Unit or House?

[EmD]

Hi all,

Yet another needy first home buyer looking for advice from all the competent property investors out there! I'm impressed after reading so many threads that people give so much support and advice - the property veterans are to be commended!

Attempting brevity, here's my situation -

- Looking for an owner occupied property first (After talking to mortgage brokers, accountant etc decided this is the right place to start - would move on to IP's second).
- Very attached to the Northern Beaches area
- Have a $185k deposit ready after 4 years of steady saving, and $150k combined income
- Currently renting at a rediculous $460p/wk
- An ultimate goal of owning a house on the beaches (room for husbands bonsai collection, dog, future offspring.

Trying to decide between three options -

1. Buy the house now
This would require a large loan ($500k +), & would only be afforded if the property included a granny flat for income and we'd still be stretched and renno costs would be unknown. But we would have some income and the land value in the property.

2. Keep renting & saving hard for another year or 2
We're currently earning $1000 a month interest - & I personally feel property values in the area won't dramatically increase in value over this time. I'm noticing many properties taking a long time to sell, and 'vendor must sell' notices. My feeling is with more rate rises there'll be more available in the next year or so & that there's no need to rush. For these two options - we'd hope like hell we could afford an IP a few years down the track.

3. Buy a Nthn Beaches unit
Approx $450k. We wouldn't put down all deposit, could maintain healthy offset account, would not pay any stamp duty - saving about $25k, and repayments would only be $150p/wk more than current rent. Then buy an IP soon after, and hope that in the next few years we are in a better position to buy a house. The down side is I worry that units don't have good capital growth to count on (and there's so much stock on the beaches).

I know this is simplistic, but would really appreciate any comments. Thanks so much!

Kind regards,
Em

 

[yo yo ma]

Buy a Nthn Beaches unit
Approx $450k. We wouldn't put down all deposit, could maintain healthy offset account, would not pay any stamp duty - saving about $25k, and repayments would only be $150p/wk more than current rent. Then buy an IP soon after, and hope that in the next few years we are in a better position to buy a house. The down side is I worry that units don't have good capital growth to count on (and there's so much stock on the beaches).

From the info you have given, I like this option the best. I would put down an 80% deposit to avoid LMI and keep the rest in an offset account like you have said. I would also have an interest only loan to minimise the repayments, with any additional funds going into the offset account. Then, when you wish to buy a house in a few years time, you will have a good deposit and the option to keep the unit to use as an IP. It is best to keep the loan for the IP as high as possible for tax purposes.

Note that you are getting $1k pm interest but how much of this is being eroded by tax and inflation?

Keep in mind that I moved from Sydney 7 years ago and can't comment specifically on this market though. What is the vacancy rate like for units on the Northern Beaches?

 

[FelixL]

We were in pretty much the same scenario as you are about 2 years ago, except you are a much better saver than us

We bought an apartment not far from the city for around $400k. It allows us to claim the full FHOG and free stamp duty and keep the mortgage repayment down. We haven't got kids yet and work in the CBD, so a low maintenance apartment with good transport meets our need much more than a traditional 3br house with a big backyard.

Then the rest of our money goes into 2 IPs, with one of them already earmarked as our next home when we have kids. It cost so much less to keep an IP than the PPOR! Our goal is to buy our dream house (4+ br house on northern beaches) in the next 5 yrs, keep it as an IP until we pay off our current PPOR mortgage

 

[EmD]

Thanks 'Yo Yo ma'!

Really great feedback. Much appreciated. Interest Only is something to consider! I hadn't thought of that. You're right - that way we can keep saving towards our ideal.

And yes, come income tax time our $1k pm interest earned is a definite disadvantage!

I know that across Sydney vacancy rates are v low. And the rental squeeze is making properties much closer to positive cash flow which is a plus.

You're working in PNG? I grew up in there - was great back then.

Cheers,
Em

 

[EmD]

Thanks Felix! Great to hear! It's certainly a 'delayed gratification' strategy - but it sounds the smartest.

Cheers,
Em

 

[yo yo ma]

Interest Only is something to consider! I hadn't thought of that. You're right - that way we can keep saving towards our ideal.

I know that across Sydney vacancy rates are v low. And the rental squeeze is making properties much closer to positive cash flow which is a plus.

You're working in PNG? I grew up in there - was great back then.

Hi Em
Yes, IO is the best way to go if you can save (like you have done). By putting these savings into an offset account, you are doing the same thing as paying P&I anyway.

The low vacancy rate potentially makes the unit a good IP in future. If you can structure the loan correctly now, it makes your tax saving greater in future, if you decide to go down this path. Best to see a good mortgage broker to do this.

We started out buying a unit and then traded-up to a house when we needed the extra space for the kids. (If I had known then what I know now, I would have kept the unit)... I think better to start off smaller and move up, rather than go straight for a house and find you are short with finance for renovations, kids, interest rate rises or whatever.

Yep PNG is a great spot but unfortunately, wouldn't recommend it for tourism.

 

[FelixL]

Thanks Felix! Great to hear! It's certainly a 'delayed gratification' strategy - but it sounds the smartest.

Cheers,
Em

Actually, being a Gen Y, I fail miserably in the "delayed gratification" department, especially comparing to my parents. When I see something that I want, I want it now... Luckily at least I have the willpower to stick to the 80-20 rule, where 80% of the savings comes from only 20% of the effort. I focus hard on cutting back in terms of housing, car and luxury holidays and give in on others like eating out, clothes, electricals, short holidays etc. So far this not-so-ideal strategy still give enough savings for investment.