Hi,
I am new to these forums and would really appreciate the advice of the savvy investors on here. I'll give you a brief rundown on my situation before I ask a couple of questions.
My partner and I are paying off our home that we live in. We have a substantial mortgage on our home but do have about 200 000 equity in our home. We have recently been to a financial advisor who has suggested that we buy an investment property and their suggestion was to invest in a house and land package in Ipswich in Queensland. The plan involves using a line of credit set up and putting all our money into our home whilst paying interest only on the investment.
Has anybody been in a similar situation to us and what options did they choose?
Also, has anbody ever dealt with Members Alliance?Thanks, in anticipation of great advice!!
Nicki
What do u mean by substantial? A$2 million mortgage with 200k only 10% equity?
You need to remember that property market is sliding… therefore your equity might be less
Need some clarification240k mortgage.
Nicki
Firstly welcome to the forum and I hope you enjoy our time with us.
Although I am also a Licensed Financial Planner and certainly recommend my clients buy property this is very unusual for the FP industry unless they are receiving something out of the sale.
I dont take commissions from Property but many in the industry do and therefore understand that the person who is paying this commission is you the buyer.
My suggestion would be to do your own Due diligence and buy a property you find and have valued by the Bank rather than a property which has been referred by a FP.
The set up you mention is standard practise but one problem i normally find is that Financial Planners have no idea how to structure the loan when it comes to cross collateralising the securities.
This is probably the initial problem i find most clients have been caught up in and takes a while to untangle.
With regards to the equity position you find yourself in structured correctly you should be able to avoid LMI and also have further leverage to buy again down the track.
Richard Taylor | Australia's leading private lender
How, 200k equity on a 440k property ain't bad. Sounds like good advice – but make sure you DO NOT NEGATIVELY GEAR! You may be sold the benefits of "saving tax", but remember you only save tax when you lose money! (for example you spend $100 on interest and you get $40 of that back in tax – you're still $60 behind). Do your numbers and buy a sure thing – do not speculate, as speculating is gambling, not investing. Educate yourself – people go to uni so they can get a job that pays 50k p.a, but then they try to make 100k out of the property market without learning a bit about it. Read books, I have founds Steve McKnights books the most helpful of all the ones I've read (and no, I don't work for his marketing dept). they are available on this website…
Thanks for the advice given so far.
Perhaps if I give some better info on our situation, it may be easier for people to offer advice.
We built a house 2 years ago. We have a mortgage of 240K but our house is valued around 440K. We have a combined income of around 130K/ year before tax.We have been told to invest in Ipswich in QLD by investing in a house and land package for 370K. We have been told to expect rental returns of 340-360/week.
We are in a strong position financially so I don't really see how we could lose, but it a scary prospect all the same. I am only 25 years old so all this is fairly daunting for me.
We have been told that we can pay off our house in 6.2 years and the investment property in 12.5 years. Does this sound feasible?
Any opinions or advice would be gratefully accepted.
We are in a strong position financially so I don't really see how we could lose, but it a scary prospect all the same. I am only 25 years old so all this is fairly daunting for me.
Just because you can afford to pay for it DOES NOT make it a good idea. Personally I dont think the return you have advised is very healthy, you will achieve higher by putting it in term deposit. The other side of the coin is will property prices rise thus giving you your return? Ah crystal balls mate, and the only person responsible for the final result is YOU. You can take on all the advice offered, both paid and unpaid, but at the end of the day, it is your butt on the line. YOU have to be confidant in the chosen investment. Do your own due diligence, know your market as best you can. Ths forum is a great place to ask questions, there is so much knowledge here, from all sorts of people who have constructed all types of property deals. Sorry…. al little side tracked there……it just always rings alarm bells when a novice investor makes a purchase based on "someone elses" opinion. I have seen a few suffer badly.
I agree with Richard, I find it very unusual to hear a FA has been so specific with the davice to purchase a property. I am not familiar with the Ipswich market so will not make a comment on if it will increase and to what amount. Throw up a post specifically on ipswich and see the response.
All the best
Mick
Thanks for that Mick.
My understanding is that the IP would initially be beneficial in the tax cuts it would allow us, therefore allowing us to put more money into our PPOR loan. So we are not really looking at the IP to make us substantial money in the short term, really just allow us to pay off our PPOR loan quicker. As long as we don't lose money on the IP in the meantime. Are we taking the wrong approach?
Well Nicki
Dont get talked into buying an IP just get a tax break.
What happens if the property is vacant or Government legislation with regards to the negative gearing laws change.
I would only buy an IP if it made financial sense and created long term wealth not for a short term tax break.
I also would be suprised given the current interest rates if any new property was cash flow neutral irrespective of the Depreciation and Building Write off allowances.
I go back to reiterating my first post. Dont get persuaded to buy a property your Financial Adviser recommends as i guarantee you he is likely to be receiving a commission from the sale. Certainly buy an IP but make sure you carry out your own DD.
Richard Taylor | Australia's leading private lender
Hi Nicki,
The idea to invest in property is a good one, but I too would be cautious about the house/land package offered to you.
Friends of mine did this several years ago and YES their Financial Advisor did make commission out of it (they found out later). The problems they have come across are these… If it is a large development, many many people are being fed the same lines as you and so there will be many new houses completed at around the same time all looking for new tenants at the same time as you as well – this will instantly cause the rents to decrease as you all compete for the same middle class/working tenants and so investors will drop rents to attract the tenants & you will have no choice but to follow suit. Your rental will probably now be something like $320 per week or less. No where near as good!
To add to this there is a good chance that there may be more Housing developments built in the area in the next few years & then your investment becomes "old hat" and not as interesting as the newer developments. When you try to sell it you might not get the $370,000 you paid for it (have a look at what other older local housing estate prices are at the moment to compare against) because buyers will just go for the new House & land packages themselves. The tenants you are trying to attract will also opt for the newer house if the rents are about the same. (All this has happened to my friend) – Oh and also there was no bus route nearby or shops within walking distance which was also a turnoff for tenants.
My advise would be – look around and spend the $370,000 on a couple of ready built properties (or one – depending on the location) that brings in better rent – or find your own land in a good location around already established houses (older) & build on that – hire a project manager if you prefer to leave a lot of the work up to someone else.
Good luck
Shnook
funksta,
i agree with richard also and the general sentiment in this thread about being careful with house and land packages.
The rent return is nothing flash on the house and land, though i think ipswich is a good place to start with due to the current and future gov spending an projection of popuation growth.
Ipswich is certainly an area to watch. My advise will be different to others here because i dont buy new properties and prefer property that has a known supply and scarcity value.
My reccommendation would be to buy an solid old character house on a large block that you can sub-divide. Keep the old house and pay down the loan with the sale of the block to reduce your negative gearing. Remember there will be alot of new stock coming on line and there is danger of it becoming over valued and crashing like in western sydney currently. Ive seen ovepriced 2003 properties in western Sydney sell for almost half of their original selling prices (from 900K to 550K) in the last 6 months and this is the danger with new homes on the fringes when development is fast paced and developers get greedy when the wheels are fast turning. Though i dont see the same thing is likely in Ipwsich becuase of the low base but who knows in 5yrs.
And know i wouldnt pay 900k or even 100K for a dodgy mock tudor, italianate, fauve federation, pretend wantabe palace that pays homage to the motor car with 5 garages and winding streets that make impossible to walk anywhere and even if you could there would be nowhere to go and each having an enviromental footprint of a small city , personally i think these homes are a discrace, but thats just me. Anyhow I digress. Always get an independent valuation and make it part of contract conditions as well as the usual building inspections etc etc so you have an "escape claus".
You may be earning 130K combined but assume your income split is roughly half and neither of you earn over 80K you still only get back 30% in tax deductions on all costs so negative gearing isnt that attractive. Having myself gone from 42% tax to 30% and an increase in rates of 3% i can tell you on a 5% yeild you will have alot of out of pocket expenses which will mean you will want at least 10-12% per annum in cap growth to justify the losses.
My view is you will get better growth on an old queenslander in close proximity to the centre of ipswich, (i like the houses just north over the river personally, a nice pocket) than a new home and if you can subdivide as i said you should be able to sell the block for at least 1/2 of your orginal purchase price but you still have a house which shoud be worth near what you paid by then. Obviously you must deduct all costs but you would getter ahead faster and have less financial stress.
I forgeot to make an obvious point. Assuming you are a couple that is looking at the long haul, whilst it may not be on the cards, pitter patering little feet have been known to cause a huge reduction in income and increase in costs. They certainly have a habit of coming along before that loan is paid off. My point, dont forget to factor in these events, sickness, loss of job etc. Not to be doomsday, but a realist.
Mick
Hi funksta
I also am a Licensed Financial Planner like Richard. This sounds very much like something I have been approached by developers to assist the sale of their properties.
And yes they offered real estate commission if I found a buyer.
I of course have not done this. However if it is Lowood you are talking about the area does seem like it has got a lot of opportunity. There is major government infrastructure going in at Ripley not far away, health centres etc. This is the targeted "Western Corridor" development plan. There is also a large Woolworths going in as well – they generally tend to know where to put a store.
Oversupply could be an issue in the short term.
Never be suckered by rental guarantees.
The development I have heard about does have a "local strip shop" going in and medical centre. At least this is what I have been told.
This development was on the road between Lowood and Gatton – quite a busy road. There is the new jail and other government infrastructure at Gatton – my wife works for project services Qld Government – lots on the cards depending on the politics of course!!
House and land packages are always more risky – you don't know what "marketing premium" has been built into the property price.
In the end in comes down to your financing capability and as Newbi said – factor in the single income issue if the pitter patter is in the plan (it is always a chance anyway!).
Who knows – maybe watch for the old houses that aren't so interesting after the new ones come on line!
Be sure to keep the emotion out of property purchases – it is an investment – not somewhere for you to live.
Out of interest, did you pay for your advice from the financial planner? Be prepared to pay for advice if you want it to be independant – and please read the advice in full including the "disclosure area" where it sets out fees, commissions etc. If the adviser was to get commission it should have been disclosed in your advice.
Any other general queries please feel free to email me at [email protected].
Hi
Have been interested in this topic as we have been dealing with Members Alliance too. We are in similar circumstances as Nicki but we have had the pitter patter and will not be going back for more!!
I believe (our) IP will be in a different suburb. No where have i read, so far…., that there is any commission payable on the sale of H/L packages. Mind you we have had the intial in home spiel and now going for the in premises spiel.
From the advise that has been shown here there are alot more questions I will be asking before there are signatures on dotted lines.
We are venturing this way as we could be able to afford the weekly 'out of pocket'.
a) to be able to reduce tax payable, b) to be able to sustain more investment properties, c) create a saving for us in our retirement, d) maybe an inheritences for our children.
I had been advised that maybe I should invest locally (WA). Our block prices and house prices are even more expensive than Queensland way. I know that at the moment we are in a renters and buyers market but has that reached it's peak too?
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