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Newbie with 100k deposit - how to start?

Discussion in 'Property Finance' started by ashchay, 18th Oct, 2015.

  1. ashchay

    ashchay Member

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    14th Oct, 2015
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    Location:
    Sydney
    Hi,
    I'm new to the forum so please excuse me if I'm asking stupid or obvious questions!

    I'm at the stage where I'm ready to buy my first property and I'm feeling quite overwhelmed by the process, particularly the finance aspects of it. I've pored through a lot of the excellent advise on here and here's what I have decided so far.

    I'm going to start with buying an investment property (likely in Brisbane suburbs or Newcastle which I know well as I went to university there).
    I am currently renting in Sydney and can't justify the price of apartments I'd actually want to live in the areas I rent now. We are going to move to Darwin for a year in 2016 and have no idea which city we will live after that so no PPOR for now.

    We currently have about 100k to invest, and both earn about 100K per year currently (but also lots of study related expenses per year). My hope was to buy investment properties in the next couple of years, maybe 2 (or more) less than 450k? However In 2 - 3 years we'll be on a single income of around 140k as I'll likely have to stop work to start a family. As we mostly have a secure income I'm most interested in capital growth and happy to hold onto properties for medium to long term.

    What is the best way to get started, buy a cheapie around 300 - 400k, try and pay it off as quickly as possible and then build on that?
    Should I put down all our 100k deposit on the one investment property? And wait for it to be paid off before buying more?
    Or is it best to put down the minimum possible deposit and have longer loan terms for multiple properties?

    I would like to buy our PPOR in about 3 years time so this is likely to be a more expensive purchase (maybe Sydney northern suburbs or inner west)

    I just don't understand how the mortgages and financing works! Can someone please tell me where I should go to start learning about all of this very confusing matter. Any idea what might be the best strategy for me to get started?

    Again I apologize if I'm asking very obvious questions - just learning now!

    Many thanks!
     
  2. monalisa

    monalisa Well-Known Member Premium Member

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    Location:
    Sydney
    Hi Ash

    If I were you, I would figure out how much you are able to borrow, with a number of scenarios including what sort of rental yield you are targeting.

    We bought as and when we could - especially in a rising Sydney market a few years ago. We have learnt the more exposure you have to a particular market (esp when rising), the better gains you have - e.g. say you have $1,000,000 exposure and prices grow 10% = you have $100k; if you have $2,000,000 exposure, you have $200k, and it is compounding.

    Whilst this depends on your risk profile, in my view you should go for the max you can spend (esp if you are looking to buy in Brisbane), and put minimum deposit possible - this way you will maximise your exposure, and benefit from the gains.

    Also figure out your strategy in terms of what you are trying to achieve with each property. There is cash flow vs capital growth plays. Whilst you do not need to have it all figured out, you need to consider whether you are comfortable with having a lower yield for now, and buying in an area where prices are driven by owner occupiers vs somewhere like Logan. Depends on what you are comfortable with. Regardless of where you buy - make sure you buy WELL LOCATED PROPERTIES.

    Also see this thread:

    https://propertychat.com.au/communi...m-around-you-is-fuel-for-your-portfolio.4282/

    Good luck!
     
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  3. wombat777

    wombat777 Well-Known Member Premium Member

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    If you are looking for a house in Brisbane, perhaps look in the $280 to $350k range. You tend to get a higher rental yield for your dollar in this price range. Ideally look for rental yields above 5.5%.

    Most people use Interest Only finance for Investment Properties. General aim is that over time you will increase your equity in the property by it increasing in value. Ideally the rent covers the interest payments on the loan and expenses associated with holding the property ( such as rates, insurance and property management fees ).
     
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  4. Redom

    Redom Mortgage Broker Business Member

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    Sydney (West) and Canberra
    Heya,

    Welcome to the forums.

    Good starting spot to be coming in at - you've got both the deposit and the borrowing power (likely) to start your portfolio.

    I won't comment too deeply on where to buy, but it is great that your not limiting yourself to whats down the street. Realistically the markets where your looking at are probably more primed for growth than some others nearby.

    In terms of finance, with your stated goals, it is probably best to take advantage of LMI early. This will allow you to put less cash down per investment at a reasonably small insurance cost (1.5-1.8% of the property value). You can purchase with 12% deposits this way (+ duties, etc). With 100k, you may be able to stretch a portfolio value up near 700k this way. Compared to an 80% deposit approach, your max portfolio value would be around 400k.

    It would also be a good idea to map out exactly how you'll fund each investment and in particular your PPOR purchase down the track. Given its a stated obvious objective, you want to make sure you don't 'snooker' yourself from a borrowing power perspective by maxing out your serviceability and not being able to purchase a PPOR. Or at least, you'd want to consciously make that choice with the information on hand rather than finding out when your ready to buy.

    Good luck!

    Cheers,
    Redom
     
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  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    In regard to deposits, you'll definitely want to use small deposits for your IP's so you have as much cash as possible for your PPOR when the time comes to purchase. Otherwise you'll end up with a huge (possibly 105%) PPOR loan rather than maximising your deductions.

    As Redom said, and especially now that APRA has made a big changes to servicing it's going to be very important to map out your purchases to ensure you can continue to borrow until you've got your PPOR, particularly knowing your income will be dropping.

    If you're going to have to drop a significant amount of cash on your PPOR you may want to look at purchasing it prior to starting a family. This is where doing some timeline planning with your broker will pay off in spades.
     
  6. ashchay

    ashchay Member

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    Location:
    Sydney
    Thank you for all your replies!
    Ok so I will start with finding out how much I can borrow as monalisa said. Is the first step to go to the bank or to talk to a mortgage broker for this?
    @Jess Peletier are you suggesting that I should wait until 2017/2018 and buy my PPOR when we are ready before buying IPs now?
     
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  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    No - but I am suggesting you find a good broker that will spend some time chatting with you and map it all out.

    There's no point buying IP's now only to find you won't be able to service your PPOR. An in depth conversation and a clear understanding of your circumstances, plans and priorities will allow your broker to run a few scenarios and come up with a finance plan to confirm that you can achieve what you hope to achieve, and if it's not going to work, re-jig things until they do.

    Many brokers will give you loan for your IP without giving any consideration at all in regard to what you hope to do next, which can cause all sorts of problems.
     
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