Ready to make a big investment move, what would you do?

Discussion in 'Investment Strategy' started by Des, 12th Jan, 2020.

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  1. Des

    Des Well-Known Member

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    Hi, I’m a newbie to this group but stumbled upon you guys a few days ago and since then have been reading through and learning a lot. I never new something like this existed what a great idea! My husband and I have been thinking about our next move for 6 months but don’t really have many property investing friends to talk things over with and get a fresh perspectives. These are our ideas and we’d love to hear ‘what you would do’ in our situation. Sorry in advance this turned into a longer post than I anticipated, I hope I can return the favour and also be of some help to you all over time.

    The situation:
    Melbourne based, mid 30s married couple with young family, 1 baby & plans to have another in the next 12 months although with paid maternity leave this doesn’t effect us financially just a lifestyle consideration. Husband working FT & wife works PT combined income 120k.

    Current investments/financials:
    - 1 IP in Corio almost positively geared: worth 325k, owing 190k, bought 2013 same good tenants the whole time $275pw rent. 560m2 corner block near shopping centre.
    - 1 PPOR Reservoir, 3bdr 2bth front townhouse. Bought 500k 2016, worth 720k now due to growth and a lot of work fixing up the place (flooring, new laundry, deck, pergola, landscaping), owing 460k but 300k in offset (100k of this is from sale of an IP in Kangaroo Flat which had slow growth and inconsistent tenants & 200k was a gift from parents).
    - Borrowing capacity if we sold Reservoir is 580k - preapproval through mortgage broker.
    - Able to purchase something for approx 950k using full borrowing capacity, equity from sale and most of the money in offset account.

    5 - 10 year goal - Own our own house in inner northern suburbs of Melbourne, hopefully outright and have a decent passive income through IP, haven’t worked out what that should be yet. The type of house we want would cost roughly 1 million to buy in the location now but would need a bit of work probably to get the house really nice, we predict with a compounded growth rate of 5% in 5 years that will be roughly 1.3 and in 10 years 1.5 million.

    Strategy ideas
    The Corio IP is paying itself off and seems to be getting good CG as well so we think it’s probably one to keep and maybe develop in 5 years if prices have continued to rise there. We are willing to sell our PPOR & rent an apartment for a couple of years or would even move back in with parents for a year to kick start a really game changing investment strategy. We have enjoyed simple property investing for the last 7 years and would like to go to another level with it for bigger returns if possible.

    Strategy options we are considering:
    • Don’t change anything and work hard to pay off mortgage in the next 5 years. Pros - mortgage free in 5 years . Cons - staying in townhouse means still need to remortgage to buy dream house, townhouse may not have the best CG.
    • Keep IP and buy house as PPOR now, renovate/extend it eventually into the dream house. Pros - buying at a cheaper price, get to live in a house now, a house in the northern suburbs will probably have decent CG for a residential investment, low risk. Cons - large mortgage, $$$ and borrowing capacity maxed out = no more investing, no potential to get rich quick.

    • Keep IP, buy run down houses. Live in them and fix up, renovate/extend & sell for a profit. Pros - we have somewhere to live and can do a lot ourselves as we can afford it Cons - time poor with working and babies.

    • Knock down Corio house and subdivide, build & sell. Probably build costs are too high compared to the sale price for units in Corio for this to be profitable yet.

    • Keep IP, sell PPOR & rent/move back in with parents short term.

      • Get into development projects such as demo then building a duplex or 3-4 townhouses, sell for CG, repeat until enough $$$ to continue developing/investing and buy PPOR. Pros - potentially a good way to build wealth quickly Cons - more risks, do we even have the finances to do this?

      • Buy a commercial property. Possibly need big $$$ for this to be worthwhile.

      • House and land package investing, I only read about this idea on this forum yesterday and don’t know a lot about it.

      • Something else that we haven’t considered yet?
    Happy for anyone to tear these ideas apart and give any advice or feedback you can, we are here to learn. We want to work smart and hard now and hopefully FIRE or at least have the choice to (another new term I learned here!). Happy new year and wishing everyone great luck with their investments for 2020!
    Des
     
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  2. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    Welcome.

    Everyone will have different advice for you.

    My approach would be to be clear and specific on your goals and timeframe.

    Take stock of your financial situation and borrowing power. Combined income of 120k will be very limiting on how rapid you can expand.

    Re developing, be very careful there. You need alot of money ( cash not just loans) as well as a portfolio which can sustain the risk imo. No point risking it all on one venture which could wipe out your entire net worth or more.

    Get clear and specific on your goals. Determine your borrowing ability. Then choose a strategy you can afford to persue and meets your risk tolerance. Then....DONT do what so many ppl do by just jumping in blind. Spend time to learn the strategy, meet contacts, learn as much of the basics of your strategy as you can. Network with others doing similar. Really understand the risks. Then decide your action.

    Losing financial capital is one thing. Losing emotional capital is alot more devestating and difficult to recover from.
     
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  3. Des

    Des Well-Known Member

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    Hi Sackie,
    Thanks for the response! You’re right out borrowing capacity is basically maxed out currently, and is about 600K if we sell our PPOR, but we have a little equity to play with, at least 400k if we sold our PPOR or 550k if we sold both our properties. We are never going to keep up let along get ahead on our income alone, which is why we take property investing so seriously.
    You’re also right I guess I am asking for a crystal ball answer and basically want to know, what I guess everyone here wants to know... what do you think the fastest way to generate wealth is? We are willing to take a medium risk path and sacrifice on lifestyle/home comforts in the short term as we are young. Be reassured though we are meticulous in planning and researching and won’t jump blindly into anything.
     
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  4. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    This really depends on what the goal is. Also depends on your individual financial situation. Determine you're goals first. Everyone wants to build wealth asap to reach their goals but it will be for most people a long term game. If you had the capacity to take on more pro active strategies, you could possibly quicken the process. Renovating in good areas and selling can also do this, but you need to have a decent amount of knowledge and contacts to help you pull it off. As well as accepting the risks.

    Hands down, educating yourself in the strategy you decide on is the key. Then maximising your financial capacity to enable you to action your strategy.
     
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  5. albanga

    albanga Well-Known Member

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    I wouldn’t be doing anything.
    You have a decent self funding IP so leave that.
    You have a good PPOR in a very good suburb which will get great long term growth.

    Why would you want to take on more debt when your considering having another baby? I know you say you have mat leave but that’s fairly shortsighted. Kids are a lifetime of financial cost.

    So if I were you my focus would be in having the baby and continue to save what you can and hold in offset.

    The reality is your combined income is going to be limiting for you to do much except swap properties which when you consider exit and entry costs is not a good investment decision.
    What industry are you both in? Is their an opportunity to up skill to try and earn more money?
     
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  6. Des

    Des Well-Known Member

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    Hi Albanga, thanks for taking the time to reply. I appreciate your thoughts.
    Staying put is an option we have thought seriously about and is something we are still open to. With regards to the finances and having a baby, I didn’t mean my comment to sound flippant, it’s just I have a full time job I can return to from family leave when I’m ready so I guess I see our current lower income situation as a temporary issue. I’m only working 2.5 days a week at the moment by choice while I have a very young child.
    Why would we go into more debt? Here’s a hypothetical.
    Person A stays keeps the townhouse and it has decent long term growth as you say, buying a house in 5 years when both husband and wife have returned to full time work.
    Person B sells the townhouse in Reservoir and for a house on a decent block in Reservoir, increasing the mortgage. They live in it for a 4 years, let’s say the property growth is the same as for person A even though it’s likely that house growth will outperform townhouse growth. As long as house growth is higher than interest rates Person B is earning growth on an extra 250k more invested than A. On top of that the land size may mean B can subdivide and develop now that both are working full time again and have increased serviceability, or at the very least sell to a developer for a higher price. So in a worse case scenario B & A get equal growth but B enjoys living in a house for 5 years and in a best case scenario B has bought land which has increased in value significantly as 2-4 subdivided lots, each probably worth approximately the same as the townhouse land value person A has.
    Maybe i’m missing something but this doesn’t seem that improbable to me, I don’t know how much more B stands to make, but if we can afford the higher mortgage payments, which we can, it seems like this one decision could make a massive difference to our financial position over the next 5 years?



     
  7. kierank

    kierank Well-Known Member

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    Yep, been climbing this Net Worth creation mountain for 40+ years and still not there yet :eek:.

    Every time the summit is in sight, some silly bugger keeps moving the “goal posts” :D.
     
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  8. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    That's our little friend in our minds some call greed, left wingers will call it evil capitalism and I call it party on! :p
     
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  9. The Y-man

    The Y-man Moderator Staff Member

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    Possible other idea:

    Keep PPOR.
    Keep IP.
    Buy into commercials thru A-REITS for added income.
    Buy shares/LICs/ETFs

    The Y-man
     
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  10. The Y-man

    The Y-man Moderator Staff Member

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    ... also maybe debt recycle the ppor loan

    The Y-man
     
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  11. Des

    Des Well-Known Member

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    Thanks for your suggestion The Y-man, appreciate your reply and will consider this as we don’t currently have any shares etc.
     
  12. wylie

    wylie Moderator Staff Member

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    I'd consider selling the PPOR and buying something livable for now, but with potential for a renovation down the track, bigger block, subdivision potential. That way you don't change much about your living arrangements now, but are sitting on a bigger or better block with potential in the future.

    That would mean selling costs and stamp duty to get back in, so you'd need to be buying something that will make more than the costs of doing it.

    I don't think you will get rich quick, but we've done similar and we got rich slowly, without us making huge sacrifices to our family situation. We never had much "spare" or "spending" money but we never really suffered or missed out on essentials, and it paid off and we are in a good position now.

    We could have made much more money had I gone back to work or hubby worked longer hours, but every choice was made with an eye on more than just making money.

    Work out what you want to do and work towards that without giving up something you might regret, or without getting so much into debt that you are forced to work longer than you'd like (either of you) or feel you've missed out on family life and/or lower stress than you may have with huge debt.

    Time should do its thing and you've got time.
     
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  13. Rex

    Rex Well-Known Member

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    How does borrowing cap improve if all loans are reset to 30yrs P&I and potential rental income from the Reservoir townhouse is factored in? And how does this improve with any expected income increases in the foreseeable future e.g. working more hours, expected promotiona/payrises, retiring out HELP debt etc? I.e. consider a strategy of keep everything and maximise borrowing capacity to purchase a new PPoR either now or in a few years when household income permits.
     
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  14. Des

    Des Well-Known Member

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    Hi Wylie, sounds like you agree think the strategy I talked about to Albanga (below) might be a good move?
    My get rich quick comment was fairly tongue in cheek, although we are people with pretty humble needs & expenses so I guess rich and quick are also subjective aren’t they.

    I couldn’t agree more about money not being the only factor at play, we could earn/work more if we wanted but factor our family and working in jobs we love into our decisions.

     
  15. alicudi

    alicudi Well-Known Member

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    Hi Des, welcome to propertychat.

    I look at your scenario and then look back and consider what I would have done had I been in the same situation as yourself. I think you are doing well and should stay living in the property you are in, keep the ip and strongly consider looking at building a nice little share portfolio over the next 3 to 5 years and then asses the situation in a couple of years time.
     
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  16. Des

    Des Well-Known Member

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    Hi,
    We haven’t looked into shares/assets/trusts etc because we didn’t think we could leverage our money to buy them but after reading your story it seems like maybe this is possible, although maybe not recommended?
    It seems like you were getting a great return on your A-REITS, and maybe still are? Is that taxable income? Even if it was taxed simple maths in my head makes me think we would be better putting some of our offset account money into A-REITS and than saving the 3-4% interest on the mortgage. Does that sound right to you or am I getting it mixed up?
     
  17. The Y-man

    The Y-man Moderator Staff Member

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    There's a few things it lets you do:
    • Buys you a bit of time - to think and also let your current properties grow in value. Transacting real estate is expensive - so minimising transactions is one thing to aim for (that's why they call it buy and hold unless you're a "flipper")
    • yes, reits, lics, etfs can give you effective return in excess of your mortgage costs but not by blind choice. For example, one condition I have when putting money into reits and other "income" type investments is to generate at least 6%pa, so it gives me a margin between the interest rate costs of my loans.
    • yes reit income is taxable - but carries some tax deferrals from things like building depreciation - it's no different to jointly owning a big commercial building in may respects. Hence you might also extend out to lics/etfs for CG. Also remember dividends from shares carry franking credits.
    • listed reits/etfs/lics allow you to explore into the field $500.00 (that's a decimal point!) at a time - i.e. in small increments to "test the waters" without selling a house and going all out.
    • If you have a think about what you wrote out top about living off the rent from your IPs - how many IPs will you need? And it's all good building equity in the props, but when you hit the serviceability barrier, you can get to it without selling it (i.e. killing the golden egg laying goose). Therefore, you may need to convert part of your portfolio into things that generate income more efficiently in the future - and if that's the case, I suggest it's better to start learning about it now, rather than leaving it until later.
    • Finally, as mentioned above - also explore debt recycling - it may make your PPOR loan tax deductible with some tax sorcery and black magic....
    The Y-man
     
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  18. Des

    Des Well-Known Member

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    Wow... well to put it simply a lot has changed in a few months!

    In light of recent events we have thought up a new plan. I will go back to work FT next year doubling our borrowing capacity, if house prices have come down 15% or more in that time we will try to buy our new PPOR without selling the Reservoir townhouse. It would become our 2nd IP. Then we will try to use debt recycling on the new PPOR to pay down the mortgage faster.

    We are currently refinancing and restructuring our loans, which will also make available for use some of our equity, approx 50k. On top of our savings/offset account this would mean we have 170k approximately in cash available. We were originally planning to invest about 100k of this in shares while the market is down and then buy our next property in a few years when the shares have hopefully made some good CG.

    If we want to buy in 12 months though, it makes things a lot more complicated
    1. seems like there is every chance the shares will continue to go down and won't have regained their value from when we purchased them yet?
    2. if we do invest them now, we take the bird in the hand, property market is no guarantee of dropping and we could miss out on both if we don't invest in shares and can't buy a house later for unforeseen reasons.
    3. If we invest in shares and things go well we give ourselves the chance getting lucky and making money on the share market and then reinvesting the whole lot into property riding that wave up as well.
    4. Definitely risky, if we can't sell them in the time frame we need to then we will have to be happy going back to the original plan and not buying the new house for a few more years.

    Would welcome anyone's thoughts on the overall plan and also like to know if you would still invest in shares now or hold onto your money for the house.
    Thanks!
     
    Last edited: 3rd Apr, 2020
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  19. iloveqld

    iloveqld Well-Known Member

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    I will just read all the posts again and evaluate to choose one or mixing them. They are from all the best and most active posters here... and you always can adapt your plan.
    And you are already doing well, keep it up and good luck @Des
     
  20. iloveqld

    iloveqld Well-Known Member

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    One small note from me, what go out will go around. I strongly believe in karma and try to do good things as I got many good investment decisions and timing just on pure luck.
     
    Des likes this.

The ABS tells us that household wealth has increased 35.3% but is that of any real use or comfort when it is all tied up in our home? They say cash is king and with prices escalating together with interest rates, that needs to be key to your budget.