Hi everyone,
I'm a regular reader of these forums – but a first time poster!
My partner and I (both mid 20s) bought a 1-1-1 unit in the Melbourne CBD in December for $380,000. It's about 55sqm + an 8sqm balcony overlooking the Yarra River opposite Crown Casino. A matchbox in a great location.
We're owner-occupiers. We bought in the city because we like the lifestyle and both work in the CBD.
After stumping up a 20 per cent deposit, FHOG, and some other cash – our loan is now $290,000. We're paying double the minimum monthly repayments and based on that, will own the pad in around seven or eight years (based on interest rates reaching 10% in the next year or so).
Our goal is to move out of the apartment in the next four or five years, and buy a bigger property outside the CBD, but still within 10-15kms of the city.
I have always been an investor in shares , so I'm a n00b at property investment – and was keen to hear your thoughts and suggestions on the best way forward for us.
Should we occupy for as long as possible and build equity – then lease out and buy a new place?
Should we occupy for the next one or two years only, then lease out and buy a new place?The other option is to convert some equity in shares into cash and dump that into the loan to get it down quickly.
What do you guys think? Thanks in advance for taking some time to respond
I have been reading a lot of Michael Yarneys material lately. I believe he is a bit of a guru in regards to Australian property, and in particular the Melbourne market.
He suggests that there is a looming oversupply of inner city apartments in Melbourne and Sydney. More so in Melbourne, there is a large number of proposed developments on the cards which will then lead to donward pressure on prices. In contrast, planning restrictions and a lack of small scale developments in middle ring suburbs means a shortage of housing stock here resulting in upwards pressure on prices.
My thoughts- I really think you have to research your local area. If there are a lot of buildings going up near you, then this is a bad thing as there will be more stock on the market and you will have competition from newer buildings when it comes time for you wo sell, which will mean a lower price for you. However, if there are still relatively few buildings in your area and stromg competition from buyers, then it may be worth holding onto your property for the medium term and consider purchasing a second property.
I personalle prefer houses on decent blocks of land in the inner to middle ring suburbs due to the rising value of the land component, a shortage of new stock on the market in these areas and the ability to create extra value (by renovating, subdividing etc) these type of properties compared to inner city apartments. But that's just my preference!!!
Luke.
luke86 wrote:He suggests that there is a looming oversupply of inner city apartments in Melbourne and Sydney.I personalle prefer houses on decent blocks of land in the inner to middle ring suburbs due to the rising value of the land component, a shortage of new stock on the market in these areas and the ability to create extra value (by renovating, subdividing etc) these type of properties compared to inner city apartments. But that's just my preference!!!
Thanks for the post Luke – we bought in the CBD for the lifestyle and to be walking distance to work. I disagree with Michael Yarneys doomsday view of city apartments – this view has been recycled over the years and in the medium to long term, has always proven overstated.
I think if you read widely enough, there are a number of experts and gurus making all sorts of predictions, but all so far ahead of time that they're never really held to account!
In terms of our spot, we found a great location – unobstructed (and never to be built out) views of the Yarra River, one minute walk to Crown and Southbank and five minutes to South Melbourne.
What I'm hoping someone can help with is some advice about a medium to long term strategy – notwithstanding that there are gloomy forecasts for Melbourne's apartment market.
There sure is a lot of experts with different opinions!! I dont believe everythin I read, but he does have a few good points. I am ot in Melbourne so I do not really know much about that market, but there isnt a huge amount of CBD develpment going on in Sydney so his views on CBD apartments here may be a way off I agree. And seeing as your building is located in a unique spot, there should be good potential for future growth.
Anyway, back to your question, I think that using equity to leverage into more property as early as possible is the best way to go. Of course I am not a financial advisor or anything, and you have to be comfotable with your level of borrowings, but I think the earlier you get stuck into investing the better!!!
Luke.
Firstly if you are thinking about keeping it as an investment STOP paying off the loan. Put the money in an offset account so you can withdraw it to buy the new place. If you rent out a place with no or little loan you will be paying extra tax and the money you borrow for your new home will not be tax deductible.
Catalyst wrote:Firstly if you are thinking about keeping it as an investment STOP paying off the loan. Put the money in an offset account so you can withdraw it to buy the new place.Thanks for the reply – when you say offset account – the (BankWest) home loan we have allows us to move the money in and out with no penalty (just a $500 minimum transaction). So we can transfer between savings and home loan accounts.
Can you guys spell out how to leverage for me? How much equity would we need in the loan before we can lease out the unit and buy a new place? How does this work?
Cheers
An offset account and redraw are two different things. I think you should do what Catalyst suggested and start putting excess money into an offset account instead of paying extra off the loan.
When you redraw money from a loan, it is counted as new borrowings. So if you redraw, say, $50 000 from your loan to purchase a new PPOR and rent out yyour existing apartment, this $50 000 is counted as new borrowings and because the purpose of the loan is to buy a place to live in (not an investment), the interest on this money is not tax deductible. If you just leave the money in an offset account however, it is not new borrowings as it was never paid into the loan and you maintain the tax detectability of this money.
Leverage is when you use equity to 'leverage' or lift yourself into another investment. If you own a property worth $500 000 and you only owe $200 000 on the mortgage, you have $300 000 equity. Banks typically let you borrow 80% of a properties value with no problems (provided you can service the loan) so they will let you borow $400 000 against that property ($400 000 = 80% * $500 000). So you can borrow another $200 000 against that property if you wish, to take you up to that maximum $400 000 borrowings. What you can do then is set up a $130 000 line of credit secured against that property to pay for a 20% deposit and costs on a $500 000 investment. Then you can borrow another $400 000 secured against the new investment property. You would then have bought a second investment property using 100% borrowed funds and none of you own cash down. You then leave all of your cash in an offset account linked to your PPOR so if you ever purchase a new PPOR, you can move that money around to reduce non-deductible debt.
Hope I explained that ok, I always seem to confuse people when I try to explain offset accounts. Maybe Catalyst could expplain better
Luke,
Thanks for the tips guys – are there any benefits to waiting and paying off the mortgage in full? Before diving into investments and leverage?
You must be logged in to reply to this topic. If you don't have an account, you can register here.
