Looking at first investment, please punch holes in idea

Hi everyone. Very new here still, but have come here with a good amount of research already done, so hopefully I don't come across as too much of a beginner. I also hope this isn't too much of a TMI kind of thread, thought to provide enough information so you're able to have an informed opinion.

Our situation
We're on a $190k annual income with about $40k to $50k in savings. That's also about the amount we save in a year. We're both 30 years old and have no loans or credit cards.
I'm Dutch on a temporary visa (that can be extended indefinitely) and my girlfriend is a Kiwi on a temporary New Zealand Citizen visa, so while that income is pretty decent and we're bombarded with the dizzyingly high numbers we can borrow with that income, there's a limit to how much we can borrow with those visas.

We've been in Australia for close to two years now and intend to stay here. We both work in Melbourne's CBD and would like to keep renting ourselves, because we're not sure where we'll be in say 5 years from now. We don't want to lock ourselves down to one area or type of house just yet and property close to the city is more than we can/want to borrow anyways.

Things we've taken into consideration
We love working. We both work fulltime jobs and have a pretty decent career trajectory going. As such we don't have the ambition to retire early. The idea behind investing is that having our money parked at the bank does nothing. It's safe and predictable, but that's it. Additionally you start spending money on dumb things if you have it sitting around. We prefer to be forced into an artificial, somewhat frugal lifestyle, knowing that things are covered for the long term.

Shares
We've looked at shares as a form of passive investing but with shares you're betting on growth and you're often told you should let it sit about 17 years before you should really expect growth. We're not the biggest fans of putting all your money into something that relies so heavily on outside influences. The ROI on a, what is considered safe, fund like say the ASX200 is also pretty low that you might as well put your money in a term deposit account and have no risk at all.

Property for growth
This is obviously the one most people do. Buy something and sell it a couple years down the line for a profit. "You'll double your investment in 20 years." Is something that we were told. Our opinion is that growth is stagnating a bit, so while you can definitely still find up and coming areas that will give you a good return, the massive growth we had the last 20 years is a thing of the past.

Property for rent
This is the one we're interested in. Buy something that, as long as it has renters, will make money. It won't be an earth shattering amount and it'll take fairly long before you break-even, but it's fairly low risk, has the advantage of being able to add value to by putting in some elbow grease and/or money, and if everything goes sideways we could decide to live their ourselves.

The idea
Get a lower value property. We're thinking in the range of $150k in a more rural area that has it's own local economy with a rental price of around $250 per week. There's obviously things to look out for. A couple that we're aware of are:

- Economy isn't completely built on a single industry (like the mines in WA for example)
- Age of the population and whether or not people are/will be leaving the area
- As an extension of that, if the growth of the area matches at least inflation
- Is there a healthy amount of people interested in rental properties/average rental prices
Happy for you to add to the list

Reasons we're interested in this particular route is:
- Cheap and low risk way to get started and learn the ropes of owning property
- A stable long term income if you have renters, but due to the low price doesn't hurt too much if the property is empty for a while
- You can add value yourself (painting the house, putting in new kitchen, etc)
- You have assets making it easier to loan more money in the future if we were to expand our portfolio
- Comfort of knowing you own something tangible (purely an emotional reason)

Downsides
- Return, especially without renters, will be low/non-existant
- More work and stress than shares
-

Long term
Long term we'd like to build a portfolio of multiple properties spread out over Australia with the idea of spreading the risk and generating a passive income to compliment our normal income. At a later stage we might also be looking at other strategies and/or building something. We love project management kind of work so building something, even if it's not to live in, is high on our bucket list.


So that's the idea. I'm sure I'm forgetting something, but I'll just add that when I remember.
My question at this point is really just to poke holes and ask the tough questions we might not have thought about. This idea is based on what several colleagues and friends of ours have been doing for several and we've pitched the idea to them. We didn't get much pushback and/or questions we couldn't answer, but they might've just been polite. So don't hold back, tell me why this is a bad idea! ;-)

Thanks!

 

The idea of multiple low value properties doesn't settle well with me. But that wasn't our strategy.

What if these properties go no where due to little or no growth over the years, and at the same time metro areas show much better value/growth?

Is there a chance you may have an issue with just having borrowings, so you want to ensure its an amount you feel comfortable with? Perhaps its a mindset shift that is required?

What sort of properties have your friends and colleagues been targeting?

Do you have examples of where your proposed strategy has worked and yielded results.

Best to look at your overall potential, your borrowing capacity and where your resources and current savings rate can take you over the coming years.

 

Hey Thijs.

Great starting point, and awesome ambition.

You'll find life doesn't always go as planned, so need to consider, illness, kids, loss of work/visa, will family rely on you at some point in the future? That may have an impact. It's amazing how quickly your drive for career vanishes when you or a close family member has a near death experience.

The implementation of your plan will also likely be a combination of different avenues. So best to look at how much time and resources you're willing to put into it. Are you time or asset poor?

As the twins stated above, with your resources, super low entry cashflow properties like that are likely more if a hindrance than a win. Best to look at stronger capital growth/uplift potential properties in or around big cities and maintain a balanced (neutral geared) portfolio.

The truth with real estate investing, as much as we talk cashflow, you need a strong capital uplift to grow any sort of decent retirement worthy portfolio.

They key to success is consistency, set at least a yearly goal to work towards. Buy 1 property a year, or generate $10k passive extra income per year, increase income by 10%. Etc a little challenge both you and your partner have agreed upon together.

 

Take caution in going too rural. it is not a low risk investment if you struggle with consistency of securing tenants, or struggle to on-sell. It is not cheap if it costs you due to failure to grow in value.

 

As a "slumlord", I can tell you that buying low quality high yield properties is not as simple a solution as you make out. Just one example, maintenance costs are largely independent of property values, so you'll spend a much higher percentage of the property value on maintenance.

But that's not the main issue, the main issue is that you don't seem to have a good long term strategy yet.
Generally you might but high yield properties partl on in your investment journey, because you're either running out of cashflow or servicabliserv for lower yielding properties.

A high yield is nice and you should still strive for one early on, but it shouldn't be your primary focus.
What you want to do is buy something that is likely to give you good growth in the medium term.
You'll then in time be able to remortgage and par for the deposit on another property.

Leave high yield for IP 4+.

Personally, I wouldn't look regionally, I'd be looking at Perth (it's going to be the next one to boom, in my opinion) or perhaps Brisbane. You can still look for cheaper, higher yielding areas within those markets though.

 

Forget 150k props. Forget rural.

Choose good or ripple locations. High demand OO areas. Something you can add value to later on. Max out your serviceability on high demand, high chance growth areas, maybe 400-550k price points. You need to get that equity engine started on quality deals not rubbish . You seem to want to focus on peanuts cf before you build the equity . And you still have all your serviceability . I wouldnt go down that path. That's my advice .

Also keep reading more. Lots more to learn

AND...tbh..

ADD VALUE POTENTIAL
ADD VALUE POTENTIAL
ADD VALUE POTENTIAL


That'll make the biggest difference imo.

 

Thanks everyone for your replies. I really appreciate it. Seems I have a bit more researching to do!

 

The skill that will help you the most is GRIT.

Owning numerous properties and making money from real estate aren't necessarily correlated.

You'll meet a lot of people on your journey with a half dozen, dozen properties, boasting of their success, when in reality they simply had a high income/inheritance/had 1 good deal/haven't actually crunched their numbers.

Be clear on your end goal and be prepared for the super hard slog ahead.

 

Which area/suburb do your recommend? Do you see value in HL package (for the premium one would pay) or existing? Is Depreciation benefit for HL package overrated if one is after Long Term CG?

 

As close to the cbd as your budget/financial situation will allow with add value potential.

Re HnL packages I haven't had much to do with them. I think most would make inferior deals to what I can otherwise get with established, add value properties.

 

For a first IP, I think it should always be existing residential. Even if NRAS was still around, I'd still recommend that as a first purchase, even if @euro73 might disagree.

 

@spludgey thanks. Do you mind explaining rational behind this? I was under an impression that you get max tax benefit with new? @euro73 your view?

 

Setting NRAS aside, yes there are changes to depreciation laws around properties where you aren't the first owner.

If you accept that future growth will be slower and lower than in the past , because of the APRA regulations relating to assessment rates and debt to income ratios....

And if you accept that holding costs are going to much higher than in the past , because of the APRA regulations relating to IO quotas

And if you accept that those two issues require you to improve your cash flow to reduce debt in order to improve future borrowing capacity and future holding capacity, I don't know why anyone would be building a resi investment portfolio today where that isn't foremost in their thinking

 

People talk stats without looking at the causes.

"Property doubles every 7-10 years".
Ok, since the beginning of time?
In the last 100 years?
Why?

Industrial revolution, houses became dual income, inflation, looser lending, lower interest rates, international purchasing, higher migration.

What's going to cause the next doubling considering we have the lowest rates, dual income families, etc.

Hyper loop? Wouldn't that reduce existing home prices as far flung suburbs are more central? Curious.