Hi guys, I came across this site a few days ago and I’m very impressed. The forum looks to have a great active community which I’m eager to be a part of.
I’m a 22 year old fulltime computer engineer with good saving habits, over the past few years I’ve been fairly interested in investigating further investing options including property but haven’t really taken the time to do so, thus I have been contempt keeping my entire savings in a Vangaurd Managed fund which is generating on average 8% PA. Im currently living at home with my parents and plan to stay there for another few years in order to help save up some more cash faster.
My question is I’m basically not sure if I should be looking at buying an Investment Property sometime next year using all the money in my managed fund which would be about 60k, to act as a deposit, whilst I take out a 320k Loan. Or if I should just continue to save money into my Vanguard Managed Fund until I can save up enough money that I wouldn’t have to borrow so much from the bank.
I really don’t like the idea of having to pay so much interest back to the bank on such a big loan compared to the managed fund which is only costing me very minimal admin fees.
Here are my quick calculations:
Total Interest Payable
320K Loan @ 7.41% over 15yrs = $210,332
Is that too much interest to pay? Should I be saving up more money before I commit to a loan of that size?
I just really can’t see how the Investment property would generate a better investment figure than the managed fund when I have to pay $210,332 in interest throughout the time of the loan.
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Ok. you are focusing on the interest but neglect to look at the money coming in.
Just say you leave your $60K in the managed funds for 10 years. 8% (minus tax = 5.6%pa- assuming 30% tax rate).
So compounded you will have (after 10 years) $70,665.Take that $60K and buy a house value $300K. 10% deposit + stamp duty etc.
OK you have a loan of $300K at say 7% interest. =$21K a year BUT rent will give you $18K minus costs = $15k. So you lose $6K the first year (- tax and depreciation) should cost you $3K max in the first year BUT the rent goes up each year so after 3 years you should be cash flow neutral. So for the next 7 years the rent will more than pay your interest. The last 5 years you'll actually have money in your pocket AFTER you pay the interest.
In the meantime your $300K property is now worth $600K (based on the assumption that property doubles every 10 years).So instead of have $70,665 you now have $300K equity. Sure you lose some if you sell CGT but that';s still a hell of a lot more than $70K. Also you now have $20% of a property but in 10 years time you've only got just over 10% of a property making it impossible to get in to the market.
The above is very simplistic (I hope) but I think you'll get the idea.
Ok. you are focusing on the interest but neglect to look at the money coming in.
Just say you leave your $60K in the managed funds for 10 years. 8% (minus tax = 5.6%pa- assuming 30% tax rate).
So compounded you will have (after 10 years) $70,665.Take that $60K and buy a house value $300K. 10% deposit + stamp duty etc.
OK you have a loan of $300K at say 7% interest. =$21K a year BUT rent will give you $18K minus costs = $15k. So you lose $6K the first year (- tax and depreciation) should cost you $3K max in the first year BUT the rent goes up each year so after 3 years you should be cash flow neutral. So for the next 7 years the rent will more than pay your interest. The last 5 years you'll actually have money in your pocket AFTER you pay the interest.
In the meantime your $300K property is now worth $600K (based on the assumption that property doubles every 10 years).So instead of have $70,665 you now have $300K equity. Sure you lose some if you sell CGT but that';s still a hell of a lot more than $70K. Also you now have $20% of a property but in 10 years time you've only got just over 10% of a property making it impossible to get in to the market.
The above is very simplistic (I hope) but I think you'll get the idea.
Thanks for your response Catalyst,
The only thing is you have calculated the Managed Fund incorrectly.
Interest paid monthly on a 60k account over 15 years works out to be $132,000 assuming i don't make any contributions to the fund at all.You have also assumed that housing prices will double in 10 years.
if the property market is flat or only slightly positive, the strategy is no better than putting the deposit in the bank, term deposit, managed funds, shares, ETF's ect…
Thanks for your response Catalyst,
The only thing is you have calculated the Managed Fund incorrectly.
Interest paid monthly on a 60k account over 15 years works out to be $132,000 assuming i don't make any contributions to the fund at all.You have also assumed that housing prices will double in 10 years.
if the property market is flat or only slightly positive, the strategy is no better than putting the deposit in the bank, term deposit, managed funds, shares, ETF's ect…
Yeah sorry about that. I thought it sounded too low. I have worked the figures on 10 years.
So there would be $104K in the account. I haven't included adding extra because it's not easy to calculate the extra payments going into the mortgage or the fact that you could have used that extra money to buy a second investment property in that time with that money.Yes I have assumed property doubles in 10 years as it's easier. Some don't, some more.
You are also forgetting that rents go up so the property becomes positive and pays itself off. Even though you have a debt it erodes over time even if you don't pay it off. I bought my first house for $60,000. Now imagine I never paid it off. Would I be happy having a $60K debt on a house that's now worth $300K. You bettya.I have a property that I have owned for 2 years (in Sydney so not booming by any means), It has risen 48% in 2 years.
I also have not taken into account that you don't (well I don't) pay full price for property. The idea is to buy under market so you have instant equity. I have also just done a quick reno which increased my equity by $30K. So I can now draw out the money I put in and it owes me nothing. That property, by the way is now cash flow positive so it gives me money each week too. Even if it never goes up (which it will) as rents rise it will pay itself off. Then I can sit back and live off thje rent. No bank acvcount will do that.Over time property rises more than inflation.
So on my (very basic) figures you would be ahead (if you sold).Sell $600K minus CGT and selling costs $250K. That's $146K more than your account.
By just saving you will never keep up with property.
OK my opinion. Take it for what it's worth. The numbers are simplistic (as I said). You need to read more and educate yourself.
Yeah sorry about that. I thought it sounded too low. I have worked the figures on 10 years.
So there would be $104K in the account. I haven't included adding extra because it's not easy to calculate the extra payments going into the mortgage or the fact that you could have used that extra money to buy a second investment property in that time with that money.Yes I have assumed property doubles in 10 years as it's easier. Some don't, some more.
You are also forgetting that rents go up so the property becomes positive and pays itself off. Even though you have a debt it erodes over time even if you don't pay it off. I bought my first house for $60,000. Now imagine I never paid it off. Would I be happy having a $60K debt on a house that's now worth $300K. You bettya.I have a property that I have owned for 2 years (in Sydney so not booming by any means), It has risen 48% in 2 years.
I also have not taken into account that you don't (well I don't) pay full price for property. The idea is to buy under market so you have instant equity. I have also just done a quick reno which increased my equity by $30K. So I can now draw out the money I put in and it owes me nothing. That property, by the way is now cash flow positive so it gives me money each week too. Even if it never goes up (which it will) as rents rise it will pay itself off. Then I can sit back and live off thje rent. No bank acvcount will do that.Over time property rises more than inflation.
So on my (very basic) figures you would be ahead (if you sold).Sell $600K minus CGT and selling costs $250K. That's $146K more than your account.
By just saving you will never keep up with property.
OK my opinion. Take it for what it's worth. The numbers are simplistic (as I said). You need to read more and educate yourself.
Another factor to consider is the returns each asset class would give you, the psychology of investing in a manged fund (or even trading), and whether or not you are comfortable with the more 'stable' growth of property against the volatile movement of the share market (although returns can be amazing in short periods) and managed funds and the more consistent income from property (historically low vacancy rates) against those of the share market. The loans and costs would be a consideration but almost secondary IMO.
Another factor to consider is the returns each asset class would give you, the psychology of investing in a manged fund (or even trading), and whether or not you are comfortable with the more 'stable' growth of property against the volatile movement of the share market (although returns can be amazing in short periods) and managed funds and the more consistent income from property (historically low vacancy rates) against those of the share market. The loans and costs would be a consideration but almost secondary IMO.
Thanks Catalyst and LH for your help, i really appreciate it.
I have a few other questions
The scenario is i decide to go ahead with an IP worth $380k whilst working fulltime (50k gross) but still living at home with my parents with only minimal expenses.
1- How much Deposit should i aim for?
2- Would an IO loan be best or should i try and reduce principal ASAP?
3- Do i need an offset account?
4- Is there anything else that i need to be aware of?Thank you in advance.
Thanks Catalyst and LH for your help, i really appreciate it.
I have a few other questions
The scenario is i decide to go ahead with an IP worth $380k whilst working fulltime (50k gross) but still living at home with my parents with only minimal expenses.
1- How much Deposit should i aim for?
2- Would an IO loan be best or should i try and reduce principal ASAP?
3- Do i need an offset account?
4- Is there anything else that i need to be aware of?Thank you in advance.
I don't think the average property is a good investment in this climate. You need something special to get any gains.
Assuming you could find a good property, why not do both?
take out your cash and buy a house to live in, get the FHOG and stamp duty exemptions. Stay for 6 months, do it up to maximise valuations and rent. Then move out again but to your parents and rent the place out. Hopefully the rent will almost cover the loan.
Since you have lived in it you could keep it as your main residence and thereby CGT free for up to 6 years.
You then reborrow against it and invest in managed funds. You will now have a property growing in value and a deductible loan for the same amount of managed funds you started with – if not more.
Generally you will need 5 to 20% deposit. Maybe try for 5% and pay the LMI as that will leave more money for MF investing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I don't think the average property is a good investment in this climate. You need something special to get any gains.
Assuming you could find a good property, why not do both?
take out your cash and buy a house to live in, get the FHOG and stamp duty exemptions. Stay for 6 months, do it up to maximise valuations and rent. Then move out again but to your parents and rent the place out. Hopefully the rent will almost cover the loan.
Since you have lived in it you could keep it as your main residence and thereby CGT free for up to 6 years.
You then reborrow against it and invest in managed funds. You will now have a property growing in value and a deductible loan for the same amount of managed funds you started with – if not more.
Generally you will need 5 to 20% deposit. Maybe try for 5% and pay the LMI as that will leave more money for MF investing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Always IO loan with an offset account. Always pay the interest as required, and funnel extra money into the offset, which holds off the interest. Then you either leave the money in the offset to pay the property off one day, or pull it back out to use it as a deposit on another property.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Always IO loan with an offset account. Always pay the interest as required, and funnel extra money into the offset, which holds off the interest. Then you either leave the money in the offset to pay the property off one day, or pull it back out to use it as a deposit on another property.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
JacM – usually, but not always.
Imagine he had a loan of $300,000 and $100,000 in the offset. He wanted to buy $100,000 worth of managed funds. He could:
A. use the money in the offset, or
B. he could pay down the loan and reborrow it to invest.At the moment this would not make any difference. But what would happen if he decided to move into the property and live there – say a year down the track.
If he used method A, he would be paying more tax – maybe $3,000 pa more.
Its a hard decision to make. And it is probably best to love the money in the offset as long as possible until investing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
JacM – usually, but not always.
Imagine he had a loan of $300,000 and $100,000 in the offset. He wanted to buy $100,000 worth of managed funds. He could:
A. use the money in the offset, or
B. he could pay down the loan and reborrow it to invest.At the moment this would not make any difference. But what would happen if he decided to move into the property and live there – say a year down the track.
If he used method A, he would be paying more tax – maybe $3,000 pa more.
Its a hard decision to make. And it is probably best to love the money in the offset as long as possible until investing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
JacM wrote:Always IO loan with an offset account. Always pay the interest as required, and funnel extra money into the offset, which holds off the interest. Then you either leave the money in the offset to pay the property off one day, or pull it back out to use it as a deposit on another property.Im a little confused, Using any loan repayment calculator, i would seem to save alot of money paying off interest+principal and forgot about the IO loan and offset account. Paying off principal + interest asap means my property turns to positive gearing much quicker which will help me afford a 2nd IP down the road?
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