Hi guys,
Being a child of migrant workers who came to Australia in the 1960’s, we were always taught to save our money and to strive for the great Aussie dream of owning your own house by paying off all debt as quickly as possible.
Luckily, I followed my parent’s advice and we now own our home outright.
Now we are in a position where we’d like to purchase an investment property, but not having any investment experience (or the mindset where debt is ok), this is where I’d appreciate some help.
Our house is worth is $800k, and we are a single income family earning $75k pa (we have 3 children under 4 yo and my wife is unlikely to return to the workforce for at least 2 years).
How much money should we borrow? I’m a little nervous of “over stretching” ourselves. I had a Viridian line of credit loan when I purchased my place – would this still be applicable when purchasing an investment property, or would some other loan type/structure be more applicable. And how should I repay the loan, by pumping as much money into it as possible or only paying the interest component (which is really foreign to me) which would probably be more tax effective?
Being brought up in an “old school” environment, my preference would be to buy an average house with a decent land component, as opposed to a unit, apartment etc, because land will always appreciate. Being a nervous first time investor, I’d prefer to buy within a 20km radius of Melbourne for an extra level of comfort. Intuitively, I guess I should be looking for places within close proximity to public transport, schools, shopping centres etc. What suburbs would people recommend?
What sort of a capital and rental return would be considered worthwhile?
As you can all see, i'm pretty much starting out on this investment journey, so any advice would be extremely appreciated.Thanks everyone
Cheers
Rob
Welcome!
First and foremost about the loan type. Try and think of a Principal and Interest loan as the same thing as an Interest Only Loan with Offset account. You pump money into the offset instead of against the principal. In terms of eliminating interest and paying off faster, it's kind of the same thing. The difference is this: if you then decide to buy a second investment property, you simply pull the money out of the offset account at a moment's notice and without paying fees, and hey presto, you've got an instant deposit. I've you'd actually paid it onto the principal, you'd have to pay fees to pull the money back out. Waste of money that would be.
Where are you in Melbourne?
Perhaps you'd feel most comfortable with buying a house and land package? The reason is that in addition to the "loss" that you make that is deductible (because your costs will exceed the rent) you will also be able to get a depreciation schedule done by a quantity surveyor, that'll be worth about $8k a year in deductions. Free tax refund. Yay!
In terms of how much to borrow…. basically you want to figure out what the value of your home is plus the proposed investment property, and that makes a total figure. We'll call it 1.2million. You do not want a debt of more than 80% of that figure. If you got an IP worth $400k you would be fine with that ratio, because you already own two thirds of a $1.2million portfolio (your home – worth $800k).
But of course it's also about serviceability. You need to be able to "make up the difference"… pay the bits of the mortgage the rent won't cover, with spare cash in cae of interest rate rises, that sort of thing. So you'll need to know how much "spare cash" you have per month to put towards an IP mortgage.
If you buy a house and land package you get stamp duty concessions (which is a big cost at approx 5% of the sale price)
Some areas to look at:
A newish or new 2br townhouse (ie not apartment) in Coburg
A house and land package in Craigieburn
Something in Altona, preferably within walking distance of Pier Street and the beach
House and land package in Melton
Something not-so-new in Sunshine
Or if you'd like a lower price tag, take a look at Geelong or Ballarat where the rental demand is high
Or then of course there is the apartment and unit market. Elwood? St Kilda?Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Rob
Welcome to the forum.
I like the title "help for an old school thinker" – gave me a chuckle
You're in the same boat as plenty of the clients I deal with. They've paid off their loan and are now considering purchasing an investment property (or 10)
What we generally do is access some of the equity in their current unencumbered property. For ease of explanation, if they were wanting to purchase an investment property for $400k, we'd take out a $100k loan on their current home and use this as a deposit towards the investment property. All loans are interest only – with an offset account attached.
From the $100k we'd use $80k as a 20% deposit (avoiding lenders mortgage insurance) and the remaining $20k for stamp duty and other completion costs.
Therefore, you'd have two loans set up – the $100k against your current unencumbered property and the $300k against your investment property. Both these loans would be tax deductible.
While you have a lot of equity, it's your serviceability that may be a slight hindrance. An income of $75k to support a family of 5 suggests you probably don't want to purchase an investment property that's too negatively geared (eg. you don't want to be forking out hundreds each week to keep the property).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
… and there is of course the alternative of setting up a SMSF (self managed super fund) and buying a property thru that. a great option if your super fund already has a big pile of money in it. last i heard lending to SMSFs where 80%, so on a property worth $400k you'd need about $100k in your super; $80k to cover the deposit and $20k for stamp duty, and a few extra dollars for legal fees and any building and pest inspections needed. if indeed you have this kind of money in your superfund, it might be an option worth looking at. it might help with serviceability since money going into your super fund is taxed at only 15% on any surplus funds (so while your property is making a loss it is taxed at 0% apparently!). you're allowed to sink an up to an extra
$25k into your super per year if you wish.Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Congrats on paying off your home, Rob!
Just don't ask the bank for your title deeds back as they are safer left with the bank (i was a Westpac bank manager in Sydney CBD for several years- but don't hold that against me) . Read the Jenman article on Perth House scam: it’s a case of “I told you so” http://ow.ly/2NwaQ .
Sounds like you may be more comfortable paying down the investment debt (at least while you are both working). This is where the Viridian style LOC helps. As previous posters mention, you need only borrow 80% of purchase price for the IP against that security. You draw down on the existing facility for the remaining 20% plus legal and stamp duty costs.
Your accountant will likely suggest that you quarantine investment expenses (ie. don't use the LOC for other purposes). Structuring the finance in a way that is appropriate to your needs is as important as finding the right property.
Graeme Freer | Freer Property and Finance
http://www.freerpropertyandfinance.com
Email Me | Phone MeBuyers Agent
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