First home buyer - Advice needed/Basic Strategy

Hi PropertyChat.

My name is Nicollo - first post. Looking for a bit of guidance/confirmation.

Background
Me: Earns $119k + super. 31 years old. Australian Citizen.
Partner: Earns $55k + super. 31 years old. 457 visa but will look to move to partner visa in the next year.

Together we have $330k cash saved. No debt. Renting in a 1 bedroom in Lower North Shore in Sydney for $460/week and would be quite happy in the current place we are for the next 3-5 years. Have been pre-approved to borrow $1.08m. Both of us have never purchased property before.

Plan is as follows:
1. Buy a 2 bedroom apartment in Lower North Shore - approx price $1.1-1.4m. Property will be in my name but loan will be in both our names. This is to avoid the 8% surcharge purchaser duty for my partner. This has been approved by our lender. Loan would be an owner occupier and P&I.

2. Live in for 6 months (for 6 year main residence exemption) then move back to 1 bedroom apartment and turn purchase into Investment property (approx $700 rent/week) for the next 6 years.

The alternative is to just stay in the purchased property for the medium term and rent out a room for ~$250/week but we prefer to have our own space so would likely go with the above.

3. After she gains permanent residency through a partner visa, I would add her to the title and by this stage we would have combined finances.

Questions

• Does our plan sound intelligent?
• Have we missed any obvious better strategies?
• If we stop living in the property under a OO loan and start to rent it out, do I have to advise the bank and refinance at that point?

Appreciate your time for reading and any feedback you have.

Nicollo

 

Lets say you do this and max out your borrowing capacity on an expensive unit. What happens when you want a ppor if you have kids? Given your age that seems likely?

If its going to become ppor, thats a massive concentration of risk and nothing is deductible. If its going to be an investment property anyway why limit yourself to the area you live in?

 

I think 1.1-1.4 mill is a lot (too much) for a 2br apartment for a first home purchase! I think you could possibly get a townhouse/semi in the inner west with some land for that budget. Still a good location, but it would give you land.

* I just had a thought. You may encounter land tax with this strategy. Still, a house in the inner west should do well long term, there's always going to be demand for it. I'd avoid the flight paths.

Re: Adding your partner to title after the purchase, I'm not sure if that can be done without triggering stamp duty. Someone here will know though.

 

Hi Nicollo,

Have to agree with @Trainee and @Gockie, you would be maxing out your borrowing capacity on one place and a unit for that matter. Whilst it's in a great location, houses have outperformed units by 90% over the past 25 years and the reason for that is because the value of a property is in its land, not the dwelling. Land appreciates and dwellings depreciate, so if you can buy a house in a more affordable area with a higher land-to-asset ratio you would likely see a better cash-on-cash return for your investment.

Maxing out your borrowing capacity also means you won't be able to purchase another investment property for some time, it may be the case that you are only interested in buying one property and not building a portfolio but if that's not the case every investment purchase should be made with the next purchase in mind.

Another thing to consider is the cost to hold the asset in different scenarios. Right now the deal may work out considering we have record low-interest rates, but would you still be able to afford the property if rates rose in the future (they rise a lot faster than they fall and 6% rates are considered normal) or if there was an extended rate of vacancy?
Ultimately property investing is a game of finance and cash flows and it's really important to consider the worst-case scenario and ensure you have the buffers in place to weather any storms.

Happy to jump on a call if you'd like to chat further.

Best of luck!

Josh

 

Just for some actual context. The repayments on a loan of $1,080,000 with an interest rate of 3.30% is $4,730 per month.

That might come down a little in the near future, but at some time over the next 30 years it will also go up.

 

Your partner should get independent legal advice.

By being on the loan but not on the title, she is signing up for the liability without a say in the asset. Probably not in her best interests.

 

Unless you come into money, it's also probably going to take you both a very long time to pay it off, borrowing such a large principal amount.

And what would you do if you lose your job and can't get another at 120k/annum?

 

Op, your income is about 7k a month. Repayments 4700. Body corp 3-400? Insurance, repairs etc.

And you use all your cash savings.

Your financial position gets very precarious very quickly.

 

I think if you wanted to live in the property for a while, the strategy could make sense. Because if the question was about your PPOR, then it wouldn't just be a numbers game, but would have to include your personal tastes, preferences, where you family lives, etc.

However in this case, you are essentially talking about an investment. So it opens up more options for you.

I think the Lower North Shore of Sydney is brilliant for investors with a > 10 year time horizon, and many fortunes have been made here - it's a low risk, low yielding part of Sydney. So I wouldn't discourage you from investing in Sydney's North Shore just so you can chase yield in a secondary area. There is a lot of hot spotting on this forum, and you are instinctively right to stick to more established, premium areas if you can afford it.

But it does feel like you are over complicating things, by jumping around: 6 months here, 6 months there, for what are seemingly tax reasons. Instead, just focus on accumulating the best real estate that you can at a price you can afford, and hold it for the long term.

I would add that I bought a unit for a client in St Leonards for a client just this week, and prices are shooting up. So the price estimate in the initial question isn't absurd for what it is.

 

100% agree - even after 25 years of marriage that one would not fly in our household !

The plan seems to be targeted lifestyle / PPOR requirements.

For an investment I'd focus on land content and something you can add value to.