Deal or no Deal

Good afternoon and happy Friday!
What a great place to continue my property education - there is so much great information on here and I'm excited to chat and learn from you all.

I would love to hear people's thoughts on a property I am looking at...

4 bedroom house (195m2 new build) in Springfield on 352m2 for $478,000 turnkey (including landscaping, driveway, rainwater tanks, blinds and fencing)

We are aiming to be able to purchase 3 IPs over the next 3 years (without any capital growth - if we have growth then we will be able to purchase additional properties).

Thanks in advance for your thoughts!

 

@SuzyG

Sounds like off the plan.

What upside does this property offer you ?
What do you want the property to do for you?
How did you arrive on the 3 properties number? What will these do for you?

You can get properties with development upside for the long term for that price point.

 

Off the plan would not be on my shopping list, neither would an existing property on a tiny block like that. Well not unless that block was close to the city rather than Springfield.

Who are you going to rent it to? Who are you going to sell to in the future?

Need to know more, however suggest there are better properties for you money on the market.

 

One of the great concepts from the Steve McKnight book was what he called the "grading gap". Grade the area. Grade the property. Make sure the grade of the area is above the grade of the property.
For example, an A grade property in a D grade location will likely be a poorer investment than a C grade property in a B grade location. Same idea as "worst house in the best street". With the worse house in a good location you can renovate it and make a good profit as the value comes in-line with the higher average price of that location. With the best house in the worst location, the only way the value can go is down until the property becomes older and in-line with other established houses.

Second problem is your land size. When you buy a property, you are buying two seperate items in a single payment. Don't think that you are buying one thing. The land is what goes up in value. The house goes down in value over time. So what you can do to improve your capital growth is to buy a bigger piece of land. This is not a stand-alone rule becuase smaller land (if not buying a new house) will tend to provide higher yield and improve cash flow which may allow you to buy two of them and get a better overall return. But by paying a whole lot of extra money to a developer to build you a new house you are losing this advantage entirely. 352sqm that far out from the CBD is really missing the point of property investing imo.

Take a look at established properties that are on bigger land and/or closer to cbd.

 

The property

The property will be cash flow neutral once tax refunds are factored in so effectively we gain a property but no increase in monthly expenses.

The structure recommended to us has been to purchase multiple properties (to be cash flow neutral) then cross collateralise so you are using the income from your portfolio to pay down one loan at a time.

 

hahahaha
Would you like to explain more on why?

 

What would you invest in in this price bracket if you have $120k cash and just re-starting your property investment portfolio (after having some properties and selling them)?

 

What are you letting go of in capital growth by (over)paying for a brand new property?
What are established properties selling for in the area? Look that up ... as that will mean the established properties have to catch up to this off the plan property price before this property goes somewhere?
Are you only looking at tax benefits? And hence whilst cash flow and having overpaid (likely) for the property - you make little capital gains?

What if you decided to stop working at some point? Or went for a lower income job? Will tax benefits still help?

Capital gain is what you require to leap frog to your next property and the one after that. Paying for an off the plan in most cases, throws this strategy out of the window.

Who has recommended you to cross collateralise?

What if you needed to sell? And having bought multiple brand new properties - the bank will value all before letting you sell one... Amongst many other risks.

 

I would buy sub $400k established property with future upside so you can add value / develop. Very much doable in Brisbane and many of our clients are doing the same.

Buying off the plan along with cross collateralisation is high risk IMHO.

 

@Property Twins have summarised exactly my reasoning for saying no above.

 

Not my cup of tea.

NEVER cross collateralise your loans. I think you need a new broker.

 

Agree with all the above posters.
1. Don't cross collateralise. Who suggested that to you?
2. Location and land size - new estates far from the city will suffer most in a downturn whereas better locations will attract buyers with bigger budgets.
As @Anthony Brew suggested, its preferable to buy a C grade house in a B grade location rather than an A grade house in a D grade location. The house depreciates, land appreciates. With such a small block far from the city (middle of nowhere) - you'll never achieve premium resale prices. You can always renovate or knockdown a house but you can never change its location. Location is more important than newness.

 

Come one people, im sure sure they had nice cakes at the investment company that said we provide strategy legal and broking all in one convenient spot.

 

Woiuld be looking at established housing in the 20km limit of Brisbane, close amenities (schools, shops, transport) and without any flaws such as main roads, etc. should still be do-able for around $550k

Microburbs Capital Radius - Google My Maps

And I completely agree with other posting sentiment in respect to not crossing collateralising your loans.

 

Yes you should go on the show!

 

I will do some more research and reading into cross collateralising loans and the risk behind these structures. Thank you for all your comments

 

And....suggest you do much more reading of this site. Keep asking questions though

 

Here is a thread on the subject, one of many.
Cross collateralisation - 10 reasons to avoid

 

Thank you - I have been lurking for a while but just so much to learn.

It was reading this forum that made me realise how much I still have to learn before making my decision!