Investment strategy for a 23 year old starting out

Hi PropertyChat

I'm new to property investing and have been rapidly trying to learn before making my first move. I've read 'The Armchair Guide to Property Investing', have been working through heaps of podcasts and of course have been reading the posts on this forum for about a month or two.

Looking to get some advice and considerations on my current situation from the great knowledge base here before I dig into actually researching appropriate properties.

Current situation:

• 23 years old
• Located in VIC
• Living with parents, comfortable staying here for the next few years to save on costs
• Savings of 130k (Large portion inherited)
• ETFs of 30k
• Salary of 75k working in professional services, currently at the start of my career so am expecting this to increase this over the next few years but possibly less growth due to COVID

Current thoughts + rough plan:

• Looking to buy an investment property soon
• Seeking high growth to take advantage of my long time horizon and compounding, comfortable being negatively geared
• Current thinking is to take an IO loan with an offset account for this IP to maximise cash flow, so that in ~5 years I can purchase a PPR with my partner. When we purchase, I can take out the savings in the offset account and place it on the PPR loan to reduce the non-deductible debt
• Beyond this, the plan would be to accumulate as many growth properties as our salary allows on IO loans. Will most likely consider balanced/high yielding assets to build the portfolio further but that seems like a very distant problem. Hard to set a $ net worth or income goal as I don't know what my budgets would be living with my partner as I've only ever lived at home, but will be on the higher side of 'comfortable'

Questions:

1. My main concern is that purchasing now might restrict me for the PPR purchase in the future. Would the best way of roughly simulating the max borrowings in the future be to run the following numbers with my broker:
   • Expected salary for my partner and I
   • Expected gain in value of IP
   • Expected savings after 5 years
2. I want to purchase the IP with maximum growth in mind but also want it to be somewhere I wouldn't mind living in 5 years if the market doesn't perform and my partner and I want to move out from home. This restricts me to the East/North of Melbourne. Is this a bad move? What are the tax considerations when turning an IP -> PPR?
3. Is the rough plan flawed? Feel free to rip it apart if I have gaps in my logic or if you have any words of wisdom that's greatly appreciated too

Please let me know if the questions belong in separate sections/threads or if more information is required from my side.

Also would love to see what the top resources/top posts are from everyone. I've been going through forum posts but not with any proper method in finding the best content/posts and would love to learn more about all aspects of property investing.

Cheers in advance,
Major

 

what about the stamp duty savings of purchasing your first home as an Owner Occupier?

also Tax Tip 23: The 6 year Absent from Main Residence Rule

My suggestion is to buy a house, live in it for a year and then move home and turn it into an IP.

 

Keep ppor and ip separate. Buying ips where you might want to live is a mistake. If you plan on buying more than one ip, and you should, it doesnt make sense anyway.

 

I did think about this, but looking at the requirements for the exemption/concession I think it has to fulfil the FHOG criteria of being a property that is less than 5 years old. From my current knowledge, I thought it was best to purchase property with a higher land to building ratio which wouldn't be the case for newer properties?

I remember seeing this, this might actually be of more value for me personally as there's no minimum period to stay here as well. Thanks!

 

So given the timeline, do you think it might be best to purchase a cheaper property right now to ensure I have borrowing capacity for the future?

Also regarding the statement of keeping PPOR and IP separate, I've seen that mentioned a few times. But if I'm looking at properties with requirements such as transport, amenities, proximity to the CBD as main factors, these are all things I would consider as an owner so why is it bad to keep it separate?

 

The big difference is that as ppor you need to be willing to live there. And there will be areas and cities you dont want to live in, but end up good investments. Why limit yourself?

you need to talk to a good broker to map out the borrowing strategy. Your borrowing capacity is likely to increase over the next couple of years.

 

Fair point, I naturally (like many) feel more comfortable investing in the area I know for my first property (East/North Melbourne) despite knowing I could be limiting myself. I definitely do want to diversify as the portfolio grows but I have done very minimal research in actually looking for properties as of right now. This is probably adding to why I currently feel not ready to invest outside what I've grown up around, this might change with a few weeks/months of research!

Agree with this, I will be getting in touch with my broker soon to discuss this and draw up some projections based on conservative increases in my income

 

Its actually a pretty sensible and considered plan you've mapped out, better than some of the other newbie pipe-dreams that get put forward!

I would second @Archaon post suggesting taking advantage of any first home buyer incentives available, but you are right that the underlying property shouldnt be a dud. Also you will get better rates if you borrow for PPOR purpose. People less scrupolulous than I would suggest one could consider applying to the bank for the loan as a PPOR regardless, even if you "change your mind" shortly after settlement.

I would also add you should look into options for higher LVR lending. Your on point with keeping the offset against the IP loan too, keeps that flexibility there if you are thinking it could be PPOR later.

Have you looked into the first home buyer loan scheme? 95% LVR with no LMI, could be worth considering.

 

Good to hear this! I think as an investor I'm a very 'hope for the best but expect the worst' type.

Yep I should probably do a bit more looking into this, I think I sort of ruled it out due to it being newer property, losing a year of rent and also living by myself for a year would be a lot more costly than at home. I will run the numbers on this though to validate that thinking.

The PPOR loan seems shady Do the banks have any way of checking if you take a PPOR loan and 'change your mind'? I think the main reason I didn't think about PPOR loans though was that I was already hitting the serviceability wall with my income due to the high prices of Melbourne, perhaps I should be looking at less ambitious properties.

Similar to the previous point, I haven't really looked into these points as it's more serviceability/income limiting me, I have only checked rough amounts through the big 4 banks though.

 

You may be ineligible for the 20k FHOG, but being that it is your first home, you are still eligible for the Stamp Duty exemption, which is a win in itself for your first property purchase.

 

Interesting, I think I missed this point on this site - First Home Owner | State Revenue Office

Thanks so much! I thought I was ruled out of everything buying established properties

 

As Archaon stated, You seem on the right track with some good ideas and keep researching.

-Purchase (wisely) as PPOR @ 95% through Aus government supported FHB lending. Generally avoid OTP and new builds unless you really know your stuff.

-Use Vic FHB stamp duty exemption / discount depending on purchase price.

-Load up offset rather than pay down the loan.

-Once completed qualifying periods for benefits above, get valuation for 6 year exemption purposes when moving out and turn into IP. You also ‘may’ accidentally forget to advise the bank of this and remain on PPOR rates. This doesn’t change tax deductibility of loan once IP.
Note other items to do such as depreciation schedule when converting to IP.

-If purchase another new PPOR move offset funds to this new offset. Continue to load up offset as much as possible with disciplined savings.

-Keep learning and invest wisely

-Live happy life and planned financial freedom

Good luck.

 

Buy as OO, get government benefits and a lower rate, live in it for a year or two and then turn it into IP?

 

So upon further reading, I just realised I would have to occupy the property for 6 months for the stamp duty concession.

Summarising the options:

1. Staying in the property for 6 months
   • Stamp duty concession
   • No CGT for 6 years
   • Loss of rent for 6 months
   • Higher cost of living for 6 months
2. 'Change of mind' - Moving in and moving out shortly
   • No CGT for 6 years
   • Loss of rent for a short period
   • Higher cost of living for a short period
3. Purely IP
   • Able to use government benefits in future for PPOR

Without running the numbers, I think option 1 is the most profitable. However, reflecting on my personal situation, I want to remain living with my parents for the time being. Option 2 might be worth considering but I'm not sure if it's worth the hassle, especially if my intention is to hold for as long as possible?

Another thing I read was that if you have a PPOR and convert it to an IP, you aren't able to claim plant and equipment? Not sure how much that is worth

 

Correct -
Since 2017 rules were changed. Search this site for topics RE the changes. Likely Terry’s tax tips has it.

Depending on the age of the property & the fixtures mentioned will determine you answer.
If it’s an original house that’s say 20 years old, not much impact, but if it’s freshly Reno’d you may be losing some immediate tax deductions there.

Remember this is the P&E not the entire building cost, so if the building is 20 years old (in original condition) it still has half the capital works remaining to be claimed. This would usually be the largest part of the depreciation schedule for tax claims.

You could also potentially renovate when finished as PPOR and becoming IP for these P&E items to be claimable if the tax claims are important to you.

Important you check with your advisors here as there are traps and you need to be careful they are brand new for IP to claim.

Regardless it does mean it’s still part of your CGT cost base even if you can’t claim the existing P&E for tax.

I wouldn't change your plan based on tax outcomes but consider them in your planning.

Good luck

 

How much rent would you expect to receive?

Assuming a 5.2% yield $650 x 26 = $16900

Still about 8k better off by my reasoning.

Are you able to use the stamp duty exemption for a PPOR after you have bought an IP? I thought you were excluded after purchasing property?

 

Completely agree with this, thanks for your help @craigc!

I agree, stamp duty is a large amount that i'll have to weigh up against the hassle of moving and other costs of living in the place for 6 months. The other consideration for me is that is this loan is a PPOR, it does take back my borrowing power back quite a bit. Also a consideration when looking at my price range, perhaps I should be lowering my prices so that I do have sufficient borrowing power when I do want to purchase my PPOR in 5 years.

I found a statement on this website - First Home Owner | State Revenue Office

However, probably not best to base the decision on the current rules given a lot could change in 5 years!

 

They are also talking about removing Stamp duty completely, it may not be around in the future to save up your exemption.

 

That's a good point, will definitely need to run the numbers on the stamp duty savings depending on price limits and disregard the thought of using this saving for the future. Then it will be long hours spent researching suburbs and property Appreciate all the advice @Archaon.

 

Note that is NSW government, OP is in Vic where government has confirmed no plans for change so I’d not be counting on any change in the foreseeable future & work off the current rules.

Politicians of course could & do change their mind quickly but unlikely to be changed before OP’s purchasing plans.