What do you think of my initial portfolio strategy....

[reality_22]

Okay, not too long ago I posted on Somersoft seeking advice on how best to invest my deposit for my first purchase. To quickly recap, I have $250k which I would like to use, I am mid 20s, in my first year of full time work after uni on a salary of 45k pa (reviewed annually + bonuses).

I had initially planned to spend every last penny into my "dream" home.... either a townhouse or unit in an inner east suburb of Melbourne (Camberwell, Hawthorn etc etc), around $750 - 800k. Completely unaffordable to live in at the moment but the plan was to purchase now, continue to live at home for the next three years while its rented out, pay as much as I can into mortgage and then wait for salary to catch up before I move in. Of course, the problem with this scenario is all the "what ifs" and I worry never being able to escape the burden of a mortgage and if I were ever to return to future studies/rate rises etc. Also, the thought of having to live at home for another three/four years is daunting.

NOW.... I have changed my outlook a little. Very recently a nice one bedroom apartment has come on the market in my above preferred suburb, 3 mins to train/shops, block of 9, thick walls, courtyard etc. Decent sized to suit my needs. Price range near the 400k region.

I am considering purchasing it with a 200k deposit, thereby having a very low mortgage that I can manage comfortably on my current wage and pay extra on. Perfect for me to live in for say, the next four/five years. With the remaining 50k, I plan to purchase a house with land in Ballarat under 200k, and from the research I have done thus far I am confident the rent will cover the majority of the mortgage.

Now, obviously the one bedroom apartment is not my ideal forever home but it is affordable option which means I can live in it immediately. I expect that my pay will increase annually, therefore the difference I can save or put back into mortgage.

In this scenario, I think in 5 years time I can have another $100k deposit saved, equity in my two properties and my salary will have caught up so I can manage something bigger and better. The one bedroom apartment will then be rented out which should cover the majority of payments and by the time I am 55, I will have a PPOR and two paid off IPs that will generate me rental income.

What do you think, is this a smart way to get started? The only thing I am grappling with is that as a one bedroom apartment, I am concerned about equity growth in the property. Ideally it would be two bedrooms, however in the area I am targeting a two bedroom will probably leave me quite strapped for cash should i wish to live in it, and I will not be able to save very much extra money. My thought is that the place in Ballarat with land value should balance this issue out.

Should I be concerned about this issue? I must stress that the apartment I am considering is not the typical student accommodation apartment. It is very well built, comfortable and has a decent courtyard on title which many other apartments do not have (even two bedrooms). A two bedroom in a similar design i would expect to be around 600k - more than I want to purchase for. Of course, I can aim lower and get just a basic two bedroom for 500 - 550k as well but the apartment itself will not be as nice. What do you guys think is more viable?

 

[china]

buy the best you can

I am really amazed that you are in your mid 20s and in your first job and yet can put up a 200k deposit. Many people never reach this so you are way ahead of the crowd.

As a generally principle if you are buying an IP, you should buy the best you can afford. Buying in a blue chip suburb is great. 2 bedrooms is usually much better than 1 for either PPOR or IP as it is much more tradeable over time. At your age, you should not worry too much as you are young enough to recover from any losses of income or interruptions to income. Therefore, I think you should stretch yourself and buy that 2 bed room in the best suburb you can.

 

[Rolf Latham]

Hi

Nice one !

My primary advice ( general only) is to pay as little toward this FUTURE investment now as you can get away with, and place the balance of your cash into an offset account to reduce the mortgage payments

ta
rolf

 

[Kinnon Bell]

possibly 2 bed unit and rent out a room to make the repayments a bit more comfortable? with the one bedder is there a car park as well?

 

[Felixter]

I also vote dump the house in ballarat and buy a 2 bedder. Make sure whatever you buy has a car space/garage and balcony. Otherwise DO NOT buy it.

 

[zed_kid]

Hi

Nice one !

My primary advice ( general only) is to pay as little toward this FUTURE investment now as you can get away with, and place the balance of your cash into an offset account to reduce the mortgage payments

ta
rolf

This. Go to a broker see what is the maximum you can borrow and at what LVR (probs 80% to avoid LMI) and plonk the rest in an offset. This works by both reducing your monthly repayments and is easily accessible. Win-win

 

[reality_22]

Hi guys, thanks for the comments. Yes, the one bedroom has a car park.

The only thing that concerns me a little about getting a two bedroom is that because I also plan to live in it first, there are certain things that I look for in an apartment. First off, I prefer stronger walls ie. Not typical plaster for sound proofing and I also have a dog so I need some sort of balcony or backyard. This apartment has sandstone walls as it is older (cement-type thick), and the courtyard is actually on ground level, has a garden outlook and a small deck. So pretty much perfect, only there is just no extra bedroom. As a comparison, a typical 2 bedroom in the same location that will cost under 550k will consist of thinner plaster walls, probably won’t have a courtyard and most likely will be in a bigger block. So, in my mind – yes, two bedrooms will probably have more room to grow and more equity. But this one bedroom is perfect for me to live in! So that’s where I am grappling with the decision.

I’m also surprised the majority of feedback is to ditch the Ballarat house. I thought it was better to diversify? I believe there will be stronger growth in regional towns over the next decade, and Ballarat is a self-contained suburb (hospital/uni) that has not reached the likes of say, Geelong. If the general consensus is to ditch this option, then would it be better if I just went all out and purchased a house/townhouse in my desired area now, and wait for my salary to catch up before I move into it?

Also, what’s the difference between putting in a 50% deposit (200k) on that apartment, compared to only the minimum 20%, and putting rest of the money into an offset account?

Thanks guys!

 

[Tom-B]

Ditch Ballarat,

Stretch to buy that 2-bedder in Hawthorn. Rent it out for the next 12 months if you have to and stay at home.

If you're just exiting uni on a 45K position, you'll see some pretty serious salary growth over the next 12 months. I have no idea what field you work in, but most industries seem to be screaming for employees and paying very good money.

In 12 months time you can get into that dream townhouse in Hawthorn, and if you structure loans etc now correctly (min deposit + offset) you should be able to re-assess and get this neutrally geared property in Ballarat.

I'm a fellow Gen-Y and want it all now too, but try mapping out a 36 month goal of where you want to be and then break it down into 6 month goals of where you need to be to get to the endgame.

 

[tobe]

the benifit of not committing the whole $200k is if you ever decide to move out of the one bedder and rent it out, the larger loan then becomes tax deductable, set up the right way, with an offset account. Your repayments now are very similar, and if you never move out and rent the property, there is no harm done.

Apart from this, I agree with your thinking. I dont think there is such a premium attached to 2 bedders than 1. I think you are better off looking for a neatrally geared property, in ballarat or elsewhere while your income is relatively low (allbeit its increasing by loads next year), build up a few of those, and change the flavour of your investments as you go.

Lots of small bites rather than punting the lot on one investment. Having a couple of properties will give you more experience faster than just the one, along with relative geographic diversification.

 

[zed_kid]

So, in my mind – yes, two bedrooms will probably have more room to grow and more equity. But this one bedroom is perfect for me to live in! So that’s where I am grappling with the decision.

Careful mate, you’re getting emotions involved in an IP purchase. You have to decide now whether you want an IP or a PPOR, one will provide you the CG and yield and the other the lifestyle. If you want something in between then compromise on both sides and find a happy medium, easier said then done I know.

Take the offset account option. It’s as good as cash so readily accessible if opportunities arise. The benefit of a larger deposit is that you should in theory get a bigger loan but your income will be the proverbial brick wall here.

How big in sqm is the 1beder? Any scope for value add like reno or maybe a separate dinning room that can be converted to 2nd bedroom?

 

[reality_22]

Careful mate, you’re getting emotions involved in an IP purchase. You have to decide now whether you want an IP or a PPOR, one will provide you the CG and yield and the other the lifestyle. If you want something in between then compromise on both sides and find a happy medium, easier said then done I know.

Take the offset account option. It’s as good as cash so readily accessible if opportunities arise. The benefit of a larger deposit is that you should in theory get a bigger loan but your income will be the proverbial brick wall here.

How big in sqm is the 1beder? Any scope for value add like reno or maybe a separate dinning room that can be converted to 2nd bedroom?

Attached a layout of the property. Probably a no to added scope for value - it's not brand spanking new but pretty renovated already. And no to adding another room.

 

[zed_kid]

Attached a layout of the property. Probably a no to added scope for value - it's not brand spanking new but pretty renovated already. And no to adding another room.

Looks pretty good. Although it is small it has some features like deck and courtyard. To me this looks like a pump and dump. Do a reno inside and the outdoor area ( not sure about the body corp on this ) and sell for a profit. Its just too small for my taste.

Go a 2bedder, preferably with a separate dinning room for flexibility. Look for art deco older style apartments, look outside of hawthorn. St Kilda east / Elsternwick / Prahran are good value at the moment, IMO

 

[cadence]

I would focus on CG. You have enough money to buy into popular suburbs with land content. Not many people do. I dont live in Melb so dont know the market there, but if you feel you'll get more CG out of that townhouse for $750-$800k, I would get that (pay minimum deposit 20% and park rest in offset) and stay home.

Properties in popular suburbs tend to double in 7-10 years, think about the equity you will get then.

If it gets too difficult living at home you can consider moving out after a few years, you can use the money in the offset to pay the deposit for another place and your income should rise by then to service the repayments.

 

[Melbournian]

Hi guys, thanks for the comments. Yes, the one bedroom has a car park.

The only thing that concerns me a little about getting a two bedroom is that because I also plan to live in it first, there are certain things that I look for in an apartment. First off, I prefer stronger walls ie. Not typical plaster for sound proofing and I also have a dog so I need some sort of balcony or backyard. This apartment has sandstone walls as it is older (cement-type thick), and the courtyard is actually on ground level, has a garden outlook and a small deck. So pretty much perfect, only there is just no extra bedroom. As a comparison, a typical 2 bedroom in the same location that will cost under 550k will consist of thinner plaster walls, probably won’t have a courtyard and most likely will be in a bigger block. So, in my mind – yes, two bedrooms will probably have more room to grow and more equity. But this one bedroom is perfect for me to live in! So that’s where I am grappling with the decision.


Thanks guys!

whereabouts is this apartment? also sandstone walls are more difficult to reconfigure however - that being it is a 1 bedroom - there wouldn't be much to do. Yes courtyards add that inside and outside feel and are valued much higher.

 

[pickle pickle]

I'm going to go against the pointsw raised here and say you should get the one bedder instead of a 2 bedder (if what you are saying about price and the walls are correct) and get a place in Ballarat.

Ballarat has huge potential. It is a city approaching 100,000 people and the city is close enough to Melbourne for it to be a satelite city.

I must make another point, I'm not a fan of investing in apartments, thus that is also strongly influencing my point about investing in Ballarat instead of investing in a 2bedroom inner city apartment.

 

[jingo]

Of course, I can aim lower and get just a basic two bedroom for 500 - 550k as well but the apartment itself will not be as nice. What do you guys think is more viable?

Hi reality,

I've read of investors who have successfully based their investment strategy on buying and leasing one bedroom apartment flats in blue chip areas.

If I was going to buy a one bedroom flat, I would be in touch with a few of the local real estate agents to determine the rental and resale demand.

I buy two bedroom flats - mainly because I think that people can share a two bedroom rent and pay less than they would if they were renting a one bedroom flat on their own. I also think that people generally like to have an extra bedroom for guests/storage etc. (But these are just my thoughts!)

All the best with it and congratulations on having such a large deposit.

Regards Jason.