Purchasing first IP

Hi to all,

I have a few questions regarding the purchase of my first investment property.

If I were to purchase a $250,000 property with a 20% deposit ($50,000) and then finance the remaining 80% with an IO loan, over a 5 year term calculated on 6.78% interest rate, I would be looking at $67,800 in interest.

The repayments before going into potential tax deductions and rental income seem achievable at only $1,130 per month. My question is, this investment method, if I am not mistaken, primarily looks to extract the capital growth in the property over the 5 year term.

Where I am being led astray is to how I can accurately calculate a ballpark figure as to net returns, taking the position that the property achieves a 30% growth (not too sure if this is a realistic or achievable goal over a 5 year period.)

I am welcoming all opinions.

Thanks in advance.

 

Educate yourself

You make wealth with property through equity and equity is gained in 2 ways

Capital - price increases over time there is a question mark about how stable this will be over the next few years and some areas may Plato. Try to look at areas with significant capital investment I am not to keen in mining areas. Believe it or not western Sydney is looking good too take off again soon.

Income - a high yielding property with a good offset account or a linked property managed fund. The surplus income is seen as equity and their forth generated wealth.

Maybe one of each might be good for you it's hard to know what to do as I don't know your income level etc and your personal commitments.

But please property investment can be a straining thing if you don't have your strategy set. I have quite a few properties and I remember my first property on my 18th birthday there was so many things I didn't think of and learnt the hard way for a few years.

Try to diversify as much as you can and its amazing what surprises you can get but think about your time frame to.

You could split the 50k and buy 2 properties under 200k (still possible in all states) that have great rents and then in 12 months buy one in a city? I know some towns are paying yields of 300pw for this price mark.

When I read your interest rate I sunk in my chair shop around I only pay 5.49% and you can borrow up to 95%.

Again please consider tax and if that changes how will this effect you? What do you want too achieve? And in what time frame? How much risk do I want to take? There is lots of great websites but be careful of your get rich quick clubs

Cheers

Jeffery

 

Hi Jeffrey,

Thanks for your detailed response.

I forgot to factor sundry expenses into my calculations, e.g. legal costs, stamp duty, etc.

To give you some further background, I'm currently 21, single and earning a $50,000 gross annual income. This is by no means fantastic money, but it's enough to get the ball rolling if I strategise correctly as you have mentioned.

My goal would be to try and achieve a positive growth over a 5 year period, and subsequently reinvest the money either in growing a property portfolio, or ideally a mixed bag of investments, which would be most welcomed.

I know it's all easy, said and done on paper, but I hope I can most definitely make this goal achievable.

I am interested in your suggestion to split a $50,000 deposit to fund the purchase of two properties as opposed to one. I am looking at this all at face value at the moment, but would be most interested in further discussing options, or recommendations with fellow members.

Thanks again!

 

mysticblau,

If you have a search around the net you should be able to find a decent calculator that will give you a list of sundry items to add into your cals.

This can sometimes be a deal breaker, as these hidden costs add up quickly. Some realestate agents are legends at forgetting 'sundries'. Although technically not sundries if you think about it!

Thanks for the great question and if I locate a good spreadsheet, I will post here for you

 

Mysticblau,
Work out your costs to purchase and then your borrowing capacity.

$50k income, presume your currently rent $300 a week and are single with no credit cards and proposed rental income $250 a week. You can borrow from around $190k to about $260k.
$250k purchase price for an investment property in NSW will incur about $7.5k of costs, stamp duty and registration fees. Add another $1k for a conveyancer about.
LVR is already 83%, LMI around $1.4k added to the loan and you borrow around $210k.
Do the numbers to make sure you can support the IP, depending on age of property and costs, you could be out of pocket $50 a week. Can you support this?

I like the concept of buying an IP when you are young, it does force you to change your mindset and be more conscious of money, the tax man and a tenant is helping fund your own wealth and if you choose the property wisely, you benefit from the capital gains.

As to trying to purchase 2 lower priced IP's, I would be careful to make sure you could qualify to borrow the necessary loan amounts. Lower priced properties tend to be more regional based with possibly lower potential for capital growth. It depends on your own goals and time frame as to buying a better property in terms of capital growth potential or go down the rent yield path.
Good luck with your investing future.
Greg