Can I start with 20%?

Hi everyone,

I’ve always been really interested in property, but after reading Steve’s books and spending a few weeks researching it is pushing me towards having a go. It seems like there are some really helpful and experienced investors on this forum, and I was wondering if anyone would be able to draw on experience to give me some pointers.

A bit of background; I currently rent a unit with my partner in Brisbane. Our household income is around $160k and we are debt free, which means that I’ve been able to save up $40k over the past year and am aiming to continue to save this much again each year going forward. We are in our mid-twenties, and a family isn’t on the agenda for at least five years or so which should mean that I can continue to save this amount for a while.

The general consensus from my research seems to advise in favour of purchasing an IP or two before a PPOR, and my thoughts are that I would not want to purchase a PPOR unless the ongoing costs of it are similar to renting, in order to ensure that I can continue to save at the same level. Given the current market, I’d have to save up a large chunk for my deposit (probably half or even more of the asking price) in order for this to happen.

My preferred investment strategy is to focus on cash-flow positive properties rather than risk tying cash up in something that is negatively geared. My main question is, what is an acceptable cash return using this method?

Looking at units that are yielding at around 6% gross (which in themselves are not always easy to find), once mortgage, property management and an estimate of rates/body corporate/repairs costs are taken out my net cash yield is around 0%-1%. I appreciate that there could potentially be capital growth to factor in here as well, but is this a reasonable level of return compared to what I’d get in the bank or in shares? I’d prefer not to gamble too heavily on the capital growth side of the equation, as predicting the future prices aren’t easy, combined with the selling and taxation costs which would erode some of the capital profit.

My workings are also based on an interest-only mortgage (I understand that this is the preferred option for most investors but equally I’d welcome advice on this point). A P&I mortgage would push me into negative gearing in the vast majority of cases.

Given my low start up capital, the calculations also work on the basis of a 20% deposit. I’m not sure if others have been in similar situations, and tried to decide whether to invest now, or wait another year or even longer in order to increase my deposit size to 40-50%. Obviously the main expense pushing my yield down from 6% to 0%-1% would be the mortgage costs, so part of me thinks that I should sit and wait, but there is also another part of me that is itching to get started.

I know that most of those questions have been covered in other posts, but if anyone is able to use their experience to advice on this circumstance this newbie would be very appreciative!

Cheers
Mitch