Hi Guys,
I am planning on buying my first IP, I seeked helped from a property investment advisor, his basic plan of investing was to use the equity from your own home to buy the first IP which would mean in our case we would have to fork out approx $100-$150p/w for the investment. Then to purchase the next IP we would have to wait for the first IP to increase in value to use that equity to purchase the second IP. From what he was saying it’s about 4 yrs in-between properties, this allows the out of pocket expenses to reduce on the first IP and build enough equity to purchase the second IP. Obviously it’s a neg gearing style of investing which restricts the amount of properties you can buy. This investor only deals by building new properties, not buying already established homes. They take care of the whole process from start to finish and pay us rent if the place is not tenanted within 4 weeks. His reason for only investing through building is because of tax benefits of a new property, stamp duty savings and less maintenance costs.
Our aim is to pay off our mortgage of 368K and produce an income of 50K to replace my wife’s income so we can start a family. We have 120K saved and our combined income is 100K.
Is the method of investing common or is there a more suitable method for our situation and goals?Look forward to your responses.
Regards,
FF430.
I am not a fan of negative gearing and im sure you will get more posts from others saying the same. The advisor would get a cut from the builder for the property he is selling you.
I buy properties below market value, renovate them, pull out equity and then rent them for neutral cashflow and move on to the next.
EngeloRumora | Ohio Cashflow
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If you are negative gearing, you are making a loss. You will be able to get a portion of this loss back by claiming it against your tax return, but make no mistake, you will not get all of it back. So overall you still make a loss.
Either way, in order to negative gear, you need an income to claim the loss against. What if you lose your job? This would be a big game changer. Anyway, isn't the objective of investing to edge towards not having a job, rather than digging yourself deeping into the need to have a job?
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
FF30,
The entire basis of this plan that has been put together for you is continued growth in real estate prices. If you don't get growth in the 1st IP then the 2nd is delayed isn't it ? Your aim is to pay off your mortgage and create a further income of $50,000 per annum. If you told the property investment advisor of these goals & you wish to pay off the home mortgage of $368K and have a family planned…..how is an investment that is costing you between $100-$150 per week in addition to what you currently outlay going to achieve these goals ? At the end of the day a loss is a loss no matter how you try and gloss it up and unless your on the top marginal tax rate…negative gearing has lost it's glamour over the years anyway.
I hazard a guess the only person's goals being achieved in this case is the "advisors" own financial goals of getting another sale. Neutral or positive cashflow is what you need.
Sounds like you seen a property sales person rather than an investment advisor. Be very careful
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
FF430 wrote:Our aim is to pay off our mortgage of 368K and produce an income of 50K to replace my wife's income so we can start a family. .Hi FF,
It would appear as if your aim is not consistent with the proposal put on the table.
Bottom line is if you want to pay off your home sooner and replace your wife's income then you will need to look at other investment strategies.
As others have said negative gearing relies on the property increasing in value. I would hasten to add the $100-$150/week shiortfall is based on taodays interest rates – any increases to these and your shortfall will increase by a similar margin too.
I might add the 4 yrs between purchases and reduction of costs is something no-one can predict.
Hi All,
Thank-you!! You have confirmed my suspicions about this advisor and his methods. I definitely didn't see any gains for myself using this method.
Can any of you suggest a strategy for my situation and goals?
Kind Regards,
FF430
Hi FF430
Why not grab a copy of the Australian Property Investor magazine and study the rear pages (statistics). Look for suburbs that have good historical capital growth (at least 8% listed in the 10 year annual capital growth column), above 6% rental yield, and below 3% vacancy rate. Better still if there is new infrastructure coming to the suburb that will make it more desirable to live in. Things like new roads, rail or shopping centres. But honestly, you want the suburb to be doing well now, not based on promises that might fall through. If there is a huge gap in price between unrenovated and renovated places, fantastic. You can do a very serious overhaul of a one bedder unit for under $20k, and for this you'd get new kitchen, appliances, new bathroom, new split system, new floor and wall tiles, new carpet, some new doors and handles, new paint, new security screen doors…. So say unrenovated units are going for $200k and renovated units for $60k, there is a good opportunity there. You could reno yourself (or pay tradies to do the various components… you just direct traffic so to speak).
Get to know expected rental yields for the suburb by watching http://www.realestate.com.au/rent and also speak to a few local agents. Then you will understand say how much per week you'll get for a 3br house that is unrenovated, versus renovated.
Remembering that there are buying and selling costs associated with property transactions, you'd want to be careful of a buy, reno and sell strategy. The margins might be a bit skinny. However a strategy such as the one below might suit you;
1. Buy # 1
2. Renovate
3. Contact mortgage broker and arrange revaluation so you can find out how much equity you've created – use this equity for deposit on next purchase
4. Do a depreciation schedule (google this) so you can get tax benefits for all the new stuff you've just put into the property
5. Put a tenant in for higher rent than you would have got if you did not renovate
6. Buy IP # 2…. and repeat
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Jac M,
Great advice, very much appreciated!!
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