First time investor - $250-300K budget

Hi Christina,

@monalisa makes a good point - considering a lower deposit might be a good idea depending on the circumstances. It'd be a good idea to speak to an investment savvy mortgage broker about borrowing capacity and deposit size. Your broker will also be able to give you an indication of the necessary rental yield you need the property to be able to fetch. This in turn might direct you away from some areas with weaker yields and towards stronger yielding areas.

 

I'm in a similar position, wanting to break into the market and build equity, with a longer term goal of owning my own home in Sydney (similar to many I'm guessing!)

I've been looking locally and building savings for a deposit, but the price growth in recent years has outpaced my ability to save. I can now afford some of the outer suburbs and less desirable locations in Sydney, or areas such as Wollongong, Newcastle etc.

Is a more affordable interstate capital city generally considered a better investment than outer regions of Sydney?

 

Nothing wrong with outer regions of Sydney. It just depends on your strategy.

Rental return is currently low in Sydney, so investing locally will mean you will be heavily negatively geared.

 

It took me a second to work out but I like the pun!!

 

If the moneys in an offset though you can still be positively geared and ready to pounce on the next best deal you find. You can find plenty of properties at 90% that are cash flow positive and have capital growth prospects. Lmi just helps build your asset base quicker.

@DaveM and @Simon L are BA that could help.

Keep us updated on your journey

 

You might also want to talk to @Richard Williams in Brisbane.

 

Fantastic! Thanks

So a bit of an update on my journey.. I've actually posted this exact same post on another thread on mortgage brokers but thought it might be good for anyone else to know about how I'm going in case the info is useful but also to get some advice as well.

Here is my first update on my interaction with a mortgage broker:
So today I went to speak to my first mortgage broker based in Sydney. He is my close friends dad, James.

Based on my circumstance ($80K income, c. $100K savings, no other debt/loans), he said that borrowing 10-20% will not be an issue for a $400K property. Since I'm only purchasing a $400K property and not borrowing too much money compared to most people who borrow $400-500K+, I'm better going for a basic package but doesn't include an offset account. He said I could go for the full package but the annual fee would be $395 + $100 set up fee so doesn't make sense to do that unless I'm getting a big loan. He said that even with the basic package I could still use my $100k savings I could make extra repayments to save on interest and have the option to redraw those extra repayments IF I need to for whatever reason eg need the money to go on a holiday or buy my next IP but will have to pay $25 every time I withdraw (this is not much compared to paying almost $500 for a full package). This is essentially the same as having an offset account but I will have to manage it myself which I'm fine with since I only have 1 to manage. James said that when I purchase my next IP, because my loan will be a lot more, they can change it to the full package which will include the offset account.

In addition to this, he suggested that I go interest only for 5 years also at a fixed rate for 2 years, roughly 4.19% but getting a FR is $500. I asked him what happens if the interest rate goes lower but it's fixed.. he said the problem would be when the interest rate goes up not down because when it goes down the interest you pay is tax deductible. But we all know the risk of interest only... what if the property doesn't go up within 5 years? You're essentially screwed. My investment strategy was going to focus more on high rental yield rather than CG (although both would be ideal) but I feel like if I was to go for the interest only option my strategy would have to change in that I need to focus on high CG. What are you thoughts on this?

On top of this I'm looking at borrowing 88% instead of 80% (thanks to everyone's advice on this forum) although I have the savings for it for 2 reasons:
1. I could use the additional money I have left over for my next IP purchase which will be within 1 year or so.
2. LMI is tax deductible (although this is not something I rely on entirely)

So... this is the advice I got. It sounds good. There's also no application fee or any fee I need to pay. James gets commission from the bank so I don't need to pay him anything either.

For those who have had experienced with brokers, what are your thoughts on this?

I was initially going to look for properties in Brisbane and Adelaide through a buyers agent because I feel like Sydney is a bit too risky.. with property prices having spiked up like crazy and most areas not being affordable unless it's further away from the city. If I had to buy in Sydney I would be looking at Blacktown or Liverpool (Western Sydney pretty much). But he said that vacancy rate is very important when it comes to IP and that whilst lots of development is happening in Sydney, there isn't an oversupply of property (yet) and most likely won't be for a while because the population so when it comes to vacancy as long as the property is within 10 years old it won't be a significant issue. However, if was to purchase in Adelaide and Brisbane, vacancy rate can be a problem (again depending on the property/location) which will then impact my cash flow. What's your thoughts on this? It almost seems like I need to just make sure I find the right property... which is the whole point of this threat in the first place but I feel even more confused now.

Apologies for the long post. The more research I do, the more questions I have to make sure I'm making the right decision and I would like advice from various different types of people before I make up my mind.

Thanks a lot
Christina

 

Cool. Will come down to what you your mid to long term goals are. If it is to build a portfolio - then is Basic package the best ? If it's an investment why would you pay it down and not park money in the offset? Just somethings to think about.

What's the reason for the re-draw? Have you considered the risks with the bank having control over this facility? Have you considered the tax implications with this approach?

Also, often people get hung up on the fees. It's a cost of doing business. What's your mid to long term outcome you are looking at? It's like comparing a Lexus with Toyota ....

 

This is something that I did not think about so thanks for bringing that up! I did some research around tax implications for offset vs redraw.

For anyone else interested in the difference, offset and redraw essentially work the same way e.g. if you have $500K loan and $100K in savings/additional money, if you have it in an offset or redraw facility it will charge interest based on $400K. The only thing is that with redraw your making additional payments on top of your mortgage repayments but you have the ability to access those additional payments that you wish as a cost e.g. $25 is what my broker said it costs. So not much difference there... but as @MsAli mentioned, it's the tax that makes a difference.

Tax implications
Redraw
If you redraw money for non-investment purposes then the interest expended on that amount is no longer tax deductable in the eyes of the ATO.

Offset
Any withdrawals you make from an offset account will not affect tax deductibility on the overall amount of your interest expense.

Based on my investment goals, an offset account seems more suitable... just surprised that it costs $395 pa for an offset account!!

 

There is more to it than just an offset account. Suggest you speak with your broker in detail on the pros and cons of each. If you are looking to do a one off deal - that's fine, but if you want build a portfolio over the next decade, then highly recommend you get the right advice.

 

Hi
I am not sure abt Brisbane....But I bought in Adelaide had no issues finding tenants......Thanks to DT from forum.......Likewise I am not sure abt BA for Brisbane but I used DaveM from forum and he doesn't cost fortune......Fees are really reasonable......I purchased it for 335000 and it is renting for 340/wk. If you need any more details I am happy to share.........Due your own diligence though......

 

Plenty of infrastructure projects in the west underway. If your budget is still under 500k in West Sydney your probably looking at a older unit/townhouse . There are quite a lot of units been built so becareful of that. Make sure you if you do end up buying in Sydney its a unique/decent property with courtyard, close to station, internal laundry etc

I've got a few properties in SA and vacancies have never been an issue.