dilemma, how to proceed.

Hi Bob

So many options!

It is not out of the question for you to continue renting, and to purchase an investment property that a tenant can pay off.  One big benefit is that you can negative gear the "loss" of your little property business venture against your day job tax.  So in theory, you might get some of the loss refunded from tax you pay.  This might be a suitable avenue for you to follow if in fact you are paying enough tax from your day job to make it worth trying to claw some of it back.  In this regard, you would indeed want to seek financial advice about this.

If you decide to buy something and live in it and can't find anything you like, what about buying something that you don't like at the moment, and fix it up as and when you can afford it?  For instance, if you bought a 2br house on a largeish piece of land, you could live in the 2br house for a while, and when you feel you need more space, you could extend the house, or bulldoze it and build a new one.  Alternatively, you could purchase a slightly larger house that structurely is fine, (eg you are happy that the brick facade is fine, but don't like the paint job inside or the presence of certain walls) and put up with it for a while and make aesthetic changes in a couple of years when you have your mortgage payments at a manageable level.

I am assuming you will be eligible for the first home owner grant, which is worth at least $7k to you – more if you buy something before the end of 2009.

Jac

Good point weath4life. 

Bob – wealth4life makes a valid point – you could start small – ie get yourself a smallish and in nice condition property, use the First Home Owner Grant to help you buy it, live in it for a few years, then convert it to an investment property and buy something bigger for yourselves…

re: Jac .. what do you think about getting a townhouse in a suburb with good growth, close to city compared to outer suburb house with lots of land, both at relatively same price. One of the options I recently looked at was buying a renovated townhouse in a suburb close to city and beach .. nothing needs done, and after couple of years buy something bigger and possibly renovate and move in, while rent the townhouse. Does that sound good?

In Australia, the golden rule is that land goes up in value, not the dwelling.  So the bigger your bit of land, the better.  You'll only be able to afford a smaller bit of land close to the city, and will always be limited as to what you can fit on it (and presumably you will also be limited as to what you can do with it due to council planning restrictions.  for eg you might not get permission to build a second storey, or build all the way to the back fenceline).

As for trying to guess which suburbs will go up in value – it is the golden question.  There are some websites that offer free info on suburbs spanning the past 5 years, and it is always possible to buy more detailed or historical information.  But it is historical information.  It is not a guarantee of what will happen in the future.

If you feel that you will have the money to buy something close to the city, live in it for a while while you are young and want to go out on the town a lot, and then buy something bigger as well later on, go for it   However if you are unsure, you might be better off with buying something on a bigger bit of land a tiny bit further out that offers you a cheaper means of "expanding" later on. 

If you buy a property and live in it, you will be unable to negative gear the costs of purchasing (eg in Victoria where stamp duties will cost you a fair bit, it'd be nice to get some of it back as a tax refund).  Your proposal suggests you will twice forfeit the right to negative gear stamp duty on property.  Which is absolutely fine – just something to think about. 

If you feel you can afford only one property, but want to live near the beach for a while, but in a bigger house elsewhere later, maybe you could just buy the bigger house now as an IP and put tennants in it, and you can rent something near the beach for a while.

There are infinite options.  The thing you have to be realistic about is how much cash you have to throw at property, and ensuring you still have a life after all the bills are paid

Yes there are adviser and advisers.

Many have to recommend investment products with nice fat commissions attached as they normally earn nothing from recommending a property and see property as the investment evil. Personally as an adviser i go the other way and see property as the backbone to every clients portfolio.

That is not say that if i felt client was overweight in property in one particular area i would not recommend an altenative investment.

Structure is important as the last thing you want to do is use all of your available cash funds as deposit on an investment property where the interest is Tax deductible only to find out that when you come to purchase your own PPOR you cant obtain satisfactory finance due to serviceability or lack of deposit.

My prefered structure for someone in your position would probably be a 95% lvr interest only loan on the investment property with 100% offset account attached and you pour your surplus cash and additional deposit funds into the offset account whilst you are looking for the right PPOR.

Why not get both the tenant and the ATO to contribute to your repayment. If the Townhouse is fairly modern you will find that you can claim non cash deductions such as Depreciation and Building Write off and this may aid your cash flow allowing you to save up a bigger deposit on your own PPOR.

In my opinion:
1. Yes.
2. Mate you've got to live somewhere that you feel happy about.  You've paid a little extra for that.  No worries.
3. Yes, but be sure it has an offset account, and put all your spare cash in it to save on how much interest you have to pay.

Bob,

Are you handy with some tools and/or reckon you could borrow a bit extra to take on a renovation?

Why not buy one of the more run down-ish kinds of places (there are PLENTY of run down properties in Newcastle). Borrow a bit extra and take on your first renovation Aim to knock it over quickly and set a schedule. Add some serious value by fixing the place up – don’t overcapitalise obviously. 6 mths later (if you renovate effiiciently) you will have added significant value to the place. Then you can either rent it out asking for a decent amount of rent, OR sell it and cash in the profit CGT free because you lived in the place.

I am experienced with the Newcastle market and in my opinion only, it’s not such a great high yield market. The yields are pretty ordinary. It’s quite cheap to rent in Newcastle. Newcastle has the most potential for capital gains though at present – much more than a market like Canberra for example which is a higher yield market (fantastic rents), but has already had a long run of strong capital growth recently and is starting to slow down a tad.

So pick up a cheapy in Newcastle that you can add value to yourself. Put the hard yards in you will end up with a place that you may actually love to live in too. Plus you will have a smaller mortgage because you didn’t pay top dollar for the place to begin with. Newcastle has been circled as a place very likely to boom in terms of capital growth in coming 5 or so years.

There are also some regional towns approx 1 hr from Newcastle with some MAJOR transport infrastructure already approved and underway, due for completion in approx 3 years. If you took the path of renting somewhere, but buying somewhere as an investment, then seriously look into a couple of the regional cities, think up and coming central hubs in the hunter valley and you could be planting a very worthwhile seed.. Similarly, nothing stopping you from also renovating a place like that even if you don’t live there. You can claim some of the work and then get a higher rent for the property after the work is done.