G’day fellow investors.
So, I’m about to dive into my first investment like a headless chook. I have done my numbers, at least so I thought, and I’m looking for a positive geared property. I’ve gone into regional Australia and managed to find a good investment. I’ve gone regional because that’s where my budget takes me. It’s a 3 bedroom 1 bathroom 1 carport on 1000 m2 of land. After viewing the property today, I felt comfortable and gave them an offer.
These are the know numbers:
I will get the property for $130.000
There current tenant pays $280 p/w
I will put in 25% depositI’m not expecting any significant capital growth in a long time, but the small town has some infrastructure. New school, businesses etc. Families moving in.
And I was so excited until a couple of minutes ago, when I read about all the fees and taxes that will add up at the end. I’ll be honest, I didn’t know of all the expenses and what I just read online got me a bit scared. Like I said, I’m diving in like a headless chook.
So the questions is, is this a good positive geared investment? Is there any point of me to invest in this property? My goals are to invest in another property closer to a major city later on this year.
Hi Fred,
On first glance, your find has good possibilities. And yes, the likely outcome (on first glance) is to be positive geared. How positive? Well, your Gross Yield is over 11% (14,560 divided by 130,000) which is great – but let’s look deeper:-Purchase price = $130k
Costs to purchase (estimate) = $4000
Borrowing Costs (estimate) = $2000In reality, I don’t what Purchase costs a regional (cheaper) property would have when comparing to a city property. I have allowed a 5% Purchase cost – but is it enough? Same with Borrowing Costs – will it cost as much to borrow $100k as it does to borrow $500k? Could be – I am not sure – but others on here can put us right I’m sure.
Anyway, I gather it might be those two “upfront” costs that have you troubled, yes? All of the Stamp Duties, Solicitors Fees, application fees, Mortgagee solicitor costs, etc. In the city we usually allow from 3% upward – but is that enough when purchasing a lower cost regional house?
You likely have already looked at ongoing costs – Rates, Insurances, Mortgage, and Maintenance. With these, I would think your rental income is more than enough to cover all of those and give you some money in your pocket each week. An 11% return should have heaps left over on a weekly basis.
If you are planning to buy more, did you plan to put 25% deposit into this property, or has your lender dictated that they will only lend 75% on this place? Could you do better?
And, are you looking at IO mortgages, or P&I? Again, your lender might be saying what they want – but what do YOU say?
Benny
I’m not expecting any significant capital growth in a long time.
If this is the case what is the point in investing in this property? What will you get in your pocket? each year. How much after 5 years?
Where is the $25k deposit and costs coming from? Have you factored in the interest on this? Even if cash it would mean an opportunity cost.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank you both for the reply, much appreciated. As you probably understand, I do know very little about investing but I’m eager to give it a shot. And I only understood half of what you both wrote :)
Benny – I’ll be honest, when I started to look for properties I started to look for high yield properties only. I figured that would be the easiest way to get positive cash flow, but am I correct? This property is leased for at least another 1.5 years
What do you mean if it would cost the same as borrowing $100K or $500K? These figures got me lost :)
I think more of the ongoing costs, is the rates in regional Australia different to any other rates in Australia? Do you pay the same rates in Melbourne and Sydney as in regional? Is it worth to buy this property, since there’s not going to be that much growth, I was hoping that the high yield was going to generate some income.
What scares me the most is if this is the right property for me to buy. Will this property help me buy another one later on? Is this a smart buy if I want to build up some sort or portfolio? And how should I go with payments. My goal is to invest in another positively geared property once we paid of about 50% of the first one. Is that a smart thing to do? Pay less, pay more…?
We choose our self to pay 25% deposit. Reason being is to avoid LMI. We could have put in more. And what do you mean when you say “could you do better”? Better as in borrow more money or put a bigger deposit? We could borrow more money.
I hate to sound silly and stupid but I don’t know if it’s a IO or P&A loan. We indicated to him that we are planning to pay the house of within a couple of years.
Terry – Obviously you’ve got a point. This is me trying to get into the market. My goal is to build up more positive gearing and one day replace my partners income :)
I’m sorry but I didn’t understand, $25k deposit and costs?
I’m reading and reading online but there is sooo much information and I just don’t want to buy anything that’s not going to get me anywhere. Today I found out about compounding interest? I’m lost :)
At the end of the day, as mentioned, my end goal is to build up a portfolio with positive gearing so that my partner can stop working :) The first thing that came to my mind is positive geared properties, a few renos here and there to up the equity buy another one etc. And meanwhile, keep the repayments low, pay of as much as I can before moving onto the next project.
I hope I make some sense to you guys but please correct me if I’m wrong. Which I probably am :)
Cheers / Fred
Sorry Fred, I meant the 25% deposit which would be more $42k according to your calcs. You have to work out what you would get investing $42k elsewhere and then compare this to what your return on this property would be.
In terms of building a portfolio you have to consider serviceability. How many loans could you qualify for before tapping out. Unless you have a huge income it won’t be too much. So borrowing now for a property that puts $10 per week in your pocket may mean you cannot borrow later for a property that grows at 10% pa. So there is an opportunity cost.
You won’t get rich buying property that doesn’t grow in value. Positive cash flow is good, but not on its own its not.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Fred,
No problems in starting out not knowing too much – we all start out that way. This is where there is an opportunity cost in following the Nike brand (“just do it”) as that way can bring you unstuck.The first thing that came to my mind is positive geared properties, a few renos here and there to up the equity buy another one etc.
Nothing wrong with that way of thinking either. A large part of “what to invest in” will come down to “what suits you?” So getting your own head together is a very important part of the whole scenario. And how does one “get one’s head together?” You fill it with useful information – like being on here, reading books, doing seminars, meeting with investors, advisers, etc.
Your opportunities will come in different ways – your job is to be able to recognise the opportunity that is for you !! Following Terry’s line of thought, even if this first property were bringing in $50 a week for you, that is $2600 a year. How long would THAT take to build up the funds for your next deposit? $2600 is good, but can you do better?
It is by nutting out these kinds of things that lights start to turn on. True?
Now, I don’t know if $50 a week is even the right number – did you come up with a likely weekly income after mortgage, rates, insurance, etc? You mentioned being excited…..
And I was so excited until a couple of minutes ago, when I read about all the fees and taxes that will add up at the end.
…and I thought maybe you were referring to the “setup costs” of purchase – that is why I took a punt at some of them. And there is where my lack of knowledge of Regional purchases and borrowing lower amounts showed up. See, if it costs $400 for an Application fee, won’t that be the same for a $100k loan or a $500k loan? What about Solicitors Fees? Won’t they do just as much work to transfer a $130k property than a $600k property – thus their fees would be similar?
It is that “unknown area” that needs more work in my opinion. Some things will be relative to cost (e.g stamp duty – and that varies by State, so check it with your State Govt). OK, there are financial things to nut out – but even before that, it is useful to have a clearer picture of where you are wanting to be….. so,
Jason Staggers has just written a brilliant article on Investing – you might have even skimmed it, as it is on the front page right now. I’d suggest you go and action it (don’t just read it) so that you get the true benefit of its offering. It is here:-
https://www.propertyinvesting.com/how-to-invest-in-real-estate/After devouring that one, take a look at another string of subjects that I believe are useful to “new players” – here:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/After getting through both of those, you may well find a lot of your questions have already been answered, and that you will be much closer to deciding “What can work best for you?” Do let us know how these work out – and do come back if confused (we know what that is like, so we try to help out where we can),
Benny
Again, thank you both for the replies.
Last week I was 100% ready to purchase my first property, but I do realise now how little I know and that I obviously need to be more careful.
Terry – I do now understand what you mean when you say serviceability. And it definitely have got me to rethink my plan. We’re obviously trying to make the most of the money that we’ve got. Thank you.
Benny – You are correct, any information is good information. And this forum is a god bless for me :) We’re actually attending a seminar in a couple of weeks.
Yes, I was very excited because I was about to buy my first property :) But I clearly didn’t do my research. I do understand now there’s different rates in different properties. And I need to crunch the numbers at least 3 times to make sure they are correct.
I was thinking that the setup costs was paid “separately” and I didn’t calculate them into the rental income from the property it self.
I’ve started to read the articles here, starting with the links you gave me and I realised the information here is priceless.
Thank you both for the help, I will keep you posted :)
Hi Fred,
I was thinking that the setup costs was paid “separately” and I didn’t calculate them into the rental income from the property it self.
Yeah, and I’d say you are right – we usually refer to these as “Deposit and Costs” and they are paid separately – upfront. Thus, they are not ongoing, and don’t need to be covered by the rental income per se.
As well as that, some of those “Costs” are a Tax deduction, so you begin to recoup some of those payments as you save Tax weekly, or get a Tax Refund cheque (whichever you choose to do).
The rent would hopefully cover Mortgage Interest, Rates, RE fees (managing the property), Insurance, Maintenance, and maybe Body Corp. Will there be rent left over after those payments are met?
Benny
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