How to invest $200k in property

I've done a lot of penny pinching for most of the last ten years and now have approximately $200k. I'm 30 earning approximately $80k, I'm not expecting my remuneration to increase significantly from here on and am keen to work towards earning a passive income so that I can achieve more financial freedom.

I'm looking at using $100k on a $500k IP villa unit in the northern suburbs in Melbourne (Preston/Reservoir) this year, will leave the rest in an offset while hoping for capital growth so I can buy my next IP in the next few years. Based on initial inquiries with banks, $400k-ish is unfortunately about the upper limit I can borrow based on my salary. Am I on the right track?

How would you go about investing approximately $200k?

 

Gday peace, welcome aboard.
Not that familiar with Melbourne, but it's approaching peak of market by all accounts.
I would use the $200k as a deposit for 3 properties in different locations. And not villa/units, houses with as much land value as possible.

 

Thanks Azazel.

Excuse my ignorance... is it possible to achieve this given my modest income? If so, how? What type of strategies do I need to employ?

 

40k can buy you a property for 250k @ 10% deposit. Buy 4. Positively geared. Keep 40k as buffer.

 

Sounds much like my own situation to be honest, and i guess what i found out helped me the most in realizing what i would like to do with the money was firstly trying to figure out what i actually wanted to achieve by what i purchased. I'd try to find a house with a larger block of land (as big as possible) but with subdivision/building potential etc down the track. Still plenty of areas in Melbourne well worth spending money specially with various zone changes that have been applied in certain suburbs.

 

Talk to a broker.... you should be able to borrow a fairly decent amount if you are on 80k

 

I think I probably had 6 IPs before my income exceeded $80k.

Personally, I wouldn't buy a villa and I probably wouldn't buy in Sydney and Melbourne, given how much they've risen in the past two years. I would invest in positive cashflow property that makes you money from day one. And buy one of them (possibly at 88% LVR, but talk to a good broker), then wait six months to make sure you learn about investing and see if it's for you, then buy another few.

 

This is good advice, especially if you are considering getting a PPoR in the future. You will pay some LMI now and in exchange have maximum tax deductibility in the future for the life of the loans, use an offset to keep repayments low in the interim.
A good broker is also a must.

Some people have done well purchasing villas and units so it is possible if you do your research to do well focusing on this segment. Historically houses have outperformed in the wider market which is why most people recommend them.

I would be aiming to buy two to three properties over the next few years with $200k for deposits. Keeping in mind Sydney and Melbourne have just had good runs, purchasing in these markets may not produce much capital gains in the short to mid term. Given you are from Vic I could understand purchasing one in this market, no one has a crystal ball - the market might have a bit more to give during this cycle.

As others have mentioned think about what your goals are, why are you investing in property?

You are already aware of the limits on serviceability, don't purchase anything that's a big cashflow drain or you will find you are out of purchasing power very quickly.

You have done an excellent job saving your cash, good luck taking the next step.

 

Thanks spludgey, 88% LVR is a specific %. What's the reason for 88%?

 

Because LMI rates shoots up above 88%.

 

Thanks Hodor. I do intend to purchase a PPoR at some stage but it is not a priority at the moment. Are you able to expand on the point above.

 

Thanks all.

I also neglected to mention that I'm renting in Melbourne (approx $1.5k/month) and intend to continue doing so which further impacts on my ability to borrow but I assume the responses above still stand. Also, to clarify (though I think most correctly assumed), I've never invested in property.

The common theme from the responses appear to be to pursue positive cashflow as an investment strategy. Has the positive cashflow strategy (as opposed to negative gearing) been suggested because of:
* my limited borrowing capacity (I suppose generating cashflow from day one will increase my borrowing capacity immediately); and
* the fact that I'm on lower tax brackets (presumably, I can't make the most of negative gearing since I'm on lower brackets)?

Am keen to understand the rationale for the positive cashflow strategy.

 

I think it's because you're on 80k and you said "I'm not expecting my remuneration to increase significantly from here on". 80k is a middle kind of wage - not the worst but also not the best.
You won't go broke as long as you have money coming in and if its not bad cashflow wise you can hold it for many years without pain or needing to sell as it won't be draining you of cashflow if an emergency was to crop up.

My thought is, neutrally geared is ok for you, but look for a high growth area or something you can value add to or has some other potential. Just don't go too negative on any 1 IP.

 

I'll use simple numbers and ignore costs that don't improve the example.

You have $200k

Scenario A - No LMI spending all cash (worst case).
You buy a $500k IP using all $200k as a deposit you now own an IP at 50% LVR, congrats. A year later you decide you want a PPoR. So you refinance out $100k equity and buy your $500k PPoR.

IP has, $300k Deductible loan, $100k non deductible loan
PPoR has $400k non deductible loan

Scenario B - LMI (88% capped)
You buy the same $500k IP using $60k deposit and LMI of $10k capped (probably less), you have an offset account (not redraw) and park the remaining $140k cash in the offset to keep interest costs down. You then buy your $500k PPoR using $100k deposit, you get an offset on this loan too for the extra $40k.

IP has $450k Loan, entirely deductible
PPoR has $400k non deductible loan and further funds offsetting this to $360k

Scenario B has $10k extra lending and interest on it .
Scenario B has $150k more deductible debt. @ 5% interest that's $7,500 extra you pay with pretax dollars.

You could also avoid LMI and purchase both at 80%.
This would give loans of $400k deductible and $400k non deductible. I think you'll find that your cashflow position is still improved with Scenario B.

Don't forget the flexibility having $40k in the offset may give you.

Hope that my ramblings can be understood.

 

Thanks Hodor for the explanation.

 

Does anyone have any suggestions as to the price range I should be looking at for my first IP? $500k? Or would this be a more appropriate question to discuss in more detail with a broker?

The general consensus appears to be to invest in a house with a land component. There's not much I can get with $500k-ish in Melbourne at the moment so I am considering interstate (Brisbane/Gold Coast/Hobart) which will require significant research. Stamp duty in QLD is about $10k less than stamp duty in VIC for a $500k property which I can put towards hiring a buyer's agent I suppose..

 

Good points about serviceability - definitely talk to a broker. Every property you buy will count against your serviceability (well, unless your yield is about 11-12%).
The days of 4 properties - or six for gawds sake - on $80k have gone. I missed them along with you as all others starting now. Last year, pre the APRA changes, was the last chance for that. I'm fairly well in @euro73 's camp on serviceability (search for some of his recent posts; @Terry_w too for great sense). Definitely talk to your broker about how on earth you could get more than a couple of properties on your income. Unfortunately, after the first 1-2, how much equity you have and cash to draw on doesn't matter much if youre still asking for loans from banks.
There are good brokers on these forums too. Do some reading and choose one who knows about investment properties, not necessarily a local to you.

 

A southerner willing to drop half a mil north of the border into brisbane
(rubbing hands with glee)...right this way

 

The "rationale" is that investments should return money, not lose money. If you are buying say in Sydney and your negative, that means you will probably be losing money for some time and probably will lose CG as well.

If you can start off positive, that will always be better than losing, now if your got more money and have income to sustain, then you may do some riskier or more CG or development focused etc, but you will always want some positive cash flow, even then.

 

I would agree- slighly negative gear with buying best growth you can afford without getting to too much negatively geared.
In saying this id assume yhe op does not uhave an issue saving on that income.
Id be leaning towards growth (and if need be slighly negative ) especially if growth is likely not going to be from income growth.
Cf pos can work as well..but id foxus more on growth potential more than purely pos cf.