Hi guys,
Long time reader don't post too often….
My wife and I are looking for our first property, we have two kids and we are now working full time again. Combined income of 160K
We live in a fairly humble home in Melbourne that it worth approx 400k with 300k owing on it. We also have 50k in the bank.
Now I can't get my head around this….. We are looking for a property that will have capital growth 10-15ks from Melbourne, given that house prices are going to drop further (accorsing to most) should we be buying now or putting more money on the home loan? I can't justify buying a property for eg.. 450K for it to go down to 400K then wait 7-10-15 years for the moarket to gain steam again.
So from my limited knowledge capital growth takes a hit on rental return, where high yeilding retals don't have great capital growth (country towns etc)
So would it be correct to assume I could lose some serious money in the short term???
I know there are poeple who will be writing the reply 'hold on to it over the long term and you will be in front' I agree, but I would rather buy at as close to the bottom of the dip as possible then watch it slide for another 6-18 months (again from what I have read)
Thanks for your time in advance
Mick
Hi Mick,
As an investor (in any asset), you are taking a risk. Yes, there is a risk that in the short term, some property prices might slide.
So if you’re sure property is the way to go, you pick the right property, you make sure you can ride out all the bumps along the way – like renovation costs, interest rate rises, vacancies, tax, even property price falls. Ask yourself what your timeframe is, what your goal is, what your best case, worst case and exit strategies are.You’re already 75% geared on your own home, with only $50k cash. To buy a property around $450k, you’d need a $90k deposit to avoid lenders mortgage insurance, and then there’s costs as well.
Sorry to be blunt but I think you would be over extending yourself if you go for another one at $450k. But that’s not the only strategy to use.If you even think you can try to time the market, you’re in the wrong game. Yes, for capital growth alone (if thats your only strategy), it is time in the market, not timing the market, that will make you dollars. If you genuinely believe property prices are going to fall in the next year or two, then obviously now is not the time for you to buy another property. Use this time to educate yourself, build a bigger financial buffer, decide your strategies and structures, ready for the next upturn.
Also weigh up the cost of doing nothing, too.
What are your plans?
What are your ages?
How old are the kids? Will there be additional education expenses for them soon?
What is career stability situation?
How are you going preparing for retirement with/without this property?
I often find people focus on the property rather than considering their whole situation. Spend a little time addressing some of the questions I have posed along with a myriad of others and you'll get a better understanding of what you should do.
Property is only the vehicle for your journey. You need to know the journey.
You cant guess what the market will do. You can only find a way to make money in the current market, and any capital growth you get is just a cushy bonus (re your idea of holding it long enough)
I am a big proponent of just getting into the market, but research how you can make money in this marketplace, and dont dwell too much on what will happen in the future, you cant control that, you can only control today.
Good luck
Hi Mick,
Derek has made some very good points, look at the wider picture rather than just say ‘we won’t a IP’.
If you come full circle, I’d suggest investing in QLD – I live in Sydney but love investing in QLD – my two favourite right now are Mackay and Townsville. Both these areas are continue to grow (rather than a flat outlook for Melb), they both have multiple industries, increase population growth, government and industry investments plus if you invest in a new (house or unit) you get 10K from the QLD Gov (http://boost.treasury.qld.gov.au/buying-or-building/index.php), plus set it all up correctly and there are tax benefits.
I’ve mentioned it on a few of my other posts but I also like investing in shares as you can make both wealth creating assets work together!!
Good luck
Thanks for the replys guys!
To answer your questions-
We are both 30 years old, kids are 3 and 1
Job stabilty is very good, I am in an industry with skills shortage and my wife is a teacher (recession proof).
Retirement?? I'm only 30 lol!! Still got a good 5-10 years before this investment property adventure sets me up lol!!! Realalistically love to retire at 50
We are looking particually to have some money in property that we can use it to send the kids to private school (if required) in 10 years time.
I would also love to get a boat sooner rather then later
I can understand the 'timing isn't everything' when it comes to investing and property is a long term investment, but I can't understand why I would 'jump in' so to speak if I can wait a few months and get in once the market is back in bussiness.
We will also be able to aquire a unit in 1-2 years time for the cost of the unit only (wife's parents are developing there block with 6-8 units) so there will be some equity in there too.
To be completly honest I am looking at all types of properties at the moment (they seem cheaper than ever in Melbourne) At 500k we can repay the payments quite comfortably and even look at plans and permits for units or perhaps doing the units ourselves.
So as you can see I have many ideas and lots on enthusiasim without a great deal of knowledge. Basically with the wife going back to work I want our money working for us while we are still young enough to get the benifits when we retire. Based on the 'property doubling every 7-10 year theory' we would have 2 mill on this one place with 2 or 3 more in the bank by that stage (I hope so anyway)
Hopefully my thinking/confusion is somewhat on the right track.
Thanks again
Mick
If you have family with experience in developing, learn everything you can about how they are doing it,then replicate the process yourself. It is where the real money is to be made in property. Instead of purchasing at retail prices, you are creating value at wholesale prices. You don’t need to wait for capital growth and can instead manufacture significant profits up front. It took me years to realise this, but I don’t see myself buying at retail prices again.
Hi Mick,
While you have some time on your side – time can quickly eroded and it then becomes your enemy very quickly. Serioulsy I have lost count of the number of times people come through the door with 5 year s left to work who suddenly decided they need to buy a property becuase they plan on retiring soon. If only they had done seimthign sooner.
Anyway back to your situation……………………
Things in your favour; age, both working, solid jobs, some assets in place already, kids are relatively inexpensive (this will change), and family has some experience with developing. (?)
You haven't indciated how much experience your wife's parents have developing. Often mum and dad investors get the developing bug after property has surged in value and they also want to get in on the act. Unfortunately their inexperience and the changing market can see many fidning themselves in some distress because of a range of factors outside of their control.
On this note I would not be 'banking' on a sure thing with this possibility. There is more to be made leading into a price surge than at the end. Like you I believe the Melbourne market has had its run and its time to look elsewhere.
As a footnote you may wish to consider placing your cash savingsin an offset account linked to your own mortgage.
In a position where you dont have too much to risk by extending yourself a little .. go ahead and buy as much property as you can for your buck. If you are more worried about a significant drop in property prices .. head out to a situation where there is less of a risk. As you are earning and could do with the tax benefits that can be established from having an investment property you should take full advantage of that.
In the current market there are still positively geared properties to take advantage of .. and deals that can be made that are worthwhile. My last seventeen purchases all start with a return over the 7.2% mark and surprisingly .. 6 are in the metropolitan area. People keep saying .. what about the capital growth? Make no mistake .. i want my capital growth. But I also want my investments to pay for themselves and pay well. If the properties dont meet my stringent criteria .. then they dont get chosen.
There are too many people who think investor wealth is all about buying a property and hoping that when you come back to it in 6-8 years you can at least get your money back. Its not .. its about recognising that your property meets a social requirement that someone will pay money for .. that the area remains in demand .. and the property is worth having as an asset in later years. Yes .. thats right .. property is still an active investment.
If you are looking to swap and trade property .. now is not the best time to do that .. simply because the buyers have put their purchasing on hold. It is however a great time to do the bits that usually take time to do .. like renovating .. or painting .. or passing permits through council. Its also a good time to pickup the ones that are great value.
Again thanks the the replys guys!
The property development by the wife's folks is literally the first time they will be doing it…. But they have the advantage of both working within the building/property area, so without trying to sound like a 'user' their risk will be my gain, and if is does not come about then I will move on to another area for investment. Obviously getting a 400-500k property for 200K will be a no brainer if it does come to fuition.
Derek, we do have our savings offsetting our loan at the moment too
I would love to know what suburbs in Melbourne have a 7% rental yeild in suburbia, or positivly geared……
One thing I don't particually want to do would beto buy outside of somewhere that I can drive to. So I would include nearly all of Victoria, but I like the idea if the proverbial hits the fan I can drive to either an estate agent or property to sort it out ASAP.
Being involved in fishing I find it amazing how far people walk/drive/boat to a spot with so many other spots close by….it's kinda like tricking yourself into thinking your working hard to get somewhere so it has to be better then the close spot…. I know people with lots more experience in investing could see the flaw in my plan but hopefully leaving my investments in Vic won't hurt too much (at the moment anyways).
Oh and wind turbines…. where do I sign!!!!
Thanks
Mick
Hi Mick,
You are in a good financial shape, you are offsetting your mortgage, you have a solid combined income, equity and savings. You really are in a perfect position to enter the investor market. Should you wait for prices to drop? You could, but the wonderful thing about property investing is that you can make money at any stage of the property cycle if you buy the right property at the right price.
As an investor you ultimately want strong capital growth AND strong rental yield as well as low vacancy rates. Sounds like an unattainable perfect formula doesn’t it, but it is attainable – you just have to know the right areas.
You are correct that generally people will either focus on capital growth at the expense of rental yield or visa versa and serviceability is usually what influences the decision one way or the other.
A strong rental yield along with depreciation is what will offset any holding costs (along with tax reduction) if you want a neutrally geared property.
If you are wanting to offset your tax and don’t mind negative gearing for a few years while your property value is appreciating then you may not be so worried by lower rental yields.
But as you mentioned, property may be in for more of a bumpy ride on a downward slide in value, especially in the CBDs and if interest rates rise in a few years time, you don’t want to be stuck with higher holding costs and a property that has dropped in value.
However, it’s not all gloom and doom. If you are wanting to see strong capital growth even in an overall down economy, it’s entirely possible. Now be open here, you need to look beyond the borders of Melbourne. Melbourne has shown tremendous growth and been overheated, whereas certain regional areas are booming.
You mentioned you want to be able to drive to your property. While I understand your thinking (my first investments were within driving distance, now they are interstate from me), it’s important to remember why you are investing in property – to build your wealth and financial security! There’s no point in buying the property next door because you feel safer doing so if the property prices in your area are headed for a slump.
For example, a few years ago, Western Australia was going nuts, and recently Melbourne, however right now regional Queensland is what’s going nuts. The resources boom, growing infrastructure, work opportunity, housing shortage and the QLD gov building boost all make QLD regional property investing where the smart money is. Townsville, Mackay, Gladstone, these have been mentioned for good reason. You can buy and hold or build/develop etc and make money in several different ways. These regional areas are offering strong capital growth and handsome yields, you could definitely build a solid portfolio over the next five to ten years and generate more than enough income per annum through property to send your children to a private school.
Be brave and consider all your options, even if they are outside of the city or interstate. Property investing is fluid, you want to invest where the smart money is NOW, not where it’s easy to drive to. That’s what property managers are for!
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