All Topics / Help Needed! / New to investing with not much capital

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  • Profile photo of KurtukKurtuk
    Participant
    @kurtuk
    Join Date: 2013
    Post Count: 19

    Hi All,

    I am looking to enter the investment property market. 

    I currently own the house I live in. Its in Eatons Hill in QLD. I paid $540k for it and only have $35k in equity. I also have about $10k in cash which I would like to keep for a rainy day. 

    Through the research I have done, the only viable option is through Cross Collateralization. I know this is risky but I am confident I will be able to pay my current mortgage and the net loss through the negative gearing of the investment property. Ideally I am looking at investing between $300k and $400k. 

    Do you believe I am in a position to obtain finance, and If so, would Cross Collateralization be the best way to do it given my lack of capital?

    Thank you all very much!

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

    Hi and welcome aboard.

    Cross coll is rarely a good idea – and if an IP can be purchased with cross coll it can also be purchased without it.

    How are you calculating your available equity?

    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 KurtukKurtuk
    Participant
    @kurtuk
    Join Date: 2013
    Post Count: 19

    Thanks for the swift reply Jamie. 

    Basically I am just taking what I owe the bank ($505k) from what I paid for the property $540k. 

    Is this the wrong way to look at things?

    Cheers

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Kurtuk,

      And welcome !!   Depending on how long you have lived there, and whether you might have bought for a discounted price, the property value might not now be $540k.  We appear to be coming out of a 7 year slump in Brisbane (when prices hardly moved overall), and there are indications that values may be heading North, or have already started to do so…. 

      I agree with Jamie re x-coll (i.e. it is rarely a good idea….) but it can make the difference in specialised cases, so let's not write it off altogether – yet !!  cheeky

      If you can add a little more to your story, those extra pieces of information might turn the whole ship around.

      Do you have a particular area in mind for purchasing an IP?

    Benny

    Profile photo of KurtukKurtuk
    Participant
    @kurtuk
    Join Date: 2013
    Post Count: 19

    Hi Benny,

    We bought the place in March 2012 for $533k. Personally I feel we got it for a good price as the owners had built elsewhere and needed to get out. We have also totally gutted and redone the master bathroom ($10k), and had a fire place put in for $3k (yes Qld does get cold :) ). 

    Therefore assuming the bathroom and fireplace have added a bit of value and perhaps I have started to see some capital gains through what is hopefully the upturn in the market, I am hoping the value of my current place will be at least $540k.

    I do also feel that we are seeing the signs of an upturn and that is why I believe I want to get in now to see the full upside of the market upturn. That is why being quite negatively geared should not be a problem. We live well within our means so should be able to afford and extra few hundred dollars each month the cover the net loss of the gearing. 

    Well the location is the question….

    For a sound investment I was thinking Mitchelton or Gaythorne. They are both up and coming and close to stations. I do believe that the suburbs have already picked up a fair bit so maybe gains might br limited, but there must still be bargains in there. 

    Another left field location was Deception Bay. If you are familiar with Brizzy, its a low socio economic suburb a good half hour outside of the city. It does have the following pros though:

    1: its right by the sea. I believe that over time this area is bound to increase in value as we are already seeing this in neighbouring suburbs like Redcliffe and Woody point

    2: a train line is being built to make access to the city more accessible.

    3: there will be a strong rental market as most people will not be able to purchase their own property. I understand that I have the risk of having risky tenants being in this neighbourhood though. 

    Would be great to have your thoughts Benny.

    basically I am really keen to jump in the market in the hope of catching the upturn wave. That is why cross call seemed like an option. Are there any other options out there?

    Thanks again!!

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Your current LVR is 93.5%. Some lenders will let you go to 95%. Add LMI into the mix which usually caps out at 97% cant see you have much room to move? 

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    I don't see how you can borrow more. As mentioned you are already at over 90%. The stamp duty, solicitors fees etc will eat up the rest so you are already over committed. Time to save before buying I think.

    Put excess money into an offset account until ready to buy. In the meantime research and be ready.

    Profile photo of N@than[email protected]
    Participant
    @n-than
    Join Date: 2010
    Post Count: 241

    It will always seem like you are going to miss the boat if you don't jump in now, but really the deal of a lifetime comes along every week.

    Personally I would concentrate on building up your equity – paying down your loan if you don't intend on renting the house out in the future, or manufacturing equity through reno's etc. Before you know it you will be more educated and more cashed up – win/win.

    As Warren Buffet has said "Wealth is the transfer of money from the impatient to the patient".

    It is hard, and I am definitely guilty of it but what he says is true.

    Good luck anyway.

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

    Sound advice from Nathan above.

    With your current LVR above 90% I wouldn't be jumping in right now. Not only from your own a risk mitigation view point – but I also can't see it working with any lender.

    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 BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi again,

    Quote:
    Are there any other options out there?

      Yes there are….

      You may not like some/all/any, but here are a few thoughts that might guide you in one way or another.  I’ll summarise each, but if one particular option seems to sing your song, then jump back in to ask for more info re that one, OK?

    First though, in what area is your PPR (in case others can add a comment re the location)?   Can you find what similar properties are selling for there (e.g. via RE agents, websites, media articles, homepriceguide.com.au, your bank, etc).   This should have you finding a “value range” in which your place sits right now.  Many variables will affect this, including location, land size, condition, # of rooms, garaging, etc.

    Next, did your master bathroom really NEED an upgrade, or was it to suit your wishes?  If the former, then it is likely an older home in a settled area, and the upgrade would hopefully have added $20k+ to the value.  Kitchens and bathrooms are the major “put-offs” to many buyers – so your purchase price maybe allowed for “spending on the bathroom”, thus was under market value at the time. 

    Could it be that your place today is really worth between $560k and $590k?   If so, that changes the whole dynamics of your situation. 

    But  let’s take a look at some other options:-

    1.  Cross-coll – always an option, but can be a b*tch to unwind later…  And if your home value is really nearer $540k, there is little advantage in considering it anyway.  Others first eh?

    2.  Find data that supports a higher value for your place now – e.g. the upgraded bathroom, any recent comparables (similar houses sold in your area and their prices), completed works (or plans) from Council that may indicate a lift in local values overall.   Talk to your bank re getting a valuation for finance (and tell them what you wish to do).   They will likely talk cross-coll (of course) and will maybe suggest a “bank valuation” for purpose of releasing equity in existing.  Don’t sign up with them yet, but bring the results back so that some of the great people here can add even more up-to-date answers.

      BTW, I do agree with those who have said “You don’t have enough Equity right now”.  If too skinny, you would be creating a rod for your own back.  BUT, if a bank val comes in at $570k or higher, that could shed a whole new light on the situation.  smiley

    4.  Research the idea of moving out of existing, but keeping it as a rental.  Then rent somewhere else for yourselves.  This then opens doors to assistance from a rental income, depreciation, tax concessions, etc.   This can improve your Servicability out of sight (you say it is already good now).   But then LVR (equity) is your current sticking point, not DSR (serviceability) – so can you add value to your PPR right now ?  Pretty up the place – ahead of a bank valuation….   Does it need a paint?   A small (few thousand) investment in appearance can add tens of thousands in perceived value !!

    5.  Whatever else happens, KEEP ON reading and learning.  Buy some good books too (I prefer books, as they are easily portable, and you can scribble on each page, highlighting important bits).  

    There will be an answer – and it will show itself to you, so long as you keep looking for it !!   Do get back to us with any further thoughts/questions, etc.

    Benny

    Profile photo of KurtukKurtuk
    Participant
    @kurtuk
    Join Date: 2013
    Post Count: 19

    Hi All,

    Firstly I would like to say thank you for all your replies (even if a few of them provided some bad/realistic news). I really appreciate all your opinions and your knowledge sharing is great!

    Regarding my PPR, it's in Eatons Hill QLD. When we first bought it, lifestyle had more of a preference than location. We had just come from the UK so we were sick of living in a bedroom closet! On further investigation of Eatons Hill in magazines and on the web, it does seem that it has had not great appreciation in the last year or so (slightly negative on average). Having said that however, we have spent money on the place and our house is actually in one of the nicest streets in the suburb with great elevated views (our neighbours house two doors is worth over a million).

    I have been in contact with my mortgage broker and he suggested we get an application in to see what the valuation will come in at. If as you say Benny the valuation above it comes in at $560k +, we are in a different ball park. 

    Another strategy I am thinking of is going in with my Dad or someone to buy the Investment Property using a cash deposit rather than use the equity in my PPR. That way I can still climb a rung up the ladder, and provide some more time for my PPR to hopefully appreciate in value. I can then look at using this equity to get a third place in a year or so.

    I will come back to this post once I have a valuation number.

    By the way, does anyone have an opinion on Decpetion Bay as a buy and hold property?? Low value now, but close to the ocean and other developing suburbs like Redcliffe and Woody Point?

    Thanks again all!

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Kurtuk,

      Good work !!   I think a valuation will add a bit more certainty to your current situation. 

     A quick Google told me a little about Eatons Hill –

     http://www.realestate.com.au/neighbourhoods/eatons%20hill-4037-qld

      I was particularly interested by the number of "buyers looking" in that suburb.  Sounds to be a bit sought-after – which can only be good news for your valuation.  Note the rental return is less than 5%.

      Also, re Deception Bay, your earlier words, plus a Google :-

    http://www.realestate.com.au/neighbourhoods/deception%20bay-4508-qld

      …tell me it appears to be of similar demography to my area on the South side (Logan City – esp Kingston, Woodridge, Marsden, etc).   Houses/units were over-developed in the early 1990's which led to prices stalling for many years until early 2000's.   Then whoompah – they all shot through the roof, primarily because of the better rent returns (I know several investors who cleaned up by buying in these parts back then).  

      Note the gross rent return in Deception Bay compared to Eatons Hill…  more chance of being cash-flow positive – but then, a higher return often comes with higher risk, so one to consider…..    Gross return is yearly rent divided by cost as a percentage, so:-

       Deception Bay = 310 x 52 / 285k = 5.6%   vs   Eatons Hill = 4.3%

      That gross return is a "place to start" when evaluating how well a property might do when first looking.  Of course it is a simplistic go/nogo method of sifting through chaff to find the wheat, and not much more than that.   Similar to Steve's old 7 second rule, it is easier to call a year 50 weeks – so simply halve the rent per week and multiply by 1000.  e.g. 310/2 =155 x 1000 = 155,000.    This comes to just over half the cost of the house, so just over a 5% return.  Steve would look for a 10% return back when he was starting, thus looking for the 7 second rule to bring a number equal to the cost of the place.  

      This worked well in some areas (e.g. Kingston, Woodridge) in the late 1990s and early 2000s.  Investors could buy in for $75k (or less) but get better than $150 a week rent.   My first purchases back then (in Redlands, Logan) were around 8 – 10% without having to look very far.   Will those times come again?   I'm sure they can/do in some areas, at some point if the property cycle.   Watch for it…..

      Good luck with the val,  smiley

    Benny

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