I own a property...but now what?

Hi guys and gals, I'm very much a newbie and firstly wanted to say hi. You guys seem like a great community with some great ideas. I know very little about investing, but I'm a great saver and am really trying to learn more about investing. My wife and I (both 30) really want to make ourselves financially stable. I would appreciate your advice on our current position.

I own 1 property 5 years ago that my wife and I currently live in (bought $413K, value $600k, loan value $180k). Could rent out for $550 p/wk.

In November we're settling on a new property that we'll move to (bought $887k, loan value $600k ish if we don't sell our first property).

I earn $115k p/a and my wife earns $120k p/a (i know, don't start!). We hope to start a family this year so my wife's salary will obviously slow down after that.

We don't own shares or anything else.

I'm not sure where to go from here...

- Sell our first property and buy shares i.e. do I need to diversify?
- Keep both properties until we can't afford the repayments anymore

What are your thoughts?

 

Hi JuniorInvestor

I am out of the property market. I think it must be near the top now.

My mission statement is to be financially secure. To acheive this, I have a balanced portfolio of both share funds and fixed interest. The FI component stops me selling when the market recedes.

By being diverse, I stay on track according to my plan.





Johny.

 

Thanks Johny

Sorry for sounding silly but what does 'FI component' mean?

 

FI or fixed interest refers to cash, term deposits, government/company bonds and other forms of credit.

While the share market gyrates, FI is more stable. The down side is lower return.




Johny.

 

Are you interested in shares, managed funds or exchange traded funds? Do you want the simplicity of index funds or actively managed funds? How much can you save in a month?




Johny.

 

Hmm...

I was thinking shares or managed funds.
I would prefer the simplicity of index funds.
I can save around $2500 per month.

 

Buying shares and making a worthwhile profit takes a lot of experience. With the market where it is, I think beginners could stumble.

An index fund does not reduce market risk, but does remove manager risk. Index funds are managed by a computer so they are low cost. Unfortunately the NAV (net asset value) is worked out at night. So your funds' price is a day out, or 4 days if priced on Monday.

An ETF (exchange traded fund) is usually an index fund (but not alway). It is traded on the stock exchange like a share. You always know its price during trading hours. ETFs have become remarkably popular, growing at a huge rate.

With 2.5K a month you could build up a sizable portfolio over time. If you invest small($300) a month it is cheaper to buy a index/managed fund, but with large amounts, ETF (trading fees) are affordable.

Buy some books on Asset Allocation. A potfolio with 8(or more) Asset classes
can be held by 8 ETFs. They can be held over the long term. Some will be up while others are down. Rebalancing helps.

I know this sounds incredibly boring and not the life of a day trader, but it will get you there in the end. That is, to become financially stable.






Johny.

 

I'm always a big fan of minimising debt unless you are going into business for yourself.

Also if you are a passive sort of investor, then I am also a fan of diversifying into other asset class and even other geographies.

Here are some of my thoughts:

http://www.invested.com.au/2/investing-chris-c-style-37625/

 

Junior Investor,
An interesting position and you are trying to build the strategy after the action. The 'right' decision really comes down to what your goals are, time frame and risk view.

There are 2 ways to generate income and wealth, from your own labour or from capital. While you and your wife appear to earn good money and in a great position to save, how much can you realistically save over the next 30 years taking into account children, one income, perhaps private schools etc? Will it be enough?

The way most wealthy people have gone about creating wealth is through property. Obviously there are the number of business owners who have but for the rest of us, it is about using other peoples money to invest in capital growth assets.

I use real property as the vehicle because the lenders will lend you money to buy it. That said, what do you do now you have purchased another property?
I see two realistic choices, sell your existing PPOR and use the equity to reduce the loan on your new PPOR and then refinance with a separate loan facility and purchase another IP. The second choice is use the new property as an IP and go and rent elsewhere.

You need to do the numbers, then balance the emotional requirement of owning and living in your own home to the financial benefits. The greater value and the earlier you have capital growth assets, the greater the compounding effects. You need to have sufficient safety nets in place, risk insurance strategies etc but the benefits after tax are high.

I don't know property will continue to climb but I certainly know based on historical and current behaviour, it is a far less volatile asset class then the share market and certainly outperforms cash.

As a choice without knowing your goals, just looking at the numbers (premised that both properties perform well over time) I would consider the second option. I would go further, refinance the first property, extract equity and buy a third IP. This depends on whether you can service the loans etc but you need to structure your finances so you use techniques like debt recycling, effective use of offsets and LOC's to finance any rental shortfall etc. You put in income tax variations, you get quantity surveyor depreciation reports etc. You do the right things and build the right team around you to assist you reach your goals.

Let us know what you decide.
Good luck
Greg

 

Wow, what a challenging question - Each investor has a particular opinion and their advice will be what is right for them. So without being to boring and nonspecific this is what I think you need to do to prioritise your investments.
Sleep at night - it has to allow you and your wife to sleep at night. Some would say that must mean index funds - well it does for them.
Value - realistically at 30, time is on your side so value buying is what should guide you. Whats on sale? Can we afford it easily? And if you buy an asset and make a mistake, time is in your side so long as the cash flow makes sense.
Cash flow & capital - which is the priority? Well both. In that your overall portfolio needs to be balanced for cash flow whilst having the logical educated chance of capital growth
Good luck - is knowledge meeting opportunity. And there is an opportunity every single day. So improve your knowledge as you are here. Great move reading and seeking knowledge. Chance favours the prepared mind and your preparation is good.


Now, some more specific items regarding what you asked.
Your PPOR is not subject to CGT. So it is a great opportunity to make extra $. Having said that, I tend to buy & hold - boring but ultimately successful and life balanced - for me.
If you do sell, you'll have disposal fees - RE, solicitor.
Finance struture - your current mortgage is against you current PPOR. When you move, in terms of taxation, that mortgage becomes tax deductable. You cant just transfer the new debt to the old house. So you may end up in a position of large non deductable debt and small deductable debt
If you sold and repurchased other investments, that debt is tax deductable. There are answers to this problem but its long winded and any decent finance broker can outline solutions.
Do what you choose to do right - a lot of people go on about diversification. Its not something I advocate, particularly at the begining of your journey. Diversification is di-worse-ification and produces, well, average returns and probably less. It exposes you to more risk from my perspective. Please note, I'll be shot down for saying this but alternatives need to be tabled.
On that note, specialise. I have a particular formula and goal that works for Mr/s Rambada. It probably wont suit you or anyone else. Create your own landscape and be aware, landscapes change, albeit slowly.
Having just stated this, I do diversify - now. Overtime I have specialised and this is my bread & butter. With extra capital, when I see a "value" buy in any asset class, well I go shopping. Its about value investing in my head space.

Ok - damn I'm long winded but I want to paint the landscape for you.

What I have invested in - mainly residential IPs, specialising in adding value or development of duplexes.
RE - Approx 72%
Share fund, mainly asian based - 8.5%
Property Fund - 5.3%
Gold and Silver - 1.3%
Cash - 12.9%

So what do I do now that I consider I have a strong property portfolio? I am value investing.
And what am I buying now - Gold and Silver.

Now the last point. At last they all say.

Someone on some forum said that if your parents or grandparents were given a box post WW2 containing either $100k US$ or gold, which would you rather have today?
Now if your grandparents/parents had the option back in post WW2, the same box containing either $100k RE or Shares or gold, which one?
Now that's the field you need to specialise in, but keep a corner of one eye on the others for a steal.

Thanks for your patience. I'll hide while my diversification comment gets shot to bits.

 

Rambada,
It is slightly off topic but I agree with your diversification view. To create wealth, you are far better off concentrating your efforts and attention at what you do well and on one thing.

Diversification is a risk minimisation strategy, you preserve wealth by spreading it across asset classes and indeed within asset classes but it is not designed to built wealth. Even the saying about all your eggs in one basket implies you will lose some eggs so you spread to preserve some of them.

Concentration is a riskier strategy but it is the way to build wealth and you put in place other strategies to minimise risk such as income protection insurance, build in safety nets for cash flow etc. That is why it is critical you understand the risks, the way the markets move, what are the drivers, who are the users/renters/customers etc. For some it is about running their own business, for others it is building a property portfolio and for others the share market is their game.

Each can work but I use property because lenders continue to lend on it and in my view, creating wealth is a finance strategy, using other peoples money to purchase capital growth income producing assets.
Greg

 

Hey rambada

I definitely agree with you about cashflow and growth. A nice balance between both means a healthy business.

I would think your portfolio is Not diverse. You have 77.3% in property. This is your area of expertise. I hope it is going well.

If I could put my capital in one area and get a incredible result I would (like a miner that goes up 300%). But I can't. I can't even pick where the market will be next week. Diversify with multiple egg baskets or, just one basket and watch the eggs? For the "lot of people (who) go on about diversification" perhaps they need to limit their risk. And perhaps they may last the course under full sail.




Johny.

 

There is a strong argument that people who specialise in one area can do better than someone whose portfolio is so diverse that it simply mimics the market.

Having said that this is no answer to our initial poster. My gut feel in his place would be sell the existing PPOR, have a very small mortgage on the new PPOR and then save as much as possible in an offset account until the family starts to reduce the interest on the PPOR mortgage.

 

Take this as constructive feed back: You are not "good" at property or investing in general because you haven't thought or acted on it and therefore have no actual experience in it.

As Johnny points out you are heavily weighted in property. Simply because you have purchased a PPOR (an event that occurred as a once off 5 years ago) does not mean you are more specialised in property. So you have the opportunity to invest in anything you like.

Diversification seems to be the ideal because you are not yet an active investor. Its the most risk-free solution until you are confident enough to decide on an asset class or sub-class that is right for more intensive investing, if indeed you decide this at all. With that in mind the obvious step seems to be shares, funds and commodities.

Before you invest in anything though, you should familiarise yourself with the appropriate financial structure to minimise tax and thereby increase cash flow. Knowing this sooner would have seen you avoid the pitfall of paying of your current PPOR, rather than offsetting for example.

You've taken a good first step to educating yourself just by coming here, good luck with whatever you choose!

 

just a beginner

hey guys

Thankyou so much for these posts. These forums are fantastic and I try and read a bit everyday.

I am a 21 yr old female, single living with parents. Am earning approx 55k and am a good saver. I have recently purchased an investment property worth 290K and with tenants in there now, my repayments are approx 150 a week.
I am able to save approx 700 a fortnight.

Should I just wait until my property has more equity, continue saving and borrow again then purchase another property?

Or should I look at investing in shares? Where can I find info about this? I dont really know if I can trust financial planners, is there a way I can do this on my own?

I know I am only young and dont earn much but I would like to establish myself early and retire early. Financial Freedom so I can sit in the sun drinking cocktails in the bahamas..

Any advice/opinions/criticisms are welcome.
Thanks

 

My advice is start with the end in mind.

For a one bedder self contained apartment on the beach in the bahamas is about $150/wk maybe less on long stay. Beers are about $4 or $5 each so I'd say cocktails at around $8-10. Less if you're making your own drinks.

Based of your salary your living expenses are about $3-400 a fortnight. So you're looking at around $550 a week (conservatively) to reach your goal of sitting in the sun drinking cocktails in the Bahamas (assuming you dont want 5 stars etc).

It looks like your current IP seems is generating about $550 per week right now (approx [$1400 fortnightly repayments on $290K loan minus repay of $300] / 2).

So pay off your IP and you can meet your retirement goal.

Alternatively if its not specifically the Bahamas you're looking for, you could probably do this a lot cheaper anywhere in Sth America or tropical sth east Asia.

 

Just Me,
You have made a great start and have the longer term view in mind.
I would work with what you have, continue living cheaply (with parents until they kick you out!) use an offset account with your IP loan and push as much money as you want into that. This will achieve 2 things, reduce your interest cost on the loan and boost your savings needed for the next IP.

You may need to wait 12 months to 2 years before you have sufficient equity to revalue and refinance then extract that equity and the offset to do it again. The first two or three IP's are the hardest to get and it may take 5 years or longer but once you get to 3 or more, compound growth starts to kick in. It can be a frustrating time to wait but take the longer view.

For the next IP, consider what type of property would benefit you most, perhaps an older property with a quick rejuvenation for both immediate capital growth and higher rent yield.

I personally do not understand the drivers of the share market, all I know it is a good way to lose money quickly. I would build the property portfolio first then venture into the share market if there is interest in it, if not, don't play.
Good luck
Greg

 

Thank you Greg and Vagon.
Maybe you guys can join me on the bahamas he he
Sounds like a good plan.
Go the property market.

 

Diversification and Share vs Property.

Its always facinating reading the diversity of views on here.

Diversification does reduce risk and anyone who doesn't believe in it is a fool who as the saying goes will be easily parted from their money.

Having said that all investing involve some element of risk. Smart investors take the minimum amount of risk required to achieve their ultimate goals.

For a young investor starting out they have few assets and therefore need to compromise on the amount of diversification.

Regarding residential investment properties, in Australia a number of factors have combined to make them excellent vehicles for wealth creation over the last 50 years. Rising population, low interest rates, periods of high inflation, government tax policy and cultural attachment have all contributed to make geared residential property one of the most effective wealth creation options historically.

Economic fundalmentals however give us food for thought. Marginal tax rates are not as high as they used to be, Property values are at all time highs relative to average wages and cost of living, interest rates are rising. The rest of the world has already suffered a massive property correction which we have survived due to our high employment rates and lack of supply.

The risks in buying negatively geared residential property are currently higher than they have been for decades. I'm not a doomsayer who expects a large correction but buyers of IPs need to be realistic. They may well not get a capital gain after CGT is taken into account sufficient to cover the income loss they are subsidising along the way over the next decade.

I suspect a regular saving plan into a diversified portfolio of shares, while visibly more volatile will be less risky and provide a better long term return than borrowing hundreds of thousands to buy highly priced residential real estate.

For those with long time frames, buy a home, buy 1 Investment property if you must but its not a time for over extending and overweighting property.

One lesson from recent history is too much fixation with high debt strategies is nearly always a bad idea.

Always ask what if my health fails, or my bank calls in my loan due to unexpected new lending criteria (thats right they can do it) or for some reason I can't get a tennant, or a get a rogue one who won't leave or pay rent for 6 months), or the goverment builds a quarry or tunnel or flight path that devalues my property. These things all happen.

So, diverisify, take calculated risks where you understand what they are and can survive them. Don't invest in something unless you are sure you do understand everything that could go wrong and mitigate, insure or accept the risks.

Always ask, "would I be able to recover if this investment were to fail" and note no one really wealthy got there by doing what everyone else is doing.

The only people who get rich quick are gamblers and entrepreneurs. Everyone else needs to play the get rich slow game which means managing risks. Diversification is a critical part of this process.

Regards

Jason Bragger
Brisbane Financial Planners | Financial Advice | Financial Advisor

 

Some fantastic responses here already from some very insightful and obviously experienced investors.

My two cents- pay off as much of your PPOR debt as you can over the next few years whilst you're on two incomes and then revisit. Non tax deductible debt is usually the largest cashflow killer of most Australian families and I think it's only sensible to reduce it when you're in a position to do so. Try living off one income only now (which shouldn't be difficult given the information supplied) and hitting the mortgage with the other. Once you have a sizable chunk of equity that you're happy to use as investment funds, I'd be going shopping then.