New & Lost. Aspiring Property Investor on a low income in need of guidance...

Hi All,

Ex SS explorer here.

Looking to be more involved in the forum this time around.

A bit about myself:

32yr old low income earner (32.5% tax bracket) from Sydney.

Got sick of being booted out from rental property to rental property
so took the plunge and bought a PPOR in 2005.

Postcode 2177 - 4bed, 2bath, 2garage on 564m2 corner block for $400k (worth
about $700k now).
Had no intention of investing so just tried to pay it off as quickly as
I could. Loan is still owing $55k.

Fast forward to 2013 and decided to enter the share market via
a financial advisor. Took out $100k worth of pre-repayments and put it
into a geared fund on the North platform. Six months later took out a
margin loan for another $100k for more shares in a fund with less risk.
Eighteen months later, the portfolio hasn't moved much but always had a 3-5
year outlook for any significant gains (hopefully they come!).

Towards end of 2014 really wanted to get an IP but had no idea what and where.
Sydney was too hot so decided to speak to a property agent. He suggested an NRAS
property in Yarrabilba QLD for $420k but after looking at the characteristics, decided it was not suitable for me (locked in contracts, no choice of property mgr, no cash flow, had to wait 12 months for tax rebate).

Enter 2015 and used the equity in PPOR to purchase a 3bed 1.5bath townhouse in
4178 postcode QLD for $400k about 5min walk to the esplanade. Returns $430/w in rent. Not sure why
I chose this area. Silly as it sounds, it was just a random purchase that felt good at the
time. Looking back, it was probably wiser to pick something closer to the city but I guess
I'll know definitively in a couple of years.

Its mid 2015 now and I'm motivated to get back in the market. Hoping to get something cheap
closer to Brisbane CBD. Been looking at Macgregor, Mt Gravatt, Sunnybank Hills, Robertson or Acacia Ridge. Alternatively, looking at Elizabeth in SA.

After extensively reading PC threads I've come to the conclusion I want to be in the small % of ppl
who own more than 3 IP's. Problem is, I have no idea how to get there. Judging from my situation (below) I know equity is not my problem. Its the servicibility that holds me back.

PPOR valued at $700k
IP1 valued at $430k
shares $230k

Total Debt $255k (100k of which is a margin loan with interest capitalised).
Income 32.5% tax bracket.

Anyone have any suggestions which way I should go? Buy where? What type?
Would love to her what any you would do in my position as I'm totally lost.

Any help would be appreciated! )

 

First thing to do is see a good mortgage broker to find our what you can borrow, and importantly map a plan to see how you're going to get to your 3+ with your existing income and commitments.

 

Welcome. You have done some great things already. There is a big difference been near the top of that bracket and the bottom, you paid off a fair sack of your home so doing ok for disposable income.

With your equity I would try and buy in qld again and sa to get exposure to both markets.

If you are on a low income serviceability and cashflow will be your problems so ensure what you buy isn't too cashflow negative, positive would be better.

Get a broker, they will let you know what you can actually get finance for.

Get tax advise. The way you have obtained the original money to buy shares you have either created a mixed purpose loan or not created any deductible debt. Either way you should have 100k deductible debt, @ 5k a year in interest on that and your current tax rate you are missing over over $1500 in free money every year.. Avoid missing out on this in the future. A good broker can help you here (with non specific "general" advice) so your accountant will have an easy job

 

This is true - you need to split off the redrawn funds to segregate the money you used for shares from the remaining loan on your PPOR or the ATO will get cranky about it. It's usually an easy process.

 

Congratulations on your achievements to date. Some good advise already issued by other members.

 

This is my opinion from the limited info I know about you.

1. Determine what your financial goals are. You said you want to own more than 3 ips and be in the elite group of investors. Your a relatively young person so age is on your side which is really a great thing. Property is not a goal, its the vehicle. So try work out why your investing. What's the goal.

2. All the Financial Planners I have seen in the past are clueless when it comes to building wealth (if that's what you want to do). I'm not saying they ALL are clueless, just the ones I've seen. I know some on here are well clued up. In short, I would ditch your financial planner as the 'Go to' person for guidance.

3. Meet an experienced finance broker (forum posters I'm sure can recommend) who invests in property themselves and has a decent portfolio. There is absolutely no point listening to any FP or FB who has no idea about building wealth from property with no ips of their own, especially if that's what you want to do. So sit down with this broker to get your financial situation sorted out. Borrowing power, how to maximise it etc. This is going to be vital to move forward.

4. Consider selling your shares/pay back margin loan. It will strengthen your position to invest in property. I'm not anti shares at all, this is just what I would do. Depends on your approach/goals/risk profile/how much you want to focus on property at this phase of your wealth creation. Have a look at how much your shares have earned you to date. is it creating wealth for you? Do you anticipate it will in the short to medium term? Can that money be leveraged into a larger asset to give you more chance of a return via growth in property? These are the things I would be looking at.

5. Property Education. This is huge, imo. I have said this many times before, the most successful people I personally know who invest in property have a very good 'property education' and much of that comes from old fashioned books. Not that any 1 book is the Holy Grail. We all know that doesn't exist. But there is so much good information about the basics, property clocks, cycles, things to avoid, demographics, LMI pros/cons, avoid cross collateralisation, strategies, finance, analysing a deal, etc etc etc Just the good ol basics that will save you so much money and time, whilst at the same time broadening your knowledge of successful property investment. If you haven't already. buy some property investing books by Australian authors and read. Then you can clarify ideas, concepts and paths forward with forum members. IMO this is the most logical and efficient long term approach that will yield you the best results.

Just my 2 cents.

 

Yeah, I drew the funds into a sub loan before purchasing the shares. That allowed me to claim a deduction on the interest paid on the 100k even though I only pay a home loan rate of interest on them. It was relatively easy. Just had to fill in a form and submit back to the bank but the staff there had trouble with following instructions: first with splitting the loan then with the amount each loan was to owe and then finally converting both to interest only. My bank was recently taken over at the point so the remaining staff appeared overworked and undertrained.

 

I'm closer to the end of the bracket in terms of gross income but with both properties and a car loan, I'm left with about $300 disposable income per week. If I take on another property and interest rates rise I feel it may be cutting it too close for comfort. I've done the whole 2min noodle thing for breakfast/lunch/dinner and I can confirm its not the ideal existence (1st world problem I know, as many would kill for a hot meal 3 times a day).

 

Great stuff! All valid points and definitely things I need to think about.
To give you a bit of insight into why I went into shares:

I had tried my hand at 'day-trading' in 2009 prior to the GFC. Basically had no knowledge of what shares were and just followed a friend into a $15k loss
Scarred by that experience I told myself I would leave these things up to the 'professionals' if I ever had the inclination to enter the market again.
I strongly believe in 'building a strong team around you' so when I was finally ready, I seeked out a financial planner (family referral) as a starting point.
Why I gave shares another go was based on the logic that since the US market had recovered and surpassed pre GFC highs, I figured the Aus market would soon follow. ASX200 was approx. at 5100pts when I entered so if they can even hit 6500pts by 2017 I'll be doing ok. The other incentive in my eyes was that I would be receiving dividends which I think are roughly 7% (which would be re-invested in the portfolio) and my capital is more or less liquid (I could sell and have the money in my account within 72hrs).
I think at the time, these characteristics appealed to me (and still do, although to a lesser extent due to my increased interest in property).

 

I agree this is vital. Could anyone recommend a reputable broker? I know the forum is designed for advertising or promoting but if anyone out there is happy to take on another client with my situation please PM me. All msgs will be replied too within 24hrs. Cheers

 

HI Golden Lio,

What you've done happens to many people. They 'dabble' with very little to no knowledge and hope to do well. It's never gonna happen that way (excluding the 1 off blind luck).

The great thing is your not burying your head in the sand. You've realised your errors and seeking a new path. Personally, by and large I believe property is the way to go. Yes, shares are fine too. But if you want to build a large asset base fast, you need the power property allows to leverage. That's my opinion. Now that your interest has increased in property, take some time to do some reading and build your knowledge base. Its important, otherwise you'll approach it the same way you did the share market with similar results, although property does tend to be more forgiving.

 

Don't worry if you don't have a PM by now, I'm sure you'll get some mate. Just make sure they are well known to the forum and not someone that has like 1 post.

 

Hey @Golden_Lio

I was like you once - just had ppor and lowish income. @Corey Batt was able to formulate a path forward for me to get onto lenders who'd accept me and also reduce my non deductible debt to increase serviceability even further. Buying positive cashflow props certainly helped keep that serviceability going so I think you're looking in the right places mate.

Onwards and upwards

 

This is where my head is at now. Been looking quite heavily into the Elizabeth post and properties that were discussed last month (3bed house on 800m2 for approx 200k mark) seem non-existent on realestate.com.au. Am I looking in the wrong place or have all the PC members snapped them up already?

 

Thanks DT, I'll take all the words of encouragement I can get

 

When i said 'large asset base 'I wasn't referring to the size of the land, but more the size of the portfolio that is growing for you. Property allows for great leverage so you could be getting a %age return on 500k for only a 50k outlay, for example. I know shares allows this too but not as much and the risks are obviously different, imo. As I've said I'm not anti shares, I've just found it much easier to build wealth from property, based on my skillset and personality.

 

haha yes I do understand. Sorry if my message came off that way lol. But yes, I do agree. Property allows much greater leverage in terms of securing a large asset for relatively small capital. It would be next to impossible to secure a $500k share portfolio with $50k deposit. The one advantage I see with shares is that they are more liquid. If an emergency (medical for example) were to arise, I could easier sell a portion or all of my shares to gain access to funds in a quick amount of time. Whereas with a property I wouldnt be able to sell off say the master bedroom. Its all or nothing.

 

32.5% is NOT low income.....that's probably more than your average joe blow.

Invest in where you know and what you know- else start to research and know the new areas....
Learn from your Shares "mishap".

There's probably 50+ areas you could invest in but it all comes down to the individual investors to see if that property/ area or type of property fits yours overall strategy/ long term goal.

 

No worries Golden Lio. As Mick has said there are many areas you can invest in.

Do you know at least roughly what your financial goals are and what timeframe you would like to achieve them by? Have you worked out your risk tolerance? Generally most property investors start out with the B&H strategy and then some will branch out with other more proactive strategies later on. At the very least, work out your goals, borrowing power and then decide on a state to invest, then narrow it down to some suburbs then some properties. First though, if you haven't already, before you buy anything I strongly recommend spend some time reading to learn about due diligence, deals, analysing an area, analysing a property etc. Otherwise its just increasing your chance to buy a dud and you want your first few purchases to be as great as possible so you can leverage off the growth, assuming you want to build a large portfolio asap. So just think about those things. Take some time. Don't hurry. There will always be great deals out there.