Forums / Property Investing / Help Needed! / Need advice with first investment

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  • Profile photo of zgnilekzgnilek
    Member
    @zgnilek
    Join Date: 2011
    Post Count: 5

    Hi all,

    Found this site today and found some of the forum topics very helpful (especially the replies people were posting).

    I would dearly appreciate some input from people who have a better understanding and experience with investing.

    We are a young family, had kids in our early 20s, finally managed to buy our first home on a single income a couple of years ago and now are thinking about the wife going back to work.

    The property we bought (purchased for $330k – took out a $300k loan) is now worth circa $400k and we still owe circa $290k on the loan.

    I earn circa $110k pa and the wife is looking at entry level work so somewhere around the $40k to be on the safe side.

    I understand the difference between bad debt (which I finally managed to pay off) and good debt (which I want more of), but I do not know what my options are and where I should start.

    I am thinking of using the circa $100k equity in our PPOR to purchase an IP around our area (Berwick) with a purchase price of circa $330k.

    I just need some very basic advice on how to get from thinking about it to actually making it happen (treat me like a baby – cause that's about how green I am when it comes to investmenting in property).

    Any advice would be dearly appreciated.  I look forward to your replies.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi zgnilek

    Welcome to the forum.

    Congrats on purchasing your first home on a single income – it certainly isn’t an easy thing to do.

    You’re on the right track. Most first time investors tap into the equity in their home in order to fund the deposit and purchasing costs (stamp duty etc) on their investment property.

    In your circumstance, you could (depending on your current lender and their policy) top up your current loan up to 90% of the properties value, which would give you up to $70k to cover the deposit/purchasing costs on your first IP – some mortgage insurance will be payable since the loan is above 80% of the properties value (which can generally be added to the loan – so you don’t have to pay for it out of your own pocket).

    It’s important that you structure your loans correctly from the start so you avoid cross collaterising your home with your investment property and so you can also identify deductible debt (that used as the deposit/purchasing costs towards your IP) and non-deductible (your current home loan).

    Hope that helps – if you need anything else, just ask.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi!

    A couple of things to ponder:

    1. Your house is not bad debt as such, but is certainly non-deductible.  So you want to get that under control.

    2. Your house is worth $400k and you owe $290k.  Doesn't mean you can "use" the difference of $110k as a deposit for another property.  A lender expecting an 80% LVR (loan to value ratio) of you will require that you leave 20% in the deal.  So this means you have to leave 20% of $400k in it (which is $80k).  That leaves $320k. But you owe $290k.  So there is really only $30k to play with there.

    If I were you I would :

    1. ensure my home was on an interest only loan with offset account
    2. only ever pay just the interest – with all spare monies going into the offset
    3. get my head around the fact i'll be real glad i did steps 1 and 2 if i ever want to convert the PPOR home to an IP
    4. save my butt off for a year, funnelling all spare cash into the offset account
    5. meanwhile, read read read, choose a suburb for the IP and visit plenty of open for inspections, and find out what type of properties are in rental demand in that area
    6. you would be surprised how long it takes you to be rock solid with knowledge in your target suburb.  a year will elapse before you even notice.
    7. apply for finance.  DO NOT offer your home as security for the IP loan.  go to a separate lender if need be.  they can take one mortage for 80% of it, and a "second mortgage" against your home for the remaining 20%
    8. buy!

    Others might respond differently.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Personally, I don’t see a problem with topping up a loan above 80% LVR (this is only my opinion – and not advice). It sure beats saving like crazy, it allows me to get into the market sooner and I’m using more of the banks money (instead of my own). Again, this isn’t everyone’s cup of tea and this sort of decision obviously comes down to the individuals own risk profile.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Agreed Jamie!  Depends ho much risk someone can take on and still be able to get to sleep at night ;-)  I'd stress too much and die of a heartattack I think hehehe

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of zgnilekzgnilek
    Member
    @zgnilek
    Join Date: 2011
    Post Count: 5

    Thanks for the replies, definately confirming what I thought.  I am quite comfortable with a 'higher risk' strategy of going into the 90%+ LVR margin (my personal finances have quite some room for servicing investments – but I am absolutely hopeless at saving).

    Thus I would prefer to get into a situation where I have obligations to service, rather than be a good little soldier and save (which I know I won't do).

    Having said that though, I am also somewhat curious as to how I am best to purchase my first IP.  I obviously want to protect and isolate my investments (there will be several) from my personal income and PPOR.  Is that possible through trusts?  If so, has anyone got some knowledge on this – and could they post a skeleton outline of the basic outcome.

    Also, having researched this topic some more, I am leaning towards our first investment being a middle-of-the-road investment.  What I mean by this is a property with scope for a 4%+ rental yield and in an area that still appreciates reasonably (8-11% per annum historically).

    The reason I am thinking that's the way to go with first IP is due to cashflow (I just don't know exactly what to expect).  But at the same time I don't want to purely buy a positive property (since I also want the long term benefit of value growth as I am planning on revisiting my available equity in a year or so to purchase another).

    Am I still on the right track or did I perhaps get off the beaten path somewhere in this process.

    Once again – any advice is greatly appreciated, I'm like a sponge currently.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Zgnilek

    If you do a search on trusts you’ll find a whole heap of information.

    I’d also seek expert advice on the matter from an IP savy accountant.

    For what it’s worth, a low yielding IP purchased on a 90% lend is going to be negatively geared by quite a bit. Probably not the ideal property to be placing in a trust….but that’s just my opinion.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of zgnilekzgnilek
    Member
    @zgnilek
    Join Date: 2011
    Post Count: 5

    Jamie, fair enough.  Won't I be able to offset losses made by trust owned investments against my personal income?  I thought that as an owner of the trust I get to ultimately offset any losses against my personal income.

    If the above is not correct, is there a way to include my personal income into the same batch as negatively geared investments whilst still providing seperation between my PPOR and any IPs that I have?

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539
    zgnilek wrote:
    Jamie, fair enough.  Won't I be able to offset losses made by trust owned investments against my personal income?  I thought that as an owner of the trust I get to ultimately offset any losses against my personal income.

    No, your trust would be a separate entity from yourself. So it is kind of like a separate person.  It submits its own tax return.  It's a bit like saying "Can the bloke that lives across the street mark his investment losses on my tax return?"

    zgnilek wrote:
    If the above is not correct, is there a way to include my personal income into the same batch as negatively geared investments whilst still providing seperation between my PPOR and any IPs that I have?

    Your IP will be on a separate loan anyway, so if you buy the IP in you name, the two properties will be separate.  One way of negatively gearing the property, but not owning the property in your name is to do everything through a company and trust structure (open a company, receive you day job income into it, company has a trust it uses to buy property etc). So you'd also have some asset protection.  Such setups are complicated – you would want an investment-property-savvy-accountant.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    You can only negatively gear in hybrid or unit trusts, not discretionary trusts. Hybrid trusts are a strange animal, so you need to talk to someone who relly knows what they are doing. The ATO is cracking down on hybrid trusts so I did not go down that route when I set up a trust.

    If you are using a discretionary trust, you do not 'own' the trust so you can not negatively gear.

    Luke.

    Profile photo of BluegrassBluegrass
    Participant
    @bluegrass
    Join Date: 2009
    Post Count: 73

    As both Jamie M and JacM state, there are a number of ways to go about this.
    With you total gross income being so high, your thoughts on 90% would seem founded.
    As your safe input is considered the least amount you could put into an IP, can I suggest the NRAS product.
    I have done some sums on our NRAS calculator and the following figures (they need to be confirmed by a licensed finance consultant) are the outcome.
    NB, the product is in Queensland, we are looking at a parcel of land at Soldiers Road, in Berwick but it is a good time away from being sorted.

    The house purchase price is $370,000
    Your contribution is $37,000 + costs
    Your expected tax deduction using depreciation and NRAS deduction is approx. $9,400
    The result is that this property will put approx. $63.00 in you bank account weekly.

    Disclaimer: This is only an example for the purposes of research.

    I know others are against the NRAS system and so was I a year ago.
    They (the government) have finally figured it out and there are people close to us that are all having a good experience from it.
    Bluegrass

    Profile photo of zgnilekzgnilek
    Member
    @zgnilek
    Join Date: 2011
    Post Count: 5

    Bluegrass – I have no idea what a NRAS is, maybe you could provide a brief outline.  I agree with your 'Live Curious' sig.

    Jamie M – you state that 4%+ is low yield on rental.  Correct me if I'm wrong, but I thought 4%+ rental yield is reasonable for a property that is expected to appreciate consistantly at 8-11% pa.  Please explain.

    So in summary, I think that I need to do the following:

    1. Meet with my current lender (CBA) to find out what my borrowing power is (I have little intention of actually going with them – but I figured I can waste their time since I'm paying for it).
    2. Find and meet with a good financial adviser to clarify what the best option is for me with regard to owning the immediate and future IPs.
    3. Confirm that my plan of buying middle-of-the-road IP first is indeed the right thing for me.  (would love input on this from the forum community)
    4. Start going to some open for inspections and feel the market out in chosen suburb by placing some horribly under-valued bids (just to judge reaction and thus get an idea of what the market is like for properties that I am looking at), if one of these offers gets accepted – great.

    Finally, does anyone have a link to a good reference point with regard to buying new (under 3 years old) vs buying established (10+ years old) from a taxation point of view (idea here is to get as much of my tax to pay for my IP as possible).

    Thanks again to everyone who replied so far – much appreciated!

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    If you google NRAS (National Rental Affordability Scheme) there is heaps of info.  The general idea is that the government pays a portion of the rent, and that portion is guaranteed for a certain number of years.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    zgnilek wrote:
    Jamie M – you state that 4%+ is low yield on rental.  Correct me if I'm wrong, but I thought 4%+ rental yield is reasonable for a property that is expected to appreciate consistantly at 8-11% pa.  Please explain.

    There is no right or wrong – different strokes for different folks. To me, I’d consider a 4% yield low. Something yielding 4% is likely to cost me a fair bit to hold onto – I’d prefer something a little higher.

    You can play around with this spreadsheet to work out how much it will cost you to hold per week – http://www.passgo.com.au/pass-go-investment-property-analysis-tool

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of BluegrassBluegrass
    Participant
    @bluegrass
    Join Date: 2009
    Post Count: 73

    I agree with Jamie M, 4% is low when there is some good stock in the market at the moment and the yields are all over 4%.
    In fact the NRAS product I wrote about is 6.84% and gives you another $60.00+ per week in you account.
    Bluegrass

    Profile photo of zgnilekzgnilek
    Member
    @zgnilek
    Join Date: 2011
    Post Count: 5

    I think I owe you guys some more details when I ask for your opinion, so here's particularly what I am looking at:

    IP Acqusition Price:  $340,000
    Loan amount: As much as possible (95% if approved, if not 90%)
    Weekly Rent of Comperable Properties in that area:  $325-345
    10 Year avg value increase:  9.90%
    My income tax bracket: 37%

    So with the above, I would be working on a rental yield of around 5% in a fairly good historical growth area.  So the way I look at it – I get a property in an area that I am comfortable with, has an ok rental yield and also has an ok historical growth.

    My understanding is that at the entry point to investment (low equity / deposit), there are usually two strategies, first being high value growth (buying in a high growth suburb – usually expensive, thus providing fairly low rental yield and putting pressure on cashflow) or high rental yield (low risk with low pressure on cashflow, but the tradeoff usually is lower value growth).

    Do you agree with my understanding or did I get it all wrong (note, i'm not interested in rural or interstate property).

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    I agree with your understanding re high capital growth/low yield and vice versa. However, there’s often exceptions to this rule with decent yield and decent growth being achievable in certain areas.

    Like I said before, there’s no wrongs or right and if you ask for an opinion your bound to get a number of different points of view.

    I think what’s important is that you do something.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of ScottsdaleScottsdale
    Participant
    @scottsdale
    Join Date: 2011
    Post Count: 63

    Thanks Bluegrass for mentioning the NRAS, my 'learn something new every day' goal was fulfilled within 2mins of logging on. Seems like an interesting avenue to engage in, especially as there's always demand for affordable housing. Will look into in more detail.
    Cheers for the Property Tool Analysis spreadsheet too, I'm sure it will prove invaluable in the the near future

    Regards,

    Derek

    Profile photo of BluegrassBluegrass
    Participant
    @bluegrass
    Join Date: 2009
    Post Count: 73

    Hi Dloy
    It about building a bigger bank account using other peoples money. Easy really when you have an open mind!
    Love you signoff comment
    Bluegrass

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