crc_error buying a IP!!

To the amazement of many here, I have decided to buy a IP! My view is to possibly have it as a PPOR in future years.

I have decided to look at a brick house, 3 bedroom, with as much land content as possible.. its to be in average condition (improvable). I'm looking at the outer eastern suburbs which still haven't seen the large 25% growth of the inner melbourne city.. I'm looking at suburbs like Ferntree Gully, Rowville, Knoxfield, bayswater or croydon. This whole area should go up more once the eastern link opens.

I am looking at spending about $350-380k so I have worked out it will cost me about $800 a month to keep after negative gearing.

If anyone has any feedback or tips, please let me know.. I sold my last IP in 2005 so it will be fun getting back into the game..

 

Good decision

 

That's an after tax loss of $10k per year.
Are you putting down 20% deposit?
Cheers

 

I am looking at 10% at this stage. The benefit of property is its high LVR, so no point putting down more than I need to.. better use the excess funds in the stock market.

 

One of the huge benefits. It's not that you are buying bricks and mortar and dirt so much, but that you are getting access to rapidly deflating paper and securing it with an inflation resistant vehicle, so in effect you are joining the bad (good) side in the great inflation tax (theft).

Well done on the purchase! PPOR's add more to well being than just dollars, I love not having to open my house for inspection for any else than my Mum.

 

CRC,
It sounds ok, the less deposit the better although you will be hit with LMI
so be prepared...
$10K loss on a $400K property is something like 2.5%
but with inflation running at 3% the loan is depreciating faster than what it's costing you and any capital gain will be a bonus
Cheers

 

Interesting stuff about inflation, USD value index ect is here:
MetaStockTools.com

 

What's your reason for buying now? And why the Eastern surburbs?

 

Main reason is if I don't get in soon, I will not be able to afford to get in at all in the next few years.. give it another 3-4 years and houses will be another $100k At present, we can still buy a 3 bedroom house here for about $350k The inner east has risen 20%+ and out here about 10% so i would say the ripple effect should push up prices here in the short term.

I live in the eastern suburbs, so I know the area reasonably well. Plus once the eastern link opens, that will be a positive for the area.. even though mostly its been priced in.

Plus I think its good to have 1 IP in the portifilo for its high gearing, tax deduction and diversification away from the share market.

 

You're assuming house prices will continue to go up. Prices are dependent on many things other than a freeway, e.g. taxes on development, immigration, wages, etc. Because all these factors change all the time, the inherent value of real estate will be volatile.

Buying an IP can give good diversification but given how expensive houses are you'll need to be very rich otherwise your total wealth will be highly biased towards your IP.

Diversification is done because of ignorance and complexity. Yet you seem certain house prices will rise. If you have that foresight, why diversify and dilute returns on your investment? Why not use that foresight to pick the best investment?

Have you read these?
The Greatest Bubble of All Part 1
The Greatest Bubble of All Part 2
The Worst Investment Ever
Your Home Isn't the Nest Egg That You May Think It Is

 

Sign me up; my crystal balls on the blink though, what "IS" the best Investment

 

CRC, Good decision. I can't say that I know the Melboune market, but your reasoning sounds good - nothing like a bit of new infrastructure to raise prices!
Best of luck, Dave

 

Hi CRC,

I think it's always a good idea to have an IP. I only have one IP myself but I wish I had more. If you afford it, buy it!
Sure it has gone up but they will go up again. It's your hedging, just in case.
I like to buy another one that will pay a good rent to loan ratio but not sure where.
After what happened with the market this month, I prefer not to go through the stressful period again when I am 50 or 60.
Having to say that most of my money is in share market. Maybe in my blood.
Even if the economic condition changes people still have to live somewhere. If I were to guess the population of Australia in 10, 20 30 years time, they will be more than now.

 

Economist Dr Chris Thornberg talks about real estate economics here:

Might be of interest to some. He's talking about California homes but economic theories are universal like laws of physics are.

 

Exactly. Plus I want something which I can turn into a PPOR in the future, so even if the market slows, I'm still working towards my own place.

I don't expect the stock market to continue to run hard, as the last 4 years of 20% PA is certainly unsustainable.. so putting all my eggs into the stock market is not a good thing..

 

Plus doing some research, I have found the rental market is very tight for 3 bedroom houses, when something comes up, its snapped up quickly.. so it should rent well..

 

I never looked at it that way! Plus 'inflation' for property is higher than the normal inflation.. property goes up 8% PA so essentially 2.5% is against 8% inflation!

 

If by stock market you are referring to the Australian stock market, then recently there certainly has been strong growth. Nevertheless, nowdays the price to earnings ratio is about 12. The graph below shows the All Ords since the '80s.



Below is a chart of both Australian house prices and US house prices.



Be aware that the home price chart goes back much longer into 1880. Both the Aussie stock market and Aussie property have seen huge growth since the '80s and both have experience unprecedented growth in the past half-decade.

Is it sustainable? Depends on many things like how well the Asian economies perform, whether immigration will continue to be high under a Labor Government, etc.

 

Nice pics but what conclusions?

Would you think the 1980's was as strong as the last few years based on the ASX chart? There is no comparison between the two in terms of % movement as the 80's wins hands down, you really need a log scale to more accurately reflect these things. You would think 'wow what a bubble' looking at the second chart but if you look at a log scale of median prices then it's a pretty smooth climb in Aus with housing.

I have stock exchange data going back 100 years or so, forget exactly but that kind of vintage.

Where were these economists when they should have been telling me to buy in the 1990's?

 

I can announce that I have bought a property!

3 bedroom brick house 2 bathroom 2 living rooms 8 year old house in 8 year old estate.. nice houses around..

bought in Ferntree Gully Melbourne. I believe I got the property about $10-15k under value.

I recon this area will go well once the eastern link finally opens up.. either way property doubles every 10 years over the long term so I know my investment is a safe one!

I also bought this property with the view to make it my PPOR in a few year time when I decide to move out of home lol. So it suites as its close to work, friends and family as well.

But some questions regarding finance.. should I get interest only.. or P&I.. repayments are only about $150 a month more to have P&I so I'm thinking of doing that.

Should I focus on paying down the loan quickly in the next couple years while I rent it out? or should I put extra funds into a managed fund? Or should I put it into a redraw facility and debt recycle into shares so when the property is a PPOR, that portion is still deductable.

Or should I do a bit of both, pay down debt, and build my managed funds?

Currently I'm getting a 292k loan, 250 fixed, and 42k varable. I'm thinking of having the fixed P&I and the varable interest only.

I would like to reduce that debt as its a large debt to manage on my own when I choose to make the property a PPOR.

What are peoples ideas?