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This is where “your own situation” is most important. What does your situation need? Cashflow or growth? In all of that though, remember that cashflow is king. Like, if you suddenly don’t have a job, then payments (if negative geared) can become a monster that could eat you alive.
You are in a great situation to make a considered decision. Such an injection of equity can be the start of a huge change in your life. As such, do give it some time to check out all options…..
Though your options aren’t likely to be unlimited, this is a huge “leg-up” should you wish to change your job (if you don’t like it) by e.g. buying into a franchise that you DO love. Or it can set you up with property (of course), but also shares, or some other investment type.
Take the time, and even spend some dollars on your education, so that when you make your next move, you will already be convinced it is “the right move for you”.
Re property itself, growth is nice, but even better is buying something you can afford even if you lost your job, so having more rent coming in than expenses paid out is quite desirable. As you said, you might look at buying two properties rather than keeping one that WON’T pay for itself. Remember too, it is good to be able to sleep at night, so keep your next move as stress-free as possible.
A good way to do that is to avoid a negative geared property (Blacktown?) that costs you extra money each week. Start with one that puts money in your pocket each week. I recently attended Ian Ugarte’s day seminar that shows a way to increase the income of a rental property markedly – his way can even take a negative geared property and make it positive. Perhaps that can work for the Blacktown property too – I don’t know, but others will.
Good luck with your choices, and remember this – “If you think education is expensive, try ignorance!”
Given a choice of only those two options, I’d go the NE facing one. My main reason being that West is quite bad for heat, AND there is no guarantee that you will have a mountain view in one year’s time anyway (depending of course on the aspects of the surrounding land). i.e. I assume it is possible to build to the West of your Unit – but maybe not, if there is a canal, or land already used for infrastructure – rail, motorway, etc.
You would know whether it is possible to build to the West or not (thus blocking your view). If you keep the view, you still get the oppressive Westside heat – can airconditioning cope?
Hmmm – and just now, on a re-read of your post, I caught this bit:-
I’m buying off the plan.
Well, after answering you with my opinion on “aspect”, I also want to add the following:-
Personally I am not overly interested in Units, and particularly not if they are Off-The-Plan. There is just too much that can go wrong, and I much prefer to own a chunk of land. I would only consider a unit if it were a small part of a boutique block in an already settled area of a city (no hi-rise for me thanks). Just thought I’d add that wee note of caution….
There are some really good references in here re “Buying off-the-plan” that you might want to seek out. If you have trouble finding them, come on back – but have a look in the Training Centre first.
What an interesting muse !!
Unless they propose negative gearing cannot be used to offset the investor’s own investment portfolio, in which case that will probably kill off the invest altogether and cause some very serious consequences to the economy…
To me, this question really comes down to “Where does ‘negative gearing’ begin and end?”
I know many who do a kind of “cordial mix” – having some positive geared properties offsetting other slightly negative geared properties. If losses can be absorbed “across the portfolio”, then that’s not so bad. Some though might depend on having it offset their other Income – THAT is where such a change may lead to a change in the rental market (thinking there of “those starting out” who aren’t yet into the consolidation phase). Think mid-1980’s and the introduction of CGT. and removal of negative gearing, and the upset that caused!! (see below for more on that)
Knowing just where this proposal begins and ends is mandatory to understanding the change. One to watch in a couple of months, eh?
Looking around, I found a summary of those 1980’s changes. Initially, it looks like John Symonds is dead against it, but DO read the text and you’ll see that his video offering is not the FULL story. The words also say “the removal of negative gearing was not the only cause of rents going up…” so there does seem to be some balance in this report (from May 2016 by the way…).
From the info you provided, you sound like you are in a prime position to do just that. I haven’t done that myself, but the good-looking chap right on top of your post (advertising the one-day seminar) is doing this and showing us all how to. Get in on his course (I’ve heard it is almost full in Melbourne, so don’t delay). I am sure what he brings will fill your knowledge bank up quickly with respect to those two properties.
Only one thing that stood out to me as a possible problem is that yours are both built on slabs – that makes any new plumbing a lot harder unless sited on exterior walls. But don’t let that stop you going ahead – there will be “ways” around that too I’m sure. And maybe Ian even has an answer to that to – ask him on the day…..
Compound Interest is great – but what effect do yearly expenses play on your compounding investments?
I stumbled over a post from a year or so back – it shows just how well compounding can work. But this time, it has a twist…. It ALSO shows how much damage can be done when the compounding is accompanied by expenses along the way (be they admin fees, taxes, other costs, etc).
Be prepared to be surprised – I was !! Like, I was already aware of how GOOD compounding can be, but I was unaware of the massive effect of those regular expenses.
It starts by showing how, if you take $1 and double it 20 times, you end up with a little over $1m. Nice !! And I was not overly surprised by it, as I was already aware of the power of Compound Interest.
What surprised me was what happened if you take out 30% each year as you go (for fees or whatever)…. now THAT result surprised me. I thought it might halve the end result….. but I was WAY wrong.
Then try it again with only taking 5% out each year – think about what the result might be, then calculate it out. Again, surprising !! There has to be a big lesson in that – re watching expenses, Interest rates, taxes, etc.
As a non-resident, I guess you are restricted to “buying new” – am I right there? If so, it limits your choices somewhat – but as a general rule, I’d be looking to buy in a settled area rather than in outlying suburbs. Perhaps developers are doing “urban infill” in Southport that could suit you. Though land size is smaller (where they subdivide a large block into 2 or 3 smaller blocks) its location should give it a better value into the future.
I don’t live on the Gold Coast, but from what I read, now is not a bad time to be buying in SEQ anyway. If considering a unit rather than a house or duplex, look for smaller builds (6 or 8 units to a development) as they hold their value better.
My thoughts on Pimpama are widely known – although fine for owner-occupiers, I believe it will take many years before the value catches up to the purchase price. OO’s will spend many years there, and add value by fencing, gardening, putting in a pool, garage(s), etc – so they will grow some equity over time. But this is an area where land is readily available, thus not hugely valuable (at least not for another 20 years or so). In Southport however, the value is already there, as is the infrastructure.
Re “which suburb” to recommend, I don’t know them well enough to say – hopefully others can add some value there,
So who else spotted my earlier mistake?
Back a few posts I had said this:-
TODAY, it has all changed surely (???) Let’s say a $500k loan over 30 years must be repaid at $16,667 per annum but Interest is currently only 4.5%, so Interest paid is $22,500. Near enough?
This must surely mean that Principal repayments are now taking up nearly 45% of the repayment amount (coming close to doubling the payment that IO alone would be). Doesn’t this mean then, that any change from IO to PI must come with a whopping lift in repayments, thus affecting serviceability?
Well, I was right, and yet I wasn’t… The first paragraph is pretty much OK. But the first line of the 2nd paragraph is not quite right. Here’s why:-
1. It is the “repayment amount” comment that is incorrect – what happens in P&I is that, as Principal payments are made, the Interest payments decrease. As well as that, when calculating repayments, first the total payments (Principal and Interest) over 30 years are calculated, and then divided into the required number of monthly payments. So in the example given, though the principal repayments DO make up a huge %age of the total amount to be repaid over 30 years, the actual MONTHLY payments are nowhere near the 45% increase above IO payments that I had first said…
The IO payments were $1875/mth. After calculating the total repayments required over 30 years (with the Interest payments diminishing to zero over that time) the 360 equal payments for P&I come to $2358/mth. So, not a 45% increase after all, but a 26% increase – still substantial, so a point that should receive due consideration.
The author confirmed its sale on Dec 26th.
Further to that, OS, I just read a piece in my email from the Motley Fool – in essence it said something like “These are headlines you won’t see!” and went on to list how all news is about “today” – e.g. xyz share has plummeted 10%, (shock, horror) and quite ignoring the fact that over the previous two years, that same xyz share had grown 35%. But they don’t print THAT headline.
The same applies to current property news – e.g. Sydney homes have fallen 10% (but how much had they gained in the last 2 years???). By the way, I am guessing at the 10% figure for Sydney – its just an example really…..
So much news today is “noise” and we need to sift through it.
It would seem that if there is a drop in values, the magnitude of any drop might well vary between states and regions.
It would have to, wouldn’t it? Truly there are multiple markets involved, and multiple factors all interacting. e.g. Sydney and Melbourne have had great growth, and have now dropped away some of that growth, while other cities have had little growth, and are growing still (albeit more slowly).
Then there are those “other factors” – world issues, federal issues (which might affect all markets to some extent), and also state and local factors (that might only affect some markets but not others). And I’m sure there are many other delineations between markets – any takers?
A few extra thoughts, thanks to your added information:-
1. The medians you quote for East and West ($565k and $445K) are wildly different to what you are wanting to look at buying (new $330k or old $260k). Am I missing something, or are there some screaming bargains in Burpengary?
2. On the subject of medians, there is a lot to learn about them – first they are the “middle” price, and NOT an Average price, in a string of sold prices. One thread asked a lot of questions and we learned a lot about medians by following the topic:-
3. I can’t imagine ANY developer selling new for $330k up there – but then these are townhouses, and not houses – could it make that much difference? In fact, maybe THAT earlier question 1 is referring to “House Medians” ($565k vs $445k) rather than townhouse medians – could there be such a massive difference? Land size differences will play a part – but that much???? Could be – but you will KNOW !!
4. “What I struggle to understand is, why the median house price for Burpengary East is $565k and Burpengary is $445k.”
Micksta, it is rather normal for newer areas to be $100k up on older areas – not that they really are worth more, but developers SAY they are worth more (“They are new, and they have tax deductions, and a warranty, and even a rental guarantee, and we think they are better so we will lift the price. And if you think this is steep, watch out for our Stage 2 !!”) :p
5. As Steve would say, “Buy problem properties and sell solution properties”. You buy the problem, spend a bit to fix the problem, then sell it to someone with the solution in place (for a profit). A new property is a solution – there is nothing to be fixed, so you won’t be paid for doing it. In fact, YOU will be paying the developer, builder, for having built it – and there will usually be little chance of any discount. There will also likely be few Capital Gains for a number of years. OK for home-owners who might sit still for 10 years plus, but not so good for investors who are wanting to “make a bit” on their investment.
Let’s see what you think of a few of those questions/comments.
Run the numbers to get an idea what each +ve or -ve of either option will cost. Without knowing such numbers, it is hard to make good decisions.
e.g. What would maintenance of a 10year-old townhouse be expected to cost? Would it be $2k pa, or $5k, or $10k? Compared to that, what is the cost to you of paying $100k more on a mortgage? Is that extra mortgage cost more than offset by Tax benefits of depreciation and/or extra rent?
Will the new home be complete with all of the niceties that 10-year-old homes have – e.g. fencing, lawns, trees, concrete, schools nearby, shops, etc? Will the new home have a warranty that has a meaningful amount of value (e.g. with regard to maintenance)? Likely it should have….
Your current decision should be to quantify these things. As a quick back-of-the-envelope bit of maths, an extra $100k on a mortgage is likely to cost you (say) $5.5k pa in actual cost on an IO mortgage – but you can be nearly double that if doing P&I. And, that is ONLY the day-to-day running cost. You are automatically “down” $100k in equity when compared to a 10-year-old townhouse.
What if instead you can spend $20k on that 10-year-old townhouse and lift its value by $60k? Haven’t you then increased your equity by $40k (making it far easier to buy #2) and maybe even lifted the rent to the equivalent of a new place? Could be that the “old place” is slightly closer to town than the new one too…. Lots of things to consider.
Good luck with your decision, Micksta – the time you spend “running the numbers” could pay you off handsomely methinks !!
Older properties also (often) have a larger block of land associated with them, making the purchase of the older property even more enticing. Many wish to buy new – but we often pay a price for wanting that. Older properties tend to offer better value in most cases.
Main thing though is that new estates often sell based on this “newness” that soon becomes 10 years old itself. Are you wanting a new home, or a good buy?
My son updated me – the project is “off and running”, thanks to those who contributed toward reaching that initial funding goal. Search for “Furzaid” to keep in touch as he strives toward his bigger goals.
My hat is off to the man!
Some good words from Steven there – maybe some thoughts appeal to your current situation?
My thoughts are that the current situation calls for caution – i.e. have a little bit spare cash in your back pocket, and don’t go stretching. Maybe for you, that means selling one to bolster others. You haven’t shared any numbers, so you would need to run your own numbers to determine “Which one?”
And maybe two? Steve himself was saying just a few weeks ago that now is a good time to consider selling any IPs that aren’t pulling their weight. How are yours doing? Do any have “future potential” – e.g. a reno, or development, to add equity? Are you planning to (as Steven mentioned) do some flips to create some spare cash? Or are you looking to sell one or two to enable a better purchase that will give you some reno possibilities, also with equity growth?
Are you neg gearing? Are you wanting to “Grow” out of it – i.e. become pos geared? Do you have income stability? What are your goals re investing?
Re “values not grown much in last 5 years”, I totally agree – but I think I see the green sprouts of growth appearing in Bne…. It is just a bad time from other perspectives, leading to a lag in better values, but I suspect they will be coming. Meanwhile, are you better off selling one or two, to enable you to buy a “worst house in best street” so you can add value yourself, thus allowing it to “build” your next deposit, rather than having to “save” it.
What do you think?
From my recollections of what others (particularly Terryw) have said, I think your accountant might not be right. But then, I am no adviser – so you must depend on others.
Look for Terryw to pop up – and did you check out those links yet? I’m pretty sure Terry shared some really useful and “not well-known” info re CGT in those links.
A recent discussion re whether going from an IO loan to a PI loan would help serviceability led to some interesting learnings. From a MB’s perspective, it seems that a lender will only approve an IO loan by calculating it as though we were paying PI (Principal and Interest) and at a higher rate (Qualifying Rate). i.e. The lender needs to KNOW that you have the spare funds or income to cover the higher repayments of a PI loan before the IO loan is given. All “as expected” – but wait, there’s more……
First, go here – https://www.propertyinvesting.com/topic/5048770-will-moving-some-investment-loans-from-io-to-pi-reduce-serviceability/#post-5048803 – then read up and down from there to get context around the whole discussion.
You see, despite the words that said “your serviceability will improve by changing to PI”, I see there is a lot more hidden beneath those (no doubt true) words. The link summarises my thoughts. And to me, the big takeaway from the whole topic is to “Be very sure you KNOW what the new numbers will be BEFORE you go changing from IO to PI!” If you don’t, I suspect you may get a very rude awakening (and possibly even rock the foundations of your portfolio).
For me, “run the numbers” took on a whole new look after thinking that one through. Though the final outcome was nowhere near the 45% increase in cost that I had first thought it might be, it was still going to be a 26% increase (going from IO to PI) – which is still a substantial increase, and needs to be known before taking the leap.
First off, I am not an adviser, but I might be able to point you to one….. Your situation sounds a little complex, but those “in the know” can usually point us in the best direction. Perhaps one or two of them might pop in…..
If you check out that post, and look to the “PS” area, there are two links there that talk of situations that sound a lot like your own. Have a careful read in them to see if they shine some light on your situation. For me, two big learnings in those posts (from Terryw) were these:-
“Terry shows an example of two properties that have been lived in, thus both COULD be PPOR’s, but that the nomination of the PPOR occurs ON SALE of one of them (and not before).”
“Fed PPOR nomination and State PPOR (for Land Tax) are two separate nominations, and CAN be at odds with each other”. Wow !!
I can’t comment further Toby, but I hope that helps you to realise that there might be a better way for you if you chase down someone who knows this stuff backwards…. (look for Terryw perhaps, or someone with similar knowledge amongst your favourite advisers).
Thank you, gents.
With the extra help from you, I think I now “get” the whole picture. And, reading back, the first two replies said it all anyway – i.e. that even if you are paying IO currently, the initial borrowing was only granted because the lender deemed your total “free” income allowed you to make repayments even when you later change to a PI loan. And at the higher qualifying rate too (7%?) rather than the actual rate.
Now, knowing that, it helps me to realise there would be other outcomes that could become pretty hairy based on that. e.g. Given my earlier point, that ACTUAL expenses increase markedly if changing to PI, all of a sudden a bunch of other thoughts hit me:-
1. We had better be VERY mindful of the need to revert to PI when “Sizing up” a potential purchase (like Steven said) as any change from IO payments to PI payments will increase our day-to-day costs out of sight. Our mortgage costs are likely to almost double if my earlier comments are anywhere near correct. (addendum – in earlier days it was simply “Oh, no worries… just refinance with another lender and get a fresh 5 years of IO” – that may not be so easy in this current climate! Ouch !!!)
2. The change such as Deepak is considering – going from IO to PI – WILL add hugely to his monthly outgoings, and hitting his cashflow hard. Does his current situation allow for this? Or was his earlier loans formulated at a time where things were far less restrictive? Could it be that Deepak might not have got such a loan based on today’s criteria? If that happens to be correct, then it would be worthwhile to sit in front of a Broker to get a clear picture BEFORE any changes are made.
3. If one WERE to go PI from IO, and still have sufficient capacity to pay the extra repayments, that’s great – but suddenly a previously positive cashflow will have taken a huge hit. Is the investor now depending on Negative Gearing tax advantages to offset some of that extra cost? If so, where are they at if we have a change of Govt next year and Neg Gearing goes away? Hmmm?
4. When “running the numbers”, do we allow for “future PI repayments” that can cruel our income after 5 years? Or have we been basing the numbers only on actual expenses here-and-now? Five years can come around quickly. Further to that, we must be VERY mindful to not over-commit to extra IP’s without having taken future “IO to PI changes” into account.
5. How much have things changed since you bought your IP’s? Were the loans taken out in a time of “easy loans”? How would you be if you had to refinance today – do you KNOW? Did you know that above extra data about the huge cost increases when going to PI from IO loans? How will your portfolio stack up under that bright light?
6. If you have been considering buying more, have you really thought the above through with respect to YOUR current IPs? Can you really afford to go again – or is discretion the better part of valour?
What this topic shows me is how MY lack of knowledge in that area could have been quite damaging. I guess that shows we must depend on professionals – and we should refer to them (more) regularly, and not just when we think they are needed !! This recent tightening of rules (APRA induced) will have laid traps for many who are already in heavily mortgaged situations but who aren’t yet aware of all those points above.
What’s the time then?
Time to take a long hard look at our own scenarios with some of the above uppermost in mind. And maybe time to sit down in front of our favourite adviser.
Thanks to all who have contributed thus far, and I look forward to more input on this thought-provoking scenario,
Well, I didn’t know the following – suddenly what you say makes sense.
Yes the cash flow consequences would be entirely different, but here we were discussing serviceability. The lenders will treat any IO loan as if it was a PI loan.
So, if a lender treats either loan similarly from a serviceability perspective, then that changes lots of things. Does that mean they DON’T look at actual cashflow, but treat both loans as if their mortgage cost is identical? Seems weird to me – it seems there is a very definite meaning of “serviceability” that the average layperson is unaware of. I suspect Deepak might have thought along the same lines that I did.
Anyway, thanks for the “behind the scenes” look at things. Would you humour me a little more, please, by outlining what effect the “cashflow consequences” might be in a case where one goes from IO to PI? If it doesn’t affect serviceability, where does it “show up”?
Surely such a huge jump in an investor’s outlays must have an adverse effect on their ability to refinance…. or show up in some way.