If you were me... What would you do?

Hi everyone,

Long time reader (on somersoft), first time poster on Property Chat. I read a lot of people talk about how it is good to start property investment early because then you can make mistakes early, learn from them and have time to recover.

I come to you (the wise and more experienced people of Property Chat) tonight asking your advice. I have a keen interest in property which the hope that in the future my successful investments will allow me to live a desired lifestyle. I am mostly interested in if you were in the situation below, what would you do...

My situation:
- Age 26yo
- Income 75k (excluding rental income)
- 55k in savings (offset account)
- Both loans are interest only

Assets:
- 2 b/room townhouse in Black Rock,VIC purchased in 2011 for $500k. Loan is $435k and bringing in $420 p/week
- 1 b/room apartment in Carlton, VIC purchased for in 2014 for $350k PPOR. Loan is $305k Estimated rent $350 p/week

Looking forward to a healthy discussion and varied responses. C

 

Jump on re.com.au and see what they are worth now to look for equity avail and also to see where you sit presently.
talk with broker and see how much you'll have to play with based on your valuation guesstimates
Work out a plan of attack and where to go shopping

 

If I were you, I'd use the following couple years to save up a bit more in cash, instead of expanding the portfolio, especially it;s in a boom time. The loan margins of both your assets still seem quite high, make sure you save up a bit more, meaning the margin could get lower, before you acquire more. Otherwise... just seems too risky.

 

You've provided a current location, but what's your destination? If you knew that, you could join the dots between.

You need to get those places revalued to see what they're worth now, and the amount you can get out. That combined with the above will give you answers

 

Your first step is to get your current properties valued - you'll be much better off using any equity you have in them to fund the deposit for your next property rather than using your savings. It's much more tax efficient. Keep your savings for when you want to buy a home down the track.

 

I agree with Bob, DT and Jess. Also find out if your townhouse rent is at or near market value if you havent recently.

Good job on having IO loans on both places and extra cash sitting in offset - I imagine you might want to turn your PPoR into an IP at some stage. That's something I didn't do in my first home purchase - I did P&I and redraw not offset. Your structure in this regard is much better than mine was as a relative newbie.

 

I'd be looking more closely at what you want. Do you:

• love the profession you work in and want to work in it until you drop?
  • if no, then what? study/work in a different profession?
  • if no, want to retire?
• want to spend lotsa money on stuff (house/car/travel)?
• how much is 'lotsa'?

Then you want to look at your investment strategy - how long will you have to get there? (where there is the answer to your questions above). Does that risk level suit you?

There's more in this to explore, but I believe those are the starting qs.

 

I'd try and earn more money.

Your properties look negative, thus I wouldn't stretch myself any further on that sort of dosh (is that gross or net?). What happens if interest rates go up?

 

@cmack, well done on the progress so far. Others have made great comments. Having your IPs valued is a first good step.

@Bran has correctly identified that your income will soon become a limiting factor (if not already) so work on increasing it enough that it doesn't become an obstacle before you run out of equity to use.

Consider starting something on the side, too. The more income, the better.

 

It really depends on your goals and how focused you want to be.

Assuming you have the goals of becoming a multimillionaire in net worth asap (I don't know if its your goal I am just assuming) then I would be doing this:

1. Increase your income anyway you can to as much as you can.
2. Start buying some property books and learning the basics and then once that is drummed into your head build on that. I have heard, read and seen many people do so many common mistakes that could easily have been avoided if they just that little bit more of knowledge/understanding. I wouldn't underestimate this point imo.
3. Read books/YouTube clips on how to develop a sophisticated mindset.
4. Determine how much cash/equity you have to invest with.
5. Take constant and consistent action when your ready.

That's just personally what I would do. If the above is too aggressive for you then you can tweak it to your timeframe, level of interest, focus etc.

 

Nicely done so far cmack, great position to be in at 26yo. My advice is similar to much of the above.

- Work out where you plan to take your investments, you wrote about your desired lifestyle. How much networth in IPs is required to obtain this?
- Speak to a broker about how much you can borrow now and what is likely required for the next couple.
- I would be considering how my cashflow position will look going forwards. On $75k you can't carry a negative portfolio far.
- For my next purchase I would be looking at purchasing in a different market (interstate) to maximise the probability of catching a market upswing and having available equity.
- Don't use your cash in the offset account, refinance and pull out equity if possible.
- How long do you think you'll keep Carlton as your PPoR? If there is no equity, and you plan to stay there medium to long term, you could pay down the debt by $50k and reborrow the funds to create deductible debt from non deductible. You would want to ensure you can get the cash back on the loan with your broker. I would also seek professional advice on this as there is lots to consider.

 

Ouch that would have hurt. 75k for a 26 year old is a good income I would have thought. I must have been fooled by all the investors with 5+ IPs who are on much lower incomes.

 

Thanks @bob shovel, do you find re.com.au better then onthehouse? I have a mobile lender with a major bank who helped me with my most recent loan and refinancing but may be better to get an independent opinion from a broker. Thanks for the reply.

 

Thanks for the reply @ATANG, I was also thinking along these lines. I drew out some equity from Black Rock to add to my deposit for Carlton hence the current loan margins. Thanks for the advice, will definitely take it onboard.

 

Hi @D.T. my destination is to build a portfolio (as property is enjoyable for me) and eventually be in a position to live comfortably off rental income. I know eventually is not time specific but I am early in my career so not even thinking about retirement... yet! Do you usually just opt to get the bank to give a valuation or the real estate company? One thing I've learnt is the figures can be quiet different between the two.

 

Bank mate. REA's do appraisals, banks do valuations. Big difference. Best bet is to talk to a broker and see if they can get you an upfront valuation. This means they can find out what the banks think of it before they apply for a loan.

 

It has to be the bank doing the val - the RE appraisals can't be used for lending.

 

Thanks for the reply @Jess Peletier, this has been my thoughts so far as I don't plan to sell or pay off loans in the near future. I am more wanting to hold, save and re-invest. But my worry is wont that mean the properties will just become further and further negatively geared? I do like the idea of only using equity to re-invest rather then savings.

 

Should definitely use equity rather than savings.

 

The trick is to do your sums on the new property taking the full debt into consideration. For eg, if you use equity for a 20% deposit and costs, and another 80% loan for the remainder, you'll do your sums on the new property based on that full loan amount, not just the 80%. That way it doesn't become a massive neg gearing burden. Bear in mind also that you'll still have all your cash offsetting your loans.