Hi Drpinoy

I have some contact details for some people who have purchased 'Property Millionaire – the Boardgame' (which is a close simulation of the Australian residential property market) from my website at http://www.888abundance.com or drop me a line at [email protected] with your details and I'll see if I can put you in touch with them.

Cheers

Gary

Hi Paul

I think what Terry and Marc are indicating is that you are actually in a v.good position with your own home and only a small mortgage.  Also to trade your asset and current financial position to rent a place and putting the proceeds into a bank or cash type investment seems like a poor alternative.

I'm sensing you're quite risk averse and conservative.  So this is a possible very conservative scenario.

With your home valued at $300K you could easily borrow another $130K (on top of your $108K existing mortgage ).  That would mean borrowings of $240K against your home and possibly a little over double your current repayments (say $1100 per fortnight).  You could explore some of the 'over 55' retiree units with some 'guaranteed' income in the Logan or Caboolture area, or some other small residential unit (not in Logan as these are highly priced now) elsewhere  and look at buying one outright.  This is about as simple as it gets having just one mortgage (and one property owned outright) and it's probably even more conservative than most investors would consider.

You might need to just talk to someone over a cup of coffee (for piece of mind) and then approach a broker when your thoughts have crystallised.

I'm sure there must be a few people on this forum who are investors themselves that may take the time out to talk to you.  If not, I have a friend who lives in the Logan area who was in a similar predicament but who is now an investor with a few properties.  If you're interested, email me at [email protected] with your details, and I'll provide his details to you.

All the best.

Hi Sarah

At $400K value and $355K mortgage, there appears little equity left to draw on unless you refinanced your LVR at above 80%.  This may then attract LMI if you decided to go down this track.

Your saving of $340 per month however sounds promising.  Also assuming your tax variation impact returns $450 per month, that would mean your tax return (if there was no variation) would amount to about $5K to $6K at the end of the financial year.

You might want to consider using the $340 per month in an offset account against your IP mortgage to offest the interest.  If you kept accumulating this in an offset account then this would come to $2K at the end of financial year.  Adding this to your tax return would give you around $7K to $8K.

Using these amounts you might think about looking for a property of around $70K financed at 95% LVR with 5% for costs.  In the meantime, you could start refining and practising the search for such a property and doing some 'dummy' runs of how you would proceed in July 2008 if all the conditions are right.  I don't know if such a property at $70K exists or what other criteria you would be looking for, but it would begin to refine your thinking into shortlisting property according to some stringent criteria.

For such a significant financial decision and with volatility in interest rates, it makes sense to 'practise' and do the sums over and over as much as possible.

Hi Rohan

Just a few other things to think about.

Tradtionally we might expect a buyer's agent to be 'marketing' properities locally.  However it might be reasonable to assume that the agent's experience could extend beyond their own 'residential' location.  For all we know, they may have very good information and intellegence on that area (or they may not).  Also, the Queensland Government is fairly strong in terms of anti-two-tier marketing arrangements (You could probably also do some research whether this fits into that category)

The info you've provided is open to a lot of assumptions.  For example is it a four bedroom unit, is it purpose built for nurses, is it a motel style or serviced apartment?  Is it rented out by the room? On the upside, the short-term style accommodation may provide greater opportunities for cash flow yield (depending on how well the 'business' operates and also whether it operates on a specific unit or shared pool arrangement).  A potential downside is that lenders don't fully understand and are conservative with this type of investment (hence the possible reluctance to lend) – this effect because of restricted numbers of buyers (from limited mortgages) may impact the capital growth.  But if you were a long term thinker, and you thought that one day the lending restrictions were freed up (which would bring loads of buyers into the marketplace) you might have the dual advantages of cashflow and capital growth.

You're also asking for opinions from people who may or may not understand this kind of investment, and also have quite a different set of goals and risk profiles.  Have you asked the buyer's agent to provide more info?

In  the long run, it does come down to your own decision and your comfort  zone. 

So far you seem to have done reasonable well with two IPs at fairly low entry level prices.  What are the pros and cons of buying this one at $420K and with buying one at $250K and another at $170K?  There's a saying that successful people do one thing well, and replicate it over and over again to reap the benefits.  If you feel more comfortable at a purchase of $250K, ask yourself what this 'other' investment provides that is making you consider it seriously. 

Hi

The market has changed quite a lot since I started so I don't know how relevant that would be – except to say, there are always obstacles in every marketplace, and success can sometimes depend on discipline and your ability to problem-solve.

Some of the classic issues for first timers are:

– the cost of a first property mortgage (at $300K+) negatively geared with a 4% yield and 8%+ mortgage interest rates (ie 4% out of your own pocket).  With capital growth, how do you service the cash shortfall debt?
– if you buy in an outlying area or region for low entry level price and better yield, how do you anticipate whether there will be sufficient tenancy demand?
 – these are significant financial decisions which 'lock in' people for a number of years. 
– with uncertainty in interest rates (and the rises), how would you have fared if you adopted some of the more traditional wisdom of IO loans (so you can buy more property and you leveraged to the hilt at 90% + LVR) without a good risk management plan?

I developed a boardgame simulation tool so that the various strategies could be roadtested whether they be capital growth/low yield, positive cashflow, managing moving interest rates, negative gearing & tax effects, etc.  A number of my 'apprentices' (some of who are already investors in property)  decided after simulating various circumstances, they would have done things quite differently in starting out if they had their time over.

I also conducted an exercise for a group of first timers about 18 months ago where people in their 'local' areas did an exercise in researching and analysing a proposed purchase.  Looking at the scenario in hindsight today has some interesting results.  One of these people picked the area of the Logan shire in SE Queensland where the cost of a basic two bedroom residential unit was less than $110K and the rent was about $145pw.  When I looked at http://www.realestate.com.au recently there is now nothing less than $200K and rent is around $185pw for these properties.

In another instance, about 9 months ago, I suggested looking at the Elizabeth, SA area (about 15kms from Adelaide central) for 3 bedroom 'houses/maisonettes for around $110K and returning about $150pw.  Today Elizabeth has well and truly exceeded those initial expectations for cashflow and capital growth.

Despite these two instances, which could have been lucky guesses, what would you have done if these had been 'bad' choices?  Ok if they had not turned out, then carrying a small mortage for $100K would probably still be manageable.

So some of the lessons.
– Time is moving on.  The trick is to get into the game at what you can afford so once you are in, you can benefit from increasing prices.
– Also, it gives you some sort of 'credit' profile as an investor.
– What is the worst case scenario, if you 'picked' badly, and how can you stay in the game and keep servicing the mortgage.  Property investment is a very 'forgiving' investment and usually if you can stay in it long enough, your initial 'bad' investment can become good.  That's providing you were quite sensible and not overly high risk in the first place. 
– What is a mortgage you can carry comfortably if things don't go well?

Hope that's given you a few insights.

Hi Rob

To have paid off $80K ($320-240K) in 2.5 years is an amazing achievement.  Well done.  Also your equity position looks very good.  So it might come down to serviceability and a few other things.

Borrowing against the equity to buy an owner-occupied home will create debt that is not tax deductible.  Also borrowing $650k more for 1 mortgage would probably equal the $1200 per week alone to carry this mortgage.  You would have to add in the cost of your rental unit of $470pw unless we assume 100% occupancy with an offset at the potential rent of $420pw and zero property maintenance and running costs.

You might want to consider whether you can continue to live in your two bedroom unit for a few more years and begin investing first.  If you were to use some of the equity to buy a property (or two) for $650K and the equity used plus the new investment property mortgages would be tax deductible.  What would be the rent you would achieve on the rental properties?  This might be used to offset the costs of carrying the mortgages.  If the area is as good as you think it is – this might allow you to cash in on the increased prices and rental returns.  3 or 4 years down the track, making this decision might look very different but you would be in the marketplace already.

However, money may not be everything.  Let's say you find the dream home for $650K and borrow against your equity (in your unit) to the maximum amount possible – and rent out the 'dream home' first for a year or two.  You get the tax deductible benefits.  Then 18 months to two years down the track, you sell the unit and move into the dream home.  The mortgage on the dream home is carried at $500K which is now non-tax-deductible.  You have about $80K to $100K left over after paying out the mortgage on your unit – and the $80K becomes your stake for further investment which you could put in an offset account against the 'dream home' to reduce the interest until you're ready to invest again.  Alternatively, you could put that $80K against your $500K mortgage and reduce the mortgage further to $420K  Assuming the dream home has grown in value to $700K, This provides you with about $220K tax deductible equity to use for investment.

It becomes to some extent a question of lifestyle versus wealth.  Only you can be the judge.

Hi Mooni75

The answer is probably yes depending on whether you can service further mortgages, whether you have any spare 'cash', and what your risk management plan is (being agressive is one thing, having a good well thought out exit strategy is better) .  From what you've described, your LVR is at 77% – so you would probably be in a marginal position to borrow against further equity but it will probably cost you in LMI costs.

Perhaps if you thought about this from some fairly basic questions.  In your current situation, how comfortable are you from week to week with left over cash and savings.  If it's quite tight now, then a negatively geared situation (with possible capital growth) with little room to move might be hard to manage with further dollars required out of your own pocket.  This might mean you would need to search for something that gives you positive or neutral cashflow.

How did the $20K in personal debt arise, what did you get for it (eg you bought a car, went on holidays, etc)  and when do you think you could pay it off?  Could you 'aggressively' pay this off in less than two months?  Could you shift it all to a low or zero interest credit card arrangement?  This might indicate how well you budget and what your true servicing capability might be.  Also the personal debt would go against you in terms of current servicing capability.

This has probably raised more questions than answering your specific question, but the answers might provide some further steps you need to take before launching into buying another property. 

If you want to explore ideas in more detail (rather than providing your personal/private info here) drop me an email at [email protected].

Darren

I don't understand this part of your comment.  Can you clarify?  Do you mean that you can afford to buy a cheap property with no deposit but there are no cheap properties in your price range in Melbourne?  if that's the case, you might have to consider buying in regional Victoria (in a town/city with a reasonable population and infrastructure).

Also in relation to your property in Sydney, what is it's value?  This will impact on what the significance of $100K in equity is?  if it's valued at $1M, then even with $100K equity you're probably at the limit.  But if it's valued at $200K, then $100K equity is v.good.

In relation to the $50K personal debt it might be relevant to know what this is made up of.  For example, if it's on 4 credit cards, the solution might be to consolidate through a personal loan or raise a LOC (against your Sydney property).  it would not be tax-deductible, but it might allow for more favourable loan interest rates to improve your net cashflow and serviceability position.

There are quite a few MBs on this forum who might be able to assist if you provided a few more details.

Hi

Sounds like you have some solid 'assets' behind you.

Before going into property investing, work out a simple plan on a page your goals – eg passive income of $xxx per year, choices to work or not, etc.  This should be measurable and outcomes focussed rather than describing a state like "I want to be rich".  Why do you think property investing is going to provide these goals?

When do you want it? and how motivated are you to achieve it?  Can you achieve it in 5 years or what will be your position in 5 years.

The authors you have described have different strategies – but which one suits your circumstances and your risk profile? Do you understand the 'strategy' that is being promoted?  A strategy you can't understand puts you at great risk?

These are just a few ideas to kickstart your thinking.  They should also help in determining what you should buy, maybe where, how much and can you go the distance if a few 'curveballs' get thrown at you.

Apana

You have to think long term implications as well as the short term.

The 'risks' you have flagged are quite serious.  You will be liable as the owner. In addition, you may find difficulty in taking out landlord's insurance to cover yourself (until the problem is rectified) particularly as you have now been made aware of the issue (and you can't claim ignorance).  It would not be a good position to be in to have an un-insured or conditionally insured property – one 'mistake' here may also affect your future risk profile with insurance companies.

A couple of options:
– Go back to the vendor and flag your findings and request that they get council approval prior to settlement as a condition of contract;
– ask for a longer settlement period (say 6 weeks more) and negotiate the price down; then get a council inspection as quickly as possible; and then based on the inspection, if necessary, get an engineer to 'fix' or provide the certification you need.  Ask for an option to extend the settlement until the necessary approvals are in place;
– sell this to the vendor in terms of – in it's current unapproved state – he/she is the one that is at risk.

Regards