I am renting. My partner & I have good incomes & no dependents and I am 30 years old.
We have a very good combined disposable income. We are just starting to build savings after a long trip overseas.
Our rent is cheap (1/7 of our income) but the place is very old and run down. At this stage the only incentive to buy is emotional.
Stamp duty in Vic is ridiculous. We are looking to buy around 400 – 450k and at that price stamp duty will be $22,660. If we don’t have 20% of the value we will end up paying LMI also which could be as much as $14,000.
That’s a straight up dead cost of $36,660 for nothing.
I just can’t make it add up.
Say the capital gain on an average Melbourne property is around 7% (annual), and that’s if you’re doing well, we’ll be ahead of the game if we just continue to save and put our cash in managed funds or a high interest bank account (on which returns will increase as the official interest rate increases).
It will take us a year to save 90,000k to sink into an investment that is VERY average ie. property.
Why do people do it? Am I missing something obvious here?
If someone told you it would cost $36,000 to get into a $450,000 investment (that you don’t own) that MIGHT earn 7% and that you would have to pay 7% (and increasing) would you do it?
It sounds like a dud to me, but I may have it all wrong.
i often think the same thing arrowsmith. but the deals are out there, ive been looking through a few hundred hundred properties and there seems to be a few good deals around.
im confused but, are you only thinking of buying that run down place your renting?
Yes you are right, if you look at it through your eyes it may be a dud. Thats why some make a killing and others lose money.
Its two things:
1. Depreciation & Deductions
2. LeverageFor starters your 7% loan becomes about 5% once you claim it as an expense on your tax return. So you are now clearing 2% pa which is only payable as GCT when you sell (Assuming you find that property that grows at 7%).
So you are getting 2% for nothing? No you are getting it for the risk you are willing to take.
So that about 8k pa so long as nothing goes wrong. It will pay your expensive entry costs off in less than 5 years.
Note also over time your rents will get up while your LVR improves as the capital grows. Allowing you to move into +ve cashflow and buy more properties.
You cannot do this as well with shares. As LVR is 70% and you get margin called if the investment takes a little dive.
Hope this helps.
Mat
Mathew
http://www.arrttt.com
Custom Oil PortraitsNo not going to buy the place we rent. It is a duplex and it is extremely run down. Ready for the bulldozer I would say.
What has your experience been with buying property?
You don’t make it sound attractive at all.
What are forms of investment are you considering?
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.
Mortgage Hunter,
I am not interested in high risk style investments.
As far as other investment options go I have been looking at some 5 star S&P managed funds which are a blend of property, cash and int securites. Even interest rate securites are attractive right now.
Some of these funds are getting returns approaching 20% (annual) steady over 5 years. Sure you pay tax on the gain but there’s no cost barrier like LMI or stamp duty and you can get on board with as little as 10k.
Ultimately the IDEA of owning a home is attractive. I would conside a minimal loss as acceptable tradeoff for a home that is enjoyable. As far as I can tell right now it doesn’t look like it would be minimal.
The way rates are going some cash investments are looking more positive than property.
I really am a beginnner in all this but have worked in financial services for several years and have an idea about where money can be made.
Do you have any pearls of wisdom?
Originally posted by arrowsmith:Mortgage Hunter,
I am not interested in high risk style investments.
As far as other investment options go I have been looking at some 5 star S&P managed funds which are a blend of property, cash and int securites. Even interest rate securites are attractive right now.
Some of these funds are getting returns approaching 20% (annual) steady over 5 years. Sure you pay tax on the gain but there’s no cost barrier like LMI or stamp duty and you can get on board with as little as 10k.
Ultimately the IDEA of owning a home is attractive. I would conside a minimal loss as acceptable tradeoff for a home that is enjoyable. As far as I can tell right now it doesn’t look like it would be minimal.
The way rates are going some cash investments are looking more positive than property.
I really am a beginnner in all this but have worked in financial services for several years and have an idea about where money can be made.
Do you have any pearls of wisdom?
I also have a reasonable portfoliuo in Shares and Managed Funds. One of my shares, Rinker, just moved from $14.70 to $18.50 today. Pretty happy with that one although it had a previous high of $21+. But I got them for next to nothing so is all a bonus.
I have an article I wrote a while back on comparing managed funds with property. I will email it to you if you like.
I also don’t advocate high risk investing.
Cheers,
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.
are you factoring in rent received in these calculations or are you going to live in it as a PPOR. We live in a rented home as do most investors I know. What is the rental yield on the home you live in ie the rent you pay as a percentage of your estimate of the purchase price. Are you considering paying asking price for the property you would ultimately buy.
If stamp duty is your big concern then you will have to rule property in vic out i’m afraid – I can’t see the state government giving up those revenue dollars in a hurry.
The lmi problem would be solved over time as you obviously have the capacity to save the deposit. Leverage is going to be the big plus over time as mat has mentioned.
DLPP,
At this stage we are looking at a property as a PPOR. I realise this is not the most tax effective thing to do.
Annual yield? I would estimate the hovel we live in to be worth no more than $450k and that would be mostly land value. We pay $12,500 a year rent, so yield is around 2.7% and the place needs serious work. If we weren’t renting it I don’t know who would.
I have no experience buying property but I would try and negotiate on asking price if it seemed like the right place.
Stamp duty here is a major deterrent for me but the lure of a home that is my own (after a while) is strong.
What is a good source of medium to long range data on house prices?
How do you justify the cost of renting when you invest in property?
A) I would lose the 10k first home owners grant
I’de be paying rent plus the difference between my mortgage and rental income. I realise some of this is tax deductable but it is still a loss at the end of the day, or am I wrong?There has to be a good reason people get involved in this.
Originally posted by arrowsmith:DLPP,
A) I would lose the 10k first home owners grant
Tragically common misconception.
Suggest you reread the legislation.
There is a link to your State’s requirments on my website.
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.
just looking at it on a simple level if you rent and own a property receiving an equal rent then those two sums cancel each other out…but now the entire interest portion of your repayments is tax deductible plus depreciation, plus all other costs. If you live in the house none of those costs – in your case tens of thousands are deductible – something to think about. although at a 2.7 % gross yield I don’t think you could justify a purchase unless you were confident of some growth or you were confident you had bought significantly enough under value that you could onsell for a profit.
arrowsmith
You are trying to look into it too deeply.
Your figures already prove that buying you own home is not a good investment in your eyes.
Most don’t buy a home for that reason. To some it is a forced way to save. To others it is emotional.
If buying an investment property, then you must include rent. Do you get a better return than the other investments out there, maybe not, but that is normally due to perceived risk.
I have clients advise me to get into this or that as the return is fantastic. BUT wherever there is fantastic return, there is more risk.
Now the managed funds you talk about are not HIGH risk, but their perceived risk is higher than property.
Remember the old adage “Do not put all your eggs in one basket”
I have an article I wrote a while back on comparing managed funds with property. I will email it to you if you like.I also don’t advocate high risk investing.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Simon – If you don’t mind sending it to me I would like to read this article.
Regards
JohnInspired Finance
(02) 9944 7776I have a few investment properties and rent.
In Melbourne Rental is about 3% in a lot of nice areas, so you are getting somewhere cheap to live.(If I was living in an area with a rental yield of say 7%, I’d definately buy as it would cost the same.)
I think of it as finding the cheapest way to live, and then putting maximum cash towards investments.
Your home loan is non-deductible, and so I consider it to be bad debt.
The great thing with property is the ability to manipulate the value (renos, subdivide, vendor finance) and also the high gearing ratio available. 95% LVR is quite easy to get from banks, and if you venture into the world of wraps and lease options, it is possible to gear against future values, effectively giving you LVR in todays values of 120% or more!!!!!
I will continue to rent while investing in property, it is working well for me even in the flat market of the last few years.
It is during the years when property jumps 30% or more against a highly geared portfolio that the big money is made in property.
Live, Learn and GrowLifexperience
Arrowsmith, you will note that DLPP said that the Vic Govt won’t let the SD go in a hurry . . . it is going to reduce from 6% to 5% for certain price points in the very near future (I smell an election), however don’t get hung up on SD – the price of houses will rise by EXACTLY the value of the SD if the SD is removed. Think about it . . . a $300k house has approx $15k of SD added to the price for the purchaser – ie a total of $315k. If SD was eliminated tomorrow, at the auction on Saturday everyone bidding would simply pay $15k more for the house knowing they now had ‘extra’ money to knock out the other bidders. All that happens is the $15k goes to the vendor rather than the gov’t. Whether that’s a good or bad thning is another argument, but what I’m saying is that prices will not fall. And history has shown they actually go up because people feel richer and ultimately spend more – the ave price of the house goes up . . . usually exactly to the value of the removed SD. I might add that the REIV does not agree with me.
Finally, given that this issue applies to everyone, everyone has the same issue. Get over it I say.
You can buy a run down place, spend a little and make a lot. I have. It works. I pay CGT – it’s a nice problem to have.
May sound corny arrowsmith, but I suggest you read Steve’s second book.
Gerry G.
Gerry G
what about book three-has it been printed yet ??
I have to reluctantly agree with arrowsmith. There are creative ways to come out in front to invest in properties (residencial) like LifeX managed to. It still seems too much hard work (plus risks) for novices to learn the rope fast enough to get a grip on the best way forward.
With current tax regime and super changes, it makes sense to cast your sight wide enough to capture the opportunities available in the current climate to suit one’s appetite for income and/or growth with justifiable level of risk tolerance.
Don’t forget the forum is about properties, not many would stick their heads out to counter the suggestions. If it doesn’t sit right with your plan, it will not work.
CT
Arrowsmith,
I think that if you’re unsure of investing in a PPoR, then continue to rent, but make sure you put aside the difference you save by not owning.
I think that 7% PA growth could be a bit optomistic from this point in the cycle, and if rates rise furhter we could see a lot of negative growth.Steve’s third book comes out 17th of November called From 0 to 260m + properties in 7 years. Arrowsmith if you are not happy with stamp duty then let more feet do the walking.
As a property investor you are not bound by geographic location like with PPOR so you can purchase property in other states. If enough people take their investments out of Victoria the state government will detect a crisis and stop ripping of Victorian investors, seeing that GST is meant to remove state taxes. I haven’t invested in another state yet but I have been considering it. This is also a good method of reducing state land taxes.Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
In Melbourne Rental is about 3% in a lot of nice areas, so you are getting somewhere cheap to live.hi life x (or anyone else in melbourne) – genunie question –what type of areas (suburbs) i am trying to learn about the melbourne market – homes that are realistic drive to cbd – would you rent in if you were in had the choice.
cheers
If you’re considering a managed fund take a look at the Geared Wholesale Funds offered by Colonial. I have been with them for the last 2 years and am traking at around 40%pa the last two years. Although this can’t last forever!!
While you can’t take advantage of the tax deduction from the gearing done for you, some lenders will let you borrow to invest in them.
I’de be paying rent plus the difference between my mortgage and rental income. I realise some of this is tax deductable but it is still a loss at the end of the day, or am I wrong?
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