My partner and I are looking to purchase an investment property but are not yet sure of the how’s, where’s etc. To give you some background we were originally looking to purchase in Sydney to live in the property. As such I have amassed a $200k deposit and he has a 2 bedroom unit in Newcastle that he has paid off (technically last $80k in offset account). We currently work in Sydney and rent from his Aunty so have cheap rent. We were therefore thinking to buy a house in Newcastle (as we would love to have a house one day) and then rent it out. Is this a terrible idea? I know that units are generally more attractive given the rental yield, and we will consider all options, however the appeal of owning a house is definitely there. Is Newcastle a good place to purchase or should we look elsewhere given that we have a unit there?
Going on the savings/equity figures you’ve mentioned you’re potentially in a position to make multiple investment purchases – quite a nice situation to be in.
We’re seeing a number of clients moving there focus from Sydney to Newcastle due to price surge in Syd, so I wouldn’t be surprised if the market sees a flow on effect as more people look north to purchase.
In terms of the ‘hows’, it’s best to first touch base with an investment focused mortgage broker who can advise on the best setup to allow for this first purchase and any which may come about in the future – from there you’ll have a firm understanding of your budget which will flow onto the types of properties you can be, expectations for rent etc.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Thanks for the words of encouragement Corey, we feel quite good about our situation however it is easy to lose perspective and become demoralized in the Sydney market. I’ll definitely look into what you suggest.
How much is the unit worth? Ie. How much equity do you have?
With the $200k, $80k in the offset (or is that part of the $200?) and equity you’re probably in a very good situation. If serviceability is high you’re certainly in a position to buy multiple properties if you choose. How are you using your money now? Is the $200k just sitting in an account not doing much? Or is it invested elsewhere?
With units, gross return can be high but net return can be low because of body corporate etc. Capital gains is often harder as you’re restricted on renovations / subdivision etc. So I tend to stick with second hand houses – worst house in the street etc.
Do as Corey suggested and start confirming numbers with a broker and then make a goal. Use that goal to determine what / where to buy.
Hi TheNewGuy,
The $80k is in addition to the $200k. It is the last portion of the loan on the unit that is ready to be paid off, however we’ve kept it in offset in case we choose to buy another. The unit is worth approx $250k.
The $200k in savings is just sitting in an account doing squat. I’ve stopped adding to it and started buying shares in a few companies for diversity, however I prefer bricks and mortar.And would you recommend they be negatively or positively geared?
And would you recommend they be negatively or positively geared?
This will depend on many factors, but as a positively geared property is making you money instead of losing it, it is often the best way.
The concept can be misunderstood, it is essentially a tool which retrieves some of an investment loss. Not something which should be a goal from the outset.
It seems as though you have good equity but servicing may be more of an issue. In which case it would be a good strategy to search for a property with a good yield either cash flow positive, or near enough. This will underwrite capital growth in any event, and also assist you with further purchase options. Someone on the highest income bracket and not much equity, seeking an investment property would look at it differently. Something with anticipated strong capital growth potential, but not necessarily good rental return may be more appropriate. Even then less tax is only paid because less money is earned, so not a good thing in itself.
The key thing will be structuring your loans correctly, taking into account tax implications and flexible options moving forward.
Jason Tyrrell | Turning Point Finance
http://www.turningpointfinance.com.au/
Email Me | Phone MeFinance Strategist and Investor
I have always been a strong believer of renting where you want to live (usually cannot afford to buy) and invest in places which can either give you potentially higher yield in rent or property increase in value.
If you cannot afford to buy in Sydney as everything is $1M, then have $1M in investments spread around works out the same. The main idea is to get into something that you can afford and does not affect your personal lifestyle.
The information provided by Jason above is excellent, as Sydney starts to get saturated with people buying up all the properties, it means you have to plan ahead, buying smaller properties for a few years then offloaded to buy the dream home.
Just get something as the market is filled with people who already own a home and looking to increase more property and people who are buying their first and getting out the rental cycle. You may look at buying 2 in Newcastle with the funds you have but it will be subject to your income power.
Hope this helps.
Hank Hong
Email MeGoogle Hank Hong he's pretty cool.
Hi Dana,
Where do you want to live ultimately? If it is in Sydney then buying an investment property there makes sense as it means that any further strong growth in that market will benefit you, whereas if you are not in the market it may be significantly more difficult to enter in the future. Conversely if the market does not grow strongly, or goes backwards, in the near term it won’t matter so much if it is a property that you either plan to live in or are happy to live in.
Regards
Hi Alistair,
That’s the thing, we’re no longer entirely sure. My family is in Sydney and so is my job, however my partner has family in Newcastle, an investment property there, and he’s a coal miner so they are both viable options. If I could choose I would like a unit in Sydney in the inner west (Ashfield, Croydon area), and a house in Newcastle (Adamstown, Hamilton) since the house prices are so reasonable there and I just want the option of having a house one day in case of children etc. However are houses a sound investment or are units always preferred?Hi Dana,
The only answer you will get to that question is in hind sight. Sometimes units perform better, other times houses, depending on the time frame you are looking at and the demographics of the market. In the very long term land does not lose value while buildings degrade, which would suggest something with land content should be a better investment but you are looking at very long time frames there. If you already have an investment in Newcastle, it would seem sensible to make the next one in Sydney, from the point of view of having exposure to both the markets you may want to live in. In your position I wouldn’t be too concerned about the type of property, more the location.
I hope this helps.
Regards
Thanks Alistair, I too had the same plan of buying our next property in Sydney. However prices are out of my reach now, and given the unstable economy I’m somewhat nervous of having a bit mortgage when jobs aren’t the most secure. I see Newcastle as an attractive way to be able to buy land and I also much prefer where Newcastle is in the property cycle, with house prices on the up but still affordable. I had thought that it may be best to buy a house in Newcastle, pay it off for the next year, and hold out on Sydney for the time being while I watch what the Sydney market is doing. Talk of a bubble has me concerned/interested and I think a lot of people are over-leveraged. As prices are only modestly expected to increase in the next year or two anyway, I had thought that by the time I’m ready to buy, I’ll have equity in the Newcastle property to help me buy in Sydney. Is this misguided?
Hi Dana,
Nobody has a crystal ball. You seem to have thought through your options pretty thoroughly so you should be happy that whatever decision you ultimately make, it has been an informed one. Only the future will tell if your decision is the best one or not.
Regards
Thanks Alistair, I appreciate your advice.
Dana
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