Hi my name is matt, i am new to the property market and would like to have my plan reveiwed or criticised.
I have approximately $12000 to invest, i will be making the trip to brisbane to look at inner city studio apartments in the price range of $100000 to $160000, theses are rented out around $170 to $250 so it may be possible that some of these could be cashflow positive or around cash flow neutral. I was going to buy a house to live in in mackay but it is my beleif that the market is going to soften in mackay so now might not be the time. My plan was to get a hold on a few or as many of these studio apartments as the bank allows based on a low deposit for each. the unfortunate thing is i looked at these over the internet 12 months ago and most have risen in value by $10000 to $20000 and more for some, (i was more interested in partying and what i was going to do on the weekend back then) however i think brisbane still has a bit of boom left in it and i have allready outlined my entry strategy, my exit strategy is to sell one or two (based on how many the bank allows me to obtain) in 6 to 12 months time and use capital gains to feed into the others so they become cash flow positive and any remainder profit to be used as a deposit for my own home to live in when the market becomes cheaper in the mackay area. Is this idea worth the risk or worth trying? Is my money better elsewher or maybe should i just keep saving for a while?
If i do this would i still be able to claim first home owners grant when i choose to buy a house to live in?to me it seems a good idea because as these prices are around cash flow neatral i should be able to demonstrate to the bank that it is minimal risk to them and if they do not perform i can simply sell and not lose.
Is there any ideas on how to add perceived value to these studio apartments, if i can add some perceived value i may get a nice little capital gains payout to use on the ones i keep to make them cash flow positive.thank you for the time to read my post and look forward to your answers.
1. Look carefully at the size of the apartments. Most lenders are reluctant to lend on anything under 50 sq/m.
2. Your income will be factored into the servicability of the loan/s. You said you wanted to "sell one or two (based on how many the bank allows me to obtain) in 6 to 12 months time and use capital gains to feed into the others". How many do you expect to buy in one year, and how do you know you'll get this wonderful cap growth so much that it will give you enough to pay down a decent chunk of the remaining debt after such a short time as 6 or 12 months? That is very ambitious.
3. If you sell before 12 months, you will pay capital gains tax on 100% of the capital gain, if you sell after 12 months you will pay cgt on 50% of the gain. You may make no money at all if the cap gain is small, and most likely will be in only 6-12 months.
4. Apartments, especially smaller ones like studios, have very little "on-paper" deductions. less tax benefits.
5. How do you work out that they are cashflow positive? Allow for around 15-20% of the rent to be eaten up by holding costs such as insurance, property management, body corp fees, maintenance, vacancies (allow 4 weeks per year).
6. There are also purchase costs, which are typically around 6% of the purchase price.
7. Limited add value potential, unless they are rundown and need to be renovated – more funds required. Allow $5k minimum. This may not be reflected in increased value of property either. ie: $5k spent, value increases by only $5k or so. This happens a lot.
So, a quick number crunch for you:
Purchase price: $160k, + purchase costs: $9,600 = $169,600k. Say: $169k.
Deposit: $12k + $7k (FHOG – or is it more than $7k now?) = $19k.If you take a normal 80% loan, you will need a deposit of: $41,000 (Including purchase costs). You are $21k short. How will you fund the shortfall?
You could take out a loan for up to 95% of the purchase price, but you will then have to pay Loan Mortgage Insurance of around 1% of the Purchase price = $153,600 loan. This is a very exposed position in my opinion and I would not recommend it.
You will need to put in the remainder of $15,400 as a deposit. You have the $19k, but only use what you need and keep the remainder of cash for emergencies.
Assume you have taken the 95% loan including LMI, at 8% interest only because your deposit is too small.
The repayments are: $236 per week.
Assume the rent is at the upper end of your quoted range = $250 per week. (It will most probably be less; maximum rent will be for the best properties).Take out 20% of rent for holding costs = $200 nett rent per week.
You have a negative cashflow of $50 per week before tax return. After tax you may be able to see a pos cashflow. Depends on your income tax marginal rate.
How many properties can you afford to hold at a neg $50 (or more) per week?
Hi Matt!
Personally, I prefer homes to apartments as investments. Not so much for the difference in capital growth – which does exist but isn't that huge a deal – but because I like to have more freedom over my investment eg no body corporate! Apartments generally do have higher yields, but as Marc pointed out, this is quickly eaten up by the increased overheads associated with apartments.
$12K is not a lot, but hey, it is something, and if you can get into a property, you'll have made a good start. Unless you live in the property, you will lose your entitlement to the FHOG, but I don't think you should let this sway your decision either way. The FHOG is insignificant in comparison to the other factors that are worth taking into consideration when beginning to accumulate a property portfolio.
If I were in your shoes, I'd be looking to buy a home with the best capital growth prospects that I could afford, and then when it goes up in value, refinance to release additional equity rather than selling, to buy more properties and/or fund any negative gearing losses.
i may as well state openly that I am not opposed to negatively geared property. Many "positively geared property only" investors say that you're "gambling" on the property going up in value, but given the vast history of property prices going back to Domesday, I'd say that it's a gamble with pretty good odds. And your knowledge can steer the odds even further in your favour. If you look at the profits in all classes of property over the past 20 years or more, the vast majority of profits have come from capital growth rather than from rental income. (I own some positvely geared property myself, but that was just a "bonus"; I bought the property for its future potential.) And it's not an "either/or" issue – if you're short on cashflow, buy a few positively geared properties, perhaps with limited capital growth potential, and use those profits to allow you to buy something that may be negatively geared and has stronger capital growth prospects. It's called BALANCE!
Anyway, if you've saved $12K, I'm guessing that you've got at least some free cashflow and a negatively geared property of a few thousand dollars per year isn't going to be a huge problem for you. In which case, I'd be looking at a home in the outer commuter belt of a city with strong growth prospects. I'm thinking some parts of Geelong, the Latrobe Valley east of Melbourne (Morwell), maybe Beaudesert south of Brisbane. (And I'm sure there are others that I'm less familiar with.) You can still buy a house under $150K in these locations.
Then when you experience growth, say from $150K to $180K, you can increase your borrowings again (up to a max of 95% LVR if you're willing to pay LMI, which I think is well worth it if you're equity poor, compared to the cost of being out of the market), and you'll get an extra $28.5K (less finance costs and LMI), say $25K to spend on more property.
Good luck!
Tracey
Dear Matt,
Unfortunately as mentioned already there is a real issue with studio apartments and small one bedders and getting finance. This was supposed to change some years back, with the increase in housing costs and more smaller one bedders/studios being built however the banks have yet to change their requirements. I bought a less than 50 metre unit and had to come up with 20% deposit plus the purchase costs, go and talk to a lending person and see where you stand first before you go out and make any offers.Just to echo the previous comments about financing studio apartments make sure you dont buy anything under 35 square metres unless you are prepared to come up with 30% deposit +.
In relation to a studio apartment you may find that the mortgage insurer will not provide cover even though your lender may accept the security.
Why not negotiate a 2nd mortgage carry back deal on a house here in Brisbane.
With something in a good area you should find that you have good capital growth as well as a good rental yield.
I work with a good agent here in Brissie so let us know if you want a good recommendation.
Richard Taylor | Australia's leading private lender
thank you all for your answers, they have been most helpfull to me. I have come to the point that i think i may be better of investing in a home rather than apartment, i will be looking in to those previous mentioned areas and i should have no finanancial difficulties holding onto a property negatively geared by a few thousand dollars a year, in fact on my wage of $85k p.a. i could quite easily hold onto 4 or 5 if i so wish (just need to save for deposits). I have been saving roughly $500 a week to get to the $12k so raising money for deposits is not to big of a deal. once again thank you all for your help.
richard – that would be exxelent if you could give me a recomendation.Hi Matt
No problems, give a very good mate of mine Keith Clarke a call.
Keith is the principal at Mayfair in Clayfield and can check out anything for you in any area.
His contact number is 0411 516259.
Tell him i sent you and he will look after you.
Also dont forget there are also lenders who will fund the deposit on an IP for you.
Whilst the interest rates maybe xxie if it is only for 5% plus acquisition costs you could move ahead a lot quicker.
Give us a shout if you need any further help.Richard Taylor | Australia's leading private lender
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