Hi There,
Ive not invested in property before, despite knowing for a long time it would be a smart thing to do, just too many other things to worry about.
Basically we have a house pretty much paid off. Estimated current value is around 450 – 500k. We are looking to move to a northern Wollongong area (Bulli – Austimer) in say 5 years. Current idea is to purchase a suitable property in the 500-600k mark, large block with a ordinary house with views to knock down and rebuild or major extensionrenovation when ready.
When done likely rent out current property, or sell and buy another place to rent out (as there wouldnt be aby tax benefit in renting out a property that you own and paying off one you dont – is this right?)
Both mid thirties with a combined taxable income in the +150k mark. 4 kids.So my quesrtions are:
Where can I get independent advice on the state of the market in the area we want to puchase in? including the rental market down there?
Who can crunch all the numbers for me and find out what my out of pockets will be each week? From my initial looking the rental returns on what we want may be pretty low (est 3-4%), and we will certainly be financing 100% of the property value.
Is this a decent idea – its not primarily about making money for us. more about the most cost effective way to get the house we want in the area we want.
Thanks in advance for any advice.
Cheers
Hi there,
This is your money and your future at stake here, so its really important that you understand these figures, and not put so much trust in the hands of a total stranger. You really need to do these calculations yourself.
We have several free downloadable templates/spreadhseets on our website that will step you through the process.
Happy number crunching!!
Work out your goals. So many don't do this. They just invest for the sake of investing.
Work out a timeframe. 1 yr or 50 yrs … or perhaps something in between.
Then work out a path to get you to your goals.
There are tax benefits in any I.P you own, even if you own it outright. You may have a tax bill at the end of the year from it, but so what; you are earning an income from it while you are asleep – I like that. Give me about 10 of those.
You do not have any tax benefits on a PPoR, unless you move out and put a tenant in it. Then you can claim every cost.
So with your plan you will have a new house in Bulli with a large mortgage which you cannot claim any tax benefits from, and an I.P where you are now with little tax benefit from. This situation is upside down.
You may be better off to buy another house in Bulli that you use as an I.P, and rent a nice house there for yourself. This way you have 2 x I.P's gathering cap growth, you live in the area that you want and you can choose any rental property for your own use that you like.
The other option is to sell current PPoR, buy new one in Bulli, then use equity in it to purchase another I.P. This way your PPoR mortgage which has no tax benefits will be smaller, and your I.P mortgage will be bigger, but tax deductible.
As for finding out rental returns, property values etc in that area; do what we all do; get on the internet, the phone, look in newspapers, drive down there and have a look a round, ask about 2 million questions, ring the council – all that fun stuff. Due Diligence is what is needed to find this out, or spend around $5k on a buyer's agent if you can't be bothered.
As for number crunching, here's a very basic formula for working out the numbers on an I.P –
1. purchase costs will be around 5-6% of purchase price (including stamp duty).
2. 20% of the rent will be eaten up by all costs. This will also include management and 4 weeks vacancy, rates, insurance etc. (I haven't had a property cost this much ever, but allow it anyway).NEXT:
If the property is to become an I.P, and is 100% financed, your purchase price will be around 106%.
If you use an I.O loan, your interest will be purchase price x interest rate % = total interest per year (always round up the figure for safety).
From this, deduct 80% of the rent for the year.
The remainder is your probable cashflow for the year from the I.P. I have found this to be worst-case scenario and has never occurred so far, so if the figures work based on this formula, then I know I have a safe investment and I will take it to the next step.EG:
Assume property costs $500k and rent is $400 per week. NOTE: Higher price properties usually have worse rent returns, but you MAY do well in cap growth.Purchase Price: $500k purchase costs: $30k (6%) Total purchase price = $530k.
Interest @7.5% = $39,750 per year (round it up to $40k)
Rent is $400 per week = $20,800 per year. (80% of rent = $16,640)
Subtract rent from interest = $40,000
-$16,640
Total Cashflow for year: -$23,360 (-$449 per week)This is the worst case scenario, but I haven't included tax deductions from depreciation and holding costs which will improve the figures. The other unknown factor is interest rate; you could pay less, or more; I have based it on the approx current market rate.
Rough guess is you would be a couple of hundred per week out of pocket after tax approx. Ouch!My back of the envelope workin-out worked out at about $200 a week after tax, so that seems to marry up. I can live with that no problem.
In talking about goals – I guess ours is to be in the house we want in 5 years with a small a mortgage as possible. Long term I dont expect to have any financial problems.
I would be hesitent to sell where we are now for a number of reasons. #1 the market where we are is not great at the moment. #2. Its a great house for us right now – just in the wrong spot (VERY convienient spot, just not where we want to live). #3. We have spent a reasonable amount of money renovating and extending the current property, doing all the work myself with the intension of staying there for a while.
Whats to stop someone, with say $400k equity in the place we have now, and with a decent yearly income, just buying 2 or 3 places right now. Maybe the one in Bulli, and another with better returns solely as an investment?
Thanks for your input so far by the way – very much aprpeciated.
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