5 questions on property investing from Tom McKelvey, a 25 year old from the Sunshine Coast in Queensland

TOM

Tom is a young professional, who recently finished university and is working as a project manager with one of Australia’s largest property developers, the Mirvac Group. While Tom was lucky enough to study Property Development at university, he is still trying to identify a clear path into the property market. Like many of us Tom wants to maintain his current lifestyle, while getting ahead financially, and is currently looking to buy his first investment property in Brisbane.

TOM

Tom had some great questions, which are highly relevant for anyone looking to break into the market.

1. I want to buy an investment property but my borrowing capacity restricts the type of property and the area I would like to buy in?

I would find a new mortgage broker who understands your current situation and is prepared to work his ass off to get you in the door. There are a huge number of lenders out there who will accept a 5% deposit, which means on a $400,000 loan you only need to come up with $20,000 in cash, plus your closing costs.

Recently one of the major banks told me that I was only eligible to buy one property in the next 12 months. After an hour with a mortgage broker he was able to set up a plan, which will enable me to buy three properties over the next 6 months. Far too often a major part of the struggle is getting the right team of advisors around you.

I would also focus on increasing your income as quickly as possible, I know this is easier said then done. Approach your mortgage broker and ask how much money you can borrow today, along with how much you could borrow if your income rose by $5000, $10,000, etc. After you know exactly how much money you have to earn approach your employer or find additional sources of income to get over the line.

Another approach is to look at sister suburbs, which are the slightly cheaper neighbouring suburbs to your suburb of choice. Often these sister suburbs have similar rates of capital growth and comparable rental yields. 

2. How can I better analyse the market and identify what’s in short supply?

Analysing a new suburb when your just getting started can be daunting. Most of us feel some kind of fear as we get closer to making the decision to buy. We ask ourselves have we done enough research? Have we made the right decision? Am I getting ripped off? Luckily there are a number of simple questions and tools that can help us understand a suburb better:

Simple questions for analysing a market:

  • What is the current supply and demand ratio?
  • What are the current vacancy rates?
  • What do people do for work?
  • What’s the current unemployment rate?
  • How many people own their own homes and how many people are renting?
  • Is there any major infrastructure planed?
  • Do people have access to transport, shops and schools?
  • Is the suburb connected to cities, beaches or other desirable areas?
  • What is the current mix of housing stock and what is in high demand?
  • Where are the desirable streets in the suburb and more importantly where are the undesirable areas?
  • What is the average purchase price?
  • What is the average rental yield?

Simple tools for analysing a market:

  • ABS suburb data
  • Local councils
  • Websites like Realestate.com and Domain
  • Taking with local real-estate agents
  • Talking with local developers, mortgage brokers, solicitors and accountants

3. I’m concerned that if I buy an investment property I will sacrifice my lifestyle. I want to find a medium between enjoying life and the freedom to continue to enjoy a certain quality of life, call this classic gen-y moaning but it is what it is.

This is a great point and a commonly held belief by 95% of generation Y, including myself.

There are two parts to this:

  •  The deposit

Unfortunately it takes time and energy to get your first deposit together.

There is no hiding the fact that saving for your first deposit is going to be hard as it’s the first time most of us have put money away for an investment.

The great news is it’s really up to you how fast you would like to achieve your goal.

I personally have a budget, which took me years to get right. Its simple, I put a fixed percentage of my wage away each week, along with my tax return and any additional income, pay raises and bonuses I receive. You would be suppressed how quickly this adds up! I also label accounts in my online banking as investment accounts, which helps me stay focused on my goals.

  • The ongoing costs of holding the property

After you’ve done the hard work of getting your deposit together you’ve three quarter of the way there.

If you choose to buy a negatively geared property, meaning you have to pull money out of your own pocket each week to pay for the property, you will have a smile on your face with the right accountant come tax time.

If you choose to buy a positively geared property, meaning you have more money coming in from the property than it costs to hold it on a week to week basis, then you’ll be smiling 365 days a year.

Lets look at a negatively geared example below:

You buy a 2-bedroom unit within 5km of the city for $350,000. You owe the bank $325,000 after your deposit and you rent out the property for $350 a week.

Annual Income:

  • $350 a week x 48 weeks of the year
  • = $16,800 in rent

Annual Costs:

  • $17,225 in interest repayments ($325,000 at an interest rate of 5.3%)
  • $150 for an accountant
  • $700 in insurance
  • $1176 in property management ($16,800 at a property management rate of 7%)
  • $2000 in council fees
  • $1000 in other fees
  • = $22,251 in costs

Actual weekly out of pocket cost to hold the property (before tax):

  • $96 a week ($22,251 minus $17,225 divided by 52 weeks of the year)

As you can see from the numbers above most of us can afford to hold an investment property for $96 a week without damaging our lifestyle too much. Owning property can be far more affordable than we think, its just committing to finding that initial deposit.

4. How do I select a finance provider from the hundreds of options out there? Trying to decipher the pros and cons of each package feels like a massive task in itself.

Another great question!

I was personally loyal to one bank for my first three investment properties. It was only recently that I realised my bank did not have my best interests at heart. In fact they never once asked where I was heading, what my goals were or how we could manipulate deposits and mortgage insurances to help me move forward faster.

I’ve recently moved to a mortgage broker who understands where I’m heading and has been in the game long enough to know 30+ lenders who are happy to help me get there.

There are great websites like Canstar where you can compare hundreds of rates in one place.

I personally use sites like Canstar as a guide and to keep in touch with my own loans and how they measure up, but rely on my mortgage broker to find the best loan for my current situation.

When comparing lenders I generally look at their:

  • Fixed rates
  • Variable rates
  • Start up, on-going and settlement fees
  • Flexibility
  • Offset accounts
  • Online banking facilities
  • Customer service reviews

I recently wrote an article titled how to save a deposit, understand the banks and get pre-approval faster which goes into more detail around this lending question.

I really appreciate the opportunity to answer these questions for you Tom. These are the same questions Ive asked and are fundamental to becoming a successful property investor.

If anyone else has any questions, or would like me to write on a specific topic please let me know in the comments below…

Ben

The information provided in this article is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.

 

Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.