newbie looking to develop and refine an investment strategy

Hi Everyone,

I am a newbie, and have recently started thinking about investing in property. I'm looking for some advice/reflections/chat on setting and refining a strategy for our investment goals.

I'll start by giving you a background to our situation.

I'm married, we are mid 30s, two kids aged 5 and 7. I have a home based business that could probably be described as part time/lifestyle (profit around 30k, growth potential to roughly double this), my wife works part-time in the community sector earing around 55k. Our current income and lifestyle situation is a deliberate stratergy, our aim up until this point is to have a relatively low-income, financially low maintainence lifestyle during this phase of our life, primarily to avoid commutes, before and after school childcare, and enjoy our children while they are young and invest time into our relationship with them. We are in a good position currently in regards to this goal, and enjoy our life as it stands.

We have a mortgage on a home in Eastern Heights, Ipswich. It's a large character home in a really nice spot, built in and tiled downstairs (massive rumpus room + storage) but not legal height. 670M2 corner block, new Coles and shops 2 min walk. Good views, good street, we're on the fringe one of the blue chip areas, close to CBD, parklands, good schools. We paid 282k in 2015, and it's currently valued at 335k, and we owe roughly 218k (117k equity). We badly need to renovate the kitchen and bathroom, and want to reconfigure the house back to it's original 3 bedroom format (its currently 2 bedrooms + sleepout). I'd estimate that it would be worth 400k if these works were done. I estimate we could achieve these renos for about 30-35k (we have tradies in the family and retired parents with time on their hands). So we are reasonably confident that this house is a solid long investment. It's our second house, we bought, renovated and sold a workers cottage in Silkstone prior to this. So we've been in the market in a modest way for about 10 years, but have never thought about investment property before.

However, we suddenly have one eye to the future, something we have been blissfully ignorant of up until this point. Our low income lifestyle has been great for us, and we have managed to get into the property game, which is great.

BUT – as a result of this low income lifestyle, there hasn't been any hint of forward planning. We both have HECS debts that aren't really getting paid, and our super situation is poor. I was ripped of about 3 years worth, and we just don't have that much due to our employment and lifestyle choices. We have no other investments, apart from my business which is propably worth $20k. We don't really have much spare cash, also as a result of our lifestyle choices.

A positive is we both have the potential to increase our income. Me with business growth, and my wife could work full time. In saying this, ideally we'd like to keep our low income situation until our kids are a bit more independent and in high school, around 6 years time.

So, we have been recently been thinking about investing in property as a way forward.

I understand that setting out goals and then developing a strategy is the place to start, so I'll start with our goals.

1. grow retirement nest egg to offset poor start to super and retirement savings.
   
   
2. have money to help the kids with deposits to get into their own homes (roughly 25 years time)
   
   
3. have 2 houses + PPOR family home paid off by retirement age, then either cash our one or both (depending on the market) or continue to hold and receive rental income to help fund retirement.
   
   
4. Last goal – have enough equity to maybe get into flipping properties as a semi retirement fancy (roughly 15-20 years time).
   

A note on this last goal. My business is in catering. It also is financially low maintainence and low risk. I have a commerical kitchen trailer set up at home, so no lease and my overheads are currently only 4k/year. The trade off for this, is that as it stands, the business has a low ceiling, which is roughly double what it is now. To grow beyond this, I'd need to move off site and lease a premesis, and maintain one or two staff. All a bit too high risk for me. It's also and fairly intensive on the body and usually work at least one weekend day, sometimes both.

So, it's not something I'm looking at doing forever. 10-15 years max. In my perfect dreamworld around this time, I'd sell my business and have enough equity to renovate and flip properties, something I really enjoy and have an interest in. Or maybe go back to casual cheffing part time and muck around with flipping part time. So this last goal is more of a lifestyle aim, and not as important as the first three goals.

Ok, so onto strategy now...

We have spoken to the bank and could buy another property right now, using our equity as a deposit (we have basically no liquid cash). BUT we have no cash buffer for maintainece and periods of vacany. And we wouldn't then have enough equity to draw to do the renovations on our house. The kitchen and bathroom are pretty dire, we've been putting up with it for 4 years, I dont know how much longer my wife can hold out!

I'm thinking we should wait around a year, do the renos on the family home, get the house re-valued (it will be going from a 2 bed to genuine 3 bed). In that year, try to get the cash buffer happening, continue watching the market, continue educating ourselves about property investment.

We'd be looking for a 3 bed house in the Silkstone, Booval, Eastern Heights, Raceview area, not on a main road, with an updated kitchen and bathroom, good stumps and roof. Preferably with at least one of the following desireable features – family sized home with a downstairs OR 800m2+ subdivision potential OR characher home OR excellent location. Buying twice and living in the area, I believe we have the local experience to pick a good property when the time comes.

In the current market I think we could get something for around 280k, with a weekly rental income of $300-320. But who know in a years time?!

Another potential strategy would be to buy something quite soon for around 250k, with less gorwth potential, we'd still have the money to do the renos to our house at the same time. My gut instinct say to wait and get something a bit better in a 12-18 months.

My biggest fear is interest rates going up and now being able to service the loans. Although as I mentioned earlier, we do have the potential to increase our income. It still is a scary thought to me, as my natural instincts are to be conservative and keep the risk minimal.

Just to reiterate if I havent made it clear during this long opening post (it's become an essay!), our goals are modest, we're not looking to get rich or amass a portfolio. We just want to work toward having enough to retire comfortably, do some modest travel in retirement, and help the kids start off with their homes.

Any thoughts, feedback, suggestions on this would be very welcome.

I understand this is a long read. I just wanted to give a detailed description of our situation, as it may be a little different to the norm. So thanks for hearing me out!!

Nate

 

Have you got any numbers in mind for retirement? Eg 50k income, 100k each for the kids deposits, etc? This would have to be liquid.

Your income is low but so are your expenses. Buy and hold may not work that well for you because you cant support much in loans.

Can a buy reno sell strategy work? You just dont have much income or cash to build on.

 

Hi good post and you have obviously taken lifestyle and the kind of life that you want into consideration. Property is obv a great investment but is one that can come with certain unexpected costs so always best to have a healthy buffer and be really sure that you can afford repairs and vacancies etc.

I would keep reading, possibly look at some of the threads on debt recycling and etf investment. Might be an easier road to go down if you don’t have a large deposit and cash buffer. You can add to them when you have good cash surplus.

You might be interested in reading the strong money Australia blog. He posts on here and I think also gets the balance of lifestyle and wealth building which would appeal to you.

Use this forum a lot m, there is a lot of good info. But also keep running your own race. You sound like you have a very clear idea of the kind of life you want to live which is the important thing.

 

Your 'lifestyle choices' are holding you back. You've indicated that you can't really save money but this also means that you're not going to be borrow enough to meet your goals.

Sorry to be blunt, but if you want to get ahead, you're probably going to have to make some choices and look to increase your income so you've got some money to invest, or the ability to borrow money to invest.

Start with this and continue to research in the meantime. You're off to a good start by having some decent end goals.

 

First, great that you've put a lot of thought into this and have some clear goals you're working to.

Second, I think your gut feeling is probably right for you at this stage.

It sounds like renovating the home for lifestyle reasons is a priority and will help improve your quality of life while during this stage as your kids get older, and whilst you might miss out on some good buying ops right now, you will have gained equity in your home and potentially some growth and no one's expecting a "V" curve rebound in house prices so if you can get yourself in a position to invest in 12-18 months the equity gains would likely any price increase and give you a good buffer when it comes time to invest. No point investing now, maxing out your borrowing capacity and then having no buffers for vacancy, maintenance etc.

In regards to interest rates, it seems the consensus is we might be in for a long period of low rates so I wouldn't be stressed out about rates rising fast in the near future, but do consider that they will go up eventually and any deals you evaluate you should do so with a higher rate in mind so that you know you can hold the property in a worst-case scenario. This is especially important considering you're conservative, you don't want to make a move and not be able to sleep at night because a rate rise or extended vacancy would mean you can no longer afford the property and then having to adjust your lifestyle to compensate.

Ultimately you have a lot of time and 12-18 months isn't a big deal when you look at the big picture. It will give you time to improve your knowledge of different markets & determine what strategy would suit you best as well as build your business and adjust your cash flows in preparation for investing, with an understanding of how much you commit to an IP each week. By the sound of it something newer (lower maintenance, higher rent, depreciation benefits), that's close to cash flow neutral with moderate cap growth potential could be suitable as a first investment as it won't have a big impact on the lifestyle you are aiming to have in this phase of life and can provide a good springboard to get your next property when the time comes.

 

Thanks for your replies everyone.

I'll try to reply to some of the responses.

Firstly, Peter Tersteeg, no need to apologise for being blunt. One of the main reasons in coming here was to get a dose of reality and see if my schemes are pie in the sky or not. Could you please clarify what you mean by not being able to borrow enough to meet our goals. Our bank manager said based on figures we've given her (which are accurate as far as we know) we could get the 280k now if we wanted to. We'd have to pay mortgage insurance and we don't technically have preapproval. The problem being we'd have no more equity for the renos to our current house. Do you mean not enough income to cover maintenance/vacancy/shortfall between rental income and repayments?

Josh H, thanks for your reply and encouragement. In regards to future interest rates, is it normal practice to work out what the repayments would be at the long term average rate and see if thats affordable? Your idea about something newer makes sense.. do you mean in a new estate eg Ripley but not a H&L package? Or something more like 10-20yo?

Ian, thanks and I'll have a look into those resources.

Trainee, by buy reno sell strategy, do you mean do that as a first IP then look at another one after that? Also in regards to retirement numbers - No idea. havent though of that. We have a modest lifestyle so whatever the average is would be i guess?? in regards to the lods houses, would be good to be able to give them say 10% which is what our parents gave us... so maybe 50k each? I see what you mean by it would have to be liquid... so we'd need to sell one by the time they are ready to buy. thanks for this advice.

 

@NewbieDude income is directly related to how much you can borrow. You may have some equity in your home, but you need the income to borrow against that equity.

You've been told that you can borrow $280k based on the figures you've told a bank manager. A few comments:

*** $280k is the amount you can borrow over what you've currently borrowed. When you consider stamp duties and purchase costs, if you don't have any savings, this gives you a budget of a purchase price of about $260k. Ask yourself what you can buy for $260k, how this gets you closer to your goals and keep in mind it doesn't leave you any ability to borrow more for renovations, etc.

*** The estimate of $280k is based on what you believe to be your income figures. It hasn't been verified. It's quite common for people to over estimate their income and even more common when people are self employed. Based on the (very brief) info provided, I suspect $280k might be over estimating your borrowing capacity. Get a full pre-approval before you sign anything.


When assessing your borrowing power, lenders add 2.5% to the rate you're currently paying, then calculate principal & interest repayments on the debt over the remaining loan term. This is significantly more than what your actual repayments are. They also take into account living expenses (many lenders analyse your transaction accounts and credit cards), other debt limits and any number of data points. As you're self employed, income will be determined by your tax returns.


You've got some good goals and are on your way to developing a strategy to achieve them. The first thing I think you're going to have to do is increase your income to give you the ability to meet those goals.

 

Yes, good advisors will factor in long term average rates and even higher rates to ensure serviceability during different market conditions. It's unlikely we'll see that level of rates for some time but better to stress test your cash flows and understand what would be required to hold the asset if things change.

The newer the build the greater the depreciation benefits (greatest depreciation in first year then less and less each year after). You should never buy a property for the tax benefits but worth considering. Also a new build will come with builders warranties & product warranties, lower stamp duty (only pay stamp on the land) and can attract a better quality tenant. H&L could work, you can utilise equity in the home, put it in a Master Facility to cover the deposit, stamp & progress payments so you're not out of pocket - just need to make sure you're buying in the right area at the right time. Buying a H&L at the last stage of a development means you're paying the highest price as they increase prices at each new stage so buying in the earlier stages is better and of course location is key.

Could also buy something with the potential to reno further down the line to manufacture equity but considering your goals and lack of capital I would recommend starting with more of a set & forget property that can tick away in the background without too much maintenance and leave a project house until you're in the next phase.

 

I get the sense that you may be increasing your risk and not as conservative as you think. I say this because achieving your goals will take time and wealth compounds with time. i.e if you delay the increase in your income you will significantly reduce the time you have to prepare for retirement. You may find after working backwards that you wont be able to ‘retire’ in 15 years at all, you may be plugging away til 70.

 

Your combined income is 85k a year. Lets assume that to be what you need. So at least 1.7m on top of your own home. In 20 years the deposit might be 100k each.

You dont have enough income to support the assets that will get you there. Reno and sell might be profitable and help you build more money but it has its own risks which you dont understand yet.

Fact is you have low income and no buffer. Thats not much to work with. So either lift that income, increase the buffer, or both.

 

The reality is quite simple. Increase your incomes or growing the kind of wealth you want with RE will be a very unlikely scenario imo.

 

Tldr

One thing I would take advantage of is your family of tradies.
That's powerful,
If you can trust them and not take advantage of them, they could do you Renos for significant discount with less chance of things going wrong.

I'd love to have handy people in my family