Considering 2 BR apartment (Strata) inner suburban Melbourne

Hi Folks,

Here's our situation....
- Mum, Dad and 3 kids
- Have engaged a Buyers Advocate (BA) to help source our first IP.
- I have $115K cash to put towards a property
- Single income family ($220K pa)
- We have a family trust established, and our accountant it recommending IP purchases through this. The Family Trust currently holds $100K of shares/index funds.
- My brief to the BA has been that we are looking in the $450K - $550K range, and want something pretty close to cash flow neutral with good prospects for capital growth (I know I know, I was everything).
- The BA is recommending we look at 2 BR strata units in inner suburban Melbourne (South Yarra; Toorak; Flemington; Essendon; Hawksburn etc etc). They are targeting the more sought after locations within these types of suburbs, typically tightly held units.
- So far, we are being presented with options that have a gross yield around 4.0-4.5%, which will leave us around $6K - $8K cash flow negative on an annual basis when considering all costs.

I'm happy to put my faith in the experts, and I do trust these guys. However, I just have an uneasy feeling about the amount of negative cash flow we are looking at on an annual basis. Would you consider a $6K - $8K negative cash flow for this type of investment reasonable?

Also, am I making the wrong decision putting this type of investment into the Family Trust? I'm aware that the losses are locked in the trust and cannot be distributed, however my Accountant believes that over the long term the benefits will still be there.

Please let me know if I should share any additional information to help better understand our position.

 

Not much advice here I see..... I think you would do better with a financial advisor rather than an accountant as they technically cannot give financial advice. I think you are set up correctly and a good advisor operating in the world of family trusts would be an asset for you. (at a cost).

My two cents would be to look at a house & land investment rather than a unit. Either off the plan (new) or an established property that you could add value down the track.

You'll benefit more from equity growth I believe, unless you have an alternative use for an inner city apartment down the track?

 

Yeah I would think that an older style 3bd house in the cheaper parts of st albans or altona meadows for 550k will get a whole lot more growth than an apartment, and the low yield of 3.2% in those areas comes out at only 5k/yr less yield than the apartment you referred to. I can't imagine the capital growth of a 3bd house in middle ring will not dwarf this 5k/yr cost.

If you were a low salary earner where this 5k was very hard to come by and/or if you were looking at apartments with 6%+ gross yield vs 3.2%, I can see a reason (that's 15k/yr extra just on the interest), but an extra 1% doesn't seems worth it for what I think may be much lower capital gains.

I also think for around 550k you can get a 400sq house a bit closer in than those locations I mentioned, or a 200sqm townhouse or villa even further in, and I think smaller blocks tend to have higher yields due to lower purchase price but rents are not reduced in proportion, so you might even be able to have your cake and eat it too with 4% yield as well as a land component and closer in to keep the growth as high as possible.