Where does all this equity come from?

I wouldn't take Datto too seriously. He has a well developed sense of humour.

 

And he likes to mess with noobs.

 

Thanks, that is pretty much my plan! As I'm in SA I only get a FHOG if I build. Adelaide market is looking pretty flat so I definitely want to buy with value add potential. But like you said, realistically it'll only be a gain of about 30k

 

Hi Newdart.
So please don't be disappointed that you cant make the super big bucks in your first go. Many people on here who are making huge profits from their portfolios tend to be very high income earners to start with. Some like me have taken a lot longer to get where they are now. In many cases it was pure good luck when we were able to purchase in a flat market which rose suddenly soon afterwards. This is where your second tier of profit will come from - unusual capital gain.

The third gain is the tried and true turtle approach - as you start to reduce your mortgage, the equity increases. This figure rises exponentially the further out you get from your starting point. After five or six years if you pay more than the minimum amount (offset account), you may have plenty of equity to do bigger deals. All the best

 

Hi Newdart, I wouldn't dismiss the FHOG for a new build. Particularly if it is a house you're going to live in.

Remember, that grant isn't just the $20 -$30k ,it is also money that can be leveraged. So it's more than the difference between a house worth $300k and a house worth $330k. That grant (at least when I was purchasing) can make up a decent chunk of your deposit. So, (discounting the fact that you still have to pay expenses such stamp duty and LMI etc) that that grant as a 10% deposit can potentially access you $300k worth of finance. But obviously speak to a broker.

What you could do if you're not keen on a block of land in a new estate is see if there are any floating around in established suburbs.

The hardest part is getting in the market. No use stepping out of the market to save for say three years for a deposit on an established house because you want to value add when you might be able to build now with the grant. You might find that in the time it takes you to save that extra deposit to avoid the slow growth new build option you have still accumulated the equity in that property through growth and paying off your mortgage than what you might have saved anyway.


Also, you're planning to value add to gain an extra 30-50k extra in equity when the government is essentially guaranteeing you money if you decide to build.

It's free money, I'd try to get your hands on it if you can.

 

My approach was kind of half gamble half investment.

I was in the state of being angry and depress because I do not have enough deposit for a decent house in Sydney and my income was below average when I first started investing.

So what I did was I took a gamble and bought a house for $110k in Moree, 12% return starting from day 1, I spend roughly $15k as deposit and borrow 90% LVR.

6 months later I re-val and the property and increased by $15k, so I top up the $15k (which fairly close to my original deposit but now I've a stronger survivability as the property is having roughly $700 surplus per month ), plus some of my savings and I've bought myself another house for $235k, which again was returning 6% gross, 6 months later re-val the house and came back with $285k, top up and purchase another and so on until one day, my account has enough cash/equities to put down a deposit for the house I'm currently living in. All together took me slightly less than 2 years.

Of cause during the journey there are ups and downs but overall it worked out very well for me!

My current goal is pay down some of my debt to prevent any future economy down turn and at the same time cash up for my next purchase.

 

Great Post Angel.

 

Another excellent post!

Is the grant that much? If so, then certainly worth considering

 

It's a 15K grant. I'm only going to live in the place for a year before I convert to IP. I have looked at house and land packages but they're quite expensive and you get a tiny block. Plus there's holding costs while I wait for it to be built, this could hurt. And then I'll be relying on growth alone before I can buy the next one.

In SA there is also an affordable homes program that I'm eligible for (low income) where you can pick up older ex govt houses at a discount. Some of these are 600m2 + and most need some work.

For either of these, you have to be owner occupier for 6+ months.

 

Yep, just remember that the FHOG cash works harder than the discount. For example a $50k discount doesn't mean you can borrow extra cash from the bank, it just means you need $5k less in deposit funds (assuming a 90% LVR) the $15k means an extra $150k you can borrow.

Now with the H&L, When I did it I had the first 12 months interest only to help with the construction costs. So when doing you cost calculations for the build look at the interest only component.

Also remember that you will be saving significantly on stamp duty as you will only pay the stamp duty on the land and not the whole build.

If you're on a low income (lets say you have a health care card, there may be further stamp duty discounts as there are in Victoria)

Further, once the house is built you can rent out your rooms to help with the holing costs (Something I'm thankful I never had to do)

Here's my story
I had $15k in savings, Dad gave me another $15k and I received $27,000 in grants
I purchased a H&L for $360,00 with I think a $310,000 mortgage.
Took 18 months for the block to title (this sucked but I had the block and the market moved and I didn't pay any interest during this time. I used the time to save more so I could finish fences, buy furniture etc).
Construction started, due to the way building contracts work the holding costs were only really tight for about three months (You draw the funds down from the bank as the builder requires their progress payment)
I moved in
12 months after moving in I had the place valued at $400,000
Without making extra repayments I had also paid my mortgage down by $10k
Just like that I had $100k in equity
Purchased my first IP
Now looking to purchase a bigger shinier house

My block was actually not a smart move, the growth wasn't fantastic, there was lots of land around etc. Nevertheless I turned my $15 k and some help from Dad into $100k in three years (from signing contract, titling, building and having property re-valued) without having to save anything extra.

And again, if you do the numbers you will see that this isn't a great story, the numbers aren't fantastic. But that's how I got my little bit of equity. Now I've learn't some stuff I hope to do even better.

I'm pretty sure if I wanted an established house I'd still be saving and would have no properties now instead of two. My friend who had a larger income and larger savings at the time still does not own a house.

Also, not trying to convince you to go down the H&L route, just making sure you know enough to make an informed decision either way.

 

Also, one more thing.

Let's say you buy the cheaper house and lets say it costs $200k and you get 5% growth PA
Now lets say you take the grant money and buy the house that costs $350k which grows much slower at 3% pa

After two years you end up with 20,500 worth of growth in the cheaper house
and
20,100 worth of growth in the lower growth H&L package

The point is that investing in property is about accessing finance and compounding growth of a larger asset base.

Obviously, however, if the market goes backwards, your losses are magnified in the opposite direction.

 

You do make a good point. I will definitely research it a bit more.

Another challenge is that I'm a casual employee despite doing full time hours. What happens if you lose your job during construction?

 

She does do some good work but in tv it appears fantastic, make thousands in a weekend but there are costs not accounted for plus her sourcing great is different to average Joe. It is do able buy I would treat what she does as gospel. It does make good tv though

 

http://statesman-homes.com.au/
227k home and land package at Munno Para.

 

@Newdart we've talked about this in PMs previously. Being that you qualify for Affordable Homes program (under market homes for those who are eligible only) you can use this as a great springboard to launch your investing from.

Get a run down one and you'd get it even cheaper again. Get one for say 185k fix it up and reval for 235k. Draw 50k equity out, that's deposits on 2x 200k places. Do the same with both of these. Move back to whence you came and rent all 3 for c.f.+

You'll have circa 750k worth of property, only takes a modest period of growth to have your asset base increase by more than your annual salary each year.

If the newer 2 have equity to pull out they can be leapfrogged into more properties and then it snowballs into an avalanche.

Refer https://propertychat.com.au/community/threads/real-life-example-of-buying-under-market-value.2908/ for an example.

Then the cash you're saving from work, from c.f.+ , tax returns, etc, you can get a deposit on a ppor

 

The snowball effect sums it up pretty well!

Great work on that purchase by the way - that's what I like to see.

How has maintenance costs on these cheapie properites affected your cash flow?

 

Maintenance stuff is an overblown issue imo. I had 3 different air cond units blow up last summer so that was expensive to replace, but that's about all there's been. Due to be lower end of the market, ppls expectations aren't too high.

My friend has an expensive brand new nras apartment in perth. The dishwasher malfunctioned and water leaked all over the jarrah floors and they had to be replaced. That cost way more than my air conds.

 

If you build try not to lose your job during construction.

If you can get a $50k increase on equity on a $185,000 purchase then I would do what DT is recommending. That sounds awesome.

I would assume you would need to be good at DIY to make that work though.

 

Eh, I'm up for a challenge. I could almost borrow that amount now!

 

Just remember to judge places by the numbers, not by whether you'd live in the property / suburb yourself, and you'll be fine.