Hi Ajay,

I will anyways engage with property adviser at some point.

Yeah, getting a good team around you is a smart move. This seems like it is early days for you, but do be on the lookout for advisers to work with – you will want them in place before you make your first purchase.

Meanwhile, keep on reading, asking, and researching – as you learn more, the way forward should become apparent,

Benny

Good reply Ajay – that helps immensely. I will now leave it to others, as I have no idea of Melbourne and surrounds, but there are plenty of people on here who do.

Good luck,
Benny

Hi CI,
Do a Search on “Coomera” and check out the threads re that suburb. Pimpama is the next suburb North, and is likely to be treated similarly to Coomera.

There is a HEAP of land around Pimpama, so no scarcity value. And, with the kinds of OTP (Off the Plan) offerings I have been hearing of, there are no bargains there. No infrastructure there to speak of either.

Capital growth? I’m saying “Not likely for some years” if buying OTP. Buying second hand can be quite a different market though. Let’s see what others say…..

Benny

Hi Bjoern,

Jamie Moore wrote – what works well for some won’t for others.

Bjoern>>> Just wondering about this. Since I’ve started to look into properties I have probably read this or similar comments hundreds of times, but I never really understood it.

Consider these differences:-
o Some starting out have (quite) limited funds
o Some have stacks of equity or cash but no time
o Some have Equity and time but no skills
o Some have low risk tolerances
o Some have huge risk appetite
o Some have an aversion to “second-hand”
o Some have no stomach for “starting a business”
o Some have the resilience to push through to solutions – and some don’t
o Some want to buy themselves a well-paying job
o Some want to “put their feet up” and invest
o Some would be thrilled to take on development – some would be aghast !!
o Some have entrepreneurial skills/desires and want to exhibit them – some don’t
o Some would love a 3bd/2ba renter with a positive cashflow of $50 a week
o Some wouldn’t waste their time with such “small beer”

Small ships need to be careful of the weather when they start out (and need to consider their destinations too, for the same reason). Larger ships can weather adverse conditions without concern.

When starting out, I believe it is better for the beginning investor to define where THEY believe they fit, and the kind of investment that suits THEIR purpose. Otherwise, they can find themselves “all at sea” – bobbing around in a huge stormy ocean.

Tell us what you think you want to do (can do, can afford to do) – then come asking questions. That way, any answers you get can be much more “tailored” for your purpose, yes?

And if you are not sure yet, fair enough!! You didn’t learn to read in a day – learning of investing is another skill learned over time. Don’t be in a rush. Your first purchase should “set you up”, not stretch you because of a rash decision. Take your time – there will be another train leaving the station tomorrow….. Meanwhile, keep reading !! ;)
Benny

Hi Dana,
Coogee has come up with one side of the picture (buying your home first) and with the cash you have set aside, this could happen quite quickly for you (i.e. you DON’T have to save a Deposit, right?)

One of the links in that thread I showed you earlier involves the age-old question “Do I buy a PPOR first, or do I buy an IP first?” Go have a read of that post. The link in that thread talks of those who are just starting out – and for THEM, buying an IP first is easier and financially better than buying their PPOR. But, will that apply to you too since you already have the cash/equity to go in different directions…?

Anyway, have a read, and perhaps discuss it with your favourite broker or other adviser.
Benny

Hi Dana,
I have no knowledge of the Sydney market – except that it sounds like it is approaching “over-priced” in some areas. But then, Sydney has the advantage of being the place every new migrant seems to want to go. As such, there is a demand for Sydney that is unmatched anywhere else. With demand (and limited supply) comes price growth. But just when is “too high”?

I believe you will have a list of several options that can benefit you (and I would think keeping on with the current rental would be high on that list). The only other thing I wanted to warn is “Don’t rush to do anything!!” There is plenty of time to breathe, to read, to learn, to take counsel. Take the time you need to plan your “best shot” – then take it!!

Benny

Hi Asou,
It is good to know that market prices have moved upward. That provides hope of a better outcome for you.

Is the valuation by bank always significantly lower than the mkt price?

A valuation for finance can often be below a market appraisal conducted at the same time. A bank has their $$ on the line, so their vals tend to be more conservative. This shows up whenever we find a bargain – even though the market value of a property can be (say) $500k, and we have managed to form a contract with $400k as the purchase price, the bank usually only allows the contract price as the val, thus ensuring that we put in our 10% as a deposit (they ignore the 20% Equity we have through good buying).

One other thing that banks are looking at right now (especially re apartments) is a pending over-supply. This has been widely reported recently, especially for apartment towers in/near CBD’s of capital cities. So maybe they are building in a bit of protection for themselves. See, it CAN happen that an over-supply leads to falling values.

Does the valuation results varies a lot from different bank?

Have a chat to your Mortgage Broker re this kind of thing. Some banks might have a more pliable lending algorithm, and you might need to switch to gain the benefit of that.

If you don’t have a MB, chat to those here – a good MB is worth their weight in gold!!

Benny

Hi Bjoern,

guess I underestimate the effect of deductions a bit ;)

They certainly help – BUT, did you notice that even with expenses of about 1.3% you were still positive geared in my example?

So the “1% rule” looks like it can stand alone, even WITHOUT deductions. Of course, this depends on many things – it will not work in all situations. As always, the numbers say what will work for you, and what won’t !!

Benny

Hi Bjoern,

Is it really possible to get a property to be positively geared with a return that is only 1% (or even 2%) above the interest rate for the mortgage?

I haven’t actually read/heard how Steve does that – but one thought would be that “non-cash deductions” can help cashflow. So much so, that you can own a negative-geared property and still have a positive cashflow.

Let’s put a few rough numbers together to see how we go eh?
3Br house older with potential for subdivision
Purchase price $300k
INCOME – Rent $360/wk (6% return) = $18,000 (choosing a 50 week year for contingency)

EXPENSES – Rates $1700pa Ins $1000 Water $300pa Maintenance $1000pa = Total of $4000 expenses.
Plus Interest on $300k at 4.5% ($13,500) = Total expenses of $17,500

OK, we are a bit North of 1% in total expenses, but the maintenance figure is a “rubber” figure anyway. And, with Income of $18,000 you are making $10 a week (positive geared).

But wait, there’s more …….

Given that you are a PAYG taxpayer, and you are able to claim any losses on this property, that starts with Borrowing Costs and follows with Capital Works and Depreciation.

Even more “rubbery figures” coming right up…. :p

Borrowing Costs can be Tax deductions for up to 5 years from purchase. These are any costs associated with “Borrowing Money to buy an investment” and can be substantial – application fees, stamp duties on mortgages, transfer costs, LMI, mortgagee’s solicitor’s fees, valuation fees, etc. Let’s say $3000 for those (claimable at $600 per year).

As an older house, the Capital Works cost (cost to build it) might only have been $60k when it was built 20 years ago. You can claim 2.5% of that, so $1500 each year. Any other provable Capital costs (a new carport/garage, fence, patio, renovations to structure, etc) might also be claimable. Let’s say “None right now” and settle on $1500/year.

Then you have Depreciation – the values assigned by a Quantity Surveyor to the stove, hot water heater, dishwasher, carpets, air conditioner, and/or any other fixture in the place. These depreciate at different rates (some at 20% pa, some at 8%, etc). Again, let’s settle on a flat $1500 pa. in the first year.

So, you have total deductions of $3600 per year. Apply them to your tax returns, and you will get back a refund at whatever your Marginal Tax Rate is. Let’s say you earn less than $50k, so your Marginal Rate is likely to be around 32.5 cents in each dollar, thus about $1000 coming back to you to offset those expenses.

Thus that $1000 refund coming back to you WILL make your property even more cashflow +ve than expected (by an extra $20 a week, thanks to those tax deductions). As deductions in later years tail off, hopefully, rent returns will have increased to offset those losses.

Put your own figures in there, Bjoern – the ones above are maybe about right for some situations. The way of working things out should be similar though. And if you earn more than $80,000 pa then your refund cheque will be nearer 37%.

Keep in mind that any answer you arrive at will still be rubbery, but can be indicative of “what might be”…..

Benny