Hi,
I was hoping for some opinions on whether it is smarter to buy an IP first or a place to live?
I am tossing up between living in a cheap rental and saving up a deposit for a decent home, or buying a cheap unit and living in it to get the FHOG, no rent and my first property under the belt sooner.
I figure to be able to pay off a cheap unit in less then 10 years, then loan against it for the second, third etc etc etc
Please let me know what you think, and how different paths worked for you.
Cheers
MarlowEither can work mate.
Where I think you have made a huge error is your idea to focus on paying it off then buying the next one.
Try this idea – it works for most folks.
Pay nothing down on the property – just meet the interest payments. If it a PPOR then save another deposit in an offset account. If not then save it in an INGDirect account or similar.
Once you have saved another deposit then buy another property.
At this stage you will have extra equity in the first property from capital growth – market willing. Use this with your savings to buy the third one faster.
For the fourth you can harvest more equity from the first three places. Soon the growth will outstrip your saving ability..
So my basic premise is that you pay nothing off…. Sounds crazy right?
In 20 years the debt will be negligible. 18 years ago I bought a property for $52K. Imagine if I still owed that much against a property worth $300K+ .
When you retire you can probably sell one place and pay off all the debt …..
You need to read some more and speak to other investors mate. You have the right intentions but you are yet to truly see how powerful this strategy can be if done right. No offence intended[blush2]
All the best
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Good advice there from Simon
just add the preferred way is to say the money within a mortgage, as it is more tax effective.
Regards
JohnInspired Finance
(02) 9944 7776In 20 years the debt will be negligible.A pretty big assumption there. On what do you base this claim?
18 years ago I bought a property for $52K.I see you’ve answered my question. You’re expecting the past to mirror the future…
Fair enough, so we can expect interest rates over the coming 30 years to mirror interest rates over the past 30 years then? An average of around 10.4%?Imagine if I still owed that much against a property worth $300K+ .If you still owed that much, you would have paid out ~$100,000 in interest on the loan. Subtract 30% from the $300,000 because we are still floating near the top of a 30% overvaluation bubble, leaves $200,000 worth of house with $152k in debt and interest, maybe $8 grand in rates & insurance. Now subtract sales costs…
The picture isn’t as rosy as often painted.
$35k in profit for $160k invested over 18 years is exceedingly poor. Term deposits would yield a far higher return.
Remember, over the long term, interest costs EXCEED capital gains.
Of the two options, choose investment. An average IP only needs to appreciate by ~2%pa to pull a profit, a PPOR needs ~5%.
Cheers, F. [cowboy2]
Originally posted by foundation:In 20 years the debt will be negligible.A pretty big assumption there. On what do you base this claim?
18 years ago I bought a property for $52K.I see you’ve answered my question. You’re expecting the past to mirror the future…
Fair enough, so we can expect interest rates over the coming 30 years to mirror interest rates over the past 30 years then? An average of around 10.4%?Imagine if I still owed that much against a property worth $300K+ .If you still owed that much, you would have paid out ~$100,000 in interest on the loan. Subtract 30% from the $300,000 because we are still floating near the top of a 30% overvaluation bubble, leaves $200,000 worth of house with $152k in debt and interest, maybe $8 grand in rates & insurance. Now subtract sales costs…
The picture isn’t as rosy as often painted.
$35k in profit for $160k invested over 18 years is exceedingly poor. Term deposits would yield a far higher return.
Remember, over the long term, interest costs EXCEED capital gains.
Of the two options, choose investment. An average IP only needs to appreciate by ~2%pa to pull a profit, a PPOR needs ~5%.
Cheers, F. [cowboy2]
Wow, I had better go tell my wealthy clients that this method doesn’t actually work.
Thanks for taking a crack at shooting me down in flames.
If history has taught me anything it is that I need to beware people who tell me that “This time it is different.”. Experience tells me that it rarely is.
You didn’t factor in any taxation deductions when attempting to destroy my reasoning. You add those in, plus a depreciation allowance (which can be sizeable in a modern property) and your reasoning is flawed.
Lastly, I wasn’t prescribing a course of action for the author of the thread. Merely having him think a little bigger than the mentality of paying out a debt completely then buying another property. That action will limit him to 2-4 IPs in his lifetime. Perhaps less.
Fortunately hegets to choose his own actions. Hopefully he understands the mechanics of what is possible after this. If he is better informed and makes the same choice then good for him, better than making it naively.
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by Mortgage Hunter:If history has taught me anything it is that I need to beware people who tell me that “This time it is different.”. Experience tells me that it rarely is.
So… If you expect history to repeat itself in regards to nominal house prices, surely you are advising your ‘wealthy clients’ that they should expect mortgage interest rates to average over 10% during the next 30 years of their loans, with peaks of almost 20%. No?
Or are you claiming that history only repeats itself where convenient? That this time it really is different?
If history repeats itself, we can also expect house prices to rise nationally to 250% of their current levels over the next ten years. We can also expect housing debt to increase 10 times over that decade… No? So, housing debt is going to exceed $8,000,000,000,000 (eight trillion) in just 10 years? That’s $800,000 debt for every single Aussie worker! [blink]
See, I don’t believe things are different this time. I expect prices to revert to their mean (in relation to incomes and rents), as they have throughout time (usually with an overshoot on the downside). Expecting anything else would be foolish.
F. [cowboy2]
“Lastly, I wasn’t prescribing a course of action for the author of the thread. Merely having him think a little bigger than the mentality of paying out a debt completely then buying another property. That action will limit him to 2-4 IPs in his lifetime. Perhaps less.”
One more question I would like you to answer directly. Do you believe that average annual capital gains are going to be higher or lower than headline mortgage interest rates over the coming 10 years? Over the coming 20 years? Over the coming 30 years?
Do you tell your clients this?
F. [cowboy2]
Originally posted by foundation:“Lastly, I wasn’t prescribing a course of action for the author of the thread. Merely having him think a little bigger than the mentality of paying out a debt completely then buying another property. That action will limit him to 2-4 IPs in his lifetime. Perhaps less.”
One more question I would like you to answer directly. Do you believe that average annual capital gains are going to be higher or lower than headline mortgage interest rates over the coming 10 years? Over the coming 20 years? Over the coming 30 years?
Do you tell your clients this?
F. [cowboy2]
I don’t advise my clients of anything nore do I forecast anything.
My personal experience is that this method has worked for myself and others and I was advising of an alternative to the authors plan.
You seem more capable and informed than I so I will bow out of this discussion now.
Thank you for your ideas.
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by JohnSmith:Good advice there from Simon
just add the preferred way is to say the money within a mortgage, as it is more tax effective.
Regards
JohnInspired Finance
(02) 9944 7776John,
My preferred way is to save it within an offset account. Should the funds be used for personal expenditure – and lets face it, sometimes good intentions fail when something needs to be paid for, or even used in an emergency for travel, medical expenses or the like.
Should funds be drawn from a mortgage for personal expenses then this % of the mortgage will never be deductible.
this is easily avoided by using an offset account and the tax effect is identical.
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi guys,
Foundation you seem to be very ridiculing of Simon quite unnecessary. He is simply giving him his opinion based on his personal experience. And in an unpredictable market the only thing you can do is base your opinions or your experience and previous history.
If you have a different opinion than you can tell the person that but that doesn’t mean you need to ridicule someone else for trying to help. You attitude is what turns people off investing! And i’m not talking about being what you think as “realistic”, i’m talking about giving people the worst case scenerios! Their are many ways of reaching the same outcome, everyones situation is different.
I am in the same position of Marlow, I have saved up almost enough for a deposit ($20,000) and now I need to know what is my best course of action. I’m thinking of moving back with my parents and buying an IP. However, that would be in Adelaide and I would prefere to invest in Queensland somewhere. Is Queenslands stamp duty and general purchasing costs a lot lower than most other states?
Cheers,
Paul[suave2]Paul,
I am a firm believer that often the best deals are in a local market that you know very well.
Qld has been experiencing strong growth, many commentators feel this has ended and that the lag effect will see Qld picking up again after Melb and Sydney do. That is the macro picture.
The micro picture is where most investors do best. By getting very familiar with one area and watching every property hit the market you will soon be able to spot what might be bought well. Many investors believe that buying well is where the most money is made.
Choosing an area based on lower purchase costs is perhaps missing the forest for the trees. Saving 1% will be negligable later down the track.
I’d reconsider your own city again if it were me. Buying somewhere when you are a stranger gives you a decided disadvantage.
Just my opinion. As always make your own decisions [blush2]
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
I’m in a similar position as Paul so any input in this discussion is appreciated greatly. I agree that its best to start with a familiar area (for me Adelaide) For my first investment experience it just seems like I’d be in more control, it might be irrational but thats the route I’ll be taking.
What advice do you have Foundation? I’m very interested to hear what sort of strategy a beginner might employ because I was myself thinking along the lines of what Simon was suggesting.
Daniel[biggrin]Thanks for all the imput guys.
Its good to know that there are more people out there still umming and erring about taking that first step.
I have plenty of time to read and learn hands on before I am ready though so will keep an eye on all the forums.
Cheers again.
MarlowTo foundation;
one factor that never gets mentioned in the ‘where to invest’ argument is the fact that you can buy a property with vitually no (or little) money down.
Term Deposits you can’t do that. Shares you can’t do that. Managed Funds you can’t do that.
And the thing I love about property is you wake up in the morning and it’s still there – with shares/managed funds (think Emron, Worldcom) can you guarantee that? I think not. T.D’s are o.k – for the bank.
So when cash-on-cash returns are examined across the investment spectrum, investment property will always win.
eg; I put down $1000 (some money down) on a cheap I.P worth say; $60k (this can be done) and never put another cent into the property out of my own pocket, but fund the whole lot out of bank borrowed funds for 20 years ( the rent returns, tax write-offs make this a cashflow neutral property for me – I actually have a couple of these).
Historically, property doubles in value ever 7-10 years. So after 20 years my I.P is worth $240k. Let’s say it’s only worth $150k as there was a property crash in year 12. The largest ‘across the board’ crash recorded was 6%.
I sell my property after 20 years (I actually would never sell it), pay out my bank loan and make a net after tax profit of about $50k (it’s probably more, but let’s be conservative).
My cash-on-cash return per year for my $1000 is $2500 per year. That’s a return of 250% per year for 20 years.
Hmmm….. not bad.
And that’s not including other properties I may buy along the way using the equity in I.P no. 1 as a deposit (in other words – no money down).
Lets say ecomic times are tough, and the bank wants more deposit to protect themselves. I put down $10k as a deposit; my c-o-c is still a pitiful 25% per year. I’m crying now.
However, I do disagree with mortgage hunter here – I recommend debt reduction along the way as well to increase equity for further investing and/or protect yourself from ‘unforseen expenses’ that might occur.
Basic rule of investing – how much am I putting in, how much am I getting back and how soon do I get it.
My advice is to buy the cheap unit, and as soon as equity/savings permit, buy another either to live in or as another I.P. Either way, you are still better off than 90% of the population who do nothing.
Cheers, MarcOriginally posted by dare_to_dream:Hi guys,
Foundation you seem to be very ridiculing of Simon quite unnecessary. He is simply giving him his opinion based on his personal experience. And in an unpredictable market the only thing you can do is base your opinions or your experience and previous history.
If you have a different opinion than you can tell the person that but that doesn’t mean you need to ridicule someone else for trying to help. You attitude is what turns people off investing! And i’m not talking about being what you think as “realistic”, i’m talking about giving people the worst case scenerios! Their are many ways of reaching the same outcome, everyones situation is different.
I am in the same position of Marlow, I have saved up almost enough for a deposit ($20,000) and now I need to know what is my best course of action. I’m thinking of moving back with my parents and buying an IP. However, that would be in Adelaide and I would prefere to invest in Queensland somewhere. Is Queenslands stamp duty and general purchasing costs a lot lower than most other states?
Cheers,
Paul[suave2]Hi Paul,
Check out stampoutstampduty.com.au to give you the different rates. Don’t let the stamp duty put you off. This is a cost of doing business, and if you are using your business brain to make decisions, this will factor into the figures and hopefully they will still stack up. As a greneral rule; allow 5-6% on top of purchase price (in any state) for all purchase costs and you won’t be too far out.
Buying in qld and living in Adelaide is not that scary. I recommend you find an area in qld, then research the hell out of it yourself to find out what is good value. You can buy without even seeing the property, but as this will be your first you really should go there, spend a month in the sun and pound the pavement. Beware of the two-tier marketing guys; get your own valuers, house inspectors and lawyers (another cost of doing business).
Cheers, MarcFunny maths ahead:
“make a net after tax profit of about $50k (it’s probably more, but let’s be conservative).
My cash-on-cash return per year for my $1000 is $2500 per year. That’s a return of 250% per year for 20 years.”Turning $1,000 into $50,000 in 20 years is actually an annual return of 21.6%, not 250%. 250% per year would turn $1000 in to 76 trillion dollars over 20 years…
So using your example figures, what would the other buying costs for this $60k unit be? Let’s just assume $1250 stamp duty. Suddenly your annual return is <17%.
Anyway, my earlier point stands – you are better off investing than purchasing a home.
I didn’t intend to ‘ridicule’ anyone, only challenge assumptions that are commonly held and easily transmissible – before assumption becomes meme.
Erardent actually did the exact same thing – “Historically, property doubles in value ever 7-10 years.” he wrote. As I’ve previously pointed out, this is true only for the last 30 years, during which time interest rates have averaged over 10%. In his example, if he expects history to repeat, he should expect interest rates over 10%. Anybody here know where you can buy a $60k unit that rents for $150pw? It would need to if it were CF=, once rates, insurance, BC, PM were taken into account.
F. [cowboy2]
HI foundation,
In this case I agree with you. I think Marc is dreaming a lot if he thinks he can still buy a property for $60,000 and get a return of $150pw and still get a 200% increase in capital growth over 20 years.
Also, I prefer you idea of buying an investment property first. This way, the government and the tenant is atleast helping me pay off my investment. Plus I can live at home with my parents on cheaper rent for a couple of years.
I was only nervous because someone told me the government was thinking of reducing FHOG??? Is this true? Is this likely to happen in the next 3 years?
Cheers
Paul[suave2]dare_to_dream,
If the gov’t reduces the FHOG from $7,000 to $0, prices in the FTBer range will fall by around 7%. If your FTBer house is also PI-fodder, perhaps less.
I’m all for buying a PPOR. I think it’s a great idea, providing you can pay it off easily. If you can knock the loan back to zero in 10 years, that’s good, you’ve saved some money (literally), avoided future interest payments, avoided future rent payments, and will be in a great position to regularly invest ~30% of your income.
On the other hand, if buying a PPOR will leave you stretched and skint, pouring every spare penny into the loan for the next 30-35 years, I say forget it. Not only will your lifestyle take a massive hit through the bulk of your best years, your investing will be severely restricted, and your risk levels will peak – and stay there for a long time. And 30 years is a long time to be praying that no disaster arrives – illness, injury, redundancy, fire, babies, car problems, shopping-bill inflation etc. Sure, over time your income will tend to grow, but it would be bad economics to assume that ‘although I’m struggling now, things will be X much easier in X years’.
Good luck.
F. [cowboy2]
Thanks Foundation and Paul.
I agree. Being on the cautious side I don’t really like the idea of ammassing huge debt, then rely on tenants, stable interest rates and good capital growth to see profit in 20 years.
I think I will go the path Paul is planning. Buy a cheap (<100k) apartment. Get FHOG. LIve in it for the 12 months as PPOR then move back into home. Rent it out and use both my income and tenant rent to pay off debt. Once settled use as basis for loan on another and so forth.
I know this isn’t going to make millions following this path but if I can get around 5-6 properties by retirement I will be pretty bloody happy. Especially if I own them outright.
I do see the path Mortgage Hunter is talking about but I am the sort of bloke who hates more than $100 debt on the credit card. I don’t think I want to be in serious debt for most of my working life if I can help it.
One question though, I am looking at an apartment in a holiday complex. It is self contained and live in. Body Corp is normal for whats available (approx $3000pa). Do these sort of properties follow regular capital growth paths or completely different?
Cheers
MarlowOriginally posted by conservative:I know this isn’t going to make millions following this path
I suspect you might be surprised. But you certainly won’t lose millions (link) either!
I am the sort of bloke who hates more than $100 debt on the credit card.You have a credit card?! I don’t even have one of them!
One question though, I am looking at an apartment in a holiday complex. It is self contained and live in. Body Corp is normal for whats available (approx $3000pa). Do these sort of properties follow regular capital growth pathsGenerally, no I don’t believe they do. Others will be more informed…
Good luck.
F.[cowboy2]
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