Working out the first step!

Hi all,

Long time propertychat browser, first time poster desperately looking for a helping hand/advise on moving forward.

My wife and I have been in the research stage for the last 18 months (podcasts and books mainly - you may say I am a bit addicted, which I don't see as a bad thing!) and I believe we are now in a state of analysis paralysis and in need of a mentor/some advice from the community to get us moving!

We currently have a house that we bought 18 months ago under a guarantor loan from parents (our mortgage is sitting at 550, while from my estimate we should be able to get a 680-700 valuation after spending 20,000 on a strategic renovation - new kitchen, floors, lighting and knocking out a wall to open up kitchen and lounge room). This equity will be used in the coming months to get mum and dad off guarantor, though in the meantime we have 80,000 saved in an offset account which we plan to use for investing (while hoping to keep at least 30 in here as a permanent buffer in case a property turns pair shaped somewhere along the line).

We are both on average incomes (85,000 and 65,000 before tax respectively) and are focusing on a long term buy and hold strategy with the aim of reaching 70-80,000 passive income by our 50s (we are happy living modestly, so based on our sums we do not need the magic 100,000 that seems to be the go to, though who knows where our journey will take us!). We are planning on starting a family within the next 1-2 years which will decrease our income, though as my pay goes up and my wife is in the position to work for her father part time we estimate our income to be approximately 105-110 for around a year before my wife goes back to work full time (our repayments are 640 per week - current property rented out at 520 per week).

So, at the moment we are looking to buy and hold. We hope to acquire two growth properties in the next few years, followed with a cash cow for cash flow, and keep this process going to minimise risk to our portfolio. However, we are desperately needing some support when it comes to the WHERE (We would like to do this ourselves, not because of the money associated with a BA but because we hope to learn the process and be able to replicate ourselves - even if this means learning from our mistakes). My current thoughts are to focus on Brisbane and Perth over the next 3-5 years and then return to Sydney (or the Illawarra where our current property is located) when the market picks up. However I am concerned about the merits of our strategy, and would LOVE some input from experienced investors who know the ropes!

I understand the importance of mentors, though unfortunately I have no friends/family who understand anything about property investing - so here I am reaching out to this amazing community for advice.

Apologies for the enormous post, and looking forward to hearing from other self-confessed addicts like myself!

 

Using offset to invest will cost you lots of money if your current home is the main residence. It would be better to pay off nondeductible debt and borrow to invest.

 

Hey sam

Sounds like you're on the right track in general.

Sometimes the best way to cure analysis paralysis is to jump in and do it. As you go through each of the stages involved you learn that they're not as scary or hard as first thought.

 

Interesting - thanks so much Terry! Much appreciated. Just to clarify - what you're suggesting to do with the 80,000 that we have saved (and are keeping in our offset account to offset the loan) is to use this to pay down the non-deductible debt on the PPOR and use equity for investment purposes? Sorry if it's a rookie question, but why will it cost me to use the money in our offset account?

Cheers

 

Thanks so much D.T! The kind words are much appreciated.

 

Yes

 

Hey Rolf, could you please elaborate on this? Here's me hoping I haven't shot myself in the foot ha! I know how fun it is to negotiate with banks.

At the moment we have split our loan so that we can pay down the principle (currently with approximately 100,000 in a variable account which is attached to the offset and 450,000 in a fixed account where we have out loan fixed at 3.7%).

 

welcome to PC @Sam Kilborn, good starting point there, and congratulations to both you and wife re taking the action and get started at young age, well done.

re strategy, there are 2 aspects:

1. Finance, like @Rolf Latham and @Terry_w advised above, use borrowed money to invest could have better tax benefit. If I were you, I would release the guarantor ( when value increases by reno ...), and release equity ( if possible), and use the equity as deposit to buy an investment, then repeat. keep the $80k in the offset account. Cash is king, hard to find/get, when you have it, keep as much as you can.

2. re locations, both areas ( Brisbane, Perth) have been discussed on PC, pls do a search here, you will find lots of good opinions and advice.

cheers

 

Thanks so much Eric!

Just to clarify regarding equity - am I right in saying that most banks require 20% security? So if I were to withdraw equity and use this for a purchase I would need the deposit amount (plus stamp duty and fees etc.) plus 20% of the loan amount available for withdrawal?

 

Banks will generally lend up to 80% of the value of security - or 90% if LMI. (must also service and meet other requirements.

 

hi @Sam Kilborn, usually if you pay 20% deposit you are not required to pay LMI ( which will be capitalised onto your loan in most cases). re the 20% deposit, no LMI, it also depends on your profession, for some particular professions ( such as medical doctors...). some lenders are happy to lend up to 90% LVR without LMI.

let's look at an example, let's say Tom bought a property at $500,000 ( with guarantee from his parents), the loan was $500,000 ( LVR 100%). 3 yrs later, the value of the property increases, it worth $800,000 now. the LVR becomes 500,000 / 800,000 = 62.5%, so Tom can approach ( or via his broker) the lender to release the guarantee.

then Tom can increase the loan to 80% LVR ( pending serviceability), thus $800,000 * 80% = $640,000. now Tom has $640,000 - $500,000 = $140,000 equity ( cash) to use to fund the next purchase.

it is a simple concept, but complex exercise, devils are in the details. good to get help from a broker to guide you through the process.

cheers

 

Thanks Eric! Much appreciated. I have made an appointment with my bank to find out where we stand regarding getting my parents off guarantor, and I'll then approach a mortgage broker to find out our borrowing capacity. Cheers!

 

all the best mate

 

The key words you mentioned ..........you want to acquire GROWTH PROPERTIES..

So where is the growth? what markets in Australia are rising? where are the cycles at?

If you get this wrong you could be holding property and paying debt in a flat market with possibility of interest rates rising and your investment not keeping up with inflation, which means you will actually be going backwards.

Don't mean to be negative, but in current market its important to keep "eyes wide open"... anyone can buy a property, but not everyone will make money

You have time on your side, research, read, work out what is actually happening in the markets. Network with re agents on the ground, find out what markets have low volume? what is selling? product etc.



MTR

 

Hey MTR,

Hey MTR,

Thanks for the reply! Much appreciated.

I completely agree with you here - I have been researching non-stop for the past 18 months (mainly podcasts and books), and my understanding is leading me to either Queensland or Perth and staying clear of Sydney at the moment (born and bred Sydney-sider who now lives in the Illawarra). Well aware that the sentiments surrounding when Queensland (I know that some areas in Brisbane are moving quite nicely - though many of these blue chip suburbs are just above our price range as we don't want a unit in Brisbane) and Perth will start to show some decent movement are mixed (I'm talking 5-10km from CBD areas/the best areas that we can afford!), though I don't like the land tax of Canberra, I feel like the steam will be coming off Hobart within the next year or so (same as Melbourne), Adelaide is chugging along though I wouldn't be expecting any huge growth over the next few years..so all roads are leading me towards Brisbane/Perth for the next 12:00 on the property clock? Pending population growth and employment. We are yet to see our mortgage broker, though I wouldn't expect that we would be able to get a loan for any more than 600,000ish...what are your current thoughts on the market MTR? Any areas that are flying under the radar that I might be able to have more of a good look at? Our mission now would be to choose the right area with enough growth that we can use as leverage for our next purchase, though also enough cash flow to ensure that we can hold them and not next stuck should/when interest rates rise!

 

Growth corridors in the 10-14km distance of Brisbane CBD. An older house, larger land content, something to add value to in a good OO area. As always, DYOR.

 

Gee Sam, you sound way more together that I was when I was your age. You'll be fine.
Time to get on the ground now, I reckon. I'm guessing you have been looking at Brissy online? Look for some cheap flights and get up there for a long weekend. Rent a cheap car and look at some suburbs and properties to get your head around the market. Somebody who knows Brisbane will suggest some suburbs to drive around. Pick specific areas you like to better target your online research.
Scott

 

Thanks Leo! I've been on the portals doing my due diligence. What are your thoughts on Logan/Moreton Bay? Too far out from your perspective? My assumption is that good pockets in these areas would would work well for a yield play with hopefully some good growth once/if Brisbane decides to do its thing?

 

Thanks depreciator! It's funny, when listening to podcasts and scrolling through the forums I often feel like I'm quite late to the party! Yeah I've been on the portals making a list of suburbs that I'm interested in based on historical growth and projected growth (depending on serviceability I'm looking to get as close to the CBD as I can, however I also like the numbers of some areas in Logan and Moreton Bay - I can see these areas benefiting from Brisbane growth). I'm actually looking forward to doing exactly what you suggested and getting on the ground up on Brisbane - I'm a big traveller so, despite looking at it from an investment lense, it's exciting just to be able to explore a new area!