First ever property as investment?... Yikes!

Hi guys, first time poster here. I could appreciate any advice anyone may have for a young couple toying with the idea of buying their first property as an investment...

I have always considered my long term investment strategy to first save a sizeable deposit (currently my partner and I have a little over 60k saved), eventually buy a home well out of town (Adelaide), if I'm lucky with a little land with the overall goal to keep my debt down to as little as possible (I'm very allergic to debt..) Once completing those goals I would look to funnel any extra income into some LICs (currently have about 5ks worth) for some low maintenance capital growth, with the goal to be having a passive income in to enable me to work part time.

However plans change... My Opa has recently alerted me to a small unit in a small town near where I grew up (approx 50min to CBD), where the owner is currently looking for 240k for his 2 bedroom, 1 Bathroom unit (about on the mark for other units in that area, other units previously sold for around 230-240k). The Strata is unit in that there is an agreement that everyone just pays for their own unit.. Its currently got a good tennant paying $235/week who will be in for the next 3 years with kids at high school, after that who knows... It pricked my ears because you dont hear of anything for that low in this day and age... Its a long story, but he's a retiree looking to simplify his affairs and off load the unit. It hasnt been put on the market yet, so all private so far. It is one of 3 units, very small and basic, but the location is amazing. Tucked right in the back of little culdesac, opposite the very small river, short walk into town. The kicker? My opa owns the third unit.. A random old lady owns the 2nd unit.. I can almost see the monopoly hotels lining up, but this seems very wishful thinking on my part!!... One step at a time..

If I went for it my strategy would be first try and get him down to ideally 220k (I offered 210k, hes returned with 230k...). Then my next step would be to to see if I can get a loan fixed for 5 years whilst interest rates are low, but also one with an offset account (few and far between but think I can find one with St George for 4.54%), then we keep shoveling our current weekly savings into that account to get the interest down asap. That way we know what we are paying and wont stress if interest rates go up. My calcs I have attached below from a spreadsheet I found online, but dont think I want to pay more than 220k MAXIMUM, as will have to add on at least 10k stamp duty, conveyancing, lawyers, etc. My calcs show I will paying about $2,000 a year to just maintain the unit... Which I guess I could negatively gear, but to my eyes that still screams LOSS! Plus the time and stress managing the property..

Apologies for the essay, but I have been going back and forward on this in my own head for a week now, with many an internet search and family member weighing into the discussion. I just wanted to see if there were any other opinions out there!! It seems to be going against my own strategy (that of staying out of debt, eventually investing in low maintenance shares), but the other side of me is saying this seems like it could be a real opportunity, get that loan down, and one day have a passive income coming in... I am just very hesitant investing in property before having even bought my own place yet. I'm aware I can use the equity later on down the track but my goal is to be out of debt as soon as possible... What are people first thoughts? Can anyone see any errors in my thinking? I would appreciate any insight anyone may offer!

Many thanks in advance...! JnJ

 

I would recommend against it. The problem is, you seem to have only seriously considered and done the calculations on a grand total of one (1) property. How do you know there aren't other better opportunities out there?

Also my personal view on buying in the same complex or next door is that unless 1+1=3, then you're just wasting your time - the deal needs to stand up by itself.

Not that I know the market that well, but a 2x1 unit 50 minutes out from the CBD? That doesn't sound like the best strategic option to me?

 

Problem is you're mixing too much emotion into an investment transaction.

Next problem is you don't really know what's value and what makes a good investment there yet as you haven't done much if any DD. Granted I too am clueless about SA but I doubt a unit so far from the CBD will make a good investment there .

 

I would have expected that $240k could buy something much closer to town in Adelaide with potentially a better yield and capital growth prospects.

Whilst it's nice to have the lure of a long term tenant the yield is not that great and you essentially will be holding a property for capital growth so that you can buy your own property one day and I wouldn't have expected a small outer ring town to do that.

There is nothing wrong with your first property being an IP. I did it myself back in the dark ages of the mid 90s and sold it to buy our first PPOR. However you don't want your first purchase to tie up the hard earned deposit forever - it needs to work HARD.

I'm going to tag some local South Australians who can weigh in on the $240k better spent elsewhere debate @DaveM @D.T.

 

So a few questions to start you thinking about whether or not it may stack up as a good deal, putting dear Opa aside for a moment:
- what's the historical growth for units in the area?
- do you foresee growth in the future? why or why not?
- how many units are there in the area? is it a 'typical' property?
- what's the vacancy rate?
- what's the % of renters in the area?
- what is the proportion of people who are renting units in the area?
- how much are comparable properties in the area selling for?
- is there any scope to add value through renovation? how do you know?
- have you had a building inspection? how did it shape up?

The strata situation sounds....interesting. Presumably there is common property, what happens if there is work required? If there is no sinking fund, how do you know the other property owners will be able to stump up the cash if work is required. How do you know you will be able to?

 

Welcome Jay!

Absolute gold in the above comments.

You need to look at the opportunity objectively. The only advantages you've really given us so far are the low entry price point and having an ally in the complex. These are VERY peripheral advantages. The investment has to stack up, and as a general rule.... Units/Townhouses in regionals outside of capitals haven't been going so well for a long while now.

Hurry up @D.T.

 

Which town is it in? Units in towns, or outer suburbs even, don't really do that well because

1) They attract the worst level of tenants - imagine if houses in outer suburbs were $260 per week and you still couldn't afford that, what is your profile likely to be? (Generalising of course, but painting a picture)
2) The best bit about property investing is the land content, and they don't have any. At least inner units the land is worth more, so your share of it still has some value.

If you have a low budget, see what inner suburb units you can get into , or get an outer suburb house depending on your overall objectives.

 

I work 15km from CBD - units around here don't perform that well. But more than happy to purchase established.

Being 50km my guess would be you're looking at somewhere in the Barossa Valley.
I know the area well for the wineries but not so much for unit performance
My guess they would be like most of metro Adelaide's Units, rent p/w is decent enough, not the best tenant, limited growth.
I prefer established house, on decent size block of land with both development and value add potential.
Say Brahma Lodge or Salisbury - 20km from CBD way more upside.
77 Gregory Street, Brahma Lodge, SA 5109
9 Manya Avenue, Brahma Lodge, SA 5109
5 Witonga Avenue, Salisbury North, SA 5108

 

Hi Jay, for around 260k (only a little more) you get access to a whole lot of better options around Adelaide.

By any measure, Adelaide is really cheap at the moment...just don't blow this opportunity by buying something crap.

Do more research, hang around hère and see what sort if brainwave you come up with in 6 months or so.

 

Wow thanks guys, a lot of great advice in a very short amount of time! Couldn't believe it when I logged in! Has given me plenty to think about, a reminder to not rush and do the research, and yes, take dear old Opa and the emotion out of it!! Look at the investment objectively and on its own merits, not on hopes and dreams. FYI the unit is in Strathalbyn, SA.

I originally liked the idea of a bricked unit as I was looking at it from the low maintenance/hard to destroy point of view (I'm no handyman), but great points about land value and types of tenants.

@serendip I wouldn't be able to answer many of your questions above, I'm pretty new to the game, so am not even sure where you begin to find the information you asked for above, let alone interpret it (as I said, I always thought I was going to be a stocks man!) My research is basically limited to scouring the bought/sold section of realestate.com.au and browsing this forum! But there dont seem to be many units in Strath.
- As I said, where the units are located is in a very quite st, surrounded by quite nice houses.
- My belief is the location on the river/central to town definitely does not make it a 'typical' unit, but the above rules of rural unit/type of tenants certainly apply. Comparable sold properties in 2017/18 (four that I can find) have gone for between $227,500 and $242,500.
- No real scope for renovation, possibly out the side but not sure if I want to enter into that. My long term idea was to look to acquire all three units and knock them down and rebuild, but as pointed out above this is all hopes and dreams, not based on anything tangible.
- No building inspection. My offer was on condition of building inspection, amongst other things.

Strathalbyn still has that small sleepy town feel, like anything it will likely grow someday but that someday may be 20+ years. Nearest major center is Mt Barker (20min) and the SE freeway that leads to Adelaide.

You guys have done a great job of opening my eyes to the big picture and talking me for the most part out of it, mostly on the basis of I need to do more research and need more information.. Not just get caught up in 'the one' that has pooped up onto my radar. So just to throw a theoretical scenario out there... Say when I reject their counter offer, they come back with they will accept 210k (unlikely I know), or something like 215k, would this change the dynamics at all?? Being the unit is probably worth 230-240k by my best estimates there is already some capital there...

Or do all the above rules apply despite what from I can tell is a steal?

Thanks again for your time and insight guys.

 

Thanks @hammer, good point. Buy once buy right, there's no rush as we don't want to screw our first shot!

 

@Brady time for you to start your BA/Property Consulting business in Adelaide. Put your expertise of Adelaide's markets to good commercial use You seem like a straight shooter and quite knowledgeable , I'd be happy to engage you.

 

Alright so I went north instead of south - still better buying options IMO.
Christies Downs/MV.
31 Felix Crescent, Morphett Vale, SA 5162
5 Protea Street, Morphett Vale, SA 5162

 

I'd be pretty careful with the Felix one, it backs onto the freeway

The protea one is in a good spot, we get a few inquiries around there because people like being close to the school

 

Appreciate the comment enough on my plate at the moment

Yeah fair call was literally a few minutes search, didn't even look on the map was just quick examples - both a probably still better buying than unit in Strath :0
Don't follow down south like I used to, know the area so much better near me.

 

Do you know what other "steals" are out there in the same price bracket? If the answer is no, then you shouldn't be going ahead imo.

 

I guess that was kind of point, you've had a decent crack at answering what you could I think you're starting to realise that if you're going to invest in property it would be worth getting your head around how to figure out if it is a good deal before you dive on in. There are many debates about the relative merits of return v growth as a priority, it'd be worth having a read to figure out what you think is most important. It'd also be worth reading a book or 2 or listening to some podcasts to get down with the basics. Get it wrong & it will cramp your investment growth style, whether that be more properties or a share portfolio. Good on you for being open to finding out more.

 

Thanks guys, and appreciate the other suggestions. All taken on board! Churs!

 

Jay, I just wanted to say good on you for asking, listening and taking it on board. Some people ask questions on the forum and really only want one sort of answer and don't take to being open to other ideas and constructive criticism.
So kudos to you to seek out some other opinions, think about them and reply nicely!

 

Well said.