Hi there,
Hoping some of you could shed some light on some issues I’m having with my investment plan.
I’m new to this, but I have recently come into some inheritance and would like to put it to good use and invest in real estate. I’m based in Sydney so that’s where I’ll be looking.Here’s an example of what I’m looking at doing:
2 bdr house in Campbelltown
Price: 430k
Deposit: 200k
Interest: $958/month (based on 5.0% p.a)
Rent: $1600/month
Expenses: $800/month (based on 50% rule of thumb)
Cash flow: $-158/monthWith every calculation of costing I do, the property ends up being negatively geared, which isn’t a problem in the short term.. But I don’t understand how I would go onto purchase another house. I would only be paying off the interest of the mortgage not the principal and therefore my equity in the property will remain at 200k.
How do you go on to purchase more properties when you don’t have a positive cash flow through your initial investment? To be honest a positive cash flow seems unreachable in Sydney if you have a mortgage!
Would I have to sell the Campbelltown house in say 5 years and use the profit to purchase 2 houses? I’m new to this so ‘flipping’ seems a bit beyond me for my first investment.
Can someone explain investment continuation to me?
Much appreciated!
Hi, First I would personally never buy a 2 bedroom house unless the land had potential for subdivision. You are restricting your tenant base too much. Try to stretch for a 3 bedroom.
As Sydney is coming to the end of a boom rental yields are low. This will change. Rents (like prices) go in waves. Prices go up, then rents go up.
So your rental yield is not stagnant.
Your yield will increase as the house prise goes up (just don’t expect much growth in the next 6 years.Now is not the idea time to buy in Sydney because of that. You may even experience some negative growth (be very careful).Work out your expenses on more than a guess.
Rates are low at the moment but will rise so 5% is the minimum I would work on. You need to add land rates, water rates, insurance, management fees.No you don’t sell in 5 years (in Sydney you would go backwards if you did that). Selling costs money (stamp duty, CGT etc) so it’s always best to hold on to your property. Some people are of the NEVER sell philosophy.
Assuming you bought a property that has risen in value you withdraw the extra equity for your deposit on your next purchase. Your cashflow should be better due to rent increases so you can afford another.
A good way to increase your yield is to buy something that needs some work. Do a reno to increase equity and yield. Don’t get caught overpaying for something that needs work though. I’ve seen people pay the same amount for a dump as a place that doesn’t need a reno because they watch The Block and think they can make money in a week.Go to your library and borrow a few books and magazines. There’s lots of stuff out there for free.
Keep asking questions. Happy investment journey. Be careful it’s addictive. LOL
hi!
thanks for all the advice.
Ok so 3 bedrooms have greater rental value, got it.So you wait till the overall value of the property has risen and then you use that to borrow another down payment. So does that mean if the property goes up say 10,000 (I’m still not sure how that is proven) I have 10,000 to borrow from the bank?
Sorry if this seems basic, I’m just trying to get my head around it all.Also, is it wise to only pay off the interest of the mortgage or should I be aiming to pay off the principal too? How long do banks let you only pay off the Interest on the loan?
Yeah, I am worried about the current Sydney market.. but I also don’t want to continue waiting, as I don’t think I’ll ever be 100% sure.
I definitely have more research to do!
Thanks again Catalyst, you seem like you know your stuff!
Go back and look at a house your parents bought 30 years ago. If they paid $50k for it then it may be worth about $1mil now. Imagine if they had an IO loan of $50k for the full 30 years. One year’s rent would almost be able to pay it off.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi JSmith,
I see you are a new poster – so a big welcome to you !! And good on you for taking a look at Real Estate to make good use of your windfall. There is a lot to learn, but, as Terryw pointed out, some things you may have heard decades ago :-
Go back and look at a house your parents bought 30 years ago. If they paid $50k for it then it may be worth about $1mil now.
Though I am not sure of any house going up 20 times in value in 30 years, the important point was “Even if no extra principal amount was paid off, the amount actually owing is as tiny as the original amount borrowed”. Thus, is there a need to pay Principal and Interest? What do you think now? Do you agree with Terry?
One thread I would like you to check out actually ties together a number of “new investor” questions, ideas, finance thoughts, etc. Do check it out, along with each link. The Offset account is a real friend when thinking of “paying off” any mortgage.
Here is that link :-
https://www.propertyinvesting.com/forums/general-property/4349450Benny
Hey Benny!
Thanks so much for directing me to those posts! I just read through them all!I definitely understand the benefit of IO now, but I think I’ll need to speak with someone in finance in order to fully understand what an offset account is! I think I’m going with a buy and hold strategy to start with and then as my confidence grows, maybe try another strategy.
Some great and inspiring stories in those posts too! Minimogul is a star.I do have a question though – although I said in my first post that I’m looking at Sydney.. I’ve been doing research and the Brisbane market is looking good to get into. Im just wondering that looking interstate is wise as a first timer in terms of building a team of people (like minimogul said) and hitting the pavement in order to find good deals. I guess this is where an agents buyer comes in? Or an investment advisor?
Thanks! I really appreciate the help :)
Hi JS
Think of an offset account as a separate savings account linked to your mortgage.
Interest is charged on your initial loan each month but in turn you are given a credit for the funds in the offset savings account. You end paying interest on the net balance.
Assume you owe $300K but have $50K in your offset you will pay interest only on 250K.
In most cases interest is charged and credited on a daily basis so the longer the funds sit in your savings account each month the greater the benefit.
As far as Brisbane is concerned i have to say the demand for property is incredible and the moment and we are struggling to keep up with demand.
Cheers
Yours in Finance
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This reply was modified 9 years, 7 months ago by
Richard Taylor.
Richard Taylor | Australia's leading private lender
Thanks so much for that Richard, really helped me understand what an offset account is.. And why it’s important! Thanks for adding to my learning curve!
I’m going to pipe up and say how nice it is that you are thanking people for helping you learn. Refreshing! Good on you :)
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
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This reply was modified 9 years, 7 months ago by
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