Advice / ideas

Hi all!

Wondering if you have any advice / ideas for a 25y/o single guy who is looking for some way to improve his financial position. Currently working as a graduate engineer in Melbourne, decent pay (60k), loosing a bit to hecs etc. no debt (other than hecs), ~12k in savings + 3-5k invested (managed fund and shares). rent + bills ~800 pm. I'm currently saving ~500-750 p/fn. i have enough now for an emergency fund so I'm looking towards my next steps and ways to leverage my current $$ to maximize my position.

So i have been looking into getting my head around the property market. At this point i am considering going after cash flow ie an Investment property. It would likely be a unit as i think i do not really have enough income / savings for a house in/around Melbourne and the places i can afford seem to have low rental rates (new developments on the outskirts of the city etc). But i could maybe get my hands on a cheaper unit close to the city as an investment property. I also understand i would be liable for mortgage insurance / stamp duty etc and would have to factor this in when i do individual property evaluations.

My idea would be to continue working / saving and then buy an IP that is cash flow positive as a way of boosting my savings and giving me some eventual equity in say 5 years when i may want to buy a house. A major issue is if i have to use money i would normally have saved to service the loan i may actually be going backwards, plus there may be little capital growth to offset this.

I'm looking for peoples thoughts on something like this for somebody in my position, please do tear down the idea if it is terrible. Am i just better off saving my money for the next few years, putting it into some secure account such as a term deposit until i have a much larger chunk of $? Are there better options i haven't explored?

Thanks everyone

 

Hi Timah, welcome.

With 12k in savings I would just focus on saving as much as you can and then revisit your property investing options when you have more saved up in the future.

Also your goal of improving your financial position is too vague, you could save up 2k and that would improve your position too. You need to be more specific with your investment goals. It's also a good idea to do reading and learning about property investment as you are saving so when you are ready it will save time and you will be much better equipped to make decisions.

Well done on wanting to take action for your financial future.

 

Hi Timah,

Great to see you taking an early interest in your financial future, this is a great place to start.

I am 30 yo myself and live in Melbourne and understand the frustration of buying in Melbourne (although I bought one when I was 24).

There is no one strategy that is the best and it really depends on your life and where you will see yourself in 5, 10, 20 years time (mine was very different but similar), along with other things like income and expenses (which you have outlined) but also you appetite for risk.

Things you will maybe doing in the next 5 years is finding a partner (you said single so I'm assuming this), you or your partner may (or may not) want children. When I was 25 I just got engaged, then had a wedding and when was 28 had our first child but also my goals/strategy has changed since my early 20s.

You have other options opened to you like FHOG, there is a 6 year rule where you can rent out a place an not pay CGT.

You will see a post about what my thoughts are on strategy, it isn't glamorous or I wont be noted in a magazine or newspaper. Mine is buy/hold higher land content properties in Syd, Melb, Bris (not in that order). I have seen what my mentor has done (which I am following) and I will on track or maybe (hopefully) beat him.

Just remember it is a marathon and not a sprint along with if it was easy everyone would do it

 

Welcome!

Buying an investment property can be a good way to increase wealth. Buying a unit at $350,000 would require a deposit of about $60,000, (88% lend, stamp duty as an investor) so that's quite a few years away @$750pm. another alternative is to buy as an owner occupier, get a 97% loan, and then rent out some of the rooms, or move out and rent yourself after you buy. @$350 purchase this would need $31,000 deposit. Buying a new home, or building (usually outer suburbs) the same place means a deposit of $16,000.

You are more likely to find cashlflow positive real estate in outlying areas, or regional towns. Building new also means more depreciation, which can increase after tax cashflow.

Whatever you do, get used to saving every week. However you choose to invest, having a disciplined savings habit turbocharges everything.

 

As a few people have pointed out, savings is an issue at the moment. But awesome work getting started so early

Would your parents consider using their property to guarantee your loan?

 

If you screw up then it could be Good Bye parents home for which they've probably worked a lifetime to own. My opinion is not to tangle your parent's home with your very first property investment.

 

This was my thought as well.

I would stay away from the guarantor scenario.

 

You may be unfamiliar with how a guarantee works. Under most guarantee agreements after the investment property is sold, the parents would be liable for and shortfall between the sales proceeds and the current loan, this is normally capped at the 20% (25% if purchase included costs). If the worst case scenario where property prices had decreased -25% since purchase were to happen, on a $320k loan at 25%, the parent would be liable for $80,000.

Generally the parents are in a position where they can source or borrow $80,000 (I don't believe it's ethical for little old grandma on the pension to be guaranteeing loans!), it's obviously not ideal and it depends on the individual's risk preference, but it can be a good option. It's important to put in mitigants, such as life, income, trauma and TPD insurance.

@timah another option is for your parents to provide you a loan, if it's done correctly the interest on the loan can be tax deductible. If you go down this route I would recommend speaking to a lawyer and having them draw up the agreement.

Hope that helps

 

Guarantor scenario is just stupid. If you can't afford then you can't afford. Just wait until you can buy yourself

 

@Simon Moore I understand how the gist of it works and your example above of parents possibly being out 80k, lets say even 40k is quite a lot for most folks to pay back and unnecessary risk for most parents. He is young and can save up by himelf to invest. I think parents lending or giving a child 5 or 10k is one thing, and putting their family home on the line is something else entirely.

Just my opinion.

 

What if the property 1/2 in value (It was mentioned regional, how regional is regional), what if the parents are 60 years old. There are to many variables for me and it is still not something I would recommend but then I am conservative in my approach.

 

This is what I don't think people understand, if the bank wants a guarantor it means they see to much risk in you.

If you are to much risk and they have billions of dollars behind them then why should someone else take on your risk just so you can get it NOW.

 

So to clarify when I say a guarantee, I'm not referring to a servicing guarantee (these no longer exist). Timah would have to be able to afford the loan 100% in his own right, the banks will not lend any extra because you have a guarantor on the loan. The guarantee will enable Timah to borrow with no/low deposit with no LMI.

Becuase he said he was a graduate engineer I have made the assumption that he would be in his early/mid twenties, so flowing from that I assumed parents are still working. I could totally be wrong. Just trying to give him some options he may not have thought about before.

As he asked

 

Said 25 and my parents retired when I was 25

 

Some great discussion here, and lots to think about.

I don't really want to ask my parents to go Guarantor as i don't want to put potential strain / stress on them (both close to 60 and still paying off their own house, dad has retired, mum is working). I think i would be happier to wait so im the one taking the risk.

it does seem from what most of you are saying is that the best move for now is to wait and save until i have a bit more $ in the bank as taking on a huge debt right now may be unwise.

I think i also need to set a savings goal, which ideally would be 20% of a loan (say 70-80k), but perhaps it is ok to go in with 10%, take the LMI hit and begin making some money from an IP.

Of course i would have to sit down and flesh out the numbers (don't mind a bit of excel haha), any advice on a good guide for how to do that? particular books / reliable websites etc?

Any advice for maximizing my savings potential (i am already spending less & avoiding debt & putting solid amounts away each pay automatically). basically after a way to make my money work for me while i wait and learn. shares? TD's?

cheers!

 

Do your best to earn more money

 

I know I maybe biased by PC is probably the number one website for information as it is organic and keeps changing with what is happening in the market, where as a book was current at the time of publishing.

Books I enjoyed although dated were the Jan & Ian Somers & Peter Spann - How I built a 10M property portfolio in 10 years... Interesting reading again outdated but he started as a check out chick at coles.

For savings, avoid CC spending unless you really know what you are doing and are paying on the cc for a reason (e.g. 30 days interest free and you are holding the money in the account to earn interest). However if you start spending more money on the cc then it isn't worth doing it.

I hardly went out when I was 18-25 (and even still to this day), going out in todays dollars would be $100 just on drinks alone for me that is 2 slabs of beer or 5 x $20 bottles of wine. If you then add going out for dinner before hand and taking a taxi (or uber) in and out that could be a $300 night. Do that Friday and Saturday and you are up to $600 just for the weekend and to me it doesn't add value to your life.

Instead I was at home watching movies, sports, playing games and eating at home which would be $50 for both nights. If someone was to do the first one and the other was to do the second one the difference is $28.6k... However you would still want to go out sometimes so lets call it 25k savings .

Other ways of saving more money is doing extra work, that could be mowing lawns, weeding. Even today I still do extra work selling entry tickets at the local footy club. Remember every little bit counts and the harder you work/save today the easier it is to reach your goals.

Finally I would look at what people are doing/saying on PC and reach out and see if they want to meet and maybe potentially be there as a sounding board (or mentor). I think most successful people have a mentor that they follow or will ask questions to (I know I wouldn't be where I am without mine).

 

When you are calculating your deposit don't forget to factor in costs check out Upfront Cost Calculator for an estimate of costs. Generally, if you can keep the LVR to 88% or less then LMI won't be too much. Once you go over 88% it starts going up much more quickly.

At your age focus on increasing your income. I was in a similar situation to you, I was 24 when I started the grad program at AMP and within 3 years I had doubled my salary to >$100k. Just don't let your expenses rise with the extra income! And don't be afraid to switch companies after a few years to get a big pay rise.

 

There's a lot of negativity regarding guarantor situations.

That is certainly a viable option, however, comes with risk that the purchaser (yourself) need to be fully aware of as well as your parents if they were to guarantee their property.

Everyone has different life/financial/risk appetites. I wouldn't be pushing your own agenda and risk profile onto this young budding investor so early on.

I bought my first unit with my parents as guarantor and as soon as the LVR was 80% I had them taken off as guarantors.

 

The guarantor option is there I guess, but why not have your parents just refinance their loan and draw some cash to give to you as a gift, to which you can use for a deposit.
If the issue is serviceability that is a different story, but if it is just cash for deposit, this is a safer option as your parents don't need to act as guarantor and use their property as an asset in case of an "oh shyte" life or world event. My mum had some equity in her unit and was happy to refinance and gift me 20k. She would have acted as guarantor if I asked her, but I would never put her in that situation personally. I have worked out the extra repayments she will have to pay for since the refinance, and will pay her that difference every week to cover for it, and then just pay the remainder in full as soon as I'm in a financial situation to do so (or I just come across a briefcase full of cash...one can dream).