All Topics / Help Needed! / Best Investment/Financial Strategy

Viewing 20 posts - 1 through 20 (of 22 total)
  • Profile photo of arope99arope99
    Participant
    @arope99
    Join Date: 2012
    Post Count: 5

    Hi,

    My wife and I are currently in the process of finding the best strategy for our financial conditions. We have lined up a few different options, ad I’m just wondering what this forum community thinks about these options. We will certainly get some professional advice from an accountant or financial advisor, but it would be great as well if we can get some opinions from this community.

    Here’s our current situation now:

    I have a full time permanent job that pays around $75,00 before tax annually, while my wife is a full time housewife. We have a 2 years old daughter and expecting another baby in July. Over the last 2 years or so, we have managed to save around $40,000. We live in Adelaide (close to the city) and currently renting a townhouse for around $450 a week. We have a uni student staying with us, so effectively we pay around $300 for rent per week.

    Our target is to have as much savings as possible (hopefully around $150,000) in the next 4 to 5 years time to purchase our own home.

    Here’re the options for our next financial strategy:

    Option1:

    Continue renting (at around $300 per week), and use some of our savings to purchase an investment property (unit/apartment) around $200,000 (in Eastern or North Eastern area of Adelaide) to get as much tax benefit as possible from negative gearing. We will continue put savings in our First Home Saver account and then use those savings plus the equity from the investment property as deposit to purchase our own home in 4 or 5 years time.

    Option 2:

    Continue renting (at around $300 per week), and don’t but any investment property (to negate any risk associated with this investment). Continue to put as much savings into First Home Saver accounts and other high yield savings account/term deposit. Then 4 to 5 years time use the savings as deposit to purchase own home.

    Option 3:

    Stop renting, and buy our own home now (though will probably not the one we really like). We could purchase a 2 bedroom townhouse or unit close to the city area at around $300,000, and contribute as much as possible to pay off the mortgage for the next 4 or 5 years. Then, either sell the home or rent it out and buy our bigger dream home.

    Any opinions about those options (pros/cons, etc) are highly appreciated.

    Thanks.

    Profile photo of Nick KirlewNick Kirlew
    Participant
    @nick-kirlew
    Join Date: 2006
    Post Count: 20

    Hello aRope99,
    I suspect you will get a few answers to this question so I will travel lightly and make no recommendation.

    Option 1
    Sounds good but I would want be looking for a property that either grew in value, paid good rent (or both) before I was looking for a property that provided good tax deductions. That being said if you can get a property were capital gains are likely that rents well and is new or new near it is a perfect storm and will help with tax minimisation. There is additional stress in being a property investor and you need a buffer particulary with another child coming on.
    What are people saying about the Adelaide property market, especially the area you mention? Are many people moving in, is there low rental vacancies and so on …

    Option 2
    My least favorite option due to opportunity risk, if you buy today at today's price in 5 years time the property will be worth more and each dollar paid will be worth less.

    Option 3
    That is how we did it, brought a home, waited and used the equity to buy another in 5 years time. BTW we did not pay off much on the mortgage, see option 2. in 21 years $89k property now worth $450k still owe more than $89k.
    So maybe put your savings in an 100% offset account so that comes the time for a slightly better home you have a deposit at hand …

    Regards

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

    Option 1 – I wouldn't be purchasing an IP to benefit from negative gearing. Your borrowing capacity and disposable income will be pretty low whilst living off one income. Having an IP that's going to cost a fair bit to hold doesn't sound like a good idea to me.

    Option 2 – If property prices move, you'll be chasing your tail. I would be inclined to buy when you can afford to buy.

    Option 3 – I like this option accept the "pay off the mortgage" part since you've indicated you may rent it out. This is a serious mistake. Here's a blog entry that explains why.

    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 grantos_champosgrantos_champos
    Member
    @grantos_champos
    Join Date: 2009
    Post Count: 106

    we had the option of buying or rent and keep saving. We decided to buy for a couple of reasons. First we were sick of renting and wanted something we could play around with. Second we were able to grow equity quicker than saving by renovating. And third interest payments are slightly less than comparable rents. I find it alot more satisfying having my own “castle” than renting. Were in a similar situation 80k income with a baby and partner at home. We managed to save about 40k in 9 months before bub came along and then bought. We still save as much as we can, utilise offset account and use 55days interest free credit cards to maximize the benefits of offset account. I wouldnt have done it any differently

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Option 4.

    Buy a PPOR now get the FHOG and stamp duty concessions if possible (New concessions announced yesterday in SA for apartments, but may not suit you).

    Move into PPOR to establish it as your PPOR. Get IO loan, 100% offset.

    Move out and rent your PPOR.

    Moving in will allow you to establish it as your main residence and keep it CGT for 6 years while renting it (under certain circumstances). And you can get the grant etc. Then renting will allow you to claim all associated costs with the property and to reduce your income tax.

    Best of both worlds, but a bit of hassle moving twice.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of DerekDerek
    Member
    @derek
    Join Date: 2004
    Post Count: 3,544

    If I was in your shoes I would go with Terry's suggestion.

    Whichever option you choose just make sure you do not over extend yourself. Interest rates are set at pretty low levels at the moment.

    When doing your sums make sure you factor rate increases into your household budget.

    Profile photo of arope99arope99
    Participant
    @arope99
    Join Date: 2012
    Post Count: 5

    Thanks a lot for your opinions. We really appreciate it. It seems like buying a PPOR now with interest only + offset account seems to be the best way. We’ll start budgeting now and looking at properties/finance options.

    Any suggestion of the best home loan product with interest only + offset account. I’ve contacted a mortgage broker and he’s looking into it.

    Thanks.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    arope,
     
    Why not just contact Jamie who has already responded to your post and has considerable experience in the matter and get him to organise it for you. It is impossible for any of us to give you a recommendation without knowing all the pertitant facts.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of FreckleFreckle
    Blocked
    @freckle
    Join Date: 2012
    Post Count: 1,680
    arope99 wrote:
    It seems like buying a PPOR now with interest only + offset account seems to be the best way. We’ll start budgeting now and looking at properties/finance options.

    I’m somewhat amused by these kind of threads and a little sad to be honest. Young guy, young family, focused, disciplined approach to developing a wealth plan and by all appearances has his (their) act together.

    So why do people ignore the elephant in the room.

    Right now I’d rather invest money in my nieces lemonade stand than put a dollar into property and someone slap me blind if I ever contemplate anything in SA let alone property.

    The only option!!

    Keep your money in your pocket and watch and wait. We’re approaching the event horizon for GFC v2. If it becomes as bad as some predict you might get 25c on the dollar for property you own today if your lucky.

    Profile photo of JpcashflowJpcashflow
    Participant
    @jpcashflow
    Join Date: 2007
    Post Count: 575

    Hi Freckle,

    GFC 2 has already started, in-fact we never really go out of GFC 1.
    Its only money and money only buys you options, the key to being wealthy is to train your mind, your mind is your greatest assets.

    The economy will always go up and down, its happened in our past, our present and our future, the key is to adapt to any situation and live, not live in fear.

    Cheers

    Jpcashflow | JP Financial Group
    http://www.jpfinancialgroup.com.au
    Email Me | Phone Me

    Your first port of call in finance :)

    Profile photo of Shiny_Suit_ManShiny_Suit_Man
    Participant
    @shiny_suit_man
    Join Date: 2012
    Post Count: 54

    Well said JP. I agree entirely, however myself I am basically just sitting back watching the market, and concentrating on paying down any unnecessary debts right now as although i believe we never really came out the other side of GFC 1, i think things are about to get a hell of a lot worse before they get any better. So paying off as much debt as possible at the moment before the world goes belly up again i think is important so i can set us up to strike when the time is right in the future. I think that this approach will be much more effective when it comes to growing my small (but still existent) portfolio. I also have the option of taking part in a discount stock purchase plan which is salary sacrificed through work and I’m considering sneaking into that as a way of investing and hopefully growing myself a nice little deposit for when that time arrives.

    Having said that, while now is not really the best time given my current situation for me personally to be investing, that doesn’t mean that someone else who’s under completely different circumstances and is more aggressive than i can’t be buying up a storm. At the end of the day, what goes down must come up, it just depends on where and how much you are prepared to risk to get ahead long term.

    Thats my 2c, but i’m no pro investor either, I’m still only getting started.

    Profile photo of PISTOREPISTORE
    Member
    @pistore
    Join Date: 2012
    Post Count: 75

    A couple of things.
    Owning your own castle is overrated! Believe me when I say this as it is based on almost 2 decades of showing people how to get rid of this debt, or financial cancer as I call it.
    Once you get a mortgage, and are on 1 income, forget it. Life will stop dead, you won’t be able to borrow any more money for investment as you’ll be mortgaged to the eyeballs and until you double your income or your wife goes back to work this won’t change.
    Meanwhile 10 years will fly by and you will still have a mortgage on a home that may be worth a bit more, but the mortgage will be much the same.
    Short term pain for long term gain. Renting for the next 3-5 years won’t kill you, but if you invest in the Right places, you could put yourself years ahead in terms of your mortgage size by using the money made from your investments as a bigger deposit.

    Secondly, this is for all the alarmists out there. Sure, the world is having some financial problems, but I can assure you, there is PLENTY of money to be made in Australia over the next 3-5 years, if you know where to look.

    In summary, do what your parents did and you’ll end up like them. Most of them have nothing now in their retirement because they wanted the great Australian dream, and now they’re up the creek without a paddle.
    Do what the numbers are telling you to do, suck it up and continue renting for a while, while investing and you WILL reap the rewards.

    Profile photo of arope99arope99
    Participant
    @arope99
    Join Date: 2012
    Post Count: 5

    We’ve just done a spreadsheet comparing these 2 options.

    OPTION 1

    Buy our 1st home for $300,000 (with 10% deposit, interest only with offset account, and put $2000 in the offset account each month). Stay there for 5 years, then rent it out. Take the money out of the offset account and use that as deposit to purchase a new bigger home.

    After 5 years,
    Cash in offset account = $120,000
    Home equity = $30,000 (assume no growth, just difference between home value and principal)
    TOTAL = $150,000

    OPTION 2

    Continue savings in both my wife and my First Home Saver Account (total of $11000 a year 17% pa interest) for the next 5 year. Then save about $1000 a month on other high interest savings account (min 5% pa, under my wife’s name – no tax).

    After 5 years
    TOTAL = $195,000

    This is not taking into account any salary increase, etc.

    There’s about $45,000 if we continue to save in 5 years. Do you think property valued at $300,000 now would increase more than $45,000 in 5 years time?

    Is it still worth purchasing a property now?

    Thanks for all the opinions.

    Cheers.

    Profile photo of FreckleFreckle
    Blocked
    @freckle
    Join Date: 2012
    Post Count: 1,680

    99 here’s something to contemplate.

    Forget the 10% deposit. You’ll basically loose that in entry costs. Scratch $30k

    Property in general is moving south but of course everyone remains optimistic to the point of delusion that somehow but somehow a miracle will happen in the world and the trillions in global debt that can’t be serviced let alone paid back will miraculously disappear somehow. But Australia is different even though it’s economy is about to officially go into recession in the coming months.

    So if property continues to slide you could within 12 months have negative equity. It will only take a 3% move and you’ve done your doa!!

    Here’s a simple risk assessment.

    …hold onto your money = 100% guarantee you’ll still have it later

    …buy now = $30k out the door, 80% chance property will loose value, 10% it will hold, 10% it will increase

    Pretty simple really. Hold onto your money. Only fools buy before a crash.

    Profile photo of NHGNHG
    Member
    @nhg
    Join Date: 2010
    Post Count: 198
    PISTORE wrote:
    In summary, do what your parents did and you'll end up like them.

    Haha,

    Tried explaining that concept to my dad, he was understandably very upset.

    He struggled to understand why I talked to my accountant for accounting advice, the lawyer for legal advice and the friend who owns 50+ properties for property investing advice instead of asking him.

    Profile photo of Nick KirlewNick Kirlew
    Participant
    @nick-kirlew
    Join Date: 2006
    Post Count: 20

    Hello Arope
    You are back at the start of your questions I think?

    "Do you think property valued at $300,000 now would increase more than $45,000 in 5 years time?"

    It depends who you ask as shown above, it also depends were you buy.

    But yes I think a property could increase in value by that much over that time.

    "Is it still worth purchasing a property now?'

    If you are buying a good property for reasons that make sense yes, plenty of homes are being bought and sold as we read and write this.

    Just a thought but how many liters of fuel (or other commodity) will $45k buy today and how many will it buy in 5 years time?

    Nick

    Profile photo of arope99arope99
    Participant
    @arope99
    Join Date: 2012
    Post Count: 5

    I guess I should have asked in a more specific way.

    If we are going to buy a property, we would buy in the eastern or north eastern suburbs close to Adelaide city (Norwood, Maylands, Payneham, etc). Reasons are

    – easy for me to travel to/from work
    – close to city and shops
    – rental vacancies in those areas seems to be low

    Is it a good time to buy unit or small townhouse in those areas at this time? Hope people living and investing in Adelaide could help.

    I’m just trying to make sure that my final decision would be the best, with probably some backup plans down the years.

    Thanks everyone.

    Profile photo of KeyStrategiesKeyStrategies
    Member
    @keystrategies
    Join Date: 2011
    Post Count: 155

    Hi arope 99

    I have a question for you – I was wondering

    How would buying an investment property affect the First home savers account?

    Would you still qualify under the scheme?

    Profile photo of PISTOREPISTORE
    Member
    @pistore
    Join Date: 2012
    Post Count: 75
    NHG wrote:
    PISTORE wrote:
    In summary, do what your parents did and you'll end up like them.

    Haha,

    Tried explaining that concept to my dad, he was understandably very upset.

    He struggled to understand why I talked to my accountant for accounting advice, the lawyer for legal advice and the friend who owns 50+ properties for property investing advice instead of asking him.

    Sad but true. We learn so much at school, but nothing on basic budgeting and life lessons.

    Profile photo of PISTOREPISTORE
    Member
    @pistore
    Join Date: 2012
    Post Count: 75
    KeyStrategies wrote:
    Hi arope 99

    I have a question for you – I was wondering

    How would buying an investment property affect the First home savers account?

    Would you still qualify under the scheme?

    The answer is yes, so just invest first and make your deposit bigger, THEN go and buy your own place.

    99, I think you're over thinking the whole process. It's simple, if you want to buy your own home, then understand that financially it's going to cost you in the long run. If you rent now, invest in the right areas, and you can delay your gratification, then you could even look to buy your own home outright.

    This is a real cross road for you and this decision will change your life in MANY ways, so make it wisely.

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