What would you do with $100K if…

Hi JZ,
Welcome to you too – it is good that you have found us, as it sounds like you are well-prepared financially to make a go of IP’s. But first, do have a think about where you want to be, and whether you will need cashflow or Growth to achieve it.

The “Do I buy a PPOR or an IP?” is one of those early questions, and it would be good to arrive at your own conclusion re this. To get an idea, try Steves Articles, or check out this link :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697967

There are many things to consider and plan, so please don’t set off running – take the time to learn to walk first !! :p

That link takes you into a thread especially for those starting out, so do check out some of the other posts in it too – much you will learn grasshopper….

Benny

HI again JZ,
I’ll put my opinions re some of these – hopefully others might put counter-points, leading to a more rounded look at this complex area for you. See what you make of these thoughts :-

1) From an investing point of view, would you forfeit FHOG for a good opportunity?

Hmm, define “forfeit” !! If you mean would I NOT use FHOG to buy an IP if it was a good opportunity, I’d say a definite YES. In doing so, I believe (I could be wrong) that the FHOG might still be available to you when wanting to purchase your PPOR later on. Of course, State Govts decide when/if to offer or cancel FHOG – when wanting to buy your PPOR, the current FHOG may not be available – in that case, “forfeit” would apply I guess.

2) I’m trying to manage a safe-moderate risk profile and looking long term instead of short term and wondering if I should favour yield over growth (hopefully both). Which would allow me to grow my portfolio at a steady rate.

If a safe path were required, maybe purchasing a PPOR is better for you (as suggested by “theNewGuy” above). Certainly, you appear to have the kind of Income that would allow you to quickly pay down such a purchase, gaining Equity that could then be borrowed against for investing in IPs (and therefore Tax deductible). It also means that a later sale would NOT incur Capital Gains Tax (which, on your Income, would likely be at top marginal rate). So a safe path might be to buy a PPOR, perhaps one that could gain equity from a renovation, then sell when buying another PPOR (also with an Equity gain – another reno?). Some build their wealth in that way, and is (I believe) a very safe, if slower, way to go. The saving of CGT makes a serious difference to your final outcome.

A moderate way would be to go for positive cashflow IPs, which would earn an extra Income from day one. These are usually found in lower-priced areas (with higher yields). Growth is not usually as high, but can still happen, especially if you “manufacture it” via renos, sub-division, etc. In buying at the lower end, EVERYBODY can afford to buy/rent your place. Other demographics apply though, so don’t just buy anything in that sphere.

3) Considering I’m trying to keep it safe for now, what are your thoughts on either buying 1 place in the $500K-$600K range in a better area (e.g, inner west Syd)? Or should get 1 or 2 places in the $300K-$350K in a more remote area (e.g, west/south-west Syd)?

My answer to 2. probably covered that when I mentioned the more moderate path.

4) What are the cons of getting a 95% loan considering that I will be able to make repayments easily. i.e, Put down 5% cash even though I have enough for 10%-20%. Is it silly to do this?

Your high Income probably trumps any “cons” of a 95% loan. One major con is the extra burden when Interest Rates rise. With a larger loan, the Rate increase hurts you more than most. But these things can be mitigated – get advice before committing though – by using Fixed Rates and/or Variable, and Offset Accounts.

On the other hand, the “pros” include the capability of keeping more cash as deposits on more IPs. You could conceivably buy 2 or 3 lower-priced IPs quite quickly. If holding 3 IPs worth $300k each, you have some advantages over one higher-priced IP.

1. If you lose a tenant for 4 weeks, you lose 33% of your income for that time. With a single IP, you lose 100% of your Income.
2. Buying 1 higher priced IP might stop you in your tracks while you wait to build more deposits. With lower priced IPs, your funds can buy 2 to start, and perhaps a 3rd very soon after.
3. Should things turn sour, and you need to liquidate quickly, you can choose to sell just “the worst performing one” – leaving you in better shape afterward. With one IP, you have just one choice, and you might be selling a top-performer.

There is SO much more to it…. I hope those few thoughts are useful to you for now. Let’s see what others have to say too,

Benny

Hi JZ_33

Take care not to fall into the trap of listening to people who tell you to get yourself some negative gearing “for the growth”. If you sit down and cut the numbers, quite often such people are essentially paying for their “growth” up front in the form of out-of-pocket expenses along the way. Heaven help them if their forecasted growth doesn’t happen as planned.

You cannot buy groceries at the supermarket with the promise of “growth”. You can buy food to put on the table with cold hard cash. There won’t be much cold hard cash in your pocket if you are constantly forking out to support properties that don’t come anywhere near paying for themselves. If you are collecting properties that are covering their expenses, there is little reason why you couldn’t continue collecting properties.

Hi, you say you don’t want a PPOR. You do realise to get the grant you need to live in it right?
Calculate minimum 6 months of paying interest with no rent/

If you buy an IP you do not lose the First Home owner Privileges. Under the present rules you can still get it later if you own an IP now (as long as you have not lived in it).

Also if you buy new you may not be negatively geared as you will get much more depreciation in the first 5 years. That’s why a lot of people DO buy new.

When you do speak to an accountant find one that has a decent property portfolio. I have been given bad advice in the past. A good property savvy accountant is a MUST if you want to get anywhere in the property game.

I myself buy under market value (difficult in Sydney ATM) and add value with a reno. This gives you instant equity to buy again plus an increased yield. Done right you will be CF+ from day 1. Others have a different strategy. There’s no right or wrong, just what works for you. I buy for yield as I want to retire so cashflow is what will let me do it.