Invest in expensive property and max borrowing power or invest in smaller property?

Hi all,

Finally I am here posting in this forum after hours and hours of reading . First of all thanks to all for their insights, questions, very very helpful.

A bit about myself, live in Sydney, own a unit here (bought 2.5 years ago), the breadwinner of the family (partner not working, no intention to return to work, 2 school going kids), in a well paid job and looking to invest in properties. QLD was my choice due to affordability especially in Logan council area. Don't have much knowledge about QLD market but can only think of what it will look like from desktop research . I will fly there and go around to explore.
I have borrowing capacity of ~550K (existing mortgage of ~620K) so I have a choice to buy a property (550K - 600K) in better location (closer to CBD, next to million dollar suburbs etc etc) and max out my borrowing capacity or buy a bit far but probably 1 in ~350K range and another one say 1 year from one by improving the borrowing capacity a bit. 10% deposit + acquisition cost is not a problem for me, I can source it.

So, decision I have to take is buy in a better location for higher price (slightly negative geared) and wait for longer (3+ years maybe is my guess) for next one OR buy a less expensive (positively geared) one but can go for one more in a year's time. What is your thoughts? My goal is to build a portfolio to generate a passive income to replace 50-75% of my current income, have about 20 years to do so. Thanks in advance for replies.

 

If you are looking to replace your income with a property portfolio then a high yield strategy on cheaper properties works eg house and granny flat if you are going to buy and hold forever. Those work well in good oo % areas without too many investors so you don't get over supply issues like some areas did in Logan in the last down turn. On the other hand you can buy more expensive property and then sell later in life putting into Lics etf for a passive income...depends on what you want. $550k will get you a house and granny flat (build) in a reasonable area of Logan.

 

I've was in your position and started down the path of using IPs as cashflow to replace income.

It's not a bad strategy if you seek the right assets (Units in right locations, low maintenance etc). However, I found that this will limit your borrowing power for a PPOR eventually and I don't really want to be a resi land lord dealing with tenants.

You could invest in a single more expensive IP, but it will likely deliver lower cashflow and you did hope to get capital gains.

Buying a more expensive PPOR will actually deliver better capital gains which is CGT free will deliver better value. (As @Closet stated, you could debt recycle into a ETF for dividend income).

All subject to your circumstance, such as your future job security, income expectations and if you value living in a good PPOR.

TB

Not financial advise and DYOR

 

The 550K property is more like a house and a granny flat type of configuration so I could rent as one or do a little bit of project work and rent out as 2. It has good owner appeal. I will prefer to do so in next few years if rental demand really shoots up and having a granny flat will appeal renters market. My goal is that my 3rd property onwards should be from equity from PPOR, 1st/2nd IP. I can't at some point keep paying down 10-15% to buy properties.

 

I already have a PPOR so it is not an issue for me. 'Right asset' is what I am after , this seems to be a million dollar question. For a right asset, is it a good to spend more deposit and buy it along with maxing out borrowing capacity is something I am trying to find.

My future job prospects looks really good, it is safe and secure, have been in that job for a long time now. Income expectations will keep going up from what I see. I have got some shares that are doing pretty good as well. Thanks for your post btw.

 

That's building a gf on an existing property rented separately. The way Logan is going atm buying a low $400k property will be gone shortly...

 

yes, that is what I see, 350-400K properties are selling like hot cake, But if I see areas like Beenleigh, Eagleby and surrounding areas, they all had under 2% growth on average but in last 12 months they are 5-6%+. I am not sure if investing there is a good idea, of course rental returns are good but getting equity out and expanding port folio is a question.

 

My 2cents (and I wouldn't claim I have some strategy on some great knowledge - I go by the gut); I went with the "very expensive" option.
I dropped my mediocre IP, in a mediocre suburb, in a mediocre neighbourhood and moved to about x1.7 more expensive IP, maxed my serviceability.

My assumptions doing so:

• Hodl till retirement as passive income and land bank for my kids, so no CGT if I need to sell.
• It's an acreage (15HA) in the 40km radius from Melbourne CBD. Currently Green Hedge, but I hope that in 20-30 years it'll rezone and will become gold mine.
• If not, 15HA of amazing views will be highly desirable in the future and hard to come by (it's already quite hard to find similar land) which means people will be willing to pay more for it (hopefully).
• There's a nice well maintained 3 bedder on it, so there's a good rent return from it as it is.
  It provide a unique rental as it has large established back yard (~1 acre). For families that are looking for life style, that's something that is very hard to find.
  It also has large garage for storage. People loves storage.
• The property includes 2 huge commercial sheds that can be rented with the house or separate. The access to the sheds it separate from the house.
  That represent an additional rent (basically doubles the rent on the whole property).
• The rest of the land is farm land, currently rented to a farmer for 5 years; means I'm getting money for it (not much, but pays the rates) and I don't need to maintain it.
• Very close to the township. It's a small township, but it's growing and have some hype around it as "cool" and "young".

So for me, all those represent quite a safe future and very good yield.
I self manage and working full time, so I prefer to have less properties to manage, however, when there's a vacancy (very rare, vacancy rate there is close to zero), basically most of the income stops.
I personally can live with it, but if rental income is the only income - that can be a problem.

 

Thanks for sharing the info. Never heard of this strategy before, but its too long to hold 20-30 years for me. Are you paying P&I or I only loan? Are you looking to pay off the loan or it will be done only when it will be developed by you or as part of resale?
What are you missing in terms of opportunity by following this strategy? Thanks again for sharing your thoughts.

 

If you are going to invest in Logan and are looking for growth and cashflow you'll need to pick the suburbs that offer both. To do that you'll need to have a look at what happened in 2017 - 2019 as a rough guide for what happens when things aren't travelling smoothly ie investors sell up whereas oo ride it out. Have a look at the vacancy rates during that period as well, the LSE suburbs with high % investors tend to suffer from over supply after the boom from over saturation of investors. Even in that price range there are still decent options based on the stats...

 

I am trying to avoid LSE suburbs as much as I can as the investor to owner occupier ratio is 50:50. But if banks cannot give me enough loans I will have to go there anyways. Nothing wrong in it but as investor I have to start somewhere. The start of Logan council suburbs next to BCC what I am targeting. I see 75% owner occupied vs 25% renters there with good catchment. If I get a job there I won't be hesitant to move into that IP and make it my PPOR. They had a steady growth in last 20 years with a bit of slowness during 2017-2019 and other periods but it's normal I guess. I see that I missed the boat in those suburbs atleast by a year or so when prices a little less but if I do not enter there I cannot forever is my worry. If I go for suburbs down south then I will chew up part of my current borrowing capacity and would anyway cannot buy where I want to in start of Logan council ring. Which is why I am thinking why not enter into such suburbs now where I see old but good reno'ed houses on large blocks of land. A few KM down the road are being sold for 1M+! Who knows the ripple effect may lift up the property prices here.

 

Me neither.... I'm playing by the ear to be honest

P&I. My PPoR is fully offset, so it's time to start closing this load off.

Will pay off the loan via P&I, all the rest of the positive cash will be in offset.
I might go into EFT's when I feel brave enough. Currently I have lots of cash sitting in offset (so it's not totally useless)

I guess I could be much more aggressive with my cash and get higher return if I'd invest it rather then let it sit and offset my loans.
It also means that all my eggs are in one basket. If something goes wrong with this one property - I'm in deep s***t.
Again, my strategy is probably not the smartest from a pure investment property. I could have much better financially with my protfolio.
However, I'm not money hungry. We have a very nice and safe combined income and I have low tolerance for risk.
This strategy feels conservative and quite safe to me. Land dumper market fluctuates.

Just remember that you need to be true to yourself and what makes you tick (or rather what makes you break); for me, I prefer less money while having smooth ride.
If I wanted more money, I could switch job today and earn twice as much (I was head hunted and offered a job), but I declined cause my current job offers me life style that no other job can.
Same with my investments - I wanna sleep at night and not thinking about the future of my kids.

Others enjoy and thrive from the excitement of riding the waves.
Each to their own.

 

In my view it’s 6 of one or half dozen the other.