Greetings all!
I am a 28 year old male looking to purchase my first house in Perth, W.A. Although I plan to live in the house, I plan to use it to springboard myself into the world of property investment.
I have done my research on the market, picked up various tips from threads on here (thankyou!) and I feel I am in a good position to finally make the plunge and buy that first house. But first I would like some feedback regarding how much I should be looking at spending and what sort of property would best suit my needs.
Currently, I am paying $350p/w for a 1 bedroom rental apartment close to the city. I live alone and my costs are relatively low. I make approximately $130,000 p.a (I work away, and my cost of living is almost nil whilst I am out of Perth for half the year). I have no credit card debts, a 15k car loan (car is worth about 25k now) and 35k in savings.
Currently, my rental is leased 'til March 2013, and I fear I may have to extend the lease another 6 months (or periodical if I am lucky?) as I have left it too late to purchase a house and have it settled before my current lease expires. Is it too late to avoid another rental lease?
Knowing that I would like to buy more houses in the future, how much should I be spending on a first house, given that I will be the only one paying the mortgage, and I will probably not have a guarantor to sign onto the loan? Should I be looking at a cheap entry to the market?(around $350k for something simple). Or should I use my higher salary to purchase something of more value? ($500,000 and above)
Also, should I be looking for a house in the suburbs that may appeal to a family when I chose to move out of it, or is there money to be made down the road if I buy a new'ish apartment close to the city, similar to what I am living in now?
Any assistance or feedback would be appreciated as I am relatively new to this and I don't have a great deal of knowledge on the subject.
– Dan
Hi Dan
Welcome aboard.
Personally, I would look to use a smallish deposit on your first given that it's going to become an IP in the future. I'd also set up the loan as interest only with an offset – rather than P&I.
There's a few reasons behind this.
Firstly, when it becomes an investment property, the interest on the loan will become a tax deduction. Therefore, by using a smaller deposit you have a larger loan to claim against. I wrote an article for API mag on this topic recently – it's available here.
Secondly, by setting the loan up as interest only now, you avoid paying down the principle (which is going to be deductible in the future).
Thirdly, by using a smaller deposit, you may be able to retain more of your own cash which can be used towards a PPOR purchase in the future whilst being kept as a contingency fund now. It could also be used to purchase more IPs – but I'd look to borrow the funds first before using your savings.
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]
Hi Dan,
You don't say what sort of interest you have saved at the moment.
With finance size does matter. The bank will not only assess your income level they will also look at your security level, In the instance of your first property this often, not always, is your savings level.
I assume your comment, "I have it too late to purchase a house" means you are strongly leaning towards a house and land package which is specifically targeting the first home owner market. Is this correct? If not you may be able to find something (nice 2 X 2 X2) or townhouse that is more suited to your current situation rather than a big house in the burbs.
Must be that time of the year. My daughter and her partner have been in contact with me this week asking exactly the same questions you are asking. Someone is trying to sell them a 4 x 2 X 2 in Perth's sticks and in a suburb laden with first home owners. I haven't seen any specs but I suspect the property will have entry level finish and be short of the desired standard without extra expense and additions to the contract.
Luckily she has asked me first for some advice and I will be sitting down with them over Christmas and helping them to develop a short and long term plan.
Good luck with it all.
Hi guys,
Thanks for the quick replies – You both seem to know what you're talking about.
Jamie – I hadn't even thought of that. How well do the tax deductions stack up? And what if i reside in the house for 10 years (just an example)? If I had to wait that long to start claiming the interest on the loan as a tax deduction would it still be a solid strategy? If I liked the house and wanted to stay in it for a while, and use equity in it to buy other IP's it would serve better to start out with P+I ?
Derek – The amount I have saved is in inclusive of the interest. When I was talking about leaving it too late to buy, I meant in terms of buying/settling/moving before my current rental lease expires in March 2012 (giving me approximately 4 months to have the whole process completed) I can't imagine arranging finance and buying as a first home owner could be done so quickly?
And you're right – I'm not particularly interested in a family house in the suburbs (or out in the sticks for that matter). Nor am Ireally looking at the house and land packages tailored to first home buyers- more so I am seeking established houses/townhouses in areas close to the CBD (<10km, close to amneties).
Cheers,
– Dan
Hi Dan,
My bad – just noticed a typo in my original post. Sorry.
I meant to ask how much 'cash' you have saved. This is important to your overall borrowing capacity.
I am sure you are aware the WA Govt still offers a $7K FHOG and First Home Buyers in WA are exempt from stamp duty for any property up to the value of $500K. These two incentives will be of assistance to you as you start on your journey.
Typically it takes around 6-8 weeks (give or take a bit) to settle on a property once you have made your selection. In WA you only have to give 30 days of intent to vacate your leased property. So bottom line is you do have time to have something tucked away before your current lease expires. Having said that it would a strange decision by the landlord to evict you at the end of the lease if settlement on your property was imminent.
Just make sure you grab a good broker to help you through the purchasing process. Find a good one now and they will become an asset as you grow your portfolio.
Your property plans are solid and make sense – maybe add an extra dimension and try and find something that is subdivideable. You may wish to consider this as an option in the future.
Hi Dan,
As Jamie mentioned, IO with offset is the way to go even if you are thinking of turning it into a rental many years down the track. The premise of this strategy is that the principal amount "P" that you would have paid is instead located in the offset account, meaning the interest you do pay is no different than if you paid P&I. The advantage is the extra flexibility of being able to utilise the offset account cash.
If the time comes when you want to use equity in the property to purchase an IP, if as a worst case scenario you have limited equity, you can pay down some of the loan with your offset money, and then re-borrow that for your deposits, etc for the IP to make it deductible.
In regards to a March settlement, Derek is right, you still have some time on your side.
Cheers
Tom
danfresh wrote:Jamie – I hadn't even thought of that. How well do the tax deductions stack up? And what if i reside in the house for 10 years (just an example)? If I had to wait that long to start claiming the interest on the loan as a tax deduction would it still be a solid strategy? If I liked the house and wanted to stay in it for a while, and use equity in it to buy other IP's it would serve better to start out with P+I ?
Hi Dan
Don't worry – most people don't, and it's not usually a question that many broker/bankers ask their clients (although they should).
If you were going to live in it for 10 years and then rent it out – that makes interest only with an offset even more important.
Think about it – if it was set up as P&I for 10 years, that means you've spent 10 years paying down the principle.
When it comes time to convert it to an IP, you would have paid down a massive chunk of the loan which has now become a deductible debt.
By utilising an offset account, you can park any spare savings you have in there instead of paying down the principle.
If you're a terrible saver and will only continue to make the minimum interest repayments and never place any savings into your offset (because it's being spent elsewhere) then P&I can be a better option because it's a forced savings method.
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]
Gents,
I'm very glad I asked you all this question. You've definitely shaped my decision to go with an interest only loan and seek out a broker who will accommodate this wish.
Armed with the new knowledge that stamp duty concessions are available to first home buyers making a purchase under 500k, I think it stands to reason that I will limit my purchase to take advantage of this concession.
How feasible is it to buy a 600+ sq.m property for a first house with the goal to subdivide? If I undertake an IO loan, and have 200-300k in the offset, will this count for anything when I finally look to subdivide and build?
Would it be preferable to go for a few high rental yield IP's, or CG IP's before looking to get into a subdevelopment IP?
Also, my current "savings" is invested in shares. I plan to sell these, place the money in a savings account and use this as a deposit. Will it go against me that I haven't had a steady period of saving, as I have been siphoning my money off monthly to purchase more shares? Surely I could show proof of a growing share portfolio to indicate that I have been saving money on a regular basis?
Cheers all
– Dan
Hi Dan,
Not a broker so take what I say with a grain of salt.
Make sure the broker you choose is also a property investor. I would steer clear of those franchised operations where you will in, all likelihood, be serviced by an employee.
Your spending ceiling makes sense too – takes advantage of FHB grant. When speaking with your broker make sure you keep in mind that any borrowing calculations done at the moment will realise significant borrowings because interest rates are very low.
As I understand it most banks will accept your regular savings through your shares – something else to confirm with your broker. Depending on how you see the share market moving you may be able to leave these in situ until required.
As you grow your portfolio it will be to your advantage to have either equity or cash savings. Banks will look at these two aspects of your situation, along with your income before determining what they will lend you. So if you do go down the subdividing route you will be in a position to do so with the level of savings you are talking about.
Hi Dan and all,
The guys are all spot on.
I'd add in that you are probably not obligated to sign on a new lease, you will have the option of going month to month. The same lease conditions remain, you'll still need to give the correct amount of notice when you vacate (check with the property manager you you give notice) you may find that this adds around another month on at the back end.
If you are looking within 10kms of the city, really you can pick from anything. I've got a little villa in East Vic Park that has never been empty, or you can have a look at Belmont (used to be such a bad area then got redeveloped) if you do a lot of fly in fly out.
Think about your lifestyle and where you want to live, you've got plenty of choice.
Cheers
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeGreat feedback guys. I appreciate all your responses.
Jamie – in your first post you mentioned borrowing the funds for the deposit rather than using my own savings. How does one do this? What sort of loan/interest rate are we talking here? Sorry if this seems a stupid question but I'm not really sure how this would work.
Also, will it be harder to get a first mortgage without a guarantor to sign on? Are there any financial penalties I will incur by signing a mortgage without a guarantor?
Cheers
– Dan
Hi Dan,
I know you directed your question at Jamie but as a ball park figure you'll need a minimum deposit of approx 5% (give or take a little depending on the property chosen)
So if we use the $500K as your buying mark around $25K would be a reasonably good guide for you to aim at. You may need a little more for loan establishment costs, valuation fees, solicitors fees and so on.
Would cashing in of your shares realise $25K?
If you can come up with the deposit then it is highly possible the bank may not need a guarantor. You have, by virtue of having sufficient deposit to make your purchase alleviated any need for a guarantor.
Now just wait for Jamie to come along and finetune/correct what I have said.
Hi Derek,
I could definitely sell the shares to shore up $25k and have some left over, which it sounds like I may need.
Could you provide an estimate for how much the extra fees (Loan establishment, valuation, solitors fees) would total? Is it under $10k? And are there any other fees or expenses in purchasing an established house that I should know about?
Cheers
– Dan
Given you'll be exempt from stamp duty (that is the big one) you'll probably cover the others for around $3K – does depend on a few things like which bank you are using.
Settlement Agent (not solicitor) Fee Guide for WA here
You'll also need to factor in building & pest inspection fees – allow around $500 (give or take)
Dan personally i wouldn't sweat the complications of lending and trying to understand and get to grips with various credit criteria.
Why not drop Jamie an email and get him to source the loan for you.
Won't cost you a cent and you professional advice from a top investment broker rather than pen pusher who has never purchased before.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hey,
I agree, I'd much prefer to have a fellow investor, and someone who has done this several times before, than a pen pusher for a franchised business helping me with these important decisions.
I may be thinking old-fashioned, but isn't it easier to have someone you can talk face to face with to organise all the details? And won't a local broker be able to provide more relevant information for a local market and the laws pertaining to the state that I'm in? Maybe I'm not giving the man enough credit!
The thought of having a loan sourced by a great broker is very appealing
It was great of you to volunteer his services (free of charge too!)Hi Dan –
Here's a totally different suggestion. How about you buy two rentals instead of one PPOR?
Your income is high, interest rates are SO low and rents in Perth are high. I don't know your numbers but you may be able to borrow $700-800K and you would have around a 5% deposit.
You could then hunt around to find a couple of near cash flow neutral properties to kick start your portfolio. In your tax bracket depreciation benefits will help minimise any shortfalls between rent and repayments.
For example my most recent purchases in Perth are cash flow positive or close to:
- Off the plan studio apartment in East Perth settled 18 month ago for $310K rents for $500pw (not all banks/investors like studios though). Now worth $400K.
- 2 houses and land packages in Alkimos $475K with expected rent around $500-550pw
Over the past 10 years Perth has been kind. I have tripled my money in Tuart Hill, qaudrupled my money in Merriwa and got 250% out of Mindarie and doubled my money in Maddington. Even made 23 times my money in Morawa (country WA!)But then where would you live? I'd live on a couch if I could get off to such a great start in the property market – especially if I was only in town for half a year.
Seriously though $350pw is a lot of income to not be working towards your investments. Though you would be able to afford it with cash flow neutral investments it may make a dint in your borrowing capacity.
If you are only in town half time have you considered sharing a place? May not be your cup of tea but I know many divorced women who would love to rent out a room for some extra cash – try an add on gumtree!
Down the track you should be able to use the cashflow and equity to help qualify for your next property. Whether that be as a PPOR or another investment would be up to you…
I guess the point is that in your circumstance – footloose and fancy free at 28 – I would be looking to leverage that big income into something more than one PPOR.
Good luck!
Hey Merlin,
Very interesting idea. And it makes good sense. But how likely is it that I could secure a $700-800k loan with no collateral (no existing PPOR/IP's under my name)?
Sadly, I need somewhere to live too. And while I'm sure the divorcees would love me, I kind of like my living situation at the moment, albiet an expensive one.
I think pumping cash into an offset on a PPOR before selling or turning it into an IP is the best plan of attack for me at this stage. If I had somewhere else to live I would have no hesitation in using my earning power to go for two rentals at the same time, rather than just one. It is something I will probably look at doing in the not too distant future.
Your wealth of experience on the subject seems very relevant though. What kind of property should I be looking to get into now if I want the potential of a cashflow neutral/positive investment in the future?
Also – how much should I be expecting to pay a broker for the whole "first home" experience?
Regards,
– Dan
danfresh wrote:Also – how much should I be expecting to pay a broker for the whole "first home" experience?
Brokers earn their income from bank commissions – you shouldn't pay anything.
Hi Dan –
Banks want two things to let you borrow – Security and Serviceability.
The bank would use the properties that you are purchasing as security. With a 5% deposit they would need you to take lender's mortgage insurance – but they don't require additional security beyond that (much as they like it!)
Then you need serviceability – ie enough income to pay back the loan. Before I posted the first time I just plugged your numbers into a "how much I can borrow" calculator on a bank website but I didn't know your expenses. The calculators are pretty simple but will give you an idea of what the bank may lend you. I am sure there are folks on this thread that could give you a more accurate idea.
Last time I did a loan the bank added up all our earnings and then added 80% of our property rental income to get to our total income. For example if you bought 2 x $375K houses and rented them for $400pw your income would be $130K + $33,280 = $163,280.
Though I am currently paying around 5.8% for loans I think that banks will run your numbers on a rate a bit higher to see that you can cope if interest rates were to go up.
If you purchased 2 x $375K houses and rented them for $400pw the difference between the loan repayments at 5.8% and the rent would be -$1900 a year! Then you need pay for rates and any maintenance etc but you also get the benefits of depreciation. So after tax it isn't going to use up much of your $130K salary.
You don't need to live on a couch to do this!
– it is just that minimising your expenses will help with your serviceability and will allow you to get further ahead. Us folk with kids and school fees etc etc don't have the great financial freedom you have at the moment. Was just thinking that now is the best time for you to take advantage of it!Re PPOR or rental. The decision would determine the type of property you should buy. It is an age old debate in investment circles whether to buy a house that is better for cash flow or for growth. I have bought houses for growth and they have been outperformed by houses I bought for cashflow. That said I believe is very important – especially at the beginning of your portfolio that you buy properties that do well for cashflow. If you don't it will very quickly hamper your serviceability and stop you from buying more properties – which in turn hampers your growth.
If, however, you are just going to buy one PPOR it doesn't matter what the cashflow is as you won't be renting it. Then you would be looking for strong capital growth.
My latest choices have been East Perth – the market is so tight for hotel rooms that the apartment market is crazy. Though I rent the studio for $500pw – there is one property manager trying their luck to get $900pw for them at the moment! I have also picked Alkimos – partly as I live nearby – but mainly due to the future train and freeways going in. Also, Alkimos will be Perth's next regional centre like Joondalup. It is on the edge of the suburbs but the rental market is still strong. There are people turning out in droves for rental open houses in any of the suburbs up around this area. The market has started to move. Land prices in Alkimos were $236K since 2010 and went to $242K in 2.5 years. I bought six weeks ago and since then they have gone up by $5K three times. $15K x 2 = $30K – not a bad effort in 6 weeks!
For a PPOR I wouldn't have the same feel. Hit the RPdata type websites and read the Australian Property Investor type magazines and see what they say.
Have fun!
It was great of you to volunteer his services (free of charge too!)
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