What and where to buy?!

Have just received conditional pre approval today from our bank to buy our first IP.
Now that we have the outcome I wanted, I'm overwhelmed with the decisions that I now have to make!
We have available to us up to 550k in total to spend, however I feel far too intimidated (and scared) to spend that much on my first investment property. I don't feel that I trust my property knowledge enough to spend that much on my first one. I want to only spend up to 400k, and get something returning atleast 4.5% rental yield.
Something that will have reasonable growth over the next few years while I'm learning the ropes. I am looking to buy and hold long term but I don't want to be too CF-
I thought I had an idea of what I wanted however now that I am faced with the task of buying something I feel really overwhelmed.
What would you guys do with 400k budget for your first IP Melbourne? I'm not asking for all the answers, I'm just genuinely interested in what any experienced investors on here would do if they were starting out in my shoes

 

House or unit?

Does it have to be Melbs?

Could it be somewhere else? I don't know......say.... Mt Druitt?

 

In my opinion, if your financially quite capable of buying a 550k place, then 400k wont make much difference to the risk. (though I don't know your specific situation).

I would choose the best place that my budget can afford. I have seen people buying cheaper places when they could afford a little more which gave them more opportunities. I'm not saying you cant find good opportunities in the 400k range, just offering an alternative perspective.

 

From what I have seen is the properties closer to the 500k range have the lower rental yields, I just don't want to mess up this opportunity, and be forking out to cover the difference between rental income and mortgage repayment and then risk losing it if I were to have a slowdown at work, interest rates go sky high in a few years etc. I guess I'm just conservative and don't want to risk too much over being greedy.
Would love to buy something with development potential but it would have to have good rental yield. I am drawn to 3,4 bed houses in the suburbs but do also think the safe option would be a new h/l package in cranbourne or something that would see growth in the first 18 months but would probably then stagnate. Feels safe as everything would be new (no maintenance), good depreciation, and good rental yield and I would have confidence that growth would be enough in first year or so if I felt the need to get out if it was the wrong investment I could do so whilst covering purchase and hold costs where I'm worried if I do this with an established I may not have enough initial growth to get out if it goes pear shaped. Only want to buy in Melb for my first one as I know the area and don't want to step outside my comfort zone too much. Also Melb has treated us well with our PPOR growth and I want to stick to what i know to start with.. Having said that I will consider all of your advise)

 

I'd be increasing my yield expectations. 4.5 is fairly low.

My number one tip for the first property is dont focus on the property too much. Look at the numbers.

 

I'd say Carnbourne is a good choice. Might need to be quick though, the place is filling up.

More options can be officer/ tarneit/ werribee/ hoppers crossing provided the numbers stack up.

Third option which i would prefer is geelong and vicinity.

Regards

 

Why is a new H/L package the 'safe option'.....Granted you might get a better cash flow position at the end of it. Some other benefits are tenants love new homes, less Maintenance, Depreciation benefits and less stamp duty


Here are some of the cons. I cut and copied from an article:


"The Main Cons

Paying for someone else’s profit

When you buy any brand new property, factored into the price is the developer’s profit margin and a proportion of the high marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.

Compromised location

The majority of home and land packages are located on the outskirts of the city, in areas often with abundant supply of land, weaker economic drivers and a lack of infrastructure. Capital growth is therefore often harder to come by.

Uncertainty

When buying off the plan, you really don’t know whether the quality of the finishes will meet your expectations, or what the surrounding facilities and other homes will be like. There is also the uncertainty that the final bank valuation won’t stack up. Also you won’t know how many other similar rental properties have been sold to investors in the area.

Land value

With new property in many HL estates, much of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.

Just something to think about and factor into your due diligence.

 

I was actually tossing up between H and L in s Werribee and St Albans Park property which has more than 6 per cent yield but I can subdivide as it's because the house occupies the whole land (I like the house).

Then I looked closely at s Werribee kings Leigh. I have more confidence about the area but I'm not sure if I want to build a house on a 350sqm land. I'm not influenced by depreciation at all as these can change by a stroke of a pen.

Now I am starting to look at established homes in s Werribee which are larger and cheaper than H and L in the area. Some have potential for subdivision.

 

The only reason I feel it is the safe option as it is a fixed H& L package through a large volume builder. Finishes etc are all fixed. I am only looking at these in suburbs where completed homes are already selling for 40-60k above the cost price of the H& L package I am looking at. I am also looking at one that is 4 bed+study, plus 3 living areas which I think makes it less like all the other rentals and more attractive to owner occupiers in the future.
My PPOR was not a package, however I did buy land in the nicest estate at the time in Pakenham, for 137k (at the time other blocks in the other local estates were all around the $105k mark), we put a 200k, 30sq house on it back in 2010. Comparable houses in our street have sold for 650-700k in the last 6 months.Nothing in the entire estate has sold for under 500k for the last 15 months. I think because I have seen growth in my estate it gives me confidence in investing in a similar manner for my first ip in an area I am familiar with. I am looking to invest and hold until retirement, and to live off the rental income in retirement. Basically my main reason isI want to build a portfolio to leave to my kids. I want something that will not cause me to hit the serviceability wall too soon also

 

One of my friends sold a H and L after its built. A lot problems with the built. Unlucky maybe but quality babies between builders, contractors etc.if you believe it works for you then that's good.

 

Don't just think because its newly built it wont have any issues, specially those quantity builders use any means necessary to get your property built as cheap as possible. I've seen 25-30 year old houses with less issues then a brand new finished house to be honest.

If you really have a budget of 550k to your disposal, look towards Knoxfield, (Boronia,Bayswater) or Maroondah area (Moroolbark,Croydon, Chirnside Park) buy a house on a larger block of land with future subdivision option. If you want cheaper suburb options still with larger blocks Sunshine West is another option for long term hold and only give or take 15kms away from CBD.

 

I will be will be heavily CF neg if I buy in those areas with dev potential as rents will only cover approx 40% of the mortgage. I don't want to limit my serviceability on my first IP by maxing out on the first one. I want something to build some short term equity and something I'm not pouring money into repairs on. I'm looking to pretty much never sell so I just want something safe to start the portfolio with that will allow for some growth to provide equity in a few years. I also don't want to spend 550k on one IP when I can spend 420k or so Nd the next year look at purchasing a second property. I don't want to spend in areas that have had a growth spurt incase they stay stagnate for years if I'm getting in too late whilst servicing a mortgage larger than my own PPOR as the rental income will hardly come close to covering the loan repayments. I understand the building industry and defective work well as my husband and I own a bathroom renovation company so I know that volume builds are thrown together fast and cheap, (1/2 of of our work load is replacing leaking showers and bathrooms from builders not waterproofing properly etc) but I also know that all appliances, electrical, plumbing etc us all new, compliant, and isn't going to be a can of worms once we have open it up to repair anything.

 

so you want good CG and good CF, or reasonable CG and reasonable CF. Once you've found it, please let me know.

If you want quick CG, then you may have to pay a bit more but CF may be poor. The reverse could be true. If you want high CG property, then you must be comfortable with holding costs and pretty confident the rise in growth in the short and medium term to extract equity...but like others have posted in other threads, equity is one thing, serviceability is another thing. If it's long term hold, then you need to know how long you can hold if rates go up and have a buffer for emergency. $550K gives you a lot of options.

 

Will be negative for sure if at that rate.

Only you can really work out what you want, here are some pro's and con's to consider

1 500k house has one lot of maintenance cost, it also will have one lot of CG growth or loss, one insurance, one rent etc

2 200k + 1 100k has 3 lots of maintaining, agent fees, insurance etc, but can have 3 lots of CG gain or loss (if spread out) will likely be much higher return, can sell one if reqd etc

If your planning on multiple IP's, spreading them out and mixing the types may be a good idea, but then again one really well located property of 500k that you can afford could work really well too.

 

• The trick (read patience) is in finding good CF properties where CG can be manufactured and liability managed effectively:
  • Off loaded ASAP.
    
  • Increase the settlement period.
  • Minimize CF losses
• Sub-divisibility does not equal CG. Everyone knows about the sub-divisibility of > 600 sqm blocks and the sub-divisibility premium is built in the asking price. Numbers triumph strategies.
  
• If in Melbourne, watch out for competition from sydney investors who are finding value exactly in the same spots. http://www.domain.com.au/news/st-albans-is-melbournes-auction-capital-20160402-gnwtrk/. Is there any CF or CG left when the auction is 200K over reserve in Stab Albans.
  
• Just because 550K is available yesterday, does not mean all of it has to be spent today. Take your time in pressing the trigger. Market is turning. Melbourne's apartment market hits a turning point

Good luck

 

@Leo2413 raises some good points and and gives a two sided opinion here, but as all of my investments are in new estates I will add some comments here:

1. You don't have to overpay for someone else's profit. Have a look around some of the smaller subdivisions that don't have a big named developer and don't necessarily even advertise much. You may find there land is only found at some of the cheaper home builders. These guys trade of the advertising traffic and infrastructure built by the big names developers yet sell their little 50-100 lot subdivisions typically at a 10% discount. Ultimately the values will be the same.

2. Compromised location. Yes but your paying a lot less for the land.

3. Uncertainty, I'd say don't buy a package. Buy a block and then put a house on it. Don't pay a packagers premium. As for uncertainty of finishes etc this will help you control this. Timing uncertainty can be your friend in a rising market if you buy OTP and the titles are delayed you can be gaining equity without any debt.

4. Buy building the home on the land you can manufacture some growth. Further whilst a lot of the value in s in the house, this leads to significant depreciation benefits.

The biggest plus is you should be able to generate a 5-6% yield if you buy and build well.

Long term CG well only time will tell, but IMO because of the lower cost base and with continued immigration, I expect CG to be strong over a 10year period.

 

I found one with good CG on a big block of land that i can subdivide, only if I demolish the entire house (sits on the entire block, a big house). There's potential to increase value with lick of paint and a bit of update but i'm still unsure...vendor is willing to come to my price but just not sure API's 10 year annual growth of 3% is attractive enough. Pretty low, even South Werribee on 10 year is looking at 5.3% according to API.

 

@Caltan
I've read through some of your other posts- are you by any chance building in the watergrass estate? Only reason I ask is that I heard there's a guy in there building 4 IPs in there (my mums just built in there and her supervisor mentioned it.

 

Only reason I'm looking at packages is my lender won't finance construction or land. I only have 100k that I can use upfront (equity cash out)

 

However I do like Mooroolbark and Lilydale for yields and growth potential. Will be keeping an eye on these two but I would need to pick something up for under 450k to make me comfortable with the CF