How to afford a home and build wealth using property at the same time

Hi everyone,

I need some advice on:

1. How to afford my own home in Melbourne within 5 years - 1 million cost
2. At the same time build wealth using property as a key strategy

My current situation is:

• 32 years old. Married with 3 kids.
• Bought a 2 bdr unit in 2011 for 436k. Lived in it for 2-3 years and now it is an investment property valued 500k renting for 425pw. Yield 4.5%. Loan amount was 260k. Principal remaining is 138k. Positively geared now. Equity 360k. I'm renting at the moment
• Salary is 140k excluding Super. Bonus around 21k and company shares 10k each year. I have a small side business with revenue 15k-18k annually.
• Would like to grow passive income so that I can "escape the rat race". Leverage is probably one of only ways to accomplish this.
• I've spoken to a few banks. Using 250k as equity, I can borrow over $800K for an investment property, plus existing $140K loan. I don't have a mortgage broker and am unsure what services they provide that I might need.

I'd like to test the following:

• Buy 1 or 2 investment properties in the next few years. 450k ranges.
• Use equity to buy own home. I'm not confident that the equity will provide enough deposit.

I feel like it's one or the other. Buy a home, sell investment and be forever in debt. Or build wealth using property investment but unable to afford my own home any time soon (unless I keep renting or downgrade my lifestyle).

Any thoughts and comments appreciated. Thank you so much!

 

Hi @dpowney

The key thing with purchasing the two investment properties and then using equity will come down to your borrowing capacity.

Is there potential to grow your business and increase your income?

Using equity for a future home (if borrowing capacity allows in 5 years) requires the properties you buy to grow sufficiently in 5 years.

You may want to sit down with a broker to work out how the overall borrowing looks, and tie these into your specific goals.

What would it mean for you to:
A) Have that dream home and continue working OR
B) Invest to build an asset base which will provide for you over the long term, and continue living where you are?

 

Expenses are 3k. So assume 10k take home annually I guess after tax. The business has stopped growing and may not be around in a few years.

 

Thanks for your reply.

My side business is expected tp decline in a few years.
My wife may return to work part time in a few years. 2 days a week would create 30k.

 

Doesnt sound like your saving much? Not surprising with 3 kids maybe, but your salary isnt enough for your lifestyle and nvesting. Not like the kids will become less expensive as they grow up. If you want to do it with property, unless you can add value you need to save as much as you can for deposits for both ip and ppor.

 

you could sell the IP and buy the home, then debt recycle to pay it down.

 

Thanks. Be disappointing to have to sell the IP.

 

There are 2 ways to look at that!
a) you are losing an income producing and growth asset, but
b) you are gaining a larger tax free asset, which doesn't produce income, but you can always buy a replacement asset.

It might take you a bit longer than expected to get a new investment property, as you will have a bigger debt, it will eventually be possible.

The alternative is to hold on to the investment longer as you might get a potentially bigger capital gain.

 

I was in fairly similar boat.

Have to say renting is not a bad option at all and I personally was renting for good 3+ years and only moved back to my PPOR last month.

Buying your own home won't always be the best investment decision. But if you buy the right investments in the right areas, down the line it should create some wealth to do whatever you want with it..

And Melbourne market will have better opportunities down the line. Not to mention all the data suggest little more pain for Melb market before finding it's bottom and possibly sideways for few years after hitting the bottom...

If it was me, i'll definitely look at buying investment properties in other states...

Regarding max you can borrow and all, that will require bit more questions to be asked tbh...

 

Thanks. Yes I have 3 kids

 

Thanks for your comments. The IP has a decent rental return and the area has solid rental demand too. I don't see it increasing much in value in years to come though. I feel like selling would be throwing 20k stamp duty away. A lot of people always say "never sell" as well.

 

There's the emotional attachment to owning your own home. This is more important to my wife. I'm less attached and more concerned with securing our financial future.

If I was to invest, I'm thinking interstate such as Hobart where I can afford a house.

I'm just not sure if accumulating investment properties will help us to buy a home in 5 years. I can see it has more options and perhaps a better bet. I could always sell the less performing one. 5 years is not a long term investment so I would be betting on good growth. Is this what you think?

 

Those people generally have no idea TBH.
Anyone who understands property cycles would have sold property in Melbourne and Sydney 12 months ago and could technically already buy back the same property and still make a profit after stamp duty and sale costs.

To sell “never sell” is a ridiculous statement when their are options that return a higher profit.

 

I like to take profits off the table and move on prior to peak. Cashed up ready to go again

No right or wrong, but I would not ignore market conditions

 

In response to your actual question though you definitely need to see a broker.
You asked the benefits of doing so? I could write a thesis on why but to keep it simple they have access to every lender. You going to your bank have access to 1 which means 1 servicing and 1 policy.
Also an investment savvy broker like all on here will know how to structure your loans correctly.

Based upon the details you provided then my assumption is you will run out of servicing before you will run out of equity.

Me personally I would be selling. Melbourne isn’t going anywhere for a long time and you have paid down a lot of potential deductible debt. I could almost guarantee a reinvestment of the equity will yield better long term results.

 

If there is no expectation of capital growth is it worth retaining? Could your new main residence grow faster?

You would have to decide if holding the property will speed up you getting the new main residence or slow it down.

A lot of people sell so it is not necessarily a bad thing.

 

Buy ppor, debt recycle and build a growing income producing share portfolio (etf and lic) and then let time do its thing. My opinion only

 

Forgot CGT mate...

And not fully sold on this statement..

 

Off course different horses for courses but my post was just highlighting the statement “never sell” as stupid.
Even in my example with factoring in CGT you could have made a gain in 1 year by selling and rebuying.... but if your telling me to factor in CGT then it really speaks for itself.