How to start an investment portfolio with 700K?

Hello community,

I am writing for some advice please. I received 700K a few years ago (and still have this amount of money) and was going to invest back then but didn't because of not knowing how to do it, beginners apprehension, and then I started to do some travel and this went for an unexpected extended time of a few years. Now I will come back to Australia to start this process of investment in September this year (I know that I missed the best investment period 3 years ago...but what to do?). I have bought Jan Somers book 'more wealth from residential property' and I am waiting for the delivery overseas to start researching. In the meantime I would like to ask advice about how to proceed with property investment. Currently I am not working but receive the interest on the money. I plan to come back to Australia and buy my PPOR in a regional town for around 300K. I would then like to buy another IP house around 400K. Then after getting some experience and with more research I would like to proceed to purchase more property in the future.

1) Would it be wise to pay for my PPOR without a mortgage? I like the idea of not owing any money to the bank for my own home and therefore not paying interest.

2) I have heard about an offset account for PPOR, but how safe are these in a financial crisis/bank crisis? I am not so certain about the future world economy and if there was to be a huge economic crash, and the banks had a crisis, would I then lose the money in the offset account and therefore my home? And how would such a crash affect people who own property? Would there be loss of property or invested money in the property?

3) Would it be wise to purchase my PPOR before an IP? or IP before PPOR? and what are the reasons why?

4) Would it be also risky to use my PPOR as collateral for the IP? Is there another way that I could purchase an IP with a mortage if I had 400K cash (700K - PPOR 300K) and not use the PPOR as collateral? I don't want to lose my home.

5) How much deposit should I use for IP? How would I work out how much deposit would be required for any IP? Is it best to pay as little as possible or more than usual to get a good return on investment?

6) What mortgage options do you think I have for the initial IP and then subsequent IPs?

7) What investment strategy would be good in my situation? (My goal is to own as many IP's as possible to bring in good cashflow either now or eventually, and CG of course)...how would I plan to buy my PPOR, and IP, then additional IPs? Like, would I use deposits from my cash, increase in CG, or other ways?

8) I am looking forward to receiving the book to understand how to make investment decisions based on calculations. In the meantime, how do I calculate whether I am buying a good investment (neutral or positive cashflow)? ...and any other calculations that might be necessary/helpful to making a decision?

9) Do you have any other suggestions or advice or recommendations?

Thank you so much in advance for any advice, suggestions and help. I am new to all of this and look forward to finally commencing this journey. I know I have quite a few questions but I want to be fully aware of how I should go about this process and make as minimal (or none at all mistakes as possible....and I just need a bit of help to get started in the right direction.....so thanks

 

Welcome MissBee. You've come to a great community of investors with loads of knowledge and resources here. There is really a lot involved in your questions so i'll just answer it from a broad strokes approach which is only my opinion. I'm sure the others will chime in with great advice.


I have bought Jan Somers book 'more wealth from residential property' and I am waiting for the delivery overseas to start researching. Great start! I'm a firm believer on buying some books and starting to learn the basics.


Currently I am not working but receive the interest on the money. If you want to build a portfolio as you have indicated below, you will need a job. Banks will not lend you money unless you have income. There's no escaping this.


1) Would it be wise to pay for my PPOR without a mortgage? I like the idea of not owing any money to the bank for my own home and therefore not paying interest.
This really comes down to your goals and how big and how fast you want to build a portfolio. Also need to determine how aggressive you want to be with your approach. A lot of investors who plan to build a large portfolio will usually just give a deposit for their PPOR and use the rest of the funds as smaller deposits for investment properties (as long as you have serviceability, this is where the job comes in). I'm no expert in finance but I'm sure the expert brokers on here will chime in.

2) I have heard about an offset account for PPOR, but how safe are these in a financial crisis/bank crisis? I am not so certain about the future world economy and if there was to be a huge economic crash, and the banks had a crisis, would I then lose the money in the offset account and therefore my home? And how would such a crash affect people who own property? Would there be loss of property or invested money in the property? Hypotheticals like a huge economic crash are always possible but in my opinion unlikely. I don't think you would lose money in your offset accounts but the brokers on here will answer it. How a crash affects people who owns property is too hard to say as there are many variables. The best thing for you to do is invest at a pace and risk amount that you are comfortable will.

3) Would it be wise to purchase my PPOR before an IP? or IP before PPOR? and what are the reasons why? I don't think one is better or not. The only thing is many investors will be conservative with their PPOR in the beginning because they want to have the excess deposit for more ips. Then later on in life they upgrade their ppor once their portfolio is more established. There is no right or wrong, just depends on your goals really. Your goals and risk tolerance will determine quite a lot.

4) Would it be also risky to use my PPOR as collateral for the IP? Is there another way that I could purchase an IP with a mortage if I had 400K cash (700K - PPOR 300K) and not use the PPOR as collateral? I don't want to lose my home. The finance brokers here will answer more in depth, but if you decided to go the route of buying your ppor outright then you can just use the 400k as smaller deposits for your ips. Although in actual fact your ppor is never 100% risk free because if things go really pear shaped in the future, the bank can always go after your ppor. Again I'm not finance expert but I'm sure they will chime in here.



5) How much deposit should I use for IP? How would I work out how much deposit would be required for any IP? Is it best to pay as little as possible or more than usual to get a good return on investment? This depends on your goals and your level of risk tolerance. Usually the most aggressive investors will want to put in as little as possible when starting to build their portfolio as this allows them to build is faster. I think the more conservative approach is to fund 20%. Work out what your comfortable with and what's right for you and your goals.

6) What mortgage options do you think I have for the initial IP and then subsequent IPs? Best to talk to a good finance broker. There are some on this forum who could help you.

7) What investment strategy would be good in my situation? (My goal is to own as many IP's as possible to bring in good cashflow either now or eventually, and CG of course)...how would I plan to buy my PPOR, and IP, then additional IPs? Like, would I use deposits from my cash, increase in CG, or other ways? You certainly don't ask easy questions do ya OK well you will get a myriad and a half of answers on this one. To be honest the answer to this could be thousands of words alone, but ill try to keep it simple. If you want to build wealth long term you will need good CG at least in the long term. But you also need the cash flow from the rent to sustain your property in the mean time while it grows in value, so really many have a balanced approach. Many people look for areas that have good CG potential for the medium to long term whilst the current rent is able to meet most or all of the repayments. Because if you have 5 properties all Negatively Geared and eating $150 a week from your pocket, for most people its not sustainable. So a balanced approach for most people is realistic and sustainable. But this totally depends on your income. Someone earning 60k and someone else earning 250K their options will obviously be somewhat different. Age also is very important, I'm assuming your fairly young in your 40's perhaps. Someone in their late 50's again will have to approach things a little differently. The younger you are, the more options you have generally. Also as your portfolio grows in value you can use the increased equity as deposits to fund further ips acquisitions, which is a very common practice among quite a few investors.


9) Do you have any other suggestions or advice or recommendations? Everyone will have their own take here. Personally I think its good to buy a few books and read, trying to get your head around the basics before you formulate any plan and jump into anything. Also discussing with experienced investors on the forum is a great way to learn and ask questions.

The great news is you have 700K which gives you ALOT of options, you could probably buy a ppor and a couple of ips which is a great way to go from zero to a multimillion dollar portfolio overnight It just depends on what your own personal goals are.

Most important. none of the above will work unless you have a job. You must get a job.

OK end. lol gosh that felt like a marathon!

 

I was in a fortunate position to have my PPOR fully paid off. I borrowed against this and this money became the deposits for my IP purchases. Thus I was in my own house which had only deductible debt against it.

As Leo said, 700k gives you a lot of options. Its a pity you didn't start a few years ago, but that's the past. Keep moving and enjoy the trip.

 

3) Would it be wise to purchase my PPOR before an IP? or IP before PPOR? and what are the reasons why?

Myself personally would get the PPOR to claim FHOG if you are able to, otherwise it is up to yourself.

 

Based on this, my suggestions:

• Get a full time job.
• Work out how long you’d want to be able to keep float with no income and keep enough of that $700k aside to ensure you can last that long. This should factor in future "holding costs" for any properties you buy.
• Use the surplus to gear up into properties. If you had strong enough income, in theory you could keep $100k aside and turn the remaining $600k into round $3.5mil of investment properties but with no income presently, that won’t quite work. You’ll want to talk to a great broker to determine the kind of rental return you’ll want (based on your income/expenses) to maximise your situation and put your capital to its best use.
• Rent where you want to live for now and buy later.

 

Thank you to everyone for posting your opinions and advice. Thank you so much Leo2413 for putting in so much time and effort to reply so extensively, this is very generous of you.

I wondered if I could at least buy an IP without a job if I put down a large enough deposit?

Leo: you mentioned that I could just pay a deposit for the PPOR, but then I would be subject to the costs of paying interest, isn't this a waste of money?

A friend of mine was telling me that I should not borrow money from the banks, as this would cause stress to pay back loans and debt, stress if tenants don't pay or if there is vacancy, and then the banks can just take all of the money you have invested if you have some difficulties with the debt for a period of time. He suggested that I just buy my ppor (300K) outright, buy an IP outright (300-400K) and then just receive the income from the IP.

He also said I should be looking for a minimum 10% return. Is this even possible (other than mining high risk IPs)?

LibGS: what is deductable debt?

Steven Ryan: why would I rent where i want to live now and buy later? isn't renting just paying for someone else's mortgage

The-Y-Man: I have been living in Thailand for very little, I have to return to Australia and evaluate the living expenses. So far I have been spending about $1000 or less per month.

Thank you all for your help

 

Deductible debt is....

"Debt used to purchase an income producing assets, for example an investment property that is rented out. The Australian government allows this interest on borrowings to be of set against taxable income, the result is reducing taxable income."

I bought my house outright. I then borrowed 80% of its value as a line of credit type of loan. Well done Euro73 for helping me set this up! This money was then used as the deposits on my IPs. So all the interest I pay on my PPOR is tax deductible.

So far I've bought 3 and another is in the pipeline, all NRAS properties. I hope to buy another 1 or 2 by the time NRAS finishes in June 2016, but with all the lending changes who knows.

 

Miss bee I suggest that you ask the friend who is giving you advice about borrowing money from banks how many properties they have and how they got there. I would also ask them how long they have been investing in property for.
Plenty of people are "experts" and are happy to give advice without walking the walk.
I suggest you see a good broker and set some investment goals. Then give it a go.

 

Sometimes your friends have good intentions but their advice may not be appropriate or correct. In the case of your friend, it sounds like they have never owned an investment property, or that they have, but they did a lot of things wrong.

As for the renting vs buying–the main reason is to maximise your lifestyle AND financial situation. If you rent the same place you could have bought, generally, renting will be notably cheaper than mortgage repayments on the same place (so it frees up more cash), plus you have greater flexibility. In the mean time, some of the money you save while renting can be used to invest further to create more wealth which, if you wish, can then go towards buying your own place in the future.

It seems counter-intuitive at first as it seems like rent money is "dead money" but it frees up other money to put to very good use and can make a huge difference in the bigger picture.

I bought a place to live in as my first property instead of an investment. If I knew what I now know, back then, I would have continued to rent and bought an investment property first and probably have twice the property portfolio as a result.

 

Don't get financial advice from your friend. It sounds like they are one of those people that can find a thousand reasons not to do something. Talk to some people who have invested before (like here for instance) and start reading lots of books.
Having your money work for you is one of the most achievable ways to create wealth.

 

Be very careful with purchasing a property and using it as an investment day one as it has tax (CGT) implications.

Best scenario would be to live in the property initially and then rent it out. Seek an accountants advice and more importantly build a team and ensure that the advise given by everyone in the team aligns as you there are many considerations i.e. asset protection, tax and finance.

Sometimes they don't align but you need to understand the implications on such advice.

 

Hi LibGS,

How have these NRAS properties performed.

Care to share your experiences? Namely area/PM used/initial costs

Anyone else have thoughts/experience with NRAS?

 

Not much to say really, I've only recently bought them. 2 in Orange (NSW) these were 260k, 1 in Croydon (VIC) 290k and I have a deposit for 1 in Port Macquarie 260k. They were well priced, right on the valuation. Once I do my taxes I'll get extra money from the government. There are some dodgy operators out there who sell over inflated NRAS properties, so the key is independent valuations.

PM wise, nothing different, they get some extra money for the extra management and the only difference with the tenants is that they to meet certain income requirements. We pick the tenants, we set the rental conditions, the government does not impose tenants on us.

For me they are a pure cash flow prospect. I expect each of them to be about $9k CF+ per year over the next 10 years. This represents an annual 15% return on investment after tax. Any CG is a bonus, but I would confidently expect a modest 2% per annum. And all this with $0 out of my pocket. If I get the other 2, I'm looking at around $55k of annual debt reduction. I'm pretty happy with it all so far.

 

I don't think you need a job, it depends on your, aims ambition and lifestyle If you have kids and where you want them to go to school. Rather than buying a PPOR in Australia and spending more to live than you can earn. I would buy about 3 properties that would give me about $3k a month in income and go live in S.E. Asia for $1k a month and take advantage of the cheap flights and travel around the area, surplus income could be invested in the share market it is easy with an online broker. Live and travel when your young. It does get old after a while. Take advantage of every day. When your old and when travel, partying doing nothing isn't fun anymore, is the time working if you have to, or want to, may be more satisfying. Don't slave away the best years of your life to earn money to enjoy, when you are too old to enjoy it.

 

Thanks for sharing.

I was very close to purchasing an NRAS property myself but pulled out once I realised how much $$ I would initially have to put up.

NRAS seems to come with its own set of fees (with a mountain of paperwork) and the 10 year contracts seemed quite rigid IMO with heavy break costs involved. Selling the property before the 10 year NRAS contract expired would also present a whole list of issues as I was told you would either have to suffer the early termination costs or sell the house with the NRAS agreement on it (thereby reducing your market).

It appears the main attraction to NRAS is the fat rebate owners are given once a year at tax time to make up for renting out the property for 20-25% below market value and although this does make the property materially +ve, I found it severely hampered my CF throughout the rest of the year.

Therefore my conclusion was although NRAS has many +ve aspects, I found it really only benefited individuals on the highest income bracket (whereby the tax breaks were maximised and CF was not a problem) and not suitable myself (32.5c bracket).

note: Its been approx 12 months since I was exposed to NRAS so not all details may be accurate and/or current.

 

The paper work was annoying but didn't take long to do. I needed some verified ID as well. As far as I know there are no costs, with my props anyway, for leaving the NRAS scheme or selling before the 10 years is up. Euro73 might like to elaborate.

What sort of extra costs did you find when buying? I had a $11 application fee and extra PM costs. I've been extremely lucky to have Euro73 to help with the whole process and provide good brokerage services.

 

Your friend doesn't know what he is talking about. I wouldn't buy an IP for 400k outright as you would never get a 10 percent return over a long period of time. You should buy blue chip shares if you're afraid of debt.

Property investment works only because of debt. It is you ability to leverage that 700k into buying several million in property that makes the returns good. This way you receive your return on investment on the leveraged amount and not just your deposit amount.

For example 400k IP goes up 5% you make $20k
400k in shares goes up 10% you make $40k
You use that 400k to borrow $4 million in property. Property goes up only 3% you make $120,000

That's how leveraging works

Obviously that is an extreme example that doesn't include hidden costs, taxes and all sorts of other things. But I hope it illustrates why you would invest in property.

If I were you and a little worried and conservative I would do something such as
Buy PPOR outright
Use 40k of your cash to borrow for an IP and see how it all works and build confidence in the process
Park the rest in blue chip shares
Buy more IPs when you're more confident

And as for market crashes and an uncertain global economy. If you can hold your properties long enough you will always be okay. For example the US housing market has recovered from the GFC (Unless you live in Detroit) and markets like San Francisco are going crazy. The worst case scenario might not be losing everything it might just be that you lose money on paper and have to wait several years before your investments start working again. If you look at all the great crashes you will always see that land values come back up eventually, you just have to be able to hold.

 

Again, I appreciate everyone's advice, thank you.

This is hard to imagine actually doing, renting a house when I can afford to buy one...Because wouldn't my own house be considered an asset which value also increases with CG? So then it would be better to invest my money into my own house/mortgage than someone elses?

How do I find property which gives me income positive results like this?

Does anyone have any recommended ways of working out mathematically if a property is a successful investment?

Thank you.