would be quite difficult to do.

The areas I am currently looking at are around the Lidcombe area, and at houses around 500K. Are there any other places I should be looking at. Is 500K too much/little to begin investing? I believe as a first home owner, I will not have to pay any stamp duty on the home, so is it wise to get as expensive a home I can afford?

Would it be better to get a unit/townhouse or own a home with the land associated?

Thanks for the help!

 

[Rolf Latham]

Hi Menty

Welcome

Id say one of your first steps wpuld be to crunch some number because on 55 k taxable, that may make your decision as to what to buy where a lot simpler.

Have a chat with a good mortgage broker.

Id estimate the max u may be able to borrow for a home based on the very limited data is maxxed around 300 to 350.

PS, much of the 200 k should NOT go into the property because you will be turning it into an IP soon. Long story as to why, im sure someone will explain


ta
rolf

 

[menty]

That is interesting. I always thought that the more I put into the property from the beginning means that it will be quicker to pay off. Then again, I see your point as I would be selling this in a few years most likely too.

 

[Bigtone]

That is interesting. I always thought that the more I put into the property from the beginning means that it will be quicker to pay off. Then again, I see your point as I would be selling this in a few years most likely too.

that's not his point, call him and he will explain it

 

[TN_]

i'm also curious as to why?

is it because by putting 200k into the loan, you would reduce the interest and effiectively reducing the tax benefit from the interest?

 

[jroth]

That's basically the gist of it TN_.

As the intention is to turn the place into an investment property you retain much more flexibility to pull the money out and use it elsewhere for whatever purposes without affecting the tax deductibility by keeping the money in a 100% offset account.

If you pay off the loan directly then convert the property to an IP and move into another PPOR, you cannot just redraw that 200k and use it for the PPOR debt while still being able to claim the tax deductions for that amount without using a long debt-recycling/capitalising interest strategy.

 

[santaslayer]

Also, as you income grows, that 200K could be used for multiple deposits - not just one IP.

 

[menty]

Thanks guys, hopefully I have understood this correctly:

I should ask the bank for what they will loan me on my income, and simply pay the minimum deposit (probably only 300K). I then purchase the home as an IP.
What is an offset account?

From day 1 I should be able to start collecting rent, and I assume this should pay off the loan, hence generating positive cashflow. I can claim the home loan on tax, and any repairs needed to it.

If this is true, my only concern is that the rent I get will not cover the loan repayments, and have to start using my own money for it.

The final concerns that I have are the following:
1. What happens to the money in my FHSA? Do I just forfeit it? or leave that till the time I buy my first home.
2. I believe I get free stamp duty when buying a first home to live in, are these savings not worth it? What about the FHOG, will I forfeit that too?

 

[JohnHenry]

.....

If this is true, my only concern is that the rent I get will not cover the loan repayments, and have to start using my own money for it.

.....

Yes, that is the concept of negative gearing mate
hold on to your IP until it reach about 9-10 years to get the capital gains.

 

[alexlee]

Yes, that is the concept of negative gearing mate

Actually, it's not, since you can be negatively geared but positive cashflow.

 

[VYBerlinaV8]

Actually, it's not, since you can be negatively geared but positive cashflow.

It's also worth noting that even when the rental yield exceeds the cost of holding the property, exactly the same tax rules apply. The only difference is that you are making additional profit.

Negative gearing is just an idea.

 

[Aaron_C]

Like many a soul has said before - negative gearing is the cream on top

 

[Comper100]

I'd say in your circumstances investing $500k in one property would be a little too "all eggs in one basket", I would got for 3 smaller properties or 2 medium ones. If there rural then you might get closer to + cashflow but I find even when the rent covers the mortgage with all the other costs its tough to get a true positive result at the end of each year! However like mentioned before, a good tax set up with the proper depreciation schedules in place should net some good cream.

 

[charlieandkath]

Buy a house in Gladstone Qld for $450k after costs and rent it out for 600 a week if not more. Then enjoy the ride for 12 months, reassess and then do something else again.

 

[Aaron_C]

Given today's climate you need to get a 11%+ yield on a property otherwise your serviceability (not to mention your available cash/equity) get reduced.

 

[menty]

Thanks guys.
I just found out that as a first home owner, if I sell the house within 6 years, I do not have to pay CGT.

Now if this is true, would it not be wise to buy the house as a PPOR with my FHOG and FHSA, live in it for 6 months, move back home and rent it out, selling the house in say 5 years time?

Also, if I am able to generate positive cashflow (by having a huge deposit), would this not be worthwhile?

Ie:
Buy House as PPOR $500K.
200K in offset account
Live in house for 6 months.
Move back home after 6 months.
Rent house out in the meantime . Put as much money into offset account to make property positvely geared.
Sell after 5 years. (Value of house will have increased). Buy another IP/ PPOR

Within those 5 years I will probably have another IP also

Thirdly, IF I do decide to move into the property after I have leased it as an IP, would this strategy be worthwhile or will I run into problems?