Critique my 3 year plan

Hey guys, I’ve been reading and researching for a while and think 2017 would be a good time to really nut down my plan. I am completely new to property investing so would appreciate any advice given.

I am thinking of buying an investment property in melb for approx 300-400k. The reason I’ve been thinking about melb is because it is much more affordable than Sydney, there is a higher population growth compared to other states and it is second to Sydney in terms of jobs. I’m also viewing this as a long term buy and hold (possibly 10+ years). I’m hesitant in investing in QLD due to flooding/environmental factors.

I don’t have a particular melb suburb in mind at the moment, but I’ll use Cranbourne as an example for now as that fits within my budget.

Currently I have about $100k saved up.
The average 2br home (according to REA) in Cranbourne is about $300k.
$60k will go to the deposit
$25k will go to settle fees, inspections, lawyers (do you think $25k is a good estimate for this?)

Based on an average rent of $298 p/w (from REA) for a 2 bedroom house in Cranbourne, I’ve used a calculation somewhere on the internet to estimate that I’ll be approx $2190 out of pocket annually with a 6% loan interest rate.

Are there other costs that I should consider? Anyone have any idea on avg annual maintenance costs? Depreciation? Other factors?

At the moment I’m living with my parents but would eventually like to move out and buy my own place in Sydney. I’ve read multiple sources that in 2018/2019 there will be an oversupply in units, in which I’d love to swoop in and grab one at a discounted price. How likely do you think this will happen?

In 2016 I’ve calculated that I saved $36k in total. I’ve since changed jobs, got a pay rise and am much more committed to saving this year so I estimate I will save $40k in 2017. By the end of 2018 I predict that I’ll have an additional $80k saved (warranted that I don’t move out and rent). The $80k is probably not enough for a Sydney unit deposit of 20%, but my parents are willing to help me out with another $50k and by that time in 2018 I might consider buying with my partner.

Do you think that the oversupply/discount in Sydney units will happen by end of 2018 or earlier? Optimally I’d like to have my own PPOR.

Do you have any comments on the above strategy? My ultimate goal is to be financially secure with a place to live, have the option to not work full time so I can pursue whatever projects I desire.

 

Two points:



Would it be worthwhile borrowing more than 90% for this one and keeping more of the cash for the deposit for the next one?



And



Since you are planning on buying your own place it would be a good idea to borrow the lot so that you keep the cash for the new non-deductible purchase. You could do this by borrowing from your parents and keeping your cash in the offset account – see a lawyer about this before trying.



An alternative is to buy the main residence now, start debt recycling and then buy the IP.

 

1. Ball park for costs is around 25% (20% deposit + 5% cost), for 300k property that's around 75k
2. Markets within markets, also helps to have an overall strategy that your purchase fits in to.
3. Other costs besides the loan repayments- strata (if unit complex), council fees, insurance, property management fees, repairs
4. Re the future of apartments- makes sense that they'll start to plateau out however when it happens is unknown or how big a "drop" will be.
5. Great work on the savings and keep it up!

 

I've spotted a major flaw in your strategy!

Do your own homework! Do not rely on people that have a vested interest in you buying!

Edit: Actually, are you quoting the website or a real estate agent?

 

Cranbourne is on the very outer edge of Melbourne, a long distance from the CBD. In a downturn, if one occurs (and history tells us it will eventually) outer fringe suburbia is likely to underperform.

These areas attract people who cannot afford more desirable locations, and in a downturn those people often move. Outer fringe suburbia is often the site of extensive development in a boom, and a downturn risks unfinished projects.

Outer suburbia tends to be recently established, meaning its residents have bought high - often at or close to the peak of a market's cycle. Additionally, lower income investors and buyers who've bought in fringe suburbia are more likely to be vulnerable to a downturn, as they tend to have less secure incomes, lower incomes, and less wealth overall - Cranbourne is on the lower end of the socio-economic scale.

A quick glance at allhomes tells me Cranbourne has 171 properties on offer, compared to a mere 24 sold in 4 weeks. So - yes it's cheap, but maybe there's a good reason it's cheap. I'd tread carefully. The fact there's a lot of competition on the market may suggest low or even no rental growth. Affordable does not equal valuable (the same goes for units and apartments which are indeed very oversupplied).

 

Thanks for the advice so far guys!

@Terry_w Wondering what the benefit would be for borrowing more than 90% for the first one? I've read that paying LMI can double the amount over the course of the loan? Barefoot Steps - Step 4: Buy Your Home

Do you mind clarifying this point? Do you mean borrowing 100% of the amount?

@ZOMG Thanks, I'll try to find averages and add it to the calc

@spludgey I was actually basing this off data from realestate.com.au Cranbourne Property Market, House Prices & Suburb Profile

 

Tax Tip 61: How to borrow 105% on your first purchase https://propertychat.com.au/communi...ow-to-borrow-105-on-your-first-purchase.4928/

 

88% seems to be the sweet spot for LMI,
The curve is something like this:


Think about it this way -
Let say we are considering 80% vs 88% on a 500k purchase. Bumping up to 88% gets costs you an extra 1% (5k) - which is added to the loan and tax deductible if the property is an IP (seek professional advice), but leaves an additional 40k in your pocket for other use (even just as as a cash buffer in an offset against the loan).

Obviously depends on your risk appetite and strategy.

Borrowing more than 88% is also valid - for an IP this maximises tax deductible interest (especially useful if you can use the cash against non-deductible debt) or to deploy into the next investment move.

 

Just on this point, I don't think you should use this as a criteria to exclude the state of Queensland. Seems like there is a big fear of flooding from many interstate investors after the 2011 floods in Brisbane, but in reality there were only a few suburbs affected by what was a one in one hundred year event, and all of those are well known as flood risk areas.

It is easy to strip out properties that are potential flood risk using the Brisbane council flood maps:

Flood Awareness Maps | Brisbane City Council