What strategy suits best?

I'm 26, live at home, working FT and have available 100k-120k for a deposit and associated property purchasing expenses.

I can comfortable loan 450k (not that I intend to).

I foresee myself moving out in 18-24 months but would like to have 1 investment prior to this.

My query right now is what strategy is best to take in order to get the property to pay for itself or have me making minimal payments in this time.

I'd like to buy something I can renovate a little bit in order to boost rents moving forward but am unsure I can save up enough money and complete such a project in this time frame.

Assuming
property: $500k
Loan: $420k
Rent @ 3.5% = $17,500
Loan @ 4.5% = $18,900
Expenses = $2,500
Leasing: $1,000 (?)

OOP: $5,900

I anticipate to conservatively save at least $250/pw into an offset account. I expect this figure to increase.

Firstly, are there any assumptions or questions I am missing or need to ask and
most importantly what's would the best type of strategy to look at in order to reduce my servicing needs so I am less encumbered when I move out in in 18-24 months ??

thanks for the advice!

 

Assume you mean living with parents?

Well, you could set the loan up with no cash of your own being used. Borrow 104% and store your cash in the offset account.

Consider living in the property briefly to get the main residence CGT exemption (6 year rule).

And just save like mad into the offset

 

That's a terrible rental yield - I'm in QLD though and bang on 5.2% is pretty achievable, e.g. if a place is worth $500k, its probably renting at $500/pw. More so for inner units etc, but your buy at $440k, rent at $500/pw which is a great gross 5.9% yield, but its not so great after you get hit with a $6,000+ body corporate bill a year, which is standard for those building and look at the actual net.

If i was you, I'd be having a look at first home owner concessions in your state, might make sense to live in it for 12 months to get it.

In QLD I would then assume:
property: $500k
Loan: $400k < use your other $10-20k for stamp if you don't live in it (in QLD there is a concession for first home owners, don't know about other markets), conveyancing, subsidising your rent if you do & something really, really nice for your parents for letting you mooch off them while saving up a $100k+ nest egg
Rent @ 5.2% = $26,000 pa
Loan @ 4.4% INTEREST ONLY = $17,604 pa
Expenses (rates, water, landlords insurance, property insurance, misc) = $3,500 pa
Leasing = $1,375 pa (I used a fixed rate manager)

= CF+ by $293 month / $3,521 year

Brokers on here can probably advise (maybe I'm get a great deal?) but my IR right now is 4.2%, which would be a saving of $67 month / $804 a year over the above, so it would be slightly more positive than that but I haven't really left a huge amount in expenses for maintenance & I've assumed 100% occupancy, so I think its probably about right either way.

If we then take your $250 pw of your ongoing contrib of + the $17,604 in interest + $2,376 (the cf+ amount minus 32.5% interest, guessing you're in the 37-80k tax bracket =
$13,000 contrib
+ $17,604 interest payment covered by rent
+ $2,376 income after expenses inc tax generated by the property
= $2,748.30 month / $32,980 year

Sink that into the loan via IO repayments + offset & you'd own it in 17 years.
Assuming no major reno spend, no increase in rent, no increase in your contribution. which means it would have cost you $100,000 + $221,000 = $321,000 to buy an asset worth $500,000 in 2016 $$. Assuming 2.5% growth over 17 years, that asset should now be worth about $765,000.

Not enough to retire on (unless you take advantage of geographic arbitrage) especially once you factor in inflation, but given that you're I'm guessing early to mid 20's now, not a bad place to be at in your early 40's.

Also presumably at some stage you would bump up rents a bit so your yield doesn't just get progressively worse (not many people pay the same $$ in rent for 17 years..) and or buy other investments and or make more than $250/pw contribution.

 

From what I understand you have to live in the residence for 12 months before you are exempt from CGT? Are there any other conditions, because it seems like an easy "loophole"

 

This is not the case.

 

What you're thinking of is the temporary absence rule for 6 years CGT exemption.

There is no "minimum time", people tend to do 12 months to qualify for the Stamp duty exemption that was/is available (I think it varies by state? I know its still a thing in QLD) for first home owners, where up here (QLD) you must live in it for a minimum of 12 months within 18 months of purchasing it.

To quote the ATO's website (not the actual tax legislation though!) - see the bit in bold
The following factors may be relevant in working out whether a dwelling is your main residence:

• the length of time you live there – there is no minimum time a person has to live in a home before it is considered to be their main residence
• whether your family lives there
• whether you have moved your personal belongings into the home
• the address to which your mail is delivered
• your address on the electoral roll
• the connection of services (for example, phone, gas or electricity)
• your intention in occupying the dwelling.

A mere intention to construct or occupy a dwelling as your main residence – without actually doing so – is not sufficient to obtain the exemption.

Is the dwelling your main residence? | Australian Taxation Office

I can imagine going for 0 days occupancy and signing on with a REA within 48 hours of settlement is probably a great way to get a bunch of heat & a ruling against you by the ATO, but hey I'm not an accountant so who knows.

 

I think I could get as much as a 90/10 LVR but why would I want to pay LMI if I can avoid it?

my capital is about 1/3 cash 2/3 shares (half of which banks) which I was planning on liquidating despite having some WBC/CBA with good yields.

would I be better off having more in my offset and/or still holding on to some of my stocks despite the fact I would have more debt? Is it as simple as calculating the additional cost of debt vs yield return of stocks held?

Re terrible yield and location

I am in Melbourne and would like to buy in my own backyard first. Having said that the figures I have used are conservative/bad case scenario and I think these numbers could be genuinely improved.


Your assumption of my tax bracket is correct. I’m on a fairly low wage but given I’ve now got 12months FT exp under my belt I think I can move into a higher paying job with better career opportunities too.

I am not quite following your numbers as bolded. can you please explain for the lay man?

13k (250/week)
17604 interest (why is this + and not - ?)
3521*.675 ( or -.325 interest. Do you mean tax? I am not following this bit ???) = 2376

Maybe I’ll comprehend the next bit better once the above is expanded.

I do not plan on retiring on this property but hope to leverage it into another in 2-4 years. I don’t mind buying or renting when I move out. Whichever makes more financial sense at the time.

I am also thinking of locking in the IR for stability/risk mitigation but that’s another point of discussion I think.

Thanks for your current response!

 

Lmi is cheap as it allows you to borrow more of the banks money. You want your cash on offset and future monies in offset. Borrow as much as you can!

With your plan starting out and still at home you can really get off to a good start.

Have a listen to "the property couch" podcast and look into "rentvesting"

You can have your cake and eat it to with cg and cf, just need to balance it and work out a plan. If your on a lower income look at good cf+ ips with cg coming soon. I'm not familiar with melb but i have written it off as it's following close behind syd and about to peak and i don't want to waste time looking there.

Engage a BA and good broker to get some things in motion.keep reading the forum to see where everyone is headed. (I just got one in bris and one in adl 7.5 & 8% yield)

 

I would suggest you avoid LMI if you can, there is no benefit to you. You can still borrow 105% without having to pay LMI:

Tax Tip 61: How to borrow 105% on your first purchase

 

Funnily enough I've already done everything you have suggested already! I think I will listen to rentvesting again though.

My mortgage broker said i'd be paying LMI on any products above 80/20 according to his calculations. Is this ringing alarm bells to you? should I seek out another broker? i've only gone to this guy because he's done the rest of the families work.

(will read tip 61 soon)

 

He is not thinking outside the box and is unaware of the tax aspects.

 

Hey @kmrr - what strategy is best for you is obviously going to depend on what you are trying to achieve - why are you wanting to invest? Not even specifically in property - why do you want to invest at all?

Are you simply trying to purchase a property that is cash flow positive/neutral so that you can say you have an investment? Then it's simple, pay a higher deposit and your expenses are obviously going to be a lot less.

Or is it that you want to get your hands dirty and become a renovator/builder? Then you are potentially going to need to reduce your search area to within proximity of where you live - whether or not this is actually a good investment decision just because it's where you live is very unlikely.

Alternatively, are you trying to build wealth through property so that when the time comes in the future that you decide you want to exit the workforce, that you have the ability to do so, without being reliant on the government funded pension? Working with a good Property Investment Advisor and Finance broker are critical. With the information you have provided (Capital/deposit of $120k + Cashflow/savings of $250pw) you could potentially be in a position to buy 2 properties, in completely different locations (each with different economic industry drivers) which will assist in diversifying your portfolio, just as an astute share investor would. There is also then the tenant risk diversification, there is also the benefit of less exposure to any one specific state government. This can assist in land tax and stamp duty benefits.

I'm not a qualified property investment advisor so this certainly isn't specific advice, it's merely suggesting that there might be more value in obtaining advice regarding setting up a strategic plan about what you are trying to achieve through property investment, before jumping in and working on exact purchase prices etc. Hope this helps.

 

As for the why I want to invest it’s because I’d like to one day not have to work for someone else if I don’t have to. Financial freedom. The reason I’ve chosen property is because it’s the asset class I’m most familiar and comfortable with given my tertiary education (degree in property and valuations) and I work for a builder! I am most certainly looking to do my own reno’s at some stage and would like to start buying in Melbourne first, whether its an add value or just hold property I am not sure on yet. This is where I look to you guys for advice!


I think the most important thing for me is find an asset that will grow enough that I can leverage off it in 2-4 years but at the same time be stable enough for me to be able to move out when I’m ready and not be sweating the payments. Is this being to optimistic and having 1 foot in each camp or is this a realistic goal, especially if I think I can improve my income in the short-medium term?

Currently I’m thinking maybe I should loan a bit more and pay some LMI if I can offset the additional interest expense with any yields my remaining stocks will provide me with. This would leave me with more cash for future investments in the future however I don’t believe it would be such a significant amount that I could use it for a new deposit in its own right.

 

I don't know your overall situation/risk profile but a possible starting point for what property to choose based on the above could be to choose a property that has Adding Value potential in a stable/established . Even if you don't decide to add value then you have a good B&H longer term investment. Just 1 possible approach.

 

Still appears to be two completely different strategies here. What if to achieve the best capital growth, you need to look outside the little dot on the map that is Melbourne? But then it's going to make it very hard to reno if the property with the best potential for capital growth isn't within driving distance of where you live (which given how big of a country Australia is - is VERY likely).

Ultimately, achieving capital growth and building wealth through strategic property investment so that hopefully one day you aren't reliant on the government funded pension is one strategy.

Another, is to keep the blinkers on, completely disregard the rest of Australian and look no further afield than where you live, spend a lot of your own time and money renovating and then crossing your fingers and hoping beyond all hope that a valuer believes that you have added more 'value' than you have spent......

Just a few thoughts.