Would you buy a 1 bedroom apartment as Investment Property?

Cherry12 on 09/01/2023 - 00:21
Last edited 10/01/2023 - 22:46

Husband and I have our own 3 bedroom house in Melbourne suburbs with a mortgage. Even with the rate increases we can comfortably pay the mortgage. Both work full time and have stable jobs.

Have $300 K in savings, so we are thinking of buying a 1 bedroom apartment as an Investment property, planning to pay cash (up to $250 K apartment value) to avoid having another mortgage. For a 2 bed I would need a $100-150 K mortgage, I would get it approved but don't want to get more in debt.

I'm looking apartments in Noble Park, Oakleigh, Carlton, etc. All 25 km away from the city and near train station, shopping centers, etc.

From my research I see 1 bedroom apartments are not very popular to invest but that's all we can afford without getting a new mortgage. The plan is to keep the apartment to hope (based on historic Capital Growth in the suburb) we get Capital Growth in 10 years or so, would rent it on the meantime.

  • What do you recommend in this situation? What would you do?
  • If this were you, would you buy a one bedroom apartment as investment?
  • Would you wait until you can save for a 2 bed but maybe by then the price has increased?
  • Some articles mention that the house prices will keep falling until Sep 2023 but other articles state that it is falling minimum by now, like a -0.4% in that area.

From historic prices on some of those apartments on the market now, in the last 7 years or so they had gains and then losses so there's no much profit now but mainly falling in 2022.

Please give your feedback.

Update: Thanks so much for all your feedback, it has helped me a lot. I'm learning, keeping notes and researching about topics advised. Once I get the knowledge and am sure of risks will seek professional advice before buying. Thanks again!

Financial

Comments

  • Porker on 09/01/2023 - 00:32
    +51

    Mortgage on the investment is tax deductable via negative gearing.

    My first investment was a two bedroom apartment in Melbourne CBD. I wouldn't buy another and if i could go back in time, wouldn't have bought it. Price was based on pre-covid. Capital growth is mininal at best.

    Consider a bigger place even if you incur a mortgage - again, if you play the numbers correctly, you could be neutrally geared and with capital growth being the money prize.

    A few different ways to cut this pie.

    With all that being said, I sold some investment properties in November 2022 when the market was up and reinvested in shares.

    Return on shares has been much better with the current market, but do your own research or seek financial planning assistance with any option you take.

    The answer to your situation won't easily be answered in a ozb reply.

    • Cherry12 on 09/01/2023 - 00:56

      Thanks for your reply. How many years did you keep that apartment in Melbourne CBD? When did you sell? I have a friend living in CBD and she said that during and right after covid CBD was sort of empty so was it during those times?

      I'd be very worried if invested on shares, advisors charge a fortune and shares can suddenly lose value. Have had shares before but on a smaller amounts, lost value and had to wait awhile until they recovered the original price and better sold them.

      • Porker on 09/01/2023 - 07:44
        +4

        I've held that apartment for over 15 years and still have it. I sold some houses with land (sorry i meant November 2021 within my original reply).

        The house sales turned into a bidding war.

        I havent sold the apartment because there's effectively only yearly indexed capital gain (ie. Minimal), so i keep it as a source of monthly income. Selling won't return much.

        Share prices fluctuate just like houses do. As example, one of the houses i sold dropped in estimated price in 2016, but recovered by 2018.

        Difference is that I only check on that yearly or after several years. I check shares daily so observe the fluctuation more often with more accurately - this is both good and bad.

      • Littlevu on 10/01/2023 - 10:34
        +4

        If you had $300k to invest, getting good and proper financial advice cannot be overestimated. How many stories have you heard of people losing so much more due to poor advice or DIY investment strategy?

        A good adviser would take into consideration what your risk appetite is and what your goals are and recommend the strategy that is right for you.

      • huggsymersh on 10/01/2023 - 11:46
        +3

        shares are more volatile, and buying shares in individual companies is more like gambling no matter how much research you do. But diversified index funds, while still fluctuating in price, are far more stable and resilient - depending on what index you choose. Index funds can be bought easily without an advisor. The management fees can be quite modest as well.

        Think about it this way, with most of your net worth in property if you buy another property you'll have possibly 100% of your non-super networth concentrated in property, and concentrated in melbourne. The property market could continue to go up and up, but it's likely to have a medium term period of lower growth after consecutive years of growth. What happens if it underperforms over the next few years?

        Also, houses do change in price all the time. It's just that the only time they are meaningfully valued is when they are sold, whereas shares/index funds are sold every minute so their volatiltiy is more readily tracked.

        If you buy index funds you're spreading your investments across different asset classes. See this chart to see how different classes perform over the years.

        https://www.vanguard.com.au/adviser/en/index-chart

        In my view, property investment only makes sense if you borrow to invest. Leverage increases your return to compensate for the higher transaction costs, illiquidity of the investment, management of property / or fees paid to rental agents, rates and any applicable property taxes.

        Fair enough if you don't feel comfortable with shares. But it might be worth reading up a bit more as having all investments in one type asset class is actually higher risk, and diversifying into different types of assets is well regarded strategy for reducing overall risk. Happy to share more materials. Either way, best of luck with your decision!

        • Cherry12 on 10/01/2023 - 20:24
          +1

          Thanks for your advice, if you have links or so for the index funds I could check them.

          Shares definitely too risky.

          • huggsymersh on 10/01/2023 - 22:52
            +3

            @Cherry12: Not going to lie, the learning curve for getting comfortable with shares can be quite steep for the uninitiated. I'm not here to sell you anything or push you into any investments that you don't feel comfortable with. But sometimes getting comfortable about a type of investment is simply learning a little more about it, both the pros and the cons. I appreciate also that it can be a leap of faith investing in something unfamiliar if you don't personally know anyone who favours a particular investment.

            You probably don't have too much time to research endlessly, so here is a very short article on index investing:

            https://www.mrmoneymustache.com/2011/05/18/how-to-make-money…

            A longer, but still reader friendly series on index investing:

            https://jlcollinsnh.com/stock-series/

            These articles should give you a bit of a overview of how this approach could work for you. They are US based, but can be tweaked to Australian conditions without too much problems.

            My own take….

            Property can be a wonderful investment. As I mentioned earlier, leverage can be a very powerful thing, but it isn't without risks. But it is a lot of work (tenants, real estate agents, mainteance etc) and if you aren't borrowing to invest in property, a diversified index fund can have excellent returns with almost no work (quarterly distributions with a bit of admin at tax time for average 6-7% returns per annum)

            My very simply analogy with index funds is this.

            • Buying individual shares is like buying an individual business in a shopping street. It could be a cake shop, dry cleaners, mechanic, cafe etc etc. It could be an amazing business if you get it right, or it could be disastrous and lose you your entire investment.

            • Buying index funds is a bit like buying a share in every single business in the street. But not just the businesses in the street. You're also buying the utilities that service those businesses, the suppliers and distributors that supply to those businesses, advertising services that those businesses use like Google. Depending on the indexes you invest in, you're buying a small share in the entire economy. Because you are so diversified your returns are the same as the average returns of the entire economy. As a result, you're unlikely to lose all your money ever, or even any of it if you keep invested. Assuming you stay invested, you'll enjoy growth commensurate with the rest of the economy. And while 'average' returns may seem uninspiring, average returns of 6-7% compounding each year means you're doubling your money every 10 years.

            Note, the above assumptions are very simplified. They don't take into account the impact of tax on your investments.Also average returns per annum are averaged over long periods of time, i.e. up 25% one year, down 10% next, up 15 the next, down 5% etc etc.

            Lastly, here is a link to vanguard's index funds (the ETF (Exchange Traded Fund) version. There are several reputable index fund managers out there, but Vanguard originated the concept in the 1970s.

            https://www.vanguard.com.au/adviser/en/etf-knowledge-overvie…

            I have several Vanguard index funds. I live very frugally, but I also semi-retired in my early forties and live off these investments so it's doable.

            I think if you've got $300k to invest you owe it to yourself to explore other options that are technically less risky (than concentrating all investments on property). At least it's a good exercise to know what else is out there.

            Once again, good luck and happy reading!

          • horseshoe on 11/01/2023 - 05:41

            @Cherry12: This is how I would go about getting into index funds:

            Step 1: Apply for and set up an online share trading account. You can shop around for cheaper fees, or just set up one with the bank you have a transaction account with. It doesn't matter much if you will do very little trading.

            Step 2: Select an exchanged traded index fund from this list: https://www2.asx.com.au/markets/trade-our-cash-market/asx-in…. You are looking for one with an Investment Style of "Track", and a low Management Cost %. Obvious ones are iShares Core S&P/ASX 200 ETF (IOZ) or Vanguard Australian Shares Index ETF (VAS). Disclosure: I don't own either of these, I have units in STW because I got in on index funds a long time ago and that was the only one available then. Note down the ticker of the fund you want to buy.

            Step 3: Exchange traded funds can be bought and sold on the stock exchange, which is why you did step 1. Spend some time familiarising yourself with the fund you decided to buy, at least to know what its "normal" unit price is so you know what's cheap and what's expensive. Pick a time to buy and do it. You can try to time it for when the market falls and it's cheaper, but generally it's better to buy sooner rather than keep waiting forever.

            Step 4: Sit back and collect distributions on a quarterly basis.

            Step 5: At tax time the index fund should send you a tax statement. The types of income you get from the fund can be quite exotic, but just fill out your tax return exactly as the statement tells you to and it'll be fine. The main thing here is you will get "franking credits".

      • Chong on 10/01/2023 - 12:44
        +1

        Apartments largely for cashflow (and paying off its attached mortage), assuming it is in a decent location for the rental asked/required.

        With shares why do you need an advisor? I think you only really need it to access things not easily accessible to, like private equity investing (which large invest in things not listed on the stock exchange)

        Educate yourself and decide a strategy.

        With shares, my general advice would be to do abit of reading, decide on a strategy, pick a basket of low fee ETF, REIT, blue chip(big name) shares.

    • TheJoker on 11/01/2023 - 07:10

      Just one minor correction is that the interest on your mortgage is tax deductible regardless of the gearing on your property.

    • Pinchy on 11/01/2023 - 12:22

      Isnt that only if the Rent is less than the Mortgage repayments?

      • Porker on 11/01/2023 - 12:30

        TheJoker is correct - interest on an investment mortgage is deductible regardless. My original response is technically incorrect, although I think many understand what I was trying to say.

        The different would be how much rent there is to declare. If the rent is less than the mortgage interest (excluding all other income/loss), then it's negatively geared. If rent is more than the mortgage interest, then it's positively gears.

        But you would include any interest payments as a deduction prior to determining how much rental income there was.

  • Quantumcat on 09/01/2023 - 00:35
    +36

    Apartments don't go up much in capital growth. Apartment buildings get old and are worth less as time goes on. The land is what goes up in value but with an apartment you only own a tiny fraction of the lot that the building is on.

    If you are going to buy an apartment as an investment you need to make sure that the rent is providing all the return, don't count on capital growth for that.

    Also if I were going to buy an apartment as an investment I would buy one that was several years old (so no surprises if you find out that it is very badly built and there are huge costs to pay to fix it), and would go over body corporate meeting minutes thoroughly to make sure there aren't any issues that will be expensive to fix that they already know about.

    • Cherry12 on 09/01/2023 - 01:08
      +1

      Do you think thay units that have their own small piece of land would get better growth?

      Yes I'd buy an already established apartment with a building inspection prior to signing, brand new are very expensive. Thanks

      • Quantumcat on 09/01/2023 - 01:22
        +14

        Yeah a townhouse or similar would have better capital growth

      • Chong on 10/01/2023 - 12:50
        +1

        brand new is generally more expensive because they also price in the depreciation you can claim (which generally is bigger the first 10 years of its life)

        Generally two cliffs for depreciation, at 5 year mark and 10 year mark.

        House prices will always rise first, some fantasy about all land being wanted to be further developed. Apartment prices will generally track rental prices, like any asset class, price will be related to profitability.

      • Tleyx on 14/01/2023 - 13:25

        All units own a portion.of the land the building sits on including those 100 storey towers

    • ForkSnorter on 09/01/2023 - 09:38
      +2

      Apartments don't go up much in capital growth. Apartment buildings get old and are worth less as time goes on. The land is what goes up in value but with an apartment you only own a tiny fraction of the lot that the building is on.

      You're right about land going up in value, although the disparity between apartment prices and house prices over the past 20 years has probably reached an extreme high. It's hard to see house prices continuing to go higher without apartment prices also climbing.

      If you are going to buy an apartment as an investment you need to make sure that the rent is providing all the return, don't count on capital growth for that.

      In some areas, the rent:price ratio is very good for apartments, better than houses in fact.

      Also if I were going to buy an apartment as an investment I would buy one that was several years old (so no surprises if you find out that it is very badly built and there are huge costs to pay to fix it), and would go over body corporate meeting minutes thoroughly to make sure there aren't any issues that will be expensive to fix that they already know about.

      Good idea about buying an apartment that's at least 2 or 3 years old. Even better is to find out which building company built it, and do a bit of research into their reputation. May have to ask around quite a bit. But by now, most of the dodgy buildings/builders are probably mainstream news, and likely the industry has tightened regulations and supervision since the opal tower fiasco.

    • RefusdClassification on 10/01/2023 - 05:22
      +3

      They can easily build more apartments but you can't "build" more land. Technically there isn't a shortage of land but nobody wants to live in the desert (most of Australia, the Sahara, Western half of USA excluding the coast) or in frozen landscapes (Siberia, Northen Canada, Greenland).

  • kanmen on 09/01/2023 - 00:46
    +15

    Is paying off your current mortgage not an option? With rising interest rates I'd probably do that or use the money as a deposit for my 'dream home'

    If you paid off your current house with it and used another loan to get an investment you'd probably be able to negative gear as someone suggested above.

    • Cherry12 on 09/01/2023 - 01:03
      +7

      Not really interested on a dream home. Current house is bigger than we need. We just want something to invest for the future.

      Perhaps you're onto something on putting the money on current mortgage and getting a new loan because the interests would be tax deductable. Will discuss it with the broker. Thanks.

      • Hearthstone on 09/01/2023 - 09:40
        +30

        here is a simple calculation
        having cash in your offset on your mortgage save you 4.5 - 5% a year tax free, that equivalent to 7% pre-tax earning

        it is very unlikely you get 7% return a year on apartment for the next decade

        • Cherry12 on 09/01/2023 - 20:17
          +1

          I have the cash on the offset, so it has been helping in the meantime.

          • Blackadda on 10/01/2023 - 09:27
            +1

            @Cherry12: Then get some tax advice if / when you want to do this .. you should be ensuring the money is loaned for the new property not use your cash that could pay off your non-deductible debt.

            As for getting an apartment why not … just make sure you check the outgoings .. and get in right location… I bought 2 BR in cbd recently, with rate rises it's a negative return for now but I'm comfortable I bought for less than it's worth long term.

            • Cherry12 on 10/01/2023 - 19:54

              @Blackadda: Congratulations on your purchase. You mind sharing if the loan is interest only or capital + interests?

          • Drakesy on 10/01/2023 - 19:34
            +1

            @Cherry12: So you'll buy an asset that'll require maintenance and will have minimal growth over its lifetime, relying solely on rental yield (which will be far less than 7% after tax)

            I struggle to see the benefit.

            • Cherry12 on 10/01/2023 - 19:59

              @Drakesy: My goal is Capital Growth. My house already gained a lot of capital growth in less than a decade, way more than 7%. It may be harder at the start (this year or 2 years) but in time it should grow if it's in a good area.

              • Drakesy on 10/01/2023 - 21:09
                +3

                @Cherry12: Apartments dont appreciate
                Therell always be new ones that pop up and you wont own the land ;)

              • aj3000 on 10/01/2023 - 22:05
                +1

                @Cherry12: Past performance is not an indicator of future performance. And as @drakesy said, apartments don't appreciate in value.. Also a 1 bed will typically have a higher churn rate than 2-3 beds as most people only use it as a temporary accommodation

                • Ulysses31 on 11/01/2023 - 00:36
                  +1

                  @aj3000: A family member bought one in 2018. Seemed like a steal, they said. Cheaper than the previous 2 times it sold.
                  Wow… Just wow.

              • Brianqpr on 10/01/2023 - 22:41
                +2

                @Cherry12: I've seen quite a few people buy apartments with their super (self managed funds) and make no capital gains in a decade or more, and in some cases capital losses.

                Self managed super funds have to produce audited financial statements every year and these are a real eye opener to the actual cost and returns of this type of property investment. It's all set out and clearly shows just how much owning property costs.

                In the cases I've seen the people involved would have been much, much better off sticking with their existing industry or retail super funds invested in balanced type investment options. We've had to pay large amounts of compensation where our financial advisers recommended the property strategy.

                • Cherry12 on 10/01/2023 - 22:50

                  @Brianqpr: Thanks for sharing. Do you think this is a tendency with apartments only or property as investment in general (houses) on the SMSF?

                  • Brianqpr on 11/01/2023 - 13:41

                    @Cherry12: Definitely more so for apartments but also new build houses outside major cities which is often where these SMSF investments seem to end up. Often the advisers involved have had links to the property developers.

                    A lot depends on area/supply of course. I've been told by colleagues based in Queensland that apartments in Brisbane don't make money for example. One of the SMSF cases we had to compenste on was an apartment in a good/popular area of Melbourne where houses had done really well but the apartment made nothing in about ten years.

      • Littlevu on 10/01/2023 - 10:36
        +2

        Google debt recycling. This is a good example of good and bad debt. You definitely should look into it.

      • larndis on 10/01/2023 - 12:48
        +4

        The broker's job is to get you the best loan, NOT to provide tax advice. While the advice you've received to pay off your existing mortgage (I really hope your savings are in an offset account) is 100% correct, it sounds like you would significantly benefit from some professional advice.

        Please just don't use your savings for an investment while owing money on your own home, that would maximise rather than minimise your tax bill.

        • Cherry12 on 10/01/2023 - 20:10

          After your comment I googled and it says that there are accountants who specialise in investment property. I will have to find one before I see the broker.

          With professional advice you mean a Financial advisor or an accountant with investment experience?

          Thanks

          • Littlevu on 10/01/2023 - 21:43

            @Cherry12: A financial planner would take into consideration your overall situation so your investment (be it shares or property) and will take into account your tax situation too BUT unless they are also registered on the Tax Practitioner Board any advice regarding tax will be general in nature and you really should also engage an accountant as well.

            If you have decided an investment property is what you want then seeing a tax specialist will be more valuable.

            Do ask yourself how important it is to access those fund (liquidity) because entry and exit costs on a property could be higher compared to a share portfolio.

            An adviser would be able to help guide you so you’re better equipped to make an informed decision.

            • Cherry12 on 10/01/2023 - 21:57

              @Littlevu: Very good advice on the specialists. We see it as a long term investment that could help us fund retirement.

              Whatever we decide to do will still keep some cash on the offset just in case. Thanks!

              • Littlevu on 10/01/2023 - 23:34

                @Cherry12: If for retirement purposes then here is something you can think about. The investment property that sits inside a self managed super fund (SMSF). The tax savings there (tax capped at 15%) would offset the costs of running the SMSF. Could be a solution to meeting your retirement goals. You can also combine your super (industry or retail funds) there and it opens up to much more investment choices such as ETFs and global markets. Feel free to send a PM.

          • Brianqpr on 11/01/2023 - 19:03

            @Cherry12: Financial advisers in general don't provide advice on direct property investments and especially not in selecting which property which is absolutely critical especially with apartments.

            Advisers don't like investment property as it has no diversification (unlike investments shares in across many companies and across different asset classes such as cash, fixed interest etc) so if the property market falls, or the specific property performs badly for any reason, you are fully exposed.

            On top of this most property investors borrow to do this which adds to the risk of losing money. Borrowing to invest in shares is (rightly) seen as very high risk as debt magnifies any losses. As a result advisers are required to provide a ton of warnings if they recommend such a strategy as there are big risks involved as well as the potential for large gains. They also wouldn't recommend it to all but the most aggressive, risk taking investors who could afford to wear the losses if it goes bad.

            Borrowing to invest in property is no different, only its less diversified (often only one property and area) whereas at least shares are across different companies so if one goes bad you haven't done all your money. If the whole market goes down of course a different story.

            There's a perception that property investments are not volatile. This is absolute rubbish. Property values are only known when bought and sold and there's often a multi year (10 year plus) gap between these two events. Shares on the other hand are valued every minute of every trading day so they APPEAR to be more volatile than investment property. If property could be valued in the same way then you would see similar rapid changes day to day. Likewise if you bought a share portfolio and didn't check it for 10 or 15 years you would probably be ahead and feeling quite pleased with yourself. Even if you invested pre GFC this would now be the case.

            Financial advisers are required to meet increasingly tough education requirements to provide advice on high risk investments such as shares. This is a good thing as it protects their clients and also the advisers themselves from recommending the wrong thing to the wrong client and being found liable for losses. Clients must know and understand the risks involved. In contrast, there is no such requirement for property investors, many of whom are not at all sophisticated and just do it because lots of other people do without realising there are a lot of risks involved and that it can go badly wrong. Real estate agents and developers can happily encourage these large investments with borrowed money safe in the knowledge it can never come back on them if the property turns out to be a dud investment.

  • cauilfield on 09/01/2023 - 01:04
    +15

    apartments usually do not appreciate in value. Get a small freestanding townhouse or unit.

    • Cherry12 on 09/01/2023 - 01:17

      Thanks, I will look into units more.

      • serpserpserp on 09/01/2023 - 17:45
        +4

        Buy a house in a crappy suburb that is up and coming where the rent will likely cover most of the mortgage anyway.

    • k15866 on 10/01/2023 - 11:20

      was wondering what do you mean by 'freestanding' and what are the implications?
      is it just to not have a common wall?

      • cauilfield on 10/01/2023 - 11:55
        +3

        land land land. This is what you are effectively looking for. Ideally with no common walls/ no stratas /body corps;

        • k15866 on 10/01/2023 - 12:04
          +1

          i see. Yes I would agree prioritising land is most important, just wasn't sure if I was missing out on something. I thought being part of a shared complex/strata was inherent to townhouses / units, unless you could buy the whole complex.

          A townhouse that was detached, in my mind was just a house.

  • AustriaBargain on 09/01/2023 - 01:07
    +4

    Invest in a hotdog stand.

    • Cherry12 on 09/01/2023 - 01:17
      +3

      It's an idea for the future.

    • Quantumcat on 09/01/2023 - 01:22
      +14

      Or bananas, but don't set the stand on fire

      • AustriaBargain on 09/01/2023 - 01:51
        +9

        How much can one banana cost, $10?

      • leelemon on 09/01/2023 - 03:14
        +17

        There's always money in the banana stand

      • fredz0r on 09/01/2023 - 09:50
        +2

        There's always money in the Banana Stand.

      • Ciderfizz44 on 09/01/2023 - 23:54

        Banana flavoured hotdogs you say?

    • Ulysses31 on 11/01/2023 - 00:37

      Sauce?

  • daft009 on 09/01/2023 - 05:06
    +2

    As mentioned with apartments rental return is key.

    You need to find a location where as soon as 1 tenant goes, 5 more are ready to move in.

    Check if the bedroom and living areas are large enough if 2 flatmates can share. And yes close to transport and shops

    • AustriaBargain on 11/01/2023 - 01:01
      +1

      Check if a university is nearby. A lot of international students make bank, their parents do anyway.

  • Ocker on 09/01/2023 - 07:40
    +9

    Apartments are not an investment as such - there is seldom any capital gains. Rental income is not worth the hassles of having all the worry that comes with a rental property.

    • larndis on 10/01/2023 - 12:49
      +1

      Can all the people saying apartments don't appreciate provide some evidence?

      • ZloyKrys on 10/01/2023 - 15:13
        +1

        The OP is in Melbourne, it's absolutely flooded with apartments and I heard Melbournians don't like them. Here are a few examples I posted below, check the timeline and sold and bought prices

        https://www.realestate.com.au/property/unit-307-120-studio-l…

        https://www.realestate.com.au/property/l16-unit-162-8-waters…

        • Cherry12 on 10/01/2023 - 20:35

          When started thinking about buying the 1 bed apartment saw that in some suburbs there were negative capital growth in the last 2 years. Some suburbs have profits though.

          Now after getting the ideas here, checked more suburbs and have some gains for 2 beds. It seems some had gains at the beginning of covid but started losing in 2022, peehaps due to interest rates increasing.

          Anyway, will check carefully before committing.

        • markathome on 11/01/2023 - 13:01
          +1

          I didn't come here expecting to feel good about my investment decisions but that second property has an annualised capital return of 0.19% p.a.

          If it was negatively geared, 😱. In the rare circumstance the person was living there, then the situation is a little better.

          The trouble is, either way, these apartments have huge TCOs (rates + body corporate + water).

          This smaller one is $11,880/yr or $228/wk. For the slightly bigger one maybe $278/wk. So more than half my rent to live in the place.

          • ZloyKrys on 11/01/2023 - 13:13

            @markathome: Yep. Also, things to consider - are opportunity cost, inflation over those years, and inflation of property over those years.

            Imagine being able to buy a house with land in Brighton or Canterbury back in 2009 for $1.34M but buying an apartment instead - that decision would have had ~$2M price tag

            • markathome on 11/01/2023 - 13:33
              +1

              @ZloyKrys: And I completely forgot stamp duty too! Today it is $78.6k but back then I imagine something like $50k.

  • No and then on 09/01/2023 - 07:49

    Have you considered interstate?

    Its not that scary, two third of my portfolio aren't in the same city I live in. What's more amazing is I've only ever stepped foot in only one property.

    However, it does come with extra pre-purchase costs. Especially when using a buyers agent.

    • Cherry12 on 09/01/2023 - 20:19

      Not yet but I will start checking. Will compare taxes between states. Thanks!

      • Morphio25 on 10/01/2023 - 09:46

        Property prices are still pretty reasonable in Adelaide and you won't have any worry at all about finding someone to rent it.

      • Kangal on 10/01/2023 - 16:37
        +2

        When buying property the order of importance goes: Price, Location, Land Size, Dwelling Features, and then Intangibles.

        Get the top three done, and you won't have to cry later. Although a good portion of Australians would appreciate if you use your investment in other things, and not add to the Housing Bubble we're suffering from lately.

  • tabitha731 on 09/01/2023 - 07:52
    +1

    Never buy a 1 bedroom unit for investment, unless you can handle a high turn over of tenants, who really shouldn’t be renting.

    My financial adviser told me at one stage, dont buy an investment property, if its one u wouldn’t live in yourself. Would u live in a 1 bedder yourself?

    • TEER3X on 09/01/2023 - 20:21
      +12

      My financial adviser told me at one stage, dont buy an investment property, if its one u wouldn’t live in yourself.

      My adviser told me that's horrible advice.

      You buy an investment property for either capital growth, or yield or both. It can be a complete shithole that you'd never want to see, but that's completely irrelevant if it brings in the dough.

      • Quantumcat on 09/01/2023 - 23:59

        It can be a complete shithole that you'd never want to see, but that's completely irrelevant if it brings in the dough.

        Maybe the advice is meant to help people know if it is likely to bring in a decent rental income. If you would never live there then others might think the same.

      • Ulysses31 on 11/01/2023 - 00:43
        +1

        Agreed.
        We built our previous house, greenfields estate, for the market… not for us.

        Land & house criticism given by friends/family: too small, too simple, not what everyone wants.
        What happened: market was getting HOT, and people couldn't afford what they want. But queues around the corner for the entry-level of the market (at-least in this region) for both investers (for rental) and buyers. Sold in 24hours. Made 40% tax free in 2 years. Second time doing it. But from what I see, those days are DEAD.

      • Drakesy on 11/01/2023 - 12:33

        Not going to see much/if any capital growth in a 1 bedder though ;)

    • Cherry12 on 09/01/2023 - 20:22
      +1

      I lived several years on 1 bed, it helped me save. However, understand only a single person or couple could rent it.

      I'm now more inclined to buy a 2 bed.

    • netjock on 11/01/2023 - 15:53
      +1

      I bought a studio apartment in center of Melbourne (closest intersection is Elizabeth and Lonsdale St) in 2005. Never been empty. Always paid for it self. Doubled in value.

  • Rako on 09/01/2023 - 08:34
    +11

    If you buy a 1 bedder with no mortgage & still have a mortgage on you principal place of residence it means you would have the mortgage on the wrong property. One of the problems with units is there is always the potential for special levies.
    A 2 bedroom unit with garage or parking space on title would always be a better bet than a 1 bedder.
    Have you considered other investment opportunities? Shares? ETFs?

    • Ghost47 on 09/01/2023 - 15:29
      +2

      Have you considered other investment opportunities? Shares? ETFs?

      OP said:

      I'd be very worried if invested on shares, advisors charge a fortune and shares can suddenly lose value.

      Everyone knows investing in shares is basically gambling. /s

    • Cherry12 on 09/01/2023 - 20:30
      +1

      No shares, have done before on lower amounts and didn't get any profit. I could do in the future but never a high amount.

      I am now considering a 2 bed or unit. I will review the mortgage swap with the broker. Thanks!

  • Shadowsfury on 09/01/2023 - 08:48
    +23

    Own a 1BR apartment for a decade, wouldn't get it if I had my time again. Price has gone nowhere in the decade I have owned it. (Gross) rental yield is good though at just over 5%.

    Others are right:
    1) Minimising/no mortgage on the investment property is the wrong approach and the broker you work with should readily point this out to you without prompting - if they don't find a better broker
    2) Consider at least a 2BR if you do go down this route
    3) Don't be so put off by shares/ETFs - you do NOT need an adviser who is going to screw you over with fees. Have a read of https://passiveinvestingaustralia.com/ to get started. Property may look more stable but the difference is you aren't valuing your property on a daily basis. If you did it will fluctuate just like shares.

    • kiitos on 09/01/2023 - 13:21
      +3

      Good advice

    • amsaini15 on 09/01/2023 - 17:35
      +4

      Same here. Apartment value hasn't even doubled in last 15 years. Though good rental yield.

    • Cherry12 on 09/01/2023 - 20:37
      +1

      Thanks for sharing your experience and the link, will definitely read it.

      Have a broker but haven't discussed this yet. First wanted to know more about what to do and what questions to ask when we meet him.

      After all these comments here definitely won't get a 1 bed, will review 2 beds now.

  • ForkSnorter on 09/01/2023 - 09:29
    +1

    Consider other cities like Brisbane, Perth or Adelaide, you may be able to get a more valuable/larger property for the same price as Melbourne. For example, this one in the Brisbane CBD has a separate study, 2 balconies, and amazing views for $310k:
    https://www.realestate.com.au/property-apartment-qld-brisban…
    Looks like rents are pretty high in this area too.

    • Cherry12 on 09/01/2023 - 20:43
      +1

      Thanks! will look into that.

      • dcep on 10/01/2023 - 00:03
        +2

        Yes definitely consider IP in Brisbane

        Prices are dropping but rental continues to skyrocket and even more so in 2023.

    • jimbler on 11/01/2023 - 00:25

      You'd think they could find a decent bed for the photo.

  • Ashless on 09/01/2023 - 09:34
    +7

    Given your high incomes (and assume high annual tax bill), regardless of what investment you buy you should in principle:
    - maximise the interest on deductable debt (ie on loans related to investments) as this interest is tax deductable.
    - minimise any interest on non-deductable debt (ie loans on PPR) as this interest is no delectable

    IMHO, best way to structure an investments property is to borrow 100% of the investment property on an interest only loan.
    Any excess cash to go in an offset account against your PPR mortgage which will lower your non-deductable debt and thus non-deductable interest repayments.
    Down the road when you’re no longer working (and thus don’t have high tax bills), use the offset you have built up to pay out the investment loan.

    • kiitos on 09/01/2023 - 13:24

      Why is interest only better? Doesn't that mean you're paying more interest for longer as you're not paying down the principle?

      • md333 on 09/01/2023 - 13:33
        +10

        That's right, you want to maximise the tax deductible interest on the investment property. If you can afford to pay down principle, pay down the principle on your residence (not tax deductible interest) instead.

      • Some Guy on 09/01/2023 - 17:29

        It also minimises the repayments which helps cashflow (that can be directed to a better tax environ).

        • Blackadda on 10/01/2023 - 09:31

          it's also about a % or more higher interest rate so maybe not best for everyone.

    • Cherry12 on 09/01/2023 - 20:47

      Thanks! Very good advice.

      • Chong on 10/01/2023 - 12:52
        +1

        Make sure you can make the payments though, in common scenarios etc. losing job income, etc.

Login or Join to leave a comment
Login Join