older first time investor

Hi Simon

I'm going to zero in on the thing that stands out to me.  You said "don't have any assets other than super".  Would it be rude to ask how much you have in super between the two of you? 

I am assuming it is still sitting in a normal retail super fund.  Or have you started your own SMSF (Self Managed Super Fund) ?

You can, inside a SMSF, use your superannuation monies on purchasing property (specifically, paying for deposit, stamp duty and buying costs – leaving the bank to fund 80% of the purchase costs, and having tenants pay off the property).  Have you considered having a good hard look at your super to build a fortress around your retirement?

Hi Simon

You have a good income and yes you can buy in your super fund however with with your combined income you should also buy outside the fund. In my view you need to look at properties with high capital growth. In Australia most cash flow properties are not that high and generally they ofgfer poor capital growth,

If you buy a property for $400,000 and one growths by 5% and the other growths by 10% and all you are aiming to do is keep it for the next 20 years the difference works out to be $80,000 per year for each year you have owned the property. Now most people could live on that type of income, so it means that you need to be selective on the type of property that you should buy in the first place.

Personally I also like to develop property because it means I can build in inner city areas and acquire quality property at as wholesale price.

Hi again Simon

I'm a bit of a numbers nerd so I'll clarify if you like.  A $400k property growing at 10% per year over 20 years would give you a total of $1,629,681 more equity after 20 years than a property of the same pricetag growing at 5%.  $1,629,681 divided by 20 is equal to $81,404.  However you must understand that the forecasted growth is not precisely $81,404 each and ever year.  It's not linear.  For instance, In year 1, the "extra growth" would be only $20k.  In year 2 it would be a little more etc, due to the mathematical nature of compounding numbers.  Other thing to remember is a dollar today won't buy the same number of chocolate buddies at the Milk Bar as it will 20 years from now.  A dollar won't even get you a quarter of a chocolate buddie 20 years from now.

Thing is, you need cashflow to buy your groceries.  Equity doesn't pay the bills.  Definitely not saying avoid capital growth.  You absolutely need it.  But you also need cashflow.  I prefer to go for properties that produce both, rather than one property that is just cashflow and a separate property that is just capital growth.  Keep in mind that as you get closer to retirement age (when you will not be working to earn income to pay off mortgages), the bank is unlikely to feel like giving you a loan against your equity so you can buy your groceries, because they will be thinking to themselves um, how is this person going to pay us back?  Oh that's right, they can't.  They are old and not working.  So no, we'll reject that application.

The thing people forget is that whilst waiting for the capital growth (and presuming it happens in the manner you hope) you still have to support the mortgage whilst waiting.  In the case of a negatively geared property that is down by say $200 per week, you essentially have to find $200×52=$10,400 per year out of your own pocket just to hang on to the property.  If you cannot find such volumes of spare cash, then it is not even a strategy you could consider, because you would not be able to hang on.  Make sense?  Also, if you did have a spare $10,400 per year, you might prefer to be putting that towards acquiring additional properties rather than supporting just the one property.

Another thing to be wary of are putting all your eggs in one basket.  Imagine if you had one expensive property and it was vacant for ages.  You would have zero rental income.  Not much good to you when you are retired and counting on the rental income to buy your groceries.  And another thing is land tax.  If you have lots of your chips on the board in one state, you hit that land-tax-free-threshold really fast.  Whereas if you spread your chips around the board a bit more, this is another holding cost you are avoiding or minimizing.

Hi Simon

Yes, the point of an offset is to save mortgage interest while the money is in there, but be able to withdraw the money whenever you want to either fund the next IP, or fund an acquisition of a property for you to live in, or whatever.  It's not a redraw when you take money out of an offset.  Just a regular withdrawl.