This is a relatively simple question, but I'm looking to canvas as many opinions as I can…..
First time investor, just released equity from our PPOR to buy a property.
Do we…..
A: Buy a property up to our max borrowing limit, but it will be heavily negatively geared, but with better long term capital growth.or..
B: Spend less on a place, which will still be negatively geared, although not as much, and so will hopefully take less time to make CF+. The downside is an area of less (predicted) capital growth.
I know investing is all about the capital growth, as this is, in the long run, where the money is made, and what enables you to release more equity to buy further properties, but we would be looking at spending a lot more of our own money each month, which could, given unfortunate circumstances, lead to having to sell the property which may not have been an issue had we bought somewhere cheaper. On the other hand, how upset would we be if our investment has risen by 3% in a year, compared to say 10% where we may have bought?
I know lots of people must have these dilemmas, and as this is the first investment, we really have to narrow down our suburbs before we do too much more digging.
Any help gratefully received!
Thanks in advance……..
Hi
I think you've answered your own question respective to your particular financial case. You have laid out the two extremes of property investing……so your target must be for something in between and certainly not one that jeopardises a reasonable standard of living for yourself and family etc. As a successful property investor I prefer to have a few good growth properties than a mass of properties that might one day pay the interests on the loans but you still have the debt unless 'real' growth is a definite. For me the same rule applies to the stock market.
CarpeWhat needs to be considered is the tax rate you are on
Example
tax rate was 33%
negative gearing loss per year $10,000
Tax saved in dollars = $3300
Loss = $6,700 per year out of your pocket
If you lost employment you have to find $10,000 per year and would not get $3300 per year back as no employment income
if you hold property for say 5 years you need to make $33,500 after capital gains tax to break even
At a tax rate of 33% you have to make $40,120 just to cover the loss you made
This doesn't factor in unexpected maintenance costs & periods of being vacant & selling costs and next property buying costsIt really comes down to what level of risk you can tolerate
The risk that the gain will be large enough to offset the losses each year when you sell and the risk of higher interest rates (this will bite more when negative gearing is higher) or loss of your employment..
Thanks for the replies.
I guess deep down I know you generally, but not always, have to speculate to accumulate. The better the place we buy now, could make a huge difference in the long term. I suppose if I am confident my job is secure, then there shouldn't be an issue with paying more each month. We'll keep looking at the suburbs we were before, but if we get no joy, we may have to downsize our expectations to get something anyway. Places are going way too quickly at the moment.
Thanks again….
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