Investment Insight for Young Investor

Hi all,

I am after some thoughts/suggestions on how to continue my investment journey please. (Not sure if here or the shares section of the forum is best suited sorry).


Background:

• 24 yrs old
• Income: $120k - $240K (I am in sales and my income is largely based on my performance. Worst case is $120k, but last year for example I earned $225k)
• Partner’s Income: $60k (unlikely to go up much in the coming years)
• PPOR: $450k based on comparables (unlikely to go up much, in a regional area)
• Debt: $69k left on PPOR loan (P&I 3.76%). I am $190k ahead on the loan. I don’t have an offset, but unlimited redraws and can access this money within 1 business day.
• I have no other debts, nor investments.

Goals:

• Long term: A lot of is said about having a goal and working backwards. I understand that. But broadly speaking, I want to have the option to live off a passive income asap whilst still having a large enough asset base that it’ll keep growing if I was to live off the income from it. And I can’t put a set figure on that because I don’t know what I would need to have the option to retire and the more the merrier! Plus I love working and can’t see myself having an early retirement. I also love making a great career for myself and don’t want to work just to earn enough money to retire.
• Short term: To have over $1m in assets (property, shares, etc.)/cash by the time I’m 30yrs old (May 2024). Currently @ $450k-$69k + $10k cash = $391k

I have been reading this forum for over a year and have thought about possible investment moves a lot. But I wanted to make sure I got my non-deductable debt down first. Because my income is so variable I wanted to wait and see how this year was tracking before I made any moves. I am on track to hit target and likely make another $200k+ and predict I’ll have the amount owing on the house down to $1 by September. So I am keen to get the ball rolling with putting a plan in place. I am open to property and shares and want a combination. My current thoughts are to continue to pay down PPOR debt and refinance and get a split on the home loan. The new split would be for $100k on an IO loan with offset. The $100k would be used to invest into shares, likely LICs. After paying PPOR debt down to $1, put any additional savings into offset against $100k used to invest. I would then refinance again and use $75k (20%) to purchase a $375k investment property in North Brisbane. My first property was in this area and I sold it for $100k more than purchase price after a $30k reno and can still buy for a similar price to what I purchased in that area 2 years ago.

Another option would be to take out two splits straight up, one for shares, one for IP? My understanding is that using a loan as the deposit for an IP has obvious tax advantages, just confirming or am I better off saving enough for a 20% deposit (which would probably only take 6 months to do so)?

I am more on the risk adverse side, mostly because my income is so variable. I like the idea of having debt to pay off as it gives me something to work on. It is easier to predict as I know what I can roughly put in a month and can sit down with spread sheets and calculate how quick I will own it and I like that. I don’t need debt to help me save money though. I am a good saver. I like the idea of investing into shares first is because once I have a IP debt I will want to pay that down ASAP and will channel all surplus founds there. I can’t see myself buying a lot of shares once I have a $300k mortgage on an IP I know paying off is instantly a good return on investment. Whereas shares are up and down.

Any thoughts or opinions on this plan would be greatly appreciated please!

P.s. I also have no idea if anything I said makes any sense regarding the loan structures

Thank you!

 

Firstly Awesome Job!
What you have achieved for your age is incredible and you have a brilliant mindset.

The great thing as well is your actual strategies are fundamentally very sound. You have clearly been reading a lot

I would honestly just start by speaking to a good investment focused broker. I can recommend a few but in Melbourne @Peter_Tersteeg and Sydney @Terry_w @Redom are all quality contributors to this forum. Their are heaps of others if you read the finance section.

I imagine the likely recommendation is going to be to take a LOC against the PPOR to 80% and convert to IO splits when drawn down. Or their are specific products which are very flexible for when making multiple investments.
I’ll leave it to the experts though

 

Couple of things to consider:

1. Do not do redraw on the home loan to use as a deposit for the investment property purchase
2. Set up a seperate facility so that you don't contaminate the tax deductibility of the loans
3. Ensure you use a lender that allows creation of loan splits easily without the need for a new application
4. Ensure you use a lender that has a generous policy on bonus income
5. Dont be afraid to use LMI to leverage - LMI is tax deductible for the life of the loan or the first 5 years of the loan (whichever occurs first). Having more deposit/cash at an early age is much more powerful than trying to save on the LMI. LMI is also reasonable at the price points you are purchasing
6. Run the numbers and see what the figures look like at an 80% LVR, 85% and 88% as LMI skews at these LVR thresholds.

 

You're in a really great position for whatever investing you want to do. You've got a high income with a track record, you've got a lot of money in the bank which can be used for deposits or direct share investment as you've outlined.

Isolating investment funds via splits is critical. You can certainly save for a deposit, but you'd be better served to use this to pay down your remaining non deductible debt (the $69k) and use the funds you've already got for investing.

Your goals are achievable but you need to invest for growth. The tricky part in the current environment is what to buy and were, given that so many markets are dropping at the moment. Take some time with this, I don't think there's a need to rush in and buy right now.

Get an offset account if your lender allows it, they're incredibly useful tools. Redraw and offset shouldn't be a one of the other proposition, the two can work quite well together, but it's the offset account that gives you the ultimate flexibility.

 

Thank you, for your reply and kind words. I will definitely consider an investment broker for advice. Even if I don't stick with it, I know enough to know I don't know everything so no harm.

 

Thank you for the great advice! 1 & 2 is what I was trying to say but probably didn't use the correct terminology. I want to ensure the loan for the IP deposit is tax deductibile.

4 is a great point. I think I will be in a role that is heavily bonus based for quite a while. I have always been opposed to using LMI. That may change though as I get into the investing world and get comfortable with leveraging and debt.

 

I agree that the current market is a bit unclear. Coming from Brisbane this is where I will likely invest and I feel Brisbane wont move much in the next few years so there is time. At this stage I am hoping to repeat what I did in North Brisbane with my first property. But a small cosmetic reno first, rent it out, then potential if I move back to Brisbane in X years time, live in it for 6-12months and renovate completely to sell. And hopefully build up a bigger portfolio in the meantime.

Thanks for your reply also!

 

It’s more than no harm though. They will actually help you map out what is achievable. Don’t think of the brokers on here as someone who just gets you a loan. These guys and girls are strategiests and don’t plan for property A bit for property A,B,C,D & E.

If I can give you any advice is that in the investing game, Team is everything!

 

I would cease reducing your PPR loan and seek to refinance.
Then place additional repayments in offset. Just as a start
I used LMI to build my portfolio early on.. But be careful of the stage of the cycle you are buying in...

 

I was browsing properties on the net to pass time the other day and came across what I thought was a great IP. I did some sums and things checked out and prepared to get my finances in order and see the property. I reached out to the agent and to no surprised, it was already under-contract.

It did make me have a needed discussion with the bank though and prepare my finances to pull some equity and purchase an IP. And I have a few questions after having done so though.

1. The property has a granny flat which was connected to the house via a deck. They said they would charge me 2 valuation fees for the IP since it had dual residences. I felt that this was a joke as at the end of the day it is only 1 title and can only be sold as such. And I don't see how the GF is any different to a pool house, guest wing, etc. I spoke to others in realestate and banking and they said that it was BS too. Is the bank justified in charging 2 valuation fees if there is a GF on the property?

2. I have done some of my own research and I believe it is a good rate for an investment loan, but would others agree that 3.97% is a good INV rate for P&I with offset?

Thank you!

 

Mate, get a good broker. Hands down one of the best decisions I ever made. By all means do your own due diligence but the value comes in the 10% you don't know. Not the 90% you might.

 

At 24 I was making similar money to you and I blew it ALOT on stupid **** going out and getting drunk, girls etc.....you know how it is when your 24.

One piece of advice from an older me is that if I could take back time I would have been way way more aggressive with my housing investments and not be so scared. Like yourself I was a bit risk adverse back then for reasons I cant remember because I had no financial worries at all and I was still living at home.

Back then I already owned a few investment properties in Sydney (real cheapo ones) but I'm not sure the reason why I didn't invest more. That is one thing I regret. Thats why I always tell the younger guys to have the guts and invest dont just talk about it.

 

100%. Best thing I've read today.