Hello folks, im new to the forum and also property buying.
we just bought our first apartment in melbourne. We got the first home owners grant. EDITED TO REMOVE SOME PERSONAL INFO
Price was $295k. repayments will be about $1500/month and if it were tenanted it would fetch $270 a week.
It is close to a suburb which has undergone gentrification. about 5 minutes to train station on bus and 15 minutes into the cbd.
To me it is important that it is not a matter of buying a cheap apartment or an expensive house it comes down to what you can afford.
What you need to do is buy a property that is going to provide you with the highest level of capital growth. That is the only thing that will create wealth. If you buy cheap apartments the question is how can you improve them, can you add a kitchen?, increase a space ect. Over the years I have brought a number of older style apartments in Elwood. I generally put in new Kitchens and bathrooms polished the boards, new paint through.
Now I would do this if I was going to re sell them or keep for investment. Because you want to attract the right tenant or first home buyer.
Naturally a house could be even better however generally the cost of a house in a good area will be expensive. Also with renovating the profit is in the buying. If you buy well you make money if you pay to much you wont. Again this depends on whether you intend to just on sell or keep as a long term investment
Nigel Kibel | Property Know How
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Hi There,
Im not by any means trying to sound negative but your property is heavily negatively geared which means that you are losing money.
Treat it as a business – why are you doing it if you are losing money?
Look at how you are going to make enough equity and profit to make up for the loss you are currently making.
When you look at properties do you do a cashflow analysis? Do you then weigh this up against the CG potential?
Regards
Shahin
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Thanks for the response.
When you say heavily negatively geared, you mean the rental payments do not cover the mortgage right?
It will be owner occupied for the first year (it has to be since we took the first homebuyers grant) but then we may rent it out and move out. There is the opportunity to convert it into a 3 bedroom (turn the living room into a bedroom) and possibly rent it out at $400 a week (3 student tenants at $130/week would be easily achieved in melbourne I think) which would make it 'positively geared' right?
There are tax benefits to having a negatively geared property aren't there? What are the benefits of a negatively geared property?
We have looked at the capital growth potential, and we found that the western suburbs probably offer good potential over the next years as the government is investing in the west. We could not find a 2 bedroom unit in melbourne anywhere for under $300k except in the west. It seems to be the cheapest option, and as the past has shown us, the cheaper and less popular suburbs of melbourne have shown the most capital growth over the long term right?
Where can you buy a positively geared property in melbourne?
Negative gearing means you are making a loss. Sure you get some tax rebate on your loss, however you don't get all of your loss back. Further, you get nothing at all back if you do not have some other income to gear the loss against.
Let's say you lose $10,000 in a particular financial year on this property, and let's say that because of your day job, you are in the 37% tax bracket. The most you can hope to get back from your loss is 37% of $10,000, which is $3700. So sure, you got a tax refund of $3700, but you lost $6300 (ie $10,000-$3700).
A loss is a loss is a loss, and negative gearing is a LOSS. Anyone that tells you that you need to get yourself some negative gearing is not speaking with your best interests at heart. You will have to continue supporting this property financially for a few years until the rent in this property can be raised to a point where it covers its own costs.
Jacqui Middleton | Middleton Buyers Advocates
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Think of it this way, would you go to work to lose money?
Firstly you intend to live in the property, it seems well located and a reasonable price for the area. So if it is your intention to live in the property and the price is right and its in a block of only 8 and spacious.
Can it be improved at all? Or is it renovated?
Certainly if I was starting again I would rent and buy an investment property. I accept some of the comments about negative gearing , however you or your mother are using the first home buyers grant therefore negative gearing will not count anyway at least for the first 12 months.
Your other option is to buy a property where you could add value, however I would need to know what has been done to the property that you are buying.
Nigel Kibel | Property Know How
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Very valid point Nigel
Jacqui Middleton | Middleton Buyers Advocates
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Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
How would one have a positive geared property within 10km from the Sydney CBD for example? Don't inner city suburbs offer good growth prospects? Most properties i have looked at on realestate.com for example would be ( not 100% sure) negatively geared. I'm new here, so its a learning process for me.
Other than the upfront costs – here are a list of the ongoing costs which we factor in when we do the cashflow analysis:
1. Expenses
2. Council Rates
3. Strata Fees (if its strata titled, i.e. a unit)
4. Water Rates (not payable in NSW if its a house)
5. Landlord Insurance
6. Management Fees
7. Building Insurance (if its a house)
Yes there are tax benefits for negative gearing (losing money) however its still a loss. Look at it this way – you are negatively geared by $10k per year on average for the next 10 years. That means you have have paid $100k from your pocket. You need to ensure that after 10 years the CG seriously out performs the $100k loss.
Also I would not buy a unit – I would consider buying a house. Do a bit more research, start picking brains and come up with 2 different strategies. Also don't forget to think long term as well.
Regards
Shahin
TheFinanceShop | Elite Property Finance
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You will not find anything 10km from Sydney which is Positively Geared unless its a development site and you develop the property. This option of course requires serious capital.
What's your IP strategy? This should in many ways dictate what to buy and thus where to buy.
Regards
Shahin
TheFinanceShop | Elite Property Finance
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That's what i mean, the tone here to me seems that you shouldn't negative gear as you're losing money etc but how else would you access those properties with higher potential rates of CG? I'm no where near having an IP strategy, I'm only 17 lol. I just want to get a head start in my investment knowledge for later on.
Would having a range of positively geared properties further to the west of Sydney along with a few negatively geared properties near the CBD be a good strategy? You could say neutrally geared so you could get a balance of positive cash flow whilst still being able to have "potentially" more CG.
Let's clarify – no one is saying don't buy negatively geared property. The message is don't buy negatively geared property that is not going to be superseded by what you will get back in CG during 'x' period of time.
So let's use one simple strategy/example – you can pick up a dump in Rozelle and pay below market, renovate it and sell it for a profit. It will cost you $20k during the 2 years to hold it but after all the costs of buying and selling you make a profit of $100k. This is where negative gearing is just another 'cost'.
However if your idea is to just buy and have it negatively geared for the next 10 years with a cost of $100k but the CG will only be $110k then the question is whether making $10k profit in 10 years was a wise purchase.
Regards
Shahin
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Thank you for clarifying.
With you example, wouldn't it be better to just continue to hold it due to the high exit costs and just move on to the next property with the equity made?
Well when buying a property which is negatively geared, i would like to renovate it so i can also manufacture some additional equity into it as well.
Thank you for your assistance, I appreciate it.
Cheers,
Daniel
Absolutely. That's the idea – to make equity and re-invest that equity. There are different ways to create CG which in turn defines your strategy. Renovation is one but you need to ensure you do not overpay as there may be other investors with the same idea which often results in people overpaying for the property.
Regards
Shahin
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Sorry but where did you get the $10k per year figure?
if it was tenanted at $270 a week, thats 52 x 270 = $14,040 a year
repayments = $18k a year
So isn't that negatively geared by approximately $4k for the year?
I really do think it will grow at least $4k a year, considering that the same distance from the cbd on the east and north side of melbourne is fetching $350k for the very same apartment features.
We couldn't afford to get a house within 10km of the city, and thats where we wanted to be.
$10k a year was an example. Also with the above calculation – you are not factoring all outgoings? Also have you factored in all your upfront costs such as the deposit, LMI (if applicable) etc?
Having said that I think you have got the idea of comparing/offsetting the negatively geared loss against the CG.
Regards
Shahin
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IT has been painted and new stove and aircon/heater installed. It also has a separate toilet to the bathroom.
Yes it can be improved, the spacious lounge could be turned into a 3rd bedroom with the addition of a wall making a hall way entrance with kitchen on left and bedroom on right. Kitchen could become living room to eat meals in as its quite a spacious kitchen.
How much is it to install a simple 5 metre long wall?
Then we'd rent it out as a 3 bedroom flat, at $130 per person (very cheap rent considering its within 10km of cbd I think), thats $390 a week and $1560 a month. Mortgage repayments are $1500 a month so that means it would be positive geared by $60 a month right?
How much equity would a 3rd bedroom add?
is LMI an annual thing or just a once off payment?
the annual body corporate is like $700 and rates are like $300 I think.
For some reason I just can't see this property growing another 2 times in value over the next decade but who knows what could happen.
I heard Melbourne's population is set to outgrow Sydney's and reach 6 million by 2037. I don't know about you, but I like the idea of living within 10km of the cbd in the world's most livable city where population is growing exponentially.
LMI is a once off upfront payment which protects the lender not you. It is also tax deductible for the first 5 years.
Regards
Shahin
TheFinanceShop | Elite Property Finance
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