Hi Andrew,

We are in a very similar situation right now. My husband and I were up in Cairns in October last year and we have purchased a house and land package at Smithfield Village. We have done our due dilligence and the investment seems to be very viable – the area is definitely going ahead, it’s north of Cairns and is the last development in that area (as opposed to the southern corridor of Cairns – Edmonton, Mt Sheridan etc – which will continue to sprawl south for years to come), it’s right near the beach and a large shopping centre, it’s opposite the James Cook university and they are building shops and a cinema complex in the village. The developers are Satterley’s a Perth based company, is this the company you are dealing with?

Also, the vacancy rates are low at 1% and I spoke with Herron Todd White this week and they have predicted 1.5% growth per month (which has been the case for the last year). We have paid $419K for our package, and we too are nervous about it, we have the contracts sitting here waiting to be signed and we are madly trying to find out more information about our investment structure before signing on the dotted line. I also spoke to Herron Todd White re a valuation for this price and they confirmed that is the going / average price at the moment. New houses, one year old in similar developments north of Smithfield and comparitive to our house, are currently selling for around $550K.

Additionally, we bought the package via a company called Oz House & Land with whom we have personal contacts – a good friend of ours is a real estate agent in Cairns and he also bought a package through this company. We have been scratching our heads to see how they make any money because we checked out the package directly with the developer and the builder and the prices a transparent, we could have bought the land through the developer for exactly the same price and built the house through the same builder for exactly the same price, but we decided to go with Oz because they were able to fix the price in for us – very important.

Sooo, in terms of the financial structure, we too have been advised a similar way of setting it up = LOC to fund 20% deposit and costs, then interest only loan of $336k and the LOC to fund the repayments for the $336K. The way our accountants have worked it we don’t have to pay anything for a minimum of 10 years. (it’s difficult to explain but if you’ve heard of the Chan & Naylor Wealth For Life strategy this explains it all). The thing we are now worried about is that the property will be negatively geared.

We were all set to go when I starting reading a Margaret Lomas book – How to make an income for life – and we discovered positive cash flow properties. Now we are TOTALLY confused. From what I can see, PCF properties of course are good for the income stream but they are mostly in regional areas which may/may not experience high capital growth, which is when I realised one either invests for PCF or capital gain – there seems to be two schools of thought out there.

We are in a very similar position to you. We want to move out of our PPOR this year and into a new home too. The way the investment property finance would be set up it will not affect our ability to service a new mortgage (because the LOC is servicing the investment loan) but on paper it may not look so good so we too may have to look at low docs for our PPOR.

I really don’t have any answers for you because we are grappling with the same problem. The main thing that concerns me is the $419K on our first investment property – according to Margaret we could buy two CFP’s for that! What I can say though, is our friends who also bought in the same village last year in June at $360K and the same packages are now worth $400K. Our friends have confidently invested in this village and they know alot about the area so that also inspired us to invest there (we too know a fair bit about the area, I lived there for 18 months some time ago).

I’m not sure if this is of any help! good luck with your decision.

Cheers,
Keo