Merlin,
Thankyou so much for this. This is exactly the kind of information I was looking for.
While I don't think I'll be looking at purchasing two properties in one hit, I would like to follow the path of adding a relatively cashflow neutral property shortly after purchasing my first PPOR. I think your figures behind the $375k purchase / rent out at $400 p/w make sense to me and it is an extremely affordable way (for me at this moment) to get a foothold in the market with an IP. What sort of houses (3×1/villa/apartment?) in what sort of areas (location,suburbs?) would fit this criteria?
And in terms of the 5.8% loan you have mentioned in your calcuations – can you provide more details on what type of loan you are referring to. IO or P+I? Fixed? Variable? Presuming I look to take out a similar loan to what you have described after buying my first PPOR and draw out of the offset to put a deposit of 5% down on the IP, will they loan another $375k to me if I'm already in $400k or thereabouts in debt? Should I use my PPOR to secure the loan for the IP? Will it help?
I know you're talking about lowering my expenses to do this, and while a large mortgage for a PPOR may not seem to do this, I see it that I will be building equity to allow me to invest more in the future, and switch the property to an IP when the time is right. Does that make sense?
Sorry for so many questions but I'm just trying to get all the information I possibly can before making this big decision that may impact all further investments in the future.
And I really do appreciate all your input so far.
Cheers
– Dan
One last thing…
I've entered the calculations into a calculator and I'm getting pretty big differences here (based off 360k mortgage/6% interest/80% rent return of $400 pw). The shortfall I'm seeing between the mortgage repayments and 80% of the rent comes to $178 p/w.. or around $9256 p/a. This is significantly more than what you've mentioned? Can you tell me how you came to your calculations?
Not to mention that I will be out of town for half the year, so I will definitely need to seek out property management to solve any tenant issues while I am away. I figure this will incur additional fees to the 80% rental return that is calculate, which would create an even greater disparity between mortgage repayments and income garnered from rental return.
What percentage, or flat rates, would property management services charge to look after this type of IP?
Cheers
– Dan
Ballpark maths – allow around 11% in WA. This tends to cover PM fees and all of the costs associated (letting fees, monthly charges, inspeptions and so on) with getting your property managed in WA.
Thanks Derek.
So how should that affect my calculations – given that I'm already assuming only 80% of rental return will go back into the mortgage?
Actually – I'm operating on the figure of 80% rental return from Merlins earlier post – maybe he already calculated property management into that? If not, would a figure of 70-75% be accurate?
Cheers
– Dan
Hi Dan,
Not quite.
All banks have their own policies with respect to calculating your serviceability – how much can you afford to borrow. What Merlin was doing was using 80% of rental income and adding this to your income to determine how much you can borrow. I suspect the bank uses 80% because they tend to be conservative by nature – rather than allowing for costs.
From memory some banks allow a little more than 80% and some did allow negative gearing benefits when determining serviceability.
To be honest with – I think you are wasting your time with online calculators. The results obtained tend to bear little accuracy to actual results a broker can get by tweaking the numbers.
Whatever you do – use a broker and not a bank.
If you are trying to find out what your cashflow will be after buying an investment property then look at Jamie's website – I understand he has a cash flow calculator on it.
Hi Dan –
If you are looking to compare suburbs for rental yields consider buying a copy of Australian Property Investor. Towards the back it has a section called Databank. If you look up Market Watch: House Prices and Rental Yields you can see which suburbs in WA have the highest Gross Rental Yield %s. If you are chasing cash flow the higher the number the better.
Re the 5.8% loan. All my investment loans are interest only variable loans. IO keeps the repayments lower and means that all repayments are tax deductible. I don't really want to pay off the loans as the properties would become more profitable and that would mean I would pay more tax!
I have variable loans as I think interest rates have further to fall. That said, rates aren't far off their all time lows so I can understand why some people may want to fix. If in doubt just look what the banks are offering. If their fixed rate is less than their variable rate then they think rates will go down.
I would think the next step would be for you to go a broker and ask them how much you can borrow. You would be able to ask about the impact of any expenses you have and see what they say re the timing/order/number of possible IP/PPOR purchases. I agree with Derek – a broker is in a better position to be able to help you work through your options.
Once you know this you will be in a much better position to know how much is appropriate to spend on each purchase. This in turn will determine where you could go hunting.
Merlin
PS – property is a girl's best friend – I'm a she!
Hey,
The loan structure makes sense now. I think it may cost me a bit more than I had earlier calculated, but it's still not going to be a huge cost to me at the moment. Thanks for the advice on the API mag data, I'll check that out shortly.
Will be heading to a broker in two weeks time, when I'm back in Perth. I'm thinking your idea of going for a double mortgage, one for a PPOR and one for an IP, ($700-$750k), is looking more viable at this point.
Currently, I could buy one of the apartments in the complex I am in at the moment which is exactly the same as I am renting only pay an extra $9500 p/a to own, instead of rent. I will barely notice the difference. It would be remiss of continue renting when buying is so affordable at this point.
And the leftover of the loan allows me to spend up to $375k on an IP. I've got several in mind with expected rental return around the $400 p/w mark or thereabouts, with the rental shortfall to be a manageable cost to myself. (Hopefully the broker/bank sees it this way too)
I do have my eyes on a corporate space (relatively small, but modern and <5km from CBD, near public transport etc.) that is going for $330k at the moment…… has anyone had experience with buying corporate real estate? I've heard from a friend that corporate rental returns tend to be higher, and you are able to lock businesses in for longer contracts as tenants. How does property maintenance and tenant sourcing compare to a residential IP? Is it practical as a first IP?
Also……… sorry for the gender assumption faux pa Merlin! I blame your male looking profile avatar
Cheers
– Dan
Hi Dan –
Hee hee – yes I did look for a girly avatar alas to no avail!
Good luck with the broker – I hope the news is good.
Another possible option to investigate may be to buy a property inside your super. If you have money in super it may be worth thinking about too. It is possible to borrow to buy property inside a self managed super fund (SMSF). You need a 30% deposit and I believe that the bank will lend as long as the rent from the property plus your SGC contributions will cover the loan repayments.
ESuperfund is an SMSF provider and they have a section on their website about buying property inside super:
http://www.esuperfund.com.au/property/HowitWorks.aspx
Re corporate space do you mean commercial real estate – ie office/shop type thing or do you mean renting a residential property to a corporate tenant for their staff or do you mean buying an apartment that is part of a hotel complex and renting it back to them?
Merlin
Hi Dan,
Commercial property is a different world altogether.
I recommend you learn to walk before you run and focus on one property only at this stage (whether that is an IP or PPOR is your call) and then when the dust has settled on that purchase look at number 2.
I have seen people with grand plans to take a really big step with their first one – trouble is the step they planned is so big they never take it.
Hey guys,
The corporate real estate I was looking at is a small (just over 60 sq m) office space, with a couple of rooms.
I think I'll wrap my head around residential IP's before delving into anything corporate, but I'll discuss it with my broker in the future. The same goes for buying within my super. That may be a bit beyond me at this juncture.
My plan is still to go for two properties at once, but I get solid advice warning me against that, or the financials don't add up, I won't be too disappointed if I have to wait another 6 – 12 months before getting that first IP.
I've waited 28 years, what's another couple of months?
Cheers
– Dan
Hey Dan –
Yep, lots of people have lots of different ideas in this game (myself included!). Some good, some not so good! I find the trick is to listen to them all but at the end of the day make my own choice. Over the years I have been told by a financial planner to sell all my properties and buy shares, I was told at the end of 2003 that the boom was over in Perth and that I was crazy to invest etc etc. With the benefit of hindsight these two pearls of wisdom would have cost me hundreds of thousands.
At the end of the day we are the ones that have to live with the consequences of our own decisions so it is very important that you seek advice but then choose a path that you are happy with (and lets you sleep at night!)
***
Finding out how much you can borrow will help you answer the first question you posted on the thread:
"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)"
If there is a possibility of a second property now or down the track then the value of your PPOR purchase will be an important decision.
All the best for the meeting with your broker.
Merlin
Ok guys… just an update on the situation as it stands.
Have met with mortgage broker and they have advised me that due to my financial circumstance (good loan serviceability, stability in job/house, no debt etc.) that I could secure a mortgage of up to 800k for a first house! 800k!
I was shocked to figure it would be so much.
I plan on spending half of that (400k), or thereabouts, to secure a low maintenace PPOR and will be looking towards my first IP within 12 months when I've put a bit of equity into the offset.
Has anyone here used a buyers agent to find a house? With half of my time spent working away I'm not sure I will be able to find the right place, visit it and do all the communicating back and forward at the approrpriate times on my 3/3 roster. I've been quoted around $10k for a buyers agent fee on a 400k house, but told it was tax deductible and could be added to the final loan amount.
I really am flying solo on this one. I have no hesitations in doing this by myself. But, would is be a smart move to get someone like that on my side?
Other than – what are the next steps that take place in purchasing a property? I've been told I could, and should, bullshit a bit (excuse the language) in terms of having finance preapproved, even if I do not, as to speed things up and look more attractive to the seller.
Presuming I find a place that I like and contact the realtor to view it, how does it progress from there in terms of putting in an offer/ receiving a counter offer / getting finance etc?
Sorry for my ignorance. Just trying to get my head around this all for the first time.
Cheers
– Dan
Hi Dan –
Just checking in to see how you are getting on
Regards
Merlin
Hi Merlin.
The search for that elusive first property continues! The situation is as follows –
I can honestly say I've been looking for a property to buy for about 6 months now, with the last 3-4 months of that being very focused, and my primary ambition. I'm putting a lot of my time in effort into it, for what seems like very little result right now. I'm not getting dejected just yet, but I've learnt what I'm after and just how fussy I am when it comes to housing options.
I've been to a few home opens and I'm on real estate website every day, or every other day looking for the new additions.
Out of the hundreds of properties I've viewed online in the area/price range I'm looking for I can honestly say there have only been a handful of places that I've really liked. It appears I must have good taste because all these properties are under offer within days of being advertised, often before the scheduled home open, and sometimes within 24-48~ hours. The market is a little bit crazy where I'm looking at the moment.
I feel like I'm going to miss out on a lot of opportunities (as I already have) because of the amount of time I spend away from Perth working my 3/3 roster in the offshore oil & gas industry. I've already told many realtors, as well as my current leasing real estate agents, that I'm in the market to buy and they should give me the heads up on properties that become available for purchase – but the properties are pretty much selling themselves at the moment (from my perspective, only what I've seen) so I'm yet to hear anything from them.
I think it's time to bite the bullet, front the cash and solicit the services of a buyers agent and let them work with my particularly fussy set of stipulations that I'm setting myself getting into the property market.
Luckily enough I have a pretty great rental apartment now (in the area I'm looking to buy) and I'm on an indefinite periodic lease through a real estate agency who love me to bits and an owner who has no intention of selling. That's the one thing that's in my favour right now.
Alas, the search continues….
-Dan
Hi Dan –
Sorry to hear that you haven't found something yet.
The WA market is certainly on the move and you don't want to miss out.
I am concerned you are looking for a perfect property. Trouble is that if you are successful everyone else will want it too. Not only will it be tough to secure but you are likely to pay too much.
You are in the fortunate situation that your job gives you time and cash. Have you thought about buying something not so perfect and fixing it up? Will be cheaper, have less competition and you can put that extra 3 weeks in Perth you get to good use.
?
Regards
Merlin
It finally happened!
I'm pleased to announce that I finally made the plunge after finding a property that was suitable to my lifestyle and future plans. I found a nice, well-positioned 3bedroom townhouse in Maylands, which is walking distance from the river and approximately 5-6km from the city.
The property came in under 500k, which allowed me to avoid paying any stamp duty whatsoever as I am a first home owner. I quite like the design of the house, however the current choice of colour scheme for the wall paint is quite average, and some fittings could do with replacing and a modern touch. Likewise the kitchen and bathroom are sufficient, and definitely will suffice for now, but a handymans touch and some ongoing renovations wouldn't go astray.
The real estate agent marketed the property as a "paint and profit" and I couldn't agree more. An identical townhouse in the complex went for $60k more only a few months ago and I am of the firm opinion that I could have the property I just purchased in a better condition than that one for approximately half that price, or maybe a bit more.
I have almost no experience renovating but I feel like this will be a good opportunity to learn and I expect to make some (okay many) mistakes along the way.
First home purchase down, next one to come soon (hopefully!)
Here we go.
Dan
Congrats on your purchase Dan,
Your buy sounds a little like our first – we had lemon yellow walls with burnt orange bench tops in the kitchen, timber panellng on one wall in the third bedroom with wallpapered large ships on the other walls, burnt yellow carpet throughout and so on.
We painted and profited and I am sure you will too. Start small and within your grasp and work your way up.
Good luck on number 2.
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