Hello all, as you can tell from our name we are very new to the property investing game.
Our story,Recently been to Financial Advisor,have been advised to refinance our mortgage to a loc and to purchase an investment property.Our PPOR (in Perth) has been valued at $750k,still owe $175k.The F.A then put us onto their Property Consultant dept. who then told us that house & land packages (@$500k) in Nth Qld was best for us.That we get a no doc loan to purchase this leaving us with a $400k interest only loan, after the 20% deposit from our loc surplus.They did inform us they get a commission from the builder for signing us up.The estimated weekly income (gross) is $500-$550.This then pays into our PPOR loan along with our normal repayments,but the interest only repayments must come from our loc surplus.
This sounded quite good to us in their office,however my fiance buys me Steve's book (0-260) for xmas,I'm currently half way through,start looking on here & then start wondering if we're doing the right thing.Sounds like a large amount of debt to jump into without a 2nd opinion.
Also the Prop. Consultant guys have been pressuring us to sign on the dotted line but so far I've been able to keep them at bay.Our gross income is @$55k.
I also currently own a vacant property in Perth worth approx. $220-$250k with nothing owing which I'm hoping to build a house on later this year.Just received loc approval from the bank (yesterday) have not signed yet.
Confused about buying something expensive and on the other side of the country or is this a good thing for us,or are the Prop. Consultants just after their commission.
After starting Steve's book the negative gearing thing doesn't get me as motivated as when at the Financial Advisors office.Any help,suggestions or advice is greatly appreciated.
Many thanks
Andrew.
P.S. hope the info is adequate & not too confusing.
Hi Andrew, welcome. RUN A MILE from your new friends at the FA's office. This sounds like an absolute disaster waiting for you to sign. Your in a great position, however on your modest income you could go under quickly..
I'm not an accountant, however they want you guys to sign up to a deal that will leave you with a shortfall of of nearly $1100 per month plus your own PPOR mortgage and land rates on your block of land!! No wonder they want you to sign up. A first time investment of half a million big ones on your income is asking for trouble. Talk to as many investors as you can and read half a dozen other Australian property investor books as well before signing a thing, please.
What is the anticipated growth in this area of nth Qld? Sure you will get tax benefits through depreciation but it still wont cut it if you have a prolonged vacancy / cyclone….good luck.As Lalibella says RRRRRUUUUUUUNNNNN!!!!!
As Neil Jenman says: "DO NOT SIGN ANYTHING".
You are about to buy your first IP, spend a half a million dollars and you don't have any knowldege of the area where the property is, the local rent returns, the values of the properties, the rental demand etc.
On top of all that, you are going to be seriously out of pocket in cashflow every month on an average income. The rent return they are predicitng is around 5%; you can do better than that and spend way less for the property anywhere, so give these sharks a big miss.
Send a copy of both our responses by email to the "financial advisor" (who is just a salesperson for the developer) today, with a note saying : "THANKS, BUT NO THANKS".
The LOC idea is not a bad one; many of us here do it, but you can set that up with any Mortgage Broker (there are a few good ones here on the forum),.
And you can find a better deal on your own anywhere.
Hi Andrew,
We are in a very similar situation right now. My husband and I were up in Cairns in October last year and we have purchased a house and land package at Smithfield Village. We have done our due dilligence and the investment seems to be very viable – the area is definitely going ahead, it’s north of Cairns and is the last development in that area (as opposed to the southern corridor of Cairns – Edmonton, Mt Sheridan etc – which will continue to sprawl south for years to come), it’s right near the beach and a large shopping centre, it’s opposite the James Cook university and they are building shops and a cinema complex in the village. The developers are Satterley’s a Perth based company, is this the company you are dealing with?
Also, the vacancy rates are low at 1% and I spoke with Herron Todd White this week and they have predicted 1.5% growth per month (which has been the case for the last year). We have paid $419K for our package, and we too are nervous about it, we have the contracts sitting here waiting to be signed and we are madly trying to find out more information about our investment structure before signing on the dotted line. I also spoke to Herron Todd White re a valuation for this price and they confirmed that is the going / average price at the moment. New houses, one year old in similar developments north of Smithfield and comparitive to our house, are currently selling for around $550K.
Additionally, we bought the package via a company called Oz House & Land with whom we have personal contacts – a good friend of ours is a real estate agent in Cairns and he also bought a package through this company. We have been scratching our heads to see how they make any money because we checked out the package directly with the developer and the builder and the prices a transparent, we could have bought the land through the developer for exactly the same price and built the house through the same builder for exactly the same price, but we decided to go with Oz because they were able to fix the price in for us – very important.
Sooo, in terms of the financial structure, we too have been advised a similar way of setting it up = LOC to fund 20% deposit and costs, then interest only loan of $336k and the LOC to fund the repayments for the $336K. The way our accountants have worked it we don’t have to pay anything for a minimum of 10 years. (it’s difficult to explain but if you’ve heard of the Chan & Naylor Wealth For Life strategy this explains it all). The thing we are now worried about is that the property will be negatively geared.
We were all set to go when I starting reading a Margaret Lomas book – How to make an income for life – and we discovered positive cash flow properties. Now we are TOTALLY confused. From what I can see, PCF properties of course are good for the income stream but they are mostly in regional areas which may/may not experience high capital growth, which is when I realised one either invests for PCF or capital gain – there seems to be two schools of thought out there.
We are in a very similar position to you. We want to move out of our PPOR this year and into a new home too. The way the investment property finance would be set up it will not affect our ability to service a new mortgage (because the LOC is servicing the investment loan) but on paper it may not look so good so we too may have to look at low docs for our PPOR.
I really don’t have any answers for you because we are grappling with the same problem. The main thing that concerns me is the $419K on our first investment property – according to Margaret we could buy two CFP’s for that! What I can say though, is our friends who also bought in the same village last year in June at $360K and the same packages are now worth $400K. Our friends have confidently invested in this village and they know alot about the area so that also inspired us to invest there (we too know a fair bit about the area, I lived there for 18 months some time ago).
I’m not sure if this is of any help! good luck with your decision.
Cheers,
KeoAndrew, it's probably OK as an investment, but I'd be very concerned about the way this is set up. You should buy the best property for your circumstances, NOT what their "property consultant" is able to get a commission on selling!
For a start, having vacant land on which you can claim no tax deductions is not a great idea; I think your plan to do something with that should be top of your agenda.
I really hate these kind of property marketing schemes. We were naive enough to get suckered into buying under a similar arrangement about 8 years ago. Thankfully that investment worked out OK, but we paid a ridiculous amount in fees and commissions, and we could have just gone and purchased an IP ourselves and saved all that. And probably found as good or (likely) better an investment. The fees are really just payment for somebody to "hold your hand" through the purchase process. Ask questions here instead, or get a savvy friend to help you. Or join your local property investors group and get somebody there to help you, if you feel you need it. But don't pay these unethical people. I say they're unethical because the commission is absolutely their motive – not finding the best investment for you.
Thanks to everyone for your time & comments.
This was my gut feeling after leaving the offices.
Yes Trakka, building on the vacant land & renting this out is first & foremost on the agenda.
We will continue with the loc to finance the build.At least then our shortfall won't be as bad as the Nth Qld venture.
Keo,at least you have friends & living experience in the area.We did as much internet research as we could and from what you've explained ours was to be structured the same way.We will pursue a safer option until we're abit more experienced.
You seem to be confused with the CP+ "vs" neg. gearing like us.That's another reason for us not to sign up.According to the F.A. we could survive the IP repayments for 5 yrs from the loc surplus,but we are now thinking after 5yrs of massive shortfalls "how much will we still owe?" none of this really made sense.This may suit you if your on a good income,but I'm the only one bringing home any coin so it's probly a bit dangerous for us.If anyone knows of a GOOD Financial Advisor in Perth any info would be greatly appreciated.
Many thanks again to EVERYONE it's very reassuring to know what NOT to do from others with lots of experience.Cheers Andrew
Andrew
As a fellow Financial Adviser i am concerned with the information you appear to be getting and the idea of purchasing a property at that level of borrowing appears riduclous.
No wonder they are pressuring you to sign the commission will probably be around $15,000.
If you do find a strong capital growth property and are keen to secure something then you can always look at a cash flow mortgage but my priority would be to structure your loans in such a way that your home loan came down to a manageable level first.
With no or little non tax deductible debt you will be fine but caution always to someone who pushes you into something especially with the old line that "the Builder will sell it to someone else" or "this one is too good to miss".
Trust me i have heard them all.
Richard Taylor | Australia's leading private lender
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