Join our investing community

Update on my first IP & When Should I Consider my Next IP?

Discussion in 'Real Estate' started by Sk3tChY, 7th Dec, 2008.

  1. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Well I made a thread a while back about buying my first property;
    http://www.invested.com.au/6/so-ive-bought-my-first-property-34831/

    And well, its been about 6 months now since that thread, so I thought I'd give you guys a little update on how things have progressed for me since then for those of you who might be interested, or for any other first home buyers who may be considering going down the same road I have.

    Well as you guys know I'm currently 21 and bought my first property for $228,000 about 5 months ago. I had a good deposit and claimed all my first home buyers stuff like no stamp duty and FHOG.

    After all was done n dusted, I ended up moving into the apartment with a $182,000 mortgage, at a rate that was a little under 9%, which I had set to IO with a redraw facility.

    Shortly after moving into the apartment I got my father to repaint everything, he's a painter by trade. I had all the ceilings painted white, the walls a colour called peach powder, the doors and timberwork an off white, the walls in the bathroom a cream colour, and the kitchen cupboards white. All up this cost me $200 and vastly improved the look of the place, and added a little value. (I'll try and get some photos up for you guys when I get my hands on someones digi cam)

    Electricity was rather easy to set up, I received a letter from the previous electrical company asking me to get in contact with them before a certain date, otherwise electricity would ceise on X date. I gave them a call, gave them my details and everything was set.

    As far as insurance is concerned, well It seemed a quite controversial topic in my last thread, however I've still chosen not to get any, and to date there hasn't been an issue. (knock on wood) However when the time comes for me to rent the place out, I will most definitely look at landlords insurance. Like I said before, I don't really have anything of real value, and the building is insured under the strata.

    Income protection, was also another topic that was brought up. Since moving into the apartment, as most of you would know interest rates have dropped significantly, my interest rate is now just over 7%. I also managed to get my principle down to about $177,000 now too, so repayments are MUCH cheaper for me, which brings me to the most exciting part of my experience;

    When I move back home, and rent out the apartment, the rent should cover ALL my outgoings.

    So, overall I'm rather ecstatic with my first property investment choice and am still finding it hard to comprehend that in just under 5 months I've managed to find myself in such a great situation where I will basically have a positive flow IP. (provided interest rates stay at this level of course hehe)

    Which now brings me to my question;

    When should I consider buying my second IP? I know I'll probably be in quite a good situation when I move back home and rent out my current property, however I do recognize that if interest rates were to go up again (which they probably wont for a while with the whole recession and all) I could find myself in a bit of bother, so should I try and get some sort of buffer?

    It seems like a great time to buy, however I don't want to get to ahead of myself, and find myself relying to heavily on low interest rates, and high rents to pay for things.

    I was thinking of waiting about 12 months, and paying off as much as I can on my current property, and then buying, to give myself a little more headroom should interest rates rise.

    Big thx to everyone for their help thus far. :)
     
  2. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Sk3tchy - congratulations on the progress so far!

    If I were in your shoes I would wait until nett rental income >= interest payments on the mortgage. Then buy another IP. Keep the mortgage payments as interest only all the way.

    In other words, get yourself positively geared, or at least neutrally geared, and then look to increase the portfolio again.
     
  3. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    I think your idea of building a buffer is a VERY sensible option given the current climate, not to mention that you will still be wanting to build a significant deposit for your next home to avoid LMI.

    In the coming months there will be a lot of rental properties becoming positively geared if they aren't so already, which in itself may have implications for the property market. Like for example rental yields may actually drop as competition for tenants increases as current renters move out of the rental market and into the property market to take advantage of the FHOG doubling and low interest rates. I'm not suggesting this will definitely happen, but I think your instincts of not relying on low interest rates in the long term are very astute but should also be coupled with the potential that rental yields may drop in the future. Either way I definitely don't think this is the time to overextending yourself, recessions are usually a time for consolidation.

    Despite what many are saying in regards to "it being a good time to buy" or what seems to be regurgitated by the media "it's a buyers market" I'm standing by my opinion of, just because things are cheap doesn't mean they are a good buy. I think sitting on the sidelines for a 6 - 12 months is the smartest option at least until the dust begins to settle a little.

    PS. It's great to hear everything is going well thus far!
     
  4. Smartypants

    Smartypants Well-Known Member

    Joined:
    2nd Jun, 2006
    Posts:
    226
    Location:
    NSW
    Well done Sketchy.

    Just one thing.....GET INSURANCE.

    Don't think electrical fires etc only happen to other people.

    GET INSURANCE.

    For a couple of hundred bucks, it's crazy not to have it.

    Did I mention, GET INURANCE
     
  5. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Thanx for all the posts, and help so far.

    Tonight I asked my best mate the same question I've asked you guys.. When I should consider buying my next property, and he put forward to me a point which in some cases makes a lot of sense, but in an 'investors case' may not.

    To your everyday person this point seems very valid, but to the more astute investor it may contradict everything they stand for. :p

    His opinion was;

    Well man, I reckon when it comes to this sorta thing, you just need to be able to make sure that if both properties weren't being rented, you'd be able to cover the expenses.

    Rationally, yeah, this seems like a great option, but like, with a more 'investor' mind set I feel a little more inclined to think as long as your rent can cover the expenses you should go for it..?

    What you guys think? (I'm sure this is probably kinda like asking whats better Coke or Pepsi, but peoples opinions and experience would be great.)

    Personally I reckon In todays market (what with the huge rental shortage going on) it would probably be safe to say that as long as your rental price is 'reasonable' or even 'slightly overpriced' you shouldn't have much of a problem finding tennants..?
     
  6. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    I personally disagree with that mindset, but each to their own. I think it's safe to say that your friend is very risk adverse or is insecure about their own financial knowledge and understanding to be making a statement like that.

    I think most good investors approach most investments with a risk versus return mindset. So in the example of property investing you might factor the likelihood of rental vacancies in your area, and you might consider three different scenarios of best case, likely case and worst case scenarios and the probability of each happening.

    So for example if you think the worst case scenario is that the area your two IPs are located in experiences a 15% rental vacancies rate then the likelihood that both of your IPs are vacant at the same time would be 2.25% you may even be able to further reduce this risk by coordinating your lease contracts to conclude an different periods in the year.

    Obvious there are a whole lot more variables that you need to consider than just rental vacanies, but my point is that your investments should be based on realistic and likely risk versus return projections, not based on best or worst case scenarios. That doesn't mean you shouldn't plan for events that were unlikely yet still may happen, but the best way to plan for such event, as smartypants mentioned, is to GET INSURANCE. My understanding is that people go bankrupt as a result of unforeseen, negative events, that could have been completely insured against than poor investment timing or decisions.

    So if you are serious about reducing your risk, you need insurance.


    That's a fair assessment for the very SHORT term, things can change quickly though and as I mentioned in my above post there may very well be a movement away from renting in the coming months.

    In my opinion the best investors position their money for the economic climate of tomorrow not for the consensus of the day.
     
  7. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    You can and should insure yourself against:
    - premises being left untenable due to malicious damage caused by a tenant
    - absconding tentants
    - tenants not paying rent
    - prevention of access

    As well as a host of other things like landlord liability & damage to the property caused by tenants. Check out the specialist landlord insurer Terri Scheer -- we insured thru them for our IP, they seem to be well regarded in SA. There are several others also.

    If your property is highly lettable (you should have some idea about this from the level of demand you had when you let it out) then you can be reasonably confident of it not being vacant too long.

    I wouldn't worry too much provided you are not too greedy with your rent - better to have a long term good tenant at a slightly lower rent than too many people in and out of the place. I have found that a lot of people in the area where our IP is located are quite unrealistic about the rental rates that their properties can achieve, and this contributes to the vacancy rate- so be realistic and reasonable, have an eye on what competing landlords are doing, & keep the place in good nick you shouldn't have a problem
     
  8. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Thax for the feedback guys. :)

    Chris C, yeah your point is quite valid, I wasn't necessarily supporting my friends opinion, just seeing what others thought of it.

    I'm thinking that I'll wait about 12 months before buying another property, with the recession and all thats going on, chances are that house prices will continue to drop over the next 12 months, so I may as well try and capitalize on it, it will also give me a little time to get a bit more on top of my current mortgage too.

    For my second IP Deposit, it's possible for me to use my first IP as collateral is that correct? So I wont have to put down a 20% deposit to avoid paying mortgage insurance?

    Would this all fall under 'Landlords Insurance' ..?
     
  9. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Depends on how much of the loan against it you have paid off, and how much capital growth there has been. If it's only going to be a year then you won't see much capital growth. I reckon you will need the 20% deposit and wouldn't recommend you do it without it.

    Yes but all the policies are different so check them out
     
  10. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Well I bought the place for $228,000 and currently owe about $177,000, so that basically should mena I have about $51,000 worth of equity I can use as collateraol..? (or doesn't it work like that?)

    As in, extras you can get on top of the landlords insurance? I'll definitely look more into it when it actually comes time for me to get my insruance.
     
  11. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    sorry my bad forgot u mentioned this in your OP, in this case you should be OK in theory although depends a bit on how conservative lenders are.

    Our policy has all of the things I mentioned and a few more bits & pieces, all for about $200 or so, there are a few insurers out there doing it so you won't find it too hard. Google 'Terri Scheer' for an idea of what we have in place but there are several others too I'm sure.
     
  12. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Cheers C3PO mate..

    You said its about $200, it that a year?
     
  13. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Yes sure is :)
     
  14. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Ahh dang.. Nice.. :)

    One last question.. Should I rent out privately, or thru a Real Estate..?
     
  15. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Yes get an agent, find a good one (get some recommendations) and keep them on a tight leash in terms of what they can spend on maintenance & so on.
     
  16. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    How much do they typically charge..?

    I've heard you can buy all the necessary papers to privately rent yourself, and its rather straight forward. The only thing that can be a bit of a challenge sometimes is getting the rent out of the tennants if they don't pay?

    Any main reasons why you would recommend an Agent over Private?
     
  17. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Our agent charges 8% of the total rent collected, that's $1,539 on a gross rental income of $19,240. I believe that's pretty standard, maybe you can get less if you have multiple IPs.

    We prefer to use an agent because we don't want to deal with the day to day issues of managing the property. There are some demanding tenants around who will hassle you over minor issues and we find it helpful to have a third party in between who knows the rights of landlord and tenant, and can read them the riot act if needs be.

    Most ppl are reasonable but there are some fruit cakes out there, and you do hear horror stories. Having a good agent in place for us provides a welcome buffer between tenant and landlord.

    We are on our third agent in 5yrs and are happy with the current one. The previous two were sacked for (1) overlooking the presence of a dog living at the IP which has a no pets policy and (2) spending too much on unnecessary maintenance & not bothering to inform us of a change in tenant. That's why I say you need to keep them on a tight leash - usually you can limit how much they are authorised to spend on maintenance before they have to ask you.

    But in spite of there being some slack ones out there, if you find a good agent in my view they are worth the money.
     
  18. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    I see.. Good points..

    What if you have an Agent, and the tennant doesn't pay? Does the Agent cover the costs, or is that when you Landlord insurance some comes into action? (Sorry if some of these questions are silly, I just haven't looked much into it as of yet)
     
  19. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    The agent won't take on the responsibility/risk of paying the rent if the tenant doesn't, if this is what you mean.

    If it happens the agent will deal with it in the first instance & try to sort it out, including representing you at the Residential Tenancies Tribunal (or local equivalent- this is the Govt body which resolves such disputes).

    If it can't be sorted out then it becomes a claim for your insurance policy (which they would also handle for you).
     
  20. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    I see..

    Well thanks for all your help C3PO. :)

    I'm going to wait at least 12 months until I consider my next IP. With the market the way it is right now, it seems to me that over the next 12 months there won't be any CG to be made in the housing market, if anything I personally think there's a good chance housing prices will continue to drop over the next 12 months, along with interest rates, to encourage buying again.

    This will probably also give me the chance to get a little more on top of my current investment, meaning that once I do make my second investment, if interest rates were hypothetically to rise a little, I should be able to handle things a little easier.

    When I rent my first IP out I'll definitely be getting landlords insurance. As far as choosing to rent Privately or via an Agent, I'm still not sure. I personally think that if you manage to find decent, reliable tennants who aren't all that whingey, then renting privately shouldn't be all that difficult.

    I guess once I rent the place out I'll make another little update thread thingy. :)

    Cheers C3P0 for all ya info so far, and to everyone else. :)