1st IP advice, 115K savings, Bris inner Nth

Hi all,

We are middle aged DINKs who have paid off our inner north Brisbane home in the past year (~$950-$980k current worth) and have been throwing excess money into a Suncorp Super Saver a/c earning ~ 1% interest.

We're at a point where we would like to consider our first investment property.

Our goal is to retire ~55-60, and have an income to support us until 65 when super can kick in. We're currently in our 40's.

I couldn't find a 'newbie' section on this forum so please excuse some very 'green' questions about the whole process.

I've read a few advice pages on what to expect and things to consider with your first IP (Mozo et al), but I wonder if this is even the correct path.

Please take this as an example of something we might consider:

Use our $115k savings and invest in a 2bdrm unit at Nundah (BNE inner north and 10 mins from where we live). Purchase ~ $300-$400K.

The idea being that we could knock over the mortgage in 3-4 years and have a steady income of around $300-$350pw for ever after....lovely Then you could maybe look at a 2nd IP after that (or simultaneously if we're feeling brave).

Does that sound feasible? Is it even a good idea?

We may continue living at our current home in Wooloowin for another 5-10 years, as we have recently invested in new large solar PV array / heat pump and the place is generating surplus money from the sun and we never get a power bill - love that

But another option may be to rent our current property out and buy another house for us to live.

This would involve a substantially larger mortgage (probably $1.2M (minimum!) if we want to keep the same or better standard of living and in a similar suburb. Saving for a 20% deposit on that would take some time however...

So as you can see one option gives us an immediate return and let's us put our foot in the investment market.

The 2nd option is diving into the deep end of debt and getting into a mortgage that's larger than we've ever had (such is the BNE house prices atm if you want to live 5-10km from the city in a modern spacious home).

The 3rd option is probably more so the end game. We would ultimately like to retire at Redcliffe, maybe Bribie, but while we both work in the CBD, it's simply not an option. I commute via bike on the new NBB that's recently finished and virtually stops at my door. I enjoy the consistent travel times and don't have to worry about personal space (and hygiene) using public transport like I had been for 15 years.

My wife suggested we buy our retirement property now (e.g. Redcliffe) and rent it out until we're ready to live out there ourselves.

Anyway - apologies for the essay. In conclusion I'm trying to find the next steps forward:

- Investment / Property Advisor consultation
- Mortgage hunting online
- Property hunting online (the fun part!).

Cheers.

Max

 

Best place to start is with a few of the books about getting started with property investing which will help you put a strategy in place. If you search on the site there are lists that others have put together. Considerations are how much money you need for those bridging years, are you cg vs cash flow, what's your risk profile etc. One option for cash flow is to buy one or more properties in granny flat friendly council areas, build a granny flat on existing block as an auxiliary unit where you can rent out to separate households. Investment required for initial purchase and building granny flat 550k for $750 to 800 week return. Much better option than buying a unit but needs to be a long term strategy and align with your desired end goals.

 

Why use your savings when you could release some equity from the existing property and use that for the deposit and costs of buying the IP? Making all debt tax deductible* this can be done without cross securing the properties as well.
If buying a unit don't forget to factor in holding costs, Body Corp fees, rates, water - take that off the rental amount you expect to receive and focus on the Net return.

This is doable, again by using equity from the existing property for deposit and costs on the next property however you would then have a large amount of non-deductible debt. If going down this path, in hindsight you should not have paid off the loan and instead accumulated the cash in an offset account against the loan. That cash could have been used to offset the interest on the loan and then towards buying the next owner occupied property. The remaining debt against the existing property would then become tax deductible when it becomes an IP*

If you want the best options and credit advice avoid the following
- using online lenders,
- mortgage hunting online,
- focusing only on the interest rate
- going direct to a bank,

Get a good broker who can show you how to best structure this and map out what options you have from a lending point of view

*I'm not a tax adviser, seek specific tax advice

 

Release some of that Equity and split it off to 2 or 3 purchases, one in Redcliffe for your retirement and another 1-2 growth assets. Rent them all and stay in your PPOR (remember this is CGT free)

Sounds like your income would well and truely cover any shortfall and some giving rates are so low. You’d have 4 assets growing over the next 20yrs. When you eventually come to sell the PPOR you will clear all the debt, have 2 income streams AND have your retirement property.

Plus you would have likley paid chunks off or saved into offsets, so could Likley afford to extensively renovate or new build Redcliffe.

 

Absolutely this! ^ Also see a mortgage broker for some clarity

 

Thanks for some helpful insights there, I didn't take into account using the equity in the place we have just paid off.

The common theme appears to be renting the IP rather than our existing PPOR - for much improved tax benefits.

It also makes a lot of sense to find a good mortgage broker along with a good accountant. We both do our own tax currently, using the simple online method. However having an IP sounds like having an accountant would be mandatory to maximise the tax incentives for having an IP in the first place.

We had a substantial offset against our last mortgage, so for the last few years it's been nil interest, as we'd felt more comfortable having the liquid cash in the bank rather than ploughing it all into the loan just to get it paid off. We let the mortgage get down to <$10K then paid it out.

I did read some online financial advice at the time about "I've paid off my mortgage - what now?" - just to see if we should pay it out, or use the redraw facility on the loan to make another investment. It was too hard to make a decision so we just went down the safe and boring path, of letting it dwindle down each month to nothing.

Can't cry over past mistakes, so better to make positive steps now to get the money working for us.

@Codie - an attractive suggestion there. So does my first idea of a unit at Nundah not fit into what you would define as a 'growth asset'? I understand free standing property is always going to be a better investment, but at least with a unit you could start receiving rental income sooner than a house? Maybe I am only focussing on the short-term gains.

@Lindsay_W - you make some valuable points thanks.

@Closet - appreciate the granny flat idea too. Not sure how a tenant would feel about the landlord offering the granny flat on the premises out to a complete stranger though?

I'm trying to weigh up our appetite about getting into enormous debt again, after only just becoming debt free for the first time in our lives (esp if we purchased more than 1 IP). I guess everyone has to start somewhere, but I don't believe biting off more than we can chew (ie buying 2-3 properties when we've never done it before) is very palatable right now.

It looks like finding a reputable mortgage broker will be the way to go (maybe someone like Jess who I see advertises her services on this site t'out the 'Introductions' section). I'm assuming they can give you more property advice and list out the pro's and cons of units vs free standing home.

Thanks once more for your valuable insights.

M.

 

Above all, You need to reassess your relationship with debt. It's greatly hindering your progress to create more wealth to ultimately achieve the goals you have.

Based on some of the ascertions you made, I would greatly encourage to spend a bit of time to learn the basics of what makes sound investing.

 

@Sackie - very true. The problem is navigating the minefield of investment advisors, brokers. It's hard to tell who's interest they really have at heart. They all want something... But as @Closet mentioned above - there's plenty of books out there that are not really asking for anything in return other than the cost of the book.

If I told you I'm earning a woeful 0.95% interest with Suncorp Super Saver currently - earning <$100 a month... but at least it's safe, it's liquid, it's guaranteed and there's no strings attached.

Then there's an experimental $1K in Plenti (formerly RateSetter) - a P2P online lender. I'm in the 1.5% PA monthly rolling scheme, but they have the potential for 6% if you invest in the 5yr term deposit option. The only down side being that, unlike a bank, they have a 'provision fund' for any bad debt, but no guarantee this will cover any lost investment.

Then there's shares - but it's a bridge too far for green investers like us. We both worked in the UK for 5 years and trying to read the OzFourex market for the right time to transfer the sterling back into AUD was quite stressful. I think my wife lost several thousand over the course of a few days after the conversion rates started plummeting.

So I guess we're trying to find some safe middle ground (well trodden) that other first time (mum & dad) investors have walked before us.

We appreciate that in order to achieve our goals of having a supplemental CF in 10 years (that would mean we could reduce our work hours down to part time until super kicks in) - translates to changing our current opinion and understanding (and dare I say it - appreciation) of debt.

 

Sorry I dont understand your comment about receiving rental income from a unit sooner than from a house. Surely you start to receive income as soon as your tenant moves in (at the end of the first statement month) regardless of which type of housing you are leasing out.

 

The books are a great place to start as is discussion with a broker to understand borrowing capacity and how to structure good debt correctly. This is all based on your level of comfort so establishing that from the outset is key. There are many ways to financial freedom it's just working out what is right for you that is the hard part. Some on here have a mix of listed investment companies (LIC) and property either growth or income. There are some great threads on lics on the site which are a really easy way to invest in index funds that provide tax effective income by way of dividends. Well worth a read.

Granny flat wise there is no issue renting either if you design.the site correctly so it is essentially a separate house fenced off and private if done properly. There is also a huge demand for affordable accommodation.

One thing to keep in mind is that it is cash flow that helps to minimise risk rather than solely the size of the debt (in most cases)so having a strategy to maximise cash flow may help to minimise your concerns and risk.

 

Apologies - I meant that the mortgage debt on a unit would be paid off sooner than a house, so you would generate a clean income stream sooner rather than just using the first x years to put it directly back onto the loan, until you can then use your rental returns to supplement a fortnightly income.

 

That makes sense!

 

Personally no I wouldn’t call a unit in Nundah a growth asset, possibly quite the opposite. There’s still a lot of supply to go in there and will likely keep a lid on prices.

I understand you point about rental income, but assuming your on a decent income, and not planning on retiring for another 20+ yrs. What good what this income really be? Let’s say it rents for $400 a week, by the time you take out all your expenses and are left with $280-$300pw, add that to your income taxed between 30-47.5% (again I’m assuming) your not left with much..

Growth isn’t taxed. You might have a $1.5m property growing at 5% pa by then, miles ahead of the unit & still generating an income, likely a higher rental return as well because the right house will grow much higher and your rental yield will be growing as well.

 

Nothing is for free. Wanting something in return for advice is normal. Just be sure there's no conflict of interest in the advice they're giving you.

At the end of the day after you do your due diligence you have to take chances and put some level of trust in people. You will never achieve your goals without the collaborative efforts of many players along the way. You may be less than thrilled with some of them as you go on and I'm sure that will be the case but that's the nature of the game. Do your due diligence and vetting and then make the best decision possible. But you need quite a few players in this game to work with you if you ever want to achieve your financial goals.

 

Some good info among the replies above thanks.

I'm going to get along to an FAA open talk next week to see what assistance they can provide on an investment strategy:

FAA - Supporting you from Now to Retirement.

So let's say my current home in Wooloowin (inner Nth Brisbane) is worth ~ $950k. It's paid off and from your replies above it would appear I can use the equity in this (our PPR) to buy an IP.

If we purchased a house in a good area for ~ $600k and rented it out for $550pw, is it simply a matter of putting all the rent back into the loan, then having any funds saved sitting in an offset?

Then when it comes to tax time, we would claim all interest and any expenses against the property to give us (both partners?) a whopping tax return that we can then put onto the loan.

Our tax return currently just breaks even (or receive a few hundred dollars back) - this amount would greatly increase when owning an IP.

With the current negative gearing laws, this is where an IP really shines - at tax time.

Other than a potential for CG if/when you sell the property - You're not getting any other benefits from it until the loan is paid out and you can start to receive the rental income to supplement your own income - correct?

I'm sure an investment advisor / broker can confirm (or deny) the above statements.

I'm just trying to paint a broad picture of how a 'typical' property investment can work (ie what benefits in Year 1, vs having to wait 5-10 years before getting a decent ROI).

 

**EDIT - one thing I didn't take into account would be the rental income being taxed. I'm assuming that would also form part of our taxable income. So on one side you're claiming all IP-related expenses at tax time, but on the flip side, you're getting an additional rental 'income' stream that you're going to be paying tax on (positively geared).

I'm guessing this is where the accountant really earns their money and makes the IP work in your favour (so you're not worse off at tax time then you would be without owning an IP!),

 

We're now considering between 2-4 (6 max) IP's spread over mostly new builds and estates within 15-35km's outside of Brisbane - all from the equity in our PPOR (100% paid off).

Each IP would be worth $500K-$600K each and all be based on interest only loans for the first 5-10 years, after which time we would start paying down principal of at least 2 of them.

This way our current income and lifestyle will not be affected, and we can simply put our savings into Super (7-9% growth), PPOR renos (Kitchen / Bathroom), and personal expenditure.

Seems like an attractive option to us. Rather than buying 2 x $1 million properties, it would be more advantageous in the long run to purchase 4 x $500K properties.

The fact that they would be brand new (or near-new) IP's means maintenance is kept to a minimum.

Each property should generate a surplus of ~$2K-$3K pa while we're paying interest only (5-10yrs). This is based on a 5.5% interest, rental income, tax savings, rates & maintenance costs.

If it plays out the way we've forecast, we should be able to retire at 55, purchase a new PPOR and watch the properties continue to grow over 10-20 years.

 

I don’t know any millionaires who got there through a scheme like this (I’m sure they exist but I just don’t see any)... but someone who buys one or 2 good quality assets and holds for 10+ years... heck I can give you a 1000s of people like this.

choose your assets wisely you will never get the time back

 

I made this account just to reply to this post..

In 2 months you've gone from PPOR with 0% loan and wanting 1 IP with 115k savings, to wanting a highly leveraged PPOR and 2-4 IP on a city fringe likely house and land package - on 5-10 year IO loans and them being positively geared from onset with no problems.

Some things you may not have thought about:

Fast forward 5 years, P&I kicks in, repayments skyrocket (quite possible nobody will refinance you on IO again at your age - and coming from an IO loan already), little growth being a mass produced area, they just buy up more farmland and release 1000 more homes with 400sqm block. Your houses may be untenanted for a period of time unsure if you've calculated this in. You have large fees in - stamp duty, convenacing ect on each property. Ongoing costs are usually significantly higher than what you estimate. It's a steep learning curve owning an IP mentally, personally, financial and tax implications.

You are obviously quite debt adverse hence having no loan on a 900k asset @ mid 40's, can you handle seeing the bank account Neg 1-2 million and never moving because your paying IO, or possibly having your PPOR sold because of the leverage you now have on it - I'd see a mortgage broker also sounds like a nightmare to set up having 1 security for 2-4 different equity loans,

Quality > quantity, the same rings true for property, personally if i was you id go see someone with experience that can advise you - ie. financial planner and make a long term goal, perhaps get 1 IP to start with learn the ropes - ingoing v outgoing, dealing with tenants, agents, maintenance costs, tax - you obviously earn good money so you can wear any excess in the loan with your wages or during untenanted times.

Read the forums, listen to some podcasts, watch some youtube and build up your investing, tax, and property knowledge. Best of luck

 

Thanks for your comments and feedback - it is genuinely appreciated.

The reason for the turnaround is because we have sought professional financial advice (through FAA) and have now had 3 consulting sessions with them, including a 4 hour in-depth review of a portfolio they spent a month devising for us.

FAA appear to be the 'Fallon' trade mega to the financial advice world - they kind of do everything.

They looked at our earning potential and allow for 2 weeks untenanted periods p.a., as well as a higher 5.5 - 6% interest (when in reality it's closer to 3% currently).

We've been given about 6 scenarios, with everything from doing nothing, investing, with kids & without, retiring at 60 vs 55, etc.

They're of the opinion that we could afford a maximum of 6 IP's - with 2 of them coming from changing our current Q-Super to a SMSF and drawing from that, and the remaining 4 IP's coming from current equity in our home.

I've learnt enough now to appreciate this is likely a stretch of the imagination. With both of us being green and naïve to investing, we would more than likely follow the a more conservative path of 1-3 IP's.

We'd probably start with 1 IP for 6 months to see how we fair (FAA to handle all finances and property mngt for us). Then a 2nd IP towards the end of the year.

That may well be enough. If we were to purchase a 3rd it wouldn't be until 12-18 months after the first IP.

My biggest concern was after the honeymoon interest free period (5 yrs). FAA said they could easily extend this to 10 yrs, and possibly even to 15 yrs, by switching loans between institutions. As @webbza highlights above, P&I will kick in eventually, then all of a sudden you have a lot less available cash then you did during the interest only period.

I specifically asked FAA that very question - does our current lifestyle and savings ability change throughout the course of their 30+yr plan, and they categorically said NO, lifestyle will not change. They take into account budget incl new PPOR, holidays, expenses, etc, and work on income for both of us until a set retirement age (55 preferably).

The reason for posting this update was to simply ask - "Are they dreaming?"

FAA have been around for a long time and they have an affiliation with QLD Govt employees. While they do try to sell you on their 'Excelsior Plan', you can take it or leave it. If you want to use every one of their services (and there's about 20 of them) - they cost in a $40K 5yr plan into one of your IP loan packages. You can chose to cut this down to only a few core services, or even pay only for the one off services you require.

I guess, for us, using one company to do 'everything' means you don't have to go hunting to find the best, broker, financial advisor, solicitor, lending institution, accountant, etc) - it's essentially a one-stop shop.

As always, keep your wits about you. Don't fall for the glossy portfolios that promise so much, whilst asking so little.

If nothing else - at least It's opened our eyes to our investment potential. How much (or how little) we take advantage of it - only time will tell.