Looking for advice and mentors

G'day guys, I have been reading through this forum and a couple of books about investing in property only in the last few months.

At the moment, I am trying to get some ideas and advice about my current situation. I'm 28 with an after tax income of 75k (of which I can save about 15000 and put it into my parents' offset account), that's expected to go up to 120k in a years time with more savings available, and that figure would be fairly stable for the next 10 years or so (paying about 45% tax as I am also now paying back my FEE-HELP). I'm married with no kid and my wife is not working at the moment.

My parents have a 560k mortgage (they have 20% equity in it), and have 300k sitting in the offset on an interest only loan in Melbourne. I'm currently renting in Sydney but the lease is coming up. I'm paying about 450 a week on rent.

I'm currently thinking about the following options:

1. Keep renting in Sydney OR move back into my parents' place to save money, and once my pay rise comes through, have more borrowing capacity and buy a place back in Melbourne, live in it initially while renting the other rooms out (thinking about a 3 bedder town house with a budget of 800K).

2. Buy an apartment in Melbourne now and live in it initially while renting the other rooms out (a 2 bedder apartment with a budget of 650K).

In both cases we'd want to move out into a bigger place in Melbourne in 2 years time after we have a baby. Do you guys have any suggestions on whether those 2 options are good ideas to get started? Or would there be different and better ways to do it?

Long term wise I want to be able to invest in cash flow positive properties as well as EFTs, pay off my parents place in 10 years just before they retire, while the extra passive income can supplant their retirement, and I can have extra passive income when my and I can retire in 25 years time, with my own PPOR paid off.

I understand it's a long term process and I'm reading as much as I can, but I am also hoping to meet some mentors along the way to learn. Thanks

 

G'day Rolf, thank you for your reply.

I understand your comment, more money is always good haha however I am unlikely to have any more increase in the next 10 years or so, at which point it could increase . I am trying to work out ways to best invest in a property while being able to also live in it, therefore saving rent and putting more into the parents' house, (realistically we can put about 80k a year into the offset account as my parents are both still working). And using that offset account to start building my own portfolio.

 

Babies like a place with some dirt to dig and ride their bikes when they are bigger. Dont be an idiot like me and buy an apartment before having kids ...*headslap* can you get a house/townhouse anywhere decent?


And lliving with your parents...no comment.

 

Thanks for the reply guys We are looking to move back 6 months while we look for somewhere (that's the deadline), it's either paying that money for rent, or saving it for a deposit or offsetting the mortgage, I guess it's better to do it at 28 rather than 48 haha.

@The Y-man yes, at the moment I can use the offset account for the 20% deposit and I can only borrow up to 550K, I'll get another one done in January 2018 as I get a 10% pay rise then.

@Luckycharm that is a very good point, in Melbourne I'd be able to get a townhouse somewhere around Watsonia or Clayton for a 3 bedder under 800k just, but obviously more investigation is required on my part.

@Rolf Latham yes they can, but our thoughts are that as I am on the higher tax bracket, I should be the one doing the investing in terms of property, and as they are closer to retirement, I'll be the one taking on more risk. (but I'm also open to ideas of whether they should invest or not)

Thanks again for all the replies so far.

 

You just need to build up as much equity as soon as possible (you have a 10 year time frame). That will sort out all your problems. Personally I think your gonna have to increase your overall family income and with the new lovely world of APRA I would be looking to buy assets BMV then be able to add value in some way so your not totally reliant on CG.

But if you can find a way to increase of your overall family income, things become slightly easier and potentially much quicker to build up your equity.

 

We are initially looking to live in it for a couple of years, then rent it out after buying a second property. With me on a higher tax bracket, I stand to gain the most when I rent a property out in terms of deductions. That's my line of thinking anyway, but always happy for advice

 

Just don't.

 

I really like the way you are thinking about maximising your savings - living with parents or having people rent out other rooms are both great options.

If your wife is not studying and is able to work (legally and physically), get her to work. Even working at a coffee shop I would think can get 35k or 40k a year.

Buying with the idea of selling in a couple of years has a lot of risks and downsides. Firstly the market could correct by then and you would find it hard to sell and possibly even sell at a loss. Add in buying and selling costs and you are not looking at a good situation. If you are going to sell in such a short time frame you better know property market economics intimately.

Also cash flow positive properties generally come with low growth.

• Inner/mid Sydney/Melbourne - cash flow negative & high growth (although possibly not for the next 5-7 years since they are at peak)
• Outer Brisbane - cash flow neutral & modest growth
• Regional - cash flow positive & little-to-no growth

Obviously these are generalisations and if you are lucky enough to have a deep knowledge of property markets, you may be able to do better.

I have been thinking about how to have both decent yield and decent growth also, and the best I have come up with is development such as buying a property in a decent location where you can split the title and put a second house on there without having to knock down the original one. You double the yield with an extra 200k of building costs, while still having land that is decently located rather than going 30+ km out, so it should still appreciate in value well over the long term. Once you factor in depreciation of the new dwelling, I think this would be able to pay P&I without requiring further money from you each month impacting your cash flow.

Since you are young, you would want to adjust this in your favour.
Land appreciates, so you would want to get land first and add the second dwelling later. So you might get a property (with development potential) every 1-4 years for 15-20 years, using equity for each additional property purchase. After the 15-20 years, you use continued equity increases to add in those second dwellings on the 5 or so properties, because building costs should increase around rate of inflation while the land increases a whole lot faster.

And if you are going to go down this route by waiting for 10+ years to build, the zoning should have changed enough by then such that it would probably be very profitable to knock down the existing property and put 4 units/townhouses which will give you an even bigger boost in both value and yield.

One possible spanner in this is that you would have lower yields through these 15 years. Government would help with that through tax deduction for the loss, and rental increases (eventually) would also help with this a lot, but for maybe 10 years after purchase price you will need to be able to make up the negative cash flow, so you would need ongoing money management to put cash away in your buffer as much as you can, and you would need to do some excel sheet modelling so you are prepared for the effect on cash flow in the short term until rents rise. Similarly with interest rates rises. And again similarly with loans going to P&I due to the new lending environment. A possible way to improve this is to buy, build 2nd dwelling, sell off the original one, then you should be left with a cash flow positive property with depreciation almost immediately and hopefully you can pull the equity sooner for your next one - rinse and repeat.

Anyway, just some thoughts to consider.

 

With yields so low in most nice areas- I'd suggest instead you rent where you want to life. Find a nice place, rent the rooms out to others to cover your lease repayments and put your spare cashflow towards an IP.

When it comes time to get a bigger place, do the same- Rent.

If an owner is buying a $1.5mil house and only getting a 3% yield, you might as well be taking advantage of your tiny rental payments, having others in the rooms to cover your rent and sticking your cash into an area where the yield is much higher!

I do this and live in a penthouse that I don't own, I never have to worry about repairs and I focus on my portfolio.

Alternatively buy something where you can add massive value. Find a 3 bedder in an area where the 4 bedders sell for a much higher price and as a wall to convert it, renovate something and pretty it up.

Just my thoughts - Good luck!

w