How to continue to invest

Hi all,

I hear a lot of experts always talking about property investing being a game of finance and not bricks and mortar and that you should be thinking 2-3 loans in advanced to avoid becoming stuck. I'm struggling to understand this and apply it to my own circumstances. I'm single, make about 90k p/a, good savings and planning buy an investment property, which would be my first property (Still at home for now). I've been looking for a growth asset in Melbourne and given my 700k borrowing capacity, any sort of half decent property would basically wipe that out instantly.

Is it wise to max out my lending in order to get into a big growth market, am i setting myself up to become stuck? should i be focusing on a different approach? I wont be seeing any substantial pay increases (Just the average 2-3%) through my job. How does one continue to invest in this era without hitting a wall early on.

Thanks

 

What's the difficulty with planning though? If you want to buy more IPs then buy the type of ones that will let you do so.

I was pretty limited by both income and deposit when I started out, and I knew I wanted to accumulate more asap, so I bought stuff that was high yielding and let me manufacture quick equity.

If you're not fussed about the 2nd or third loans, then you don't need to worry about that as part of your criteria or strategy.

 

If you've been told that you can currently afford $700k, then there's probably scope to go further with different lenders, but you will hit a limit eventually with a simple buy and hold strategy. Once you've reached that limit it can be a long wait before the market overcomes it naturally.

There's two keys to getting past this:
1. Debt reduction.
2. Increase income.

If you don't anticipate your income being able to increase (sadly this is the economy we've been living in for some time), they you need to work to reduce as much debt as you can. Until it's gone, always work to paying off the loan on your home.

One way to increase your income is through purchasing properties with a high rental yield. The problem is that the rental yield generally needs to be above 12% to make it look neutral to the banks policies and in Melbourne the average is well below 5%. Most propertie with super high yields tend to have other problems which lenders would prefer to avoid, so a yield strategy is only a limited solution.

Another way to improve the equation might be to value add. Buy a property and subdivide. Sell off part so you keep some of the property but make some money from the rest to reduce debt.

There are also a few loan structuring tricks that can work, but only in rare cases, usually where the borrower is self employed.

 

Why be limited to a growth asset in Melbourne? Not sure there is many that are sustainable. Also consider NASDQ. Most people confuse security with loan purpose, then fund the crappiest poor yeilding property they can find, that should be the last property they buy instead of the first, and blow their borrowing capacity before they start and are slaves to their investment. If you can borrow 700k you should have 200k cash, you should be able to make unconditional offers may be pick up a 250k house for 230 k which could be neutral or + geared. You borrow 200k against it maybe have 170k after covering any shortfall. You use that to invest in some fast growing liquid assets on say the NASDQ in 2 or 3 years it has doubled you buy another 250k house or buy some land and build a house borrow another 2 or 300k. You now could have 300k of shares, in another 3 years you have 500k of shares and your houses are worth 620k, you keep 300k of shares, use 200k of shares, equity and 6 years of earnings offsetting loans to buy next property, which you can LOC for 200k, or more if you now qualify for more, and use for play money, even and sit on a beach in Asia until you become a bored alcoholic while you assets grow.

 

OP, I assume you are young. It’s great you are thinking about this early on, but I would first set your goals, then work backwards on how you are going to get there in this lending environment.
This may go against the grain, but IMHO, I would prioritise a PPOR before you blow your borrowing capacity on IPs.