Buy First Home vs Multiple Investments

Hi all,

I'm stuck in a very lucky position as a first home buyer.

My fiance and I have about 250k in our accounts to fund our home purchase, but looking at property prices in Sydney, and the potential mortgage burden it could cause, we are finding it difficult to find properties that fit our budget.

We have preapproval for 640k although it's less than our max capacity by around 150k.

Here's some potential scenarios I'm looking at.

1. Purchase 3x 300k investments at 20% deposit and forego our first PPOR. (Aiming for roughly 1k net return per month)
2. Purchase 1x 300k investment with 60k deposit (aiming for 400 per month net return) and use the remainder to buy PPOR
3. Purchase 1x 300k property with 250k deposit and use the equity to purchase PPOR. (Will this make any difference from scenario 2?)
4. Put 250k down into a PPOR property. (Not ideal, but still an option, and maybe use the equity to purchase investment a few years down the track, mainly due to decrease in net income)

Obviously the investments won't be in NSW.

Ideal scenario is 1 + being able to find a way to use this equity to fund a PPOR immediately, due to positive gearing. Not sure if this is possible to fund anything reasonable in Sydney though.

Would this be possibly possible through a Line of Credit, or a "Wealth Release" like Home safe?

I'm happy to take on more debt to a certain degree, to find ways of maintaining a similar monthly outlay, but maximise the number of Principle+Interest loans I repay.

Any advice would be great!!!

 

Hi, I have no solutions. Only critics:
1. I doubt you will be able to find 3X300 investments that will bring you 1K net return. To have immediately positively geared property you would need to invest either in high risk area, or buy in the right area off the plan hoping that it will boom by the time house it built, or buy a good potential house and either modify that you can have multiple tenants or re-build which is expensive. As you can see highly unlikely. Even neutrally geared (~8%) properties are very hard to come by. If it was that easy, buy and get profit immediately, it would not be economically viable to rent. In general, property or shares, high and quick returns means high risk (i.e. gambling).
2. Good option
3. Does not make sense, bigger debt allows you to write off interest. Your PPOR should have all of your money and using equity in PPOR buy investment
4. IMO, best option. I hold an opinion that it is best to have your own place before investing (even if its mortgaged) for many reasons like if you loose your job you have a place to live, bank will give you a break for a year or two to get your **** together, if you decide to have kids and one of you don't work anymore, and most importantly its cheaper to own in the long run. Rents are raising but mortgage repayments stay the same. My place costs me $200 p/w in mortgage, rents in my suburb for the similar property are $600.

 

Agree with above - although it depends a lot on your risk profile, how much effort you want to put in and what your goals are!
With #4, you could renovate to add value (and self-satisfaction!) and then invest the equity in an IP later. Your PPOR can be a good base and don't forget it's CG-free when selling!
Not advice - my only advice is to keep reading posts on this forum

 

@Whoot - what's the reason for 20% deposit on investment purchases ? Ideal would be to use as little of your own cash - 12% deposits i.e. 88% LVR which will give you the best bang for buck for LMI which is tax deductible over 5 years.

Note, that you are already using a cash deposit which minimises the tax deductible loan amount per investment property.

If your borrowing allows for both PPOR and investments, it may be worth putting cash into the PPOR and re-borrowing funds up to 80% LVR to turn non deductible debt into deductible and then purchase IP's.

Another thing is where the Sydney market is in the property cycle........It may be a long time till you see any gains.

 

How do the maths work out? Would you still recommend a 12% deposit for an IP even if a person has funds for a 20% deposit? I haven't done the maths but I've always assumed that a person would be financially better off if they can put in a 20% deposit for an IP to avoid LMI.

 

Correct, for IP still recommend 12% deposit. Anything less, the LMI rises sharply. The key benefit is that you can spread your funds against more purchases and have greater exposure to the market. LMI is tax deductible over a period of 5 years also. We like to stay below $1mill in borrowings for the LMI purchases and if servicing allows with the same lender, then aim for 80% LVR's there after.

P.S. majors are capping borrowings at 90% LVR inc LMI so 88% LVR + ~2% LMI

 

Now, my only concern in the case of spreading the portfolio with a lower deposit amount is my borrowing capacity.

I'm stuck at how lenders will view what I'm looking to do. More debt but a higher annual income. My borrowing capacity is at around 800k and if I use all of that on investments, assuming it's all positively geared, will lenders lend more to me, say, another 600k?

 

Is that with one lender or multiple lenders chosen strategically?

 

Yes, it's difficult, but I'm believing it's definitely achievable.

For example, I'm looking at areas in particular that are favoured by international students and working holidays. I'm looking to let individual rooms out, which I works out to an additional 10-15% in rentals.

 

For each of the IP's?
I have not even thought about that... I'm guessing your advice is to seek multiple lenders

 

Oh ive misread. The 800k is with one lender.

 

Yeh if you want to build a portfolio. If it's one or so IP then it doesn't matter

 

Yeah, I heard it all before. It requires a lot of management and there are a lot more running costs. There are also insurance and legal issues to think about. If this is the case, I suggest for you to buy somewhere where you can personally manage the property. Story time: The most successful case I met was a guy who bought 4 bedroom house in Bexley, put dividers in rooms including leaving area to make it 9 rooms. Lived in one room and had international students two per room staying in the house (mind you he proactively seeked students himself from the country of his origin, because of course such housing would not be allowed through any australian organisation). His mortgage was paying itself plus he had some income. He sold it off because neighbors started complaining and he was extremely tired of management this business.
Conclusion: high demand areas (aka "safe") areas near unis, tafe, transport, hospitals and airports are usually mean lower rental yeild and higher property tag. Holiday rentals are seasonal and again location has to be close to amenities, so price tag goes up and rental yeilds down. And you need to have place furnished nicely and all bills included. Anyway, I believe your goals are unrealistic. At least for the first couple of years after initial purchase.

 

Just wondering, would it work to put a 20% deposit down and in say within 12 months draw equity from that property to purchase a second IP? Say for example if a person is looking to buy an IP for $600k and have 160k saved.

 

If the property has grown in value you can extract equity and purchase the next. However this top up ideally will need to be up to 80% again as otherwise you'd be paying LMI for any additional funds.

Depending on your goals, it may make sense to buy a PPOR with 'cash' savings as buying an IP would mean you are using after tax funds for investment purposes.

I wouldn't buy an IP at 80% however - provided you are quick to get a pre-approval for an 88%+ LMI right now. The banks are adjusting as we speak with the Principal & Interest vs. Interest Only loans. With CBA coming out yesterday with Interest Only (IO) loans being upto 80% and anything above being P&I.