Luke,

I would suggest you need resist the temptation to trade your 1st property. Property is medium to long game at best.
It’s an asset, it’s not costing you anything to hold it and your properly selling at the wrong time in the market cycle for West Melbourne. You can be assured that you haven’t been ripped off because of the market appraisals show you are at best break even. Double check you are claiming depreciation, sit tight, and one day you will be pleased you didn’t sell it.

Liana1992 wrote:

Hi property experts!

Wanting to invest in Sydney – currently I have around $65,000 deposit so only have a 20% deposit for something around $325,000 so looking in Sydney’s west for a 2 bedroom unit…any suggestions of areas with good growth + good rent? Have also considered going for a larger loan amount but have been told by a broker that my LMI could be around $20,000.

Thanks all :)

Liana, the time to invest in Sydney has passed. We stopped buying there 3 years ago and those clients have had three very good to great years of capital growth so far. If you get in now you COULD see 5-7 years of flat growth or even negative which happened post the 2003 and the 1992 market tops in Sydney. Property markets go up in cycles, then they sit flat for a period.

The market that is about to boom is Brisbane and more so to the north of the Brisbane CBD where there is a new train line and a ton of population growth.

Good luck and happy investing. If I can be of help let me know, my details are below

Rob,

before you get too addicted to positive cash flow properties look hard at the capital growth drivers in the market. Here are a set of rules on investing that I have been working on. Over the years I have asked many investors what they did that was so successful?

This set of rules come from those answers;

Rule 1: Preserve your capital.
Avoid high-risk high-return investments, only ever risk your return. Preservation of capital is the number one rule in investing; in the worst-case scenario you should always be in a position to recoup your initial capital investment. Losing your capital is equal to losing years off your life.

Rule 2: Avoid being a forced seller.
Being forced to trade at the wrong time in the market cycle is a wealth killer. Avoiding being forced to market in property investing normally means keeping your loan-to-value-ratios conservative. The older you are the lower the ratios need to be.

Rule 3: Capital growth creates wealth.
Capital growth creates future cashflow. Target high growth areas for long-term capital growth in your property portfolio. Capital growth creates wealth; the purpose of the early cash flow is to maintain debt while your portfolio is in growth phase.

Rule 4: Buy when the markets selling, sell when the markets buying.
This means don’t buy at the top of the market cycle and buy when the property market in targeted area is unloved by buyers. Follow this rule and you will always come out on top.

Rule 5: In the end money & time end up being the same thing.
Time is your most important asset. Make long-term investments and disregard the bumps in the road along the way. Losing your capital is equal to losing years off your investing life. Resist the desire to trade.

Rule 6: Use leverage and keep your cash for a rainy day.
If you have the choice between investing with cash or with debt, preserve your cash and invest with debt.

I think this concept is designed for only one winner and it’s not the guy buying in.

If there is clearly a “Greed Button” being pushed by the seller then buyer beware!

Assumptions that sound all-good on paper usually come back to bite the buyer, long after the seller is gone.

• This reply was modified 9 years, 8 months ago by  Modernity Investing.

D.T. wrote:

Rents must follow? They aren’t pegged together mate.

Very correct. Rents in general terms average CPI + 2%. This can be seen when looking at the poor yields of the blue chip areas.

Swift,

How did you go? what did you end up doing?

My first thought is buying with a 20% deposit reduces your risk and that is the most important thing to set out to do when investing above all else you need to preserve your investment capital and reducing your default risk with a 20% deposit does just that.

If you would like to reduce your risk further you could rent it out instead of living in it. Why you ask? Because the bank looks at part of the rent (80%<>) as though it is your income (almost yours) as a result you will increase your borrowing capacity for your next purchase. But thats not all, generally speaking renting is cheaper then then owning, so you will have more surplus income to keep on saving for your next investment property or PPoR.

I would also expect that at todays interest rates the apartment should be positively geared after tax, or you are pay to much.

I hope this helps.

WOW, thats a great prize. Bugger about the $30,000 debt, thats the elephant in the room. While you are wasting $1000 per month on interest and only saving $1500 per month your not getting ahead.

If I was you I would sell the new car ASAP and don’t buy another car until you have bought a house or an investment property. If you do buy another car, pay cash for it.

As far as your question should I Purchase a Principal Place of Residence or Invest First?

The age old question: “Should I buy a principal place of residence first and invest later or should I invest in property first, rent and buy later?”

In order to make some sense of this question we will conduct a comparison on the following basis:
1. Analysis conducted over a 10 year period.
2. Capital Growth for both Investing and the Principal Place of Residence is calculated at 5% p.a.
3. The income of the purchaser is $80,000 per annum
4. The purchser has $130,000 in cash savings for the transactions
5. The base cost of the Principal place of residence and the investment properties is $420,000 in year 1, then increasing by 5% p.a. (compounding) each year after that).
6. Rental Income is 5.2% of the portfolio value (gross)
7. The maximum loan to value Ratio across the portfolio is 80%
8. Interest Rate of 5% p.a. on all loans taken out for PPOR and Investment loans
9. Purchaser has a goal of achieving $1,500 per week income from their portfolio in 10 years (after all expenses and tax are taken into account)
10. Cashflows in each scenario include expenses for either rent or mortgage interest repayments and household expenses (rates and maintenance)

Example:

Scenario 1 – Buying PPOR and then Investing
Purchase Years
Purchase Year – Purchase Price – Number of Props Purchased – Type Of Purchase
1 – $420,000 – 1 – PPOR
5 – $510,513 – 1 – Investment
6 – $536,038 – 1 – Investment
8 – $590,582 – 1 – Investment
9 – $620,531 – 1 – Investment
10 – $651,558 – 1 – Investment

After 10 years in running this scenario, the outcomes are as follows:

Portfolio Value – $4,661,503
Cumulative Debt – $3,668,078
Cumulative Expenses – $219,758
Net Equity (After Expenses) – $606,541
Loan to Value – 79.39%
Net Cash-flow After Tax – -$17,129

Example:

Scenario 2 – Investing and Renting First
Purchase Year – Purchase Price – Number of Props Purchased – Type Of Purchase
1 – $420,000 – 1 – Investment
2 – $441,000 – 1 – Investment
4 – $486,203 – 1 – Investment
5 – $510,213 – 1 – Investment
6 – $536,038 – 1 – Investment
7 – $562,840 – 1 – Investment
8 – $590,582 – 2 – Investment

After 10 years in running this scenario, the outcomes are as follows:

Portfolio Value – $6,515,579
Cumulative Debt – $4,961,299
Cumuative Expenses – $130,000
Net Equity (After Expenses) – $1,424,280
Loan to Value Ratio of Portfolio – 76.15%
Net Cash-flow After Tax – $3,435

In summary, by investing in property first based on the variables mentioned above being identical in both scenario’s, you would in fact be $817,739 better off from an equity perspective (Total assets less total debt) and $20,564 per year at year 10 better off from a net cashflow perspective as well as $89,758 better off from an expense/cost of living perspective over the 10 year period. This of course would put the example purchaser here well on their way to achieving their financial goal of $1,500 per week income after all expenses and tax have been taken into account and then give them a greater choice as to where they would buy their principal place of residence if that’s what they wanted to do.

• This reply was modified 10 years ago by  Modernity Investing.

Equity, It’s really is the magic ingredient that makes growing a portfolio possible, without growth in a property’s value there is no wealth being created.
Without growth in equity our only hope to buy the next property is to save every cent for next property purchase deposit or worse, having to sell one to buy another.

Luckily, equity is a very simple concept to grasp. At its most basic it simply means the amount a property is worth minus the amount owed on it.
However, not all the equity can be used because generally banks will only loan 80% of a property’s value, just in case it loses value. So the ‘useable equity’ is the amount the property is worth minus 20% and then minus the amount still owing.

Case Study

The sample property is valued at $450,000, the owner has a mortgage balance of $220,000 owing.

Owner’s equity: The property’s value $450,000 minus mortgage ($220,000) = $230,000

Useable equity: The property’s value $450,000 minus bank’s 20% ($90,000) = $360,000

Borrowing capacity: $450,000 (property’s value) minus $90,000 (bank’s 20%) = $360,000 (useable equity) minus $220,000 (mortgage balance) = $140,000

Leaves us with an accessible equity of $140,000 (the amount you can borrow)

Leaves us with an actual owner’s equity of $230,000 (the amount you will receive from the proceeds of a sale*)
Why is it so important?

This accessible equity can be used as a deposit on an investment property. The equity can be used to put down a deposit on your next investment property, to cover legal costs and stamp duty.

Accessing your equity

The most straightforward way to setup your debt is to us a loan called a Line-Of-Credit. This keeps the debt secured to just one property, but you can take the cash from the Line-Of-Credit to put down as your deposit on your next purchase.
At settlement the new mortgage is drawn down to cover the remaining cost of the property purchase.
And the process just keeps working. The faster a property increases in value the sooner the equity can be accessed to purchase another property. This rise in value is the golden egg that all property investors are looking for.

Equity can be generated by both an increase in the market value of the property and through a decrease in the amount owed on the mortgage.

* less selling costs, etc.

• This reply was modified 10 years, 2 months ago by  Modernity Investing.
• This reply was modified 10 years, 2 months ago by  Modernity Investing.
• This reply was modified 10 years, 2 months ago by  Modernity Investing.

Build your relationships with agents.

As buyer’s agents we get calls from our buyer’s agents who have found interesting opportunities around the country. They give us the heads up on properties and we do the same for them.

Buying 300-400 investment properties per year would be undo-able without a network of agents sharing their knowledge with us.

About 30% of the data we collect is research that comes from one on one calls with real estate agents located in the areas being researched, we then collate and analysis those results to substantiate our findings.

As a property investor you cannot under estimate your need to build relationships with real estate agents.