I am new to the whole property investment game and would like to get my first one more right than wrong.
I currently live in a houseshare with 3 other friends. The current house is a 4/2 and we each pay $150 + Utilities. Our lease is going to expire this April and the owner is happy to extend it.
I've some ~$30k saved up so far. My bank says that my pre-approval is a bit shy of $600k. Here is what I am thinking, I go and buy a 4×2 house as my first home. Move in with my current roommates(they are happy to do this at the same rent). This way, I can take advantage of FOG, stamp-duty rebate and also start of with a good rental income. Depending on how much I pay for the house, should comfortably be either neutral or positive cash flow.
Now for my rookie questions:
I want to get a second property not 5 years down the road but as soon as possible and start building a portfolio. I am thinking something like ~$350k on my the first home so that I'll have some more pre-approval left for my next property. Is this the right way to go? 4×2's with good capital growth seem to be a bit hard to find at the price range. So I probably won't be having much equity for the next couple of years. So it'll be just the rental income (which can easily sustain for a few years as I can find flatmates without too much trouble).
From the articles I've read so far, I think I want to build my portfolio with emphasis on equity and the cash-flow at neutral or slightly negative. I am not even sure if that is possible [for me].
BTW, I am in Perth so my interest would be properties in WA.
Any advice guys? Thanks a bunch.
It doesn't quite work that way. Just a few things – in the above scenario you will may not be able to use rental income as part of the servicing (depending on how the application is structured).
If you have an aggressive IP strategy have you considered borrowing as much as possible on the first purchase and leaving a higher deposit amount for the second purchase? Having adequate deposit for an IP purchase is an extremely common issue.
Just because you have a $600k will not mean that you have $600k to spend on 2 properties especially later on.
Strategy is a good one though – just need to ensure that the finance is set up correctly not just for what you want to do today but also for your next IP purchase.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Hi and welcome aboard.
I like the idea of buying your first home and then having your mates as boarders. It will soften the blow for you in terms of repayments.
There's a few things to consider with purchasing an IP soon after.
Firstly, you won't be eligible for concessions or grants on an IP so the purchase costs are going to be higher than for your first home. For that reason, you'll need to budget for at least a 5% deposit and enough to meet these costs.
Secondly, have you considered buying something that you can add value to for your first home? That's how I help a lot of fist time investors get into the IP market. They purchase something that they can cosmetically renovate for decent equity gains – new flooring, paint, light and window fittings, kitchen refacing and landscaping are just a few ideas. I had a client in Canberra purchase a property recently for low $400s and the reval after the renovations came back at $480k – and this is in a flat market.
Lastly, for you – it sounds like it might be an idea to use a lender that will allow you to extract equity at high LVRs. You're probably saying to yourself "what the hell is he going on about?" Long story short, some lenders will allow you to take equity out of your home up to 90% of it's value. So for arguments sake, if you purchased a $100k home today with a loan of $80k then the Loan to Value Ration (LVR) is 80%. If your lender allowed you to access equity up to 90% of the properties value – that means they'd allow you to take your loan up to $90k which is an equity release of $10k.
By allowing you to access equity at a high LVR, this could assist in purchasing your first home and your first IP sooner.
I don't know if it helps but I wrote an article for Australian Property Investor on buying your first home and your first IP soon after – here it is.
Apart from that, stick around, continue to ask questions and best of luck with searching for your first home. It's an exciting time!
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Shahin and Jamie. Your advice is invaluable.
I was reading an article that said 83% of investors only have 2 IPs and ~13% only 2-4 IPs. You guys got me thinking, I need to plan for the first 5 properties. Like most things in life, it wouldn't go as planned but better plan rather than get stuck.
Let's assume that I get my first one for under $400k but to get funds for the second one, I either need to save more (can only inject 20k to 30k per annum) or do a renno like Jaime suggested.
I like the idea of renno and re-value to get more equity. Let's assume, I inject 20k into the renno and manage an equity of 50k (this seems to be possible, depending on the place – not really sure though). I draw on this newly created equity and get my second property.
As my cash injection alone won't give me a fast enough growth rate – my second property needs to have a high CG? to get more equity for my third one? High CG only means negative gearing? Or can it be a cash-flow positive property so that it won't affect my serviceability and can quickly move to the third one?
As Shahin suggested, I am planning on taking a 95% LVR loan (with LMI capitilization) on my first property. That'll leave me some money for renno. For the second property, can I convince the lender to consider my rental income on the first one and the second one?
I guess, what I am trying to find out is "how people keep convincing banks of their serviceability to keep adding to their portfolio?"
So far this is my idea of a first property
-> 4/2 with a big-block and potential for a battle-axe sub-division and/or renno
Second property:
-> High CG or CF+ property
Third propriety:
-> if second one is CF+, then a high CG one or vice-versa.
Fourth one? Fifth one?
Thanks guys.
Ok so if you have an aggressive strategy which it sounds like you do – then you need to ensure that you will be ok from both a deposit perspective as well as servicing. There are ways to ensure you maximize your servicing. An obvious example is that different lenders lend different amounts. Some have amore conservative borrowing capacities calculations than others. When it comes to servicing Suncorp is very conservative whereas Westpac is very good.
This is just one of many things to consider when planning long term.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Lender selection is soooo important when looking to grow a large portfolio – particularly if you're investing alone (rather than with a partner) because you risk hitting a borrowing capacity wall early in the game.
Other ways to improve your overall borrowing capacity include taking out interest only loans, minimising consumer debt, not having large limits on credit cards, staying on top of rent increases for your IPs – the list goes on.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks for the all information, guys.
I need to start work on an execution plan for my strategy. First step would to be build a team. I understand that one needs the following professionals for things to go smooth.
1) Conveyancer – Helps with the buying process. Do I need a solicitor for standard home purchases?
2) Finance Broker – Takes care of the finances.
3) Buyers Agent? – Are they worth the money?
The Finance broker doesn't have to be local. Any implications in that?
How about things like, building inspectors, surveyors, valuers etc?
Any recommendations in Perth?
Is there such a service where I can get a "fast" second opinion on a property and it's suitability for my strategy?
Also, I like numbers and analytics. Where can I find detailed numbers for sale prices in a suburb/street. I know of residex, RPdata are there others? Any feedback on Residex's MarketFacts subscription? I read that these are reported numbers rather than "true" figures. How accurate do they tend to be?
Thanks everyone, this forum is a real treasure in plain sight!
Personally I would buy an investment property and keep it separate to your current situation.
One of the benefits of investing this way is you are not just restricted to investing in Western Australia which means that you can invest where you deem will provide you with the best capital growth. That's the great thing about being an investor you are not going to live in it so what does it matter if its a different state. Remember the main reason to invest in Australia is for solid capital growth, buying a house to share with your mates may not be the best use of your money.
Nigel Kibel | Property Know How
http://propertyknowhow.com.au
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Get a good conveyancer – especially one that is sharp and quick to respond. For example, if you find a good property then you want the conveyancer to look at the COS straight away and order the Building and Pest Inspection immediately. Finance Broker does not need to be local but if you prefer the face to face interaction and someone that also has knowledge of the local area then it helps. Same story with the Finance Broker – you need them to be responsive and quick amongst many other things.
Buyers Agents are worth the money but like many professions – there are many poor BA's.
You should also get a good Building and Pest Inspector. The last thing you want is to think you have landed yourself a bargain only to find out that one of the piers are sinking and the house is snapping in half. They cost $600 on average BUT make sure you get a good one and not a cheap one. It is a necessity to get one done before the cooling off period. Some even get it done before they sign the contract (it really depends on the situation).
Many brokers will have access to either APM, RP Data or Residex Reports – those reports are very handy to get an idea of recent sales.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Thanks for that, Shahin. I'll start searching for a good Conveyancer. and a building inspector so that when I do find something I like, I can move fast.
I heard that, I can actually setup the finance all-ready to go even before I find a place? Will such a thing, if it's true, reduce the final processing time?
Nigel, I agree with you. I am still not dead-set on this strategy but when I look at it as a black-box that takes my money and after xx months spits out what I want, they seem to be adding up. I am also thinking, for my 2nd property, why not just build in the big backyard(subject to council approval etc). Looks like, that may result in a greater ROI. It may also be easier(I think) to convince the lender to give me an extra $150 grand for the next IP rather than $400k. While I am at it, why not build 2 units (1 after the other) and rent them out, the ROI would be ~12+%. I am sure there are lot of things to consider in a scenario like this but I am working on it.
As for equity growth, I am still not sure how building multiple units in a block of land will add-up to the total value of the property?
Yes – its best to have your finance pre approved prior to you starting to looking for properties. That way you now exactly how much you can borrow. Make sure that your banker or broker gets a credit assessed pre-approval instead of a system pre-approval. Most banks are now offering this.
Also when you are applying for finance you need to ensure you apply for the maximum rather than what you think you will buy in case you may need to go a little higher than what you had planned. That way you know your finance is guaranteed.
Also make sure that your loans are setup/structured correctly.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Hi proprookie
No, your finance person doesn't need to be local. Providing your ok with email/phone correspondence then you can use any broker from anywhere in the country.
I received your email and will get onto it tomorrow when I'm back in the office.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Great advice
Jamie
Yes interest only loans and an offset account or, put your properties in a trust
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