What do you think of my Property Investment Strategy?

activ8newbs on 16/12/2017 - 12:31

Hi guys,

I'm looking to get into the property market and I'm considering buying my first home/apartment.

I've come up with a strategy and this is it:

Preliminary Info:

  • I have $80k savings
  • My borrowing capacity is only $300k at the moment
  • In 2 years it will go up to $550k if I include rental income
  • I would like to benefit off the First Home Owner Grant ($0 Stamp Duty if under $650k)

Plan:

  • Buy an off the plan apartment in Rouse Hill for $550k. It's a one bedder, North Facing, Top floor
  • Building hasn't yet commenced though is planned to start Feb 2018 and complete by Feb 2020
  • To secure the property now would cost me 10% deposit which is $55k
  • Balance payable upon completion once property is built in 2020

Net result:

  • I get into property market now, buy a property I can't techincally afford. But when I need to pay it (Which will be in 2 years upon completion), I will be able to afford it
  • Realistically I think the property price will appreciate and by 2020 the apartment being build, I assume it should be worth over $600k (New train station being built, new shopping centre, and new hospital)
  • Though the risk is that I've heard a lot about apartment prices falling (crashing) due to oversupply. And in that case, I'll be in negative equity by the time I'm due to repay (2020).

What are your thoughts? Am I missing something?

Also caveat, I will live in the property for 6 months so I can benefit of First Home Buyer grant, then I'll have tenants move in.

Thanks all.

It's a complicated story, I'm trying to keep it short, so just ask if I've missed anything.

Financial

Comments

  • chumlee on 16/12/2017 - 12:40
    +26

    In the words of Mike Tyson - everyone has a plan til you get punched in the mouth

  • rambao9 on 16/12/2017 - 12:47
    +5

    1 bedrooms are harder to rent.

    Especially in such remote locations. Don't count on the train station being built all the time.

    Look at the Macquarie to parramatta line.

    • activ8newbs on 16/12/2017 - 12:52

      Train station is going ahead of schedule and is definitely being built. It's a huge infrastructure project and is a big deal. It's more than 50% completed. No doubt in my mind - it's definitely coming along. I've seen it with my eyes.

      1 Bedrooms are indeed hard to rent. Valid point that I overlooked. Thanks for input

      • meumax on 17/12/2017 - 08:33
        +4

        Everybody already knows about the trains. Should already be priced into property prices which means there should be little to no value rise due to the train station being completed.

  • ihbh on 16/12/2017 - 13:04
    +2

    Things to consider:

    • Are there a lot of other apartments being built in Rouse Hill? If so, then you'll find rental demand soft and you might not get the rent you were planning.
    • Is $550k a good price (bargain), bad price (overpaid), or the right price at the moment? How have you ascertained this?
    • Is it likely to be a good price in a couple of years time when interest rates rise and more apartments have been built and owners/investors are looking to sell because they can't afford to hold the property?
    • How likely are you to get the finishes promised (what's the developer's track record)?

    I assume it should be worth over $600k (New train station being built, new shopping centre, and new hospital)

    • The events you've put in brackets, are you the only one who knows this, or is it widely known? If so, it should be already factored in the price, so this will not be the reason the property should be worth over $600k.

    • What are the alternatives? If you put the money in the bank, or invested in an indexed share fund, how would the returns compare to buying this apartment? Also, why have you restricted yourself to Rouse Hill and Sydney? For example, the market is still pretty weak in Perth and weak and declining in Brisbane. How would an investment there compare?

  • EightImmortals on 16/12/2017 - 13:12
    +9

    I smell a lot of 'if' coming of your plan. My 2c, just keep building your deposit money until you can make a plan based on the facts of the day and not what 'might' happen 2 years down the track. Don't let FOMO drive your decisions.

  • djkelly69 on 16/12/2017 - 13:17
    +2

    Very risky to sign a contract for a property you can't afford.

    Settlement dates are not set in stone - although unlikely, they can complete the units early and call for settlement at basically any time.

    You are also susceptible to changes in property values, lending practices, etc.

    Not sure you can include rental income for a property you don't own yet when applying for a loan to purchase that property. Would definitely speak to your bank or broker to check that you will actually be able to get a loan when the time comes.

    • redfox1200 on 16/12/2017 - 16:55
      +1

      you absolutely can include rental income for the property you are buying. but not if you are going to live in it

  • dcep on 16/12/2017 - 13:26
    +3

    you'll get better luck with crypto

  • CyberMurning on 16/12/2017 - 13:29
    +2

    I get into property market now, buy a property I can't techincally afford. But when I need to pay it (Which will be in 2 years upon completion), I will be able to afford it

    Who says? Crystal ball? Homeless person on train station? Financial adviser?
    No one can predict future. If you can't then you'll loose the deposit. That is what certain.

  • atris17 on 16/12/2017 - 13:31

    Homework

    • Income Statement Excel
    • Offset Account Excel
    • Rental Yield Excel

    Make sure you can afford it

  • SPCTRE on 16/12/2017 - 13:42
    +2
    • What kind of people(s) do you plan to rent it out when the time comes (student, family etc). Will your investment attract these kind of people?
      International students love a furnished 1 bedder apartments assuming the location is right.
    • With off the floor plans there is alway a sunset clause (at least in vic). Understand this clause and risk!!!
    • In the 2 years the property market can change. Heavily depends on government regulation and policy. This can depreciate or appreciate your property.
    • The apartment property market is statuated with overseas investors so if government make any changes that causes them to sell up, your property value will go down with them.
    • Being an apartment you must accept that it will not be easy to sell compare to a unit, flat or actual house with land.

    I'm from vic so not all points above may apply to your state.
    That said after taking into consideration of everything and you still go ahead, good luck with your journey 👍

  • SydneySurfer on 16/12/2017 - 16:13

    Never buy a 1br apartment for investment income. Rouse Hill, despite the train is still in the middle of nowhere. It is not a CBD with potential renters of 1br who are generally short termers without a family.
    The sunset clause is likely to cost you more money. It is possible, and even likely, so be prepared, that they will try to raise the price and you'll have no alternative but to either go ahead and pay more, or get a refund of the amount deposited, so therefore lost interest in the next two years on the deposit if it had been in a bank or invested in shares. I suggest you invest that money in ETF or a cheap managed fund and then sell when it is time to buy.
    What you need for an investment property is a 3br that will attract a family with a stable income. Better to get a property near Blacktown with a fairly centralised and established rail line with lower cost of housing that you can afford.

    • djkelly69 on 16/12/2017 - 18:24
      +1

      The sunset clause is likely to cost you more money. It is possible, and even likely, so be prepared, that they will try to raise the price and you'll have no alternative but to either go ahead and pay more, or get a refund of the amount deposited

      Small point - law has changed in NSW to prevent developers being able to do this.

      • SydneySurfer on 18/12/2017 - 13:33

        Thanks! Did this happen in the last 8 yrs? We had this dilemma about 9 years ago.

        • djkelly69 on 18/12/2017 - 14:27
          +1

          Yep, in 2015 (as a gov response to a bunch of developers doing it).

        • SydneySurfer on 18/12/2017 - 17:55

          @djkelly69: Good to know! Thanks.

  • Azrael169 on 16/12/2017 - 16:52

    Not a great idea
    - If you cant afford it now, no guarantee you can afford it in 2 years time
    - If you need to live in it for 6 months you cant factor in rental income to your borrowing capacity
    - Your not accounting for 'roadbumps' especially when basing things on future income levels, what happens if you get sick for a extended period or cant work? What happens if your occupation/field has a downturn or oversupply of workers? may be hard to find a same or equivalent job
    - 1 bed apartments work well when in the centre of a capital city, not when your ?60km to the CBD. 1 bed apartments are usually rented by young people who do it for lifestyle factors (proximity to bars/clubs/restaurants). If your that far out of CBD it would be close to same price for someone to rent a small house or town house
    - Where are you planning on living while your renting your property out? are you going to be rent free? or needing to pay rent as well
    - Have you accounted for insurance, rates/strata, agent fees?

    I'd also suggest considering a property that you would be prepared to live in long term should the housing market take a hit

  • sane on 16/12/2017 - 17:40
    +2

    Key point, you are betting twice. Once that you will have the money when need. Once that the market will go up, rather than down - even though most people consider it to have topped and it's at silly levels.

    And what do you gain?

    A 30 year liability (don't forget the cost of the strata, repairs etc.)

    In general I would run, not walk, as fast as I could away from such a duff deal.

  • garetz on 16/12/2017 - 18:57
    +2

    I wouldnt call it a strategy, but it is an extremely high risk venture.

  • meumax on 17/12/2017 - 08:57
    +2

    Here's the key risks as I see it

    1. Bank values apartment lower than $550k at settlement. Doesn't matter your borrowing power, you can only borrow 80% of what the bank values the apartment at. If there's a shortfall you have to put up cash or sell your contact to someone who can complete

    2. Are you basing your serviceability on 100% of the rental income?Banks will only consider 70% or less when calculating borrowing power. It may be less if lending standards are tightened further

    3. How unique is your apartment and how big a block? In a mega block when construction is complete there will be a flood of similar apartments for rent come on at once. You may not be able to get as much as you think unless yours stands out from the others in some way

    4. The thesis for your prediction of capital gains sounds like it needs to be thought through more. It's based entirely on the train line but I think this news is already public so will be factored into process already. What about demographics? Is this the most popular type of housing for the typical people in the area? Will it appeal to investors AND owner occupiers because these are the properties that go up.

    • Noblejoker on 17/12/2017 - 11:59

      +1 for the 70% of rental income comment = correct
      You should use this in your calcs too as a margin for error

  • TheBilly on 17/12/2017 - 09:20

    I made a bit of equity off this strategy. I focussed only on houses with big blocks and 3 plus bedrooms. I focussed only on low priced suburbs in brisbane and melbourne. I live in Penrith where a house could cost you $700k no problems. I then went to brisbane and melbournes penrith (I.e. last suburbs in metro area with a train line, shopping centre and all the similar facilities) and drove around and thought would I live here? If the answer is yes, then I Invested, If no, I didnt Invest. Ended up buying a positively geared 3 bedder for high 200's and is now in the 400's. The philosphy is, that place is either under priced, or penrith is over priced so you have a 50/50 chance of making money. Most places I visited I thought was better in everyway than penrith, yet the houses were shit cheap. Im talking closer to the city, cleaner, nicer people, better facilities, jobs etc. So logic would dictate that people would wake up to this at some point in the next 10 years and go why should I spend $700k when I can spend $300k.

    • Findo on 17/12/2017 - 13:13

      If you went for a drive around the other Mt Druitts in Australia, would you consider them worthy of buying? Genuinely curious because my parents owned a place in Penrith long before I was born and they said they couldn’t sell it fast enough (bad tenants, bad neighbours, landlord insurance was higher, etc). I won’t be able to buy on the north shore so I’m looking at potential options in the next few years.

      • TheBilly on 17/12/2017 - 16:26
        +1

        Yes some areas are just terrible. I.e. Bidwill, Tregear, Dharruk. However right next to them are some nice places. I.e. Erksine Park, St Clair, Ropes Crossing. We drove around pockets and specifically bought in the nice zones. I spoke to people in Melbourne (random shop owners, cafes etc) that would say the same thing, like "who would go there" "those places are terrible" - yet I get there and think to myself, I would live here right now absolutely nothing wrong here, then coincidently they have gone up 100k - 200k in under 2 years? I guess growing up at the bottom of the barrel, you can see the value in everything by default.

        On a side note; Hebersham, right next to all the houso shit holes. Itself is a very nice liveable area; doubled in value in a bit over 2 years.

        When investing it is really worth spending $500 here or there for a couple weekends away in the suburb you will buy, to get a feel. I did that a couple times in melbourne because the internet just does not do it justice.

        Also I would only invest is melbourne and brisbanes mt druits lol - they're big cities, melbourne especially. I cant say about adel/perth/darw etc

        • codinghelloworld on 29/01/2018 - 13:44

          Good point, I like your idea that should spend some weekends at the place I want to buy to get a feeling about the area. This approach should apply for buying property to live in as well as property for investment.

  • TheBilly on 17/12/2017 - 09:29

    Also I would like to add, Sydneys market has topped out. I would expect that it would stay where it is or drop 'slightly'. I am in the market to buy again, and my experience with open homes and the like is that the frenzy just isnt there anymore people aren't making offers, agents are willing to negotiate, banks aren't lending. Rental yields are so low, mortgages are so high, interest rates are so low, the only thing to prevent a correction/drop now is if rental incomes increase drastically. Its not the type of market to take "big risks" in - I think you will have better prospects putting your life into Bitcoin right now then a rouse hill apartment. Go look interstate.

  • Garry1959 on 17/12/2017 - 10:03

    You wont get the grant if you live in it in the first year. See the eligibility rules. A 1 bedroom isnt a penthouse so the views are very important. If the lift breaks down, what then? A 1 bedroom apartment has a limited rental market. Have you calculated the rental return over the mkrtgage? Principal and interest repayment or interest only? Where will you be living before and after the build and can you afford both? Is your jiob secure? What are the other options you have for investing and if real estate, where else is likely to get you a better return?

  • SlickMick on 17/12/2017 - 11:22

    Are you an adrenaline junkie?

    You could just go to a casino and put $55,000 on a roulette table or whatever for a quick fix.

    I'm not sure too many people would survive 2 years of that kind of pressure.

  • HeWhoKnows on 17/12/2017 - 12:14
    +1

    Dont want to spoil the party but your "over-optimistic" strategy is missing some important planning and fails to make any continency plans (what-ifs)
    Firstly do your homework with demand for 1 br units in Rouse Hill both as a rental proposition and for future resale.
    Secondly avoid massive and high rise developments (typical with off-the-plan purchases)
    Thirdly dont bank on continually rising property prices. They are already at dizzy highs. Especially in Sydneys western suburbs where prices can remain stagnent for 10 years.
    Forthly do your sums with the rental returns. Include ALL outgoings in your cosings such as strata levies, council rates, water rates, vacancy factor of 2 weeks per year, mortgage repayments and most importantly factor in interest rate increases. You might want to factor in $1000pa in repairs on average.

    Once you have done all this you will have a strategy. Right now its only a plan.

  • Baysew on 17/12/2017 - 12:36
    +1

    You might need to decide if you are a property speculator or a car modder.

    Can I Modify This Car? (Volvo C70)

  • Dont Care on 18/12/2017 - 19:48

    get a deposit bond.

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