Buying my first Investment Property ?

Hi Property Chat,

Let me introduce myself first as you can get a bit of a overview of how I can tackle this situation to get my foot in the door.

My name is Ricky, age 25 and currently sitting on around $150K in liquid cash, my current job unfortunately only pays me approx $42K ish per year... It's not how much money you make it's how much you save right ? Luckily I have a roof over my head and currently living with sibling which I am extremely grateful for.

I am planning to purchase a investment property preferably either a brick house / weatherboard, 3 bedrooms furnished with min 500sqm land in Ballarat, Radan, Mount Pleasant and near surrounding areas my budget is $300K to $350K which I am wanting to lease this out. I am planning to move into this property in approximately 5 years time.

If I was to purchase a property, how long will it take to transact the contract and get some one in paying for rent ?

My question is when it comes down to finance, how much money do you need to pay up front for a deposit. I was thinking of taking out a $300K loan and put $150K into a offset account and only pay $150K in interest. If interest rates was to ever raise to 10% I would still be okay as rental can partially cover this and it won't exceed 25% of my net pay from my full time job. Does this sound the correct approach ?

I am not looking for a massive return but if rental payment can cover the weekly mortgage repayment I would be happy. Anything above is a bonus.

Sorry for my ignorance.

 

4-6 weeks from signing a contract to purchase.

From 1 January 2020 as a FHB (not an investor if you plan to rent it out immediately) you'll only need 5%. Otherwise 20% deposit unless you want to pay Mortgage Insurance in which case you can put in less deposit.

The trick here would be to lock in interest rates for a period of years.

Yes, so would every investor
Welcome to the forum Ricky. Keep asking questions till you think you know what you're doing.

 

Note the 4-6 weeks is approx contract to settlement. You dont own the property yet so you dont pay interest. How long it takes between settlement to getting a tenant in is zero days to infinity. However there are steps to make this shorter. Like pricing your property correctly, good PM and advertising.

Your aim should be to learn to ask the right questions.

Imho this is a criminally underachieving goal. You are young and can obviously control your expenses. Add in some long term thinking, and you can be wealthy in 20-30 years. Why limit yourself to 'oh, just cover the mortgage'. You should be aiming for millions of net worth. But if you cant imagine it now, you wont get there.

Ignore anyone, including family and friends, who think its good enough to have a house and cover the mortgage payment. Read and aim higher. It might require more hard work now to increase your income for example, but it seems a waste to have a switched on young guy who is limited only by mindset, which is the thing you are most in control of, but is sometimes the hardest to change.

 

Note in Victoria the standard settlement terms are generally longer than the times stated above (NSW).
Can vary from 30, 45, 60, 90 days or anything else agreed to. Common would tend to be 90 days I believe. It can be whatever you agree to but suggest you leave enough time for arranging of loans for settlement.
Good luck!

 

Unfortunately, how much you earn is also very important. Your income (and current debts) will determine your serviceability for debt and ultimately how much you can borrow. Doesn't matter if you have 500k deposit, it wont increase your ability to borrow unless your income increases. Best to speak to a broker to see your loan capabilities.

 

Hey guys, long time post as I have been busy.

With the interest rates dropping I am tempted to purchase my first initial investment property. I have talked to the bank provided if I can receive a $250 rent per week I can service my loan. I can take up to $360K with what I earn and the rent coming in.

As per above my situation is still the same, but looking to increase my budget slightly to $350K to $375K.

If I was to purchase a $375K house, I will be depositing $175K upfront approx 41%. I will need to borrow $200K and put $50K in a offset account just for emergency.

Provided I can get a lock in term at 3.2% for 5 years my loan will be approx $218 per week for "30 years". Going by the area I could get around $300 per week and easily cash flow with insurance and counsel rates paid.

I am still new to the property game. Is there anything that I need to look out before jumping in ?

This is relatively all new to me and will be my biggest purchase.

Thanks,

 

You need to look at the yield (annual total rent as a percentage of the purchase price) not just whether the rent will cover the repayment.

The 4% gross yield that you are quoting seems a bit low for a regional purchase but if you are going to be living in the property at some point then yield obviously isn't your only concern.

Nevertheless I think you are on the right track in using a big deposit, having a relatively big buffer and paying the house off quickly.

Not everyone earns $200k a year and can carry the losses of negatively geared property.

If you start off with a low purchase price, good yield and pay it off quickly you can buy the second property using the equity that you've built up and both rents will cover the repayments and you still don't need to put in any money from your own pocket.
It's a slower path and is not recommended here very often but it ensures that you can keep investing on your income.

You are dead right that it's not about how much you earn it's about how much you save and a lower income is no barrier to getting started.

I started in exactly the same place and followed the same path outlined above.

All the best with it.

Willy

 

Great work with your savings. It's also very sensible to maintain a decent buffer of savings as you propose.

Why a furnished property (as mentioned in your original post)? In the areas you are looking there will be more demand for unfurnished.

Do plenty of research both online and on the ground (if you haven't already) before jumping in so that you are familiar with the market.

Check with your broker, if you have one, about settlement period. You may be putting yourself under a lot of pressure with a 30 day settlement to sort your finance. Some lenders take longer than others. Sixty days would be less risky.

Make sure you have a solicitor who can look over the s 32 before making an offer on a place you are interested in, so you can move quickly if you want to.

A building and pest inspection will minimise the risks of nasty surprises later. You may want to allow a bit in your budget for fixing any minor things up front that need attention.

Also once you take possession you will want a quantity surveyor to do a depreciation schedule for tax purposes.

 

Is there any reason why your pay is so low?

 

Thanks I will get a few people to do a overall inspect prior to purchasing, perhaps if they did any specific renovations, permits or invoices to prove that it wasn't a dodgy job.

Unfortunately I am not that well educated enough or rub shoulders with people at work to get a high paying job. Most of my life has been in mundane hospitality, retail and consumer based rolls, but it's changing as I want to get into property investing as I also have a interest in investing in index funds. Hence why I am here.

I can get a job in the big city that pays $60K but with the commute and fare travel, I work it out to be worse and a waste of 3.5 hours a day just on travel, x that by 240 working days is it really worth it ? I find it more economical to work locally.

 

Depends if the 60k job leads to better things. The city does have more opportunities. High pay isnt always about education. 3.5 hours travel time is a huge opportunity to read books, listen to podcasts and learn.

like it or not you need to borrow to invest in property. A higher salary will help you a lot.

Mindset and attitude are very important, especially when you can control your expenses. You should be setting ambitious goals, but theres a strong ‘i’m happy just to do ok’ from your posts. That may be just from who you associate with. You want success, you need to hang out with successful people.

 

Hi guy's.

I hope every one has been well.

I'm seeing my mortgage broker soon to get my funding approved. I have made a decision to purchase a property soon but still have a few questions which are lingering around my mind.

There are some properties that has caught my interest how ever some of these already have renters, some of these houses aren't too bad but in decent condition. I spoke to the property management and has informed that some of these leases are ending in mid this year but renters generally stay longer some have been in the property for x years.

If I can obtain one of these properties for a good price I can easily positive gear $100+ per week.

If a investor can achieve a decent return my question is why are they trying to get rid of it ? Is there something wrong ?

I have another question is when you run into delinquency and in the process of foreclosure.

Example if you deposited $150K on a property, house is worth $400K, you borrow $250K. If for unfortunate reason you become delinquent and house is sold for $350K does the bank keep the full profit or $250K + fees and you are left with >$100K after fees ($50K+) loss.

Apologies if any of these questions are silly, since it's a bit hard for me to find answers.

Any help would be greatly appreciated.

 

The bank will most likely collect:
- $250K principle
- Interest outstanding plus penalty interest rate
- Cost of of sale + legal
- Any other cost incurred in repossessing etc

More likely then not, it would take up most of the sale price.

With that said, in your scenario where there is still equity of $100K. The bank is unlikely to repossess and sale up on you. They are more likely to meet with you multiple times and get you back on track etc.

No bank likes to repossess after the Royal Commission.

TB

 

When you default on a loan, the bank does their best to recover the amount owned, plus the costs. The rest of the money goes to the ex-owner of the property.

The bank has some responsibility to get a good price for the property, but this is conflict with their desire to get a quick sale to recover their money. They get a 'fire sale' valuation to mitigate this (the valuation becomes their reserve price).

Also keep in mind that the costs can be fairly significant. Default interest. Default fees. Debt collectors. Outstanding rates? It adds up.



Another thing to consider...

I question this statement. You can positively gear properties very quickly by throwing cash at it and not borrowing much, but the usual benchmark is when you borrow the full purchase price of the property.

In this case, it's incredibly rare that I see a positively geared property at the time of purchase. In almost every case where it does happen, there's something very unusual about the property and that almost always means there's a massive risk being taken. The last time I saw this on a large scale was the mining towns around 2010. Most of the investors in those properties still haven't recovered from the 2011 crash.

If you think something will be immediately positively geared at the time of purchase, you're either using a low benchmark or you're missing something.

 

Thank you for your reply.

I'm deploying a lot of cash into this property close to 40%. I plan to either "live" in this property for the first 6 months to avoid stamp duty and later rent it out and later switch to investor. Once tenanted I will contribute part of my income to paying down the property as well. I plan to live in the place 5+ years down the track once it's nearly all paid down.

 

and then you need a bigger place because you have a family or have to move cities because of work.... and you have a ip with zero deductible debt and have to take on non deductible debt to buy another ppor.

can you at least learn about how to use debt before deciding you hate it?