What Would You Do? 260K Deposit for 570K Apartment

westie123 on 04/10/2022 - 21:36

Hi all,

I'm in a predicament at the moment - what would you do in my situation?

I've got a 260k deposit available (+10k emergency) for a 570k apartment. Meaning I have to take out ~300k loan (FHBG included). Only debt: HECS.

Planning to turn it into an investment property after 1 year.

Would you:
1. Take out a 300k loan
2. Take out a 350k loan and leave 50k in offset for future purchase
3. Something else…

Goal in the next 3 years: purchase a 2nd IP.

All thoughts are welcome and appreciated!

Poll Options

  • 4
    1. Take out a 300k loan
  • 60
    2. Take out a 350k loan and leave 50k in offset
  • 30
    3. Something else
Financial

Comments

  • Caped Baldy on 04/10/2022 - 21:42

    Talk to your bank on the options. I think you may as well put half as the deposit and half in an offset account.

  • SnowDragon on 04/10/2022 - 21:42

    You're planning to turn it into an investment property in 1 year and then purchase another investment property in 3 years.

    What are you currently doing now and what will you be doing between year 1 and 3?

    • westie123 on 04/10/2022 - 21:45

      Hi SnowDragon,
      I plan to move back home + save up more.

      • SnowDragon on 04/10/2022 - 21:51

        Why not just stay at home for the first year if you have the option?

        • westie123 on 04/10/2022 - 21:55

          Good point however to receive the first home buyers grant and stamp duty exemption- I have to live in the property for 6 months!

          • SnowDragon on 04/10/2022 - 22:10
            +2

            @westie123: I was in the same situation last year.

            It's worth calculating how much it'll cost to live in the property for 6 months vs how much stamp duty will be.

            For example I got back 7k in stamp duty on my place. But could have earned 9k~ rent during that time and also not having to pay internet, power and water bills.

            That being said I enjoyed the freedom of living out of my parents home for 6 months so perhaps that's worth the potential funds I missed out on.

            • westie123 on 05/10/2022 - 22:19

              @SnowDragon: Which state do you live in? Stamp duty would be ~20k for my property in NSW. All very valid points esp the one about moving out of parents for 6 months.

              • SnowDragon on 06/10/2022 - 07:00

                @westie123: In tas.

                The stamp duty scheme only gave back 50% of the total paid

          • Donaldhump on 04/10/2022 - 23:23
            +2

            @westie123: and to avoid CGT

        • Donaldhump on 04/10/2022 - 23:23

          cgt implications

          • SnowDragon on 05/10/2022 - 06:46

            @Donaldhump: Don't you only pay cgt if you sell the property and it's not your PPOR?

            • Zeph101 on 05/10/2022 - 08:06
              +2

              @SnowDragon: Yes.. but if he lives in the apartment from day 1 he has established main residence. Then he can rent it out for up to 6 years and still keep the exemption.

              The proviso being that he doesn't establish another main residence. Ie buying somewhere else and living in it.

              • Donaldhump on 05/10/2022 - 08:21
                +1

                @Zeph101: Even if u buy another place and live in, it’s ur choice which one is ur ppor afaik

                • Zeph101 on 05/10/2022 - 09:37

                  @Donaldhump: That's true.. but that ends up making stuff much more complicated.

                  • Donaldhump on 05/10/2022 - 09:42

                    @Zeph101: well if prop A doubled in price, and prop B dropped 10% over the course of 6 years, and you sold prop A its a no brainer.

                    or you want to delay the cgt for years when you are not working on prop B.

                    makes it complicated a tad but you do whats best for yourself

                    • Zeph101 on 05/10/2022 - 10:31

                      @Donaldhump: Yep do agree!

                      will all be down to circumstances at that point.

            • Donaldhump on 05/10/2022 - 08:20
              +1

              @SnowDragon: If you live for 6 months (1 year to be safe) you can then move out and keep as ur pppr for 6 years whilst renting out if u have no other place

  • SBOB on 04/10/2022 - 21:54
    +5

    Largest loan that gets you a suitable interest rate and no lmi, throw the rest in the offset account.

  • SF3 on 04/10/2022 - 21:57
    +7

    Take out $456k loan ( 80% ) for maximum neg gearing.

    • Mechz on 05/10/2022 - 07:44
      +3

      It would be unAustralian not to take advantage of the welfare system.

    • YRT on 05/10/2022 - 08:08

      2nd this. Current housing price means the OP's likely having a divestment property, not investment property; negative gearing is realistic and should be well considered.

    • 4foxache on 05/10/2022 - 08:21
      +1

      Yep take out the biggest loan you can to avoid LMI likely 80% and put the rest in the offset. With the offset you're only paying interest on the offset amount so no point putting more cash into the loan. Leave it for your own use and other things.

  • tabz on 04/10/2022 - 21:59
    +8

    Here's how I would do it:

    Put down a 20% deposit ($114k) so you don't pay the LMI and borrow the remainder ($456k). Make sure you get an 100% offset account attached to that loan and put your surplus in there. Don't pay additional into the mortgage other than the minimum repayments (i.e. have $0 in your redraw facility if you have one).

    When you're ready to turn it into an IP, the interest earned on the mortgage amount is better tax-wise as it would be higher than if the mortgage was less/paid down. You can deduct it against your other income (i.e. salary) lowering your taxable income.

    Talk to a mortgage broker though, I'm sure they can explain it better than I can.

    • westie123 on 05/10/2022 - 23:07

      Thanks for your input!

  • TheMindsetTraveller on 04/10/2022 - 22:02
    +1

    No.3 And this is what I would do = 20% deposit ($114k) + 80% loan ($456k)

    The loan must have an offset account where you will park your $146k, so the interest is only chargeable on the $300k.

    Now, in a few years' time when you want to get your 2nd IP, use the funds (i.e the 20% of the 2nd IP) from your offset account. You want to get a 2nd loan for the 2nd property, with only the 2nd property as security, rather than lumping both properties together (if you know what I mean).

    • westie123 on 05/10/2022 - 23:07

      Thanks for your input!

  • leelemon on 04/10/2022 - 22:04
    +5

    Is there a reason you want to get an apartment? Houses generally appreciate better because of the land.
    No hate on apartment owners - just thought there were less benefits to buying them in comparison to a house

    • westie123 on 05/10/2022 - 22:25

      Definitely had considered this very heavily when I made the decision on an apartment.
      In my area, houses are outside my borrowing capacity limits/dont have the serviceability capacity.

  • Tee Rex Arms on 04/10/2022 - 22:35
    +1

    How much of this 260k deposit where you gifted/given?

    • The Delray Misfits on 06/10/2022 - 09:56
      +2

      OP gone quiet most likely a gift from the old parents

  • Duckie2hh on 04/10/2022 - 23:04
    +1

    Take 600k loan, leave 260k in offset.

  • Donaldhump on 04/10/2022 - 23:24

    biggest loan possible avoid LMI. offset the rest - the deposit,no reward for paying things off faster

  • Tomcruise on 05/10/2022 - 00:16
    +1

    The PYRAMID is collapsing, don't be under it.

  • hasher22 on 05/10/2022 - 00:23
    +2

    I'm prob adding fire here

    Why a unit? Can you afford a house somewhere with the same mindset?

    I live in a unit now, built 2017 in Homebush, NSW. Nice units, while renting here, 3 units went up for sale, they all lost money (seeing online purchase data). One bedroom unit decreaesd by 80k, 2 x 2 bedder decreassed by 50k and 60k.

    I was looking online and the last unit I lived in for good 7 years was up for sale, coincidently. Here's the sold data:
    2005 Mar: 315k
    2013 Jun: 318k
    2014 Nov: 397k
    2022 Aug: 390k

    • ForkSnorter on 05/10/2022 - 08:50
      +2

      Property purchases don't always have to be money-making schemes. They can also be a place to live.

      Think about the quality of house you can get for $390k, and would you want to live in it? I'm thinking: a 1950s asbestos shack in the desert somewhere.

      • Donaldhump on 05/10/2022 - 10:21

        yes spot on, the $ value of living in a nice street and house is priceless

    • westie123 on 05/10/2022 - 23:06

      Unfortunately won't be about to service a loan large enough to cover the cost of a home at this time

  • Ocker on 05/10/2022 - 08:15
    +2

    Don't buy the apartment in the first place - they are a lousy investment option with minimal, if any, capital gains

  • ForkSnorter on 05/10/2022 - 08:57

    If I were you, I'd buy a cheaper apartment that you can pay off in 2 or 3 years. Live there the entire time. Pay off the entire loan. Then either sell it and move to another place, or stay there and save up for your next property.

    I don't like these complicated financial/investment manoeuvres that suck money out of the economy. Maybe you'll get lucky and make heaps in capital gains, but maybe not. In the meantime, by the time you've got your 2nd or 3rd investment property, you'll still be paying heaps of interest and rates and body corporate and insurance and don't forget you'll be up for land tax as well, which could cost you another $5k per year, then there will be maintenance costs. You can't claim all of that back in your tax return. You can only claim a portion of it.

    In the end, you will probably be better off doing it the slow way: paying off your first property before buying your second.

    • westie123 on 05/10/2022 - 23:06

      Thanks for your input!

  • Ashwsw on 05/10/2022 - 22:14

    Borrow 95% under FHBG Scheme so no LMI applies or buy in LMI as it will not be a lot of LMI at that loan amount, park rest in the offset.

    Back to parents, save up, buy next IP and so on.

    Make the whole loan tax deductible.

    Good luck.

    • westie123 on 05/10/2022 - 23:06
      +1

      Thanks for your input!

  • ForkSnorter on 06/10/2022 - 10:03
    +2

    Imagine you own 2 investment properties in Victoria, combined value = $1.2 million (apartments) or $1.6 million (houses). Each year, you'll have to pay $5k land tax ($7k if they're houses).

    https://www.e-business.sro.vic.gov.au/calculators/land-tax

    Then, each year, you'll have to pay $3.5k-$4k rates and water for each property, total = $7k/year.

    (if they're houses, the tenants will cover part/all of the water fees)

    If your properties are apartments, you'll have to pay roughly $5k body corporate on each property, total = $10k/year.

    If they're houses, you won't have to pay body corporate, but you'll have to pay ~$2k-$3k insurance on each property, total = ~$5k/year.

    If you're renting them through an agent, you'll have to pay 6% of your rental income on property management fees, total = $3k/year (apartments), $4-5k/year (houses)

    All up, you're looking at $25k outgoing costs for 2 apartments, or ~$22k outgoing costs for 2 houses.

    Then, you'll lose 35-40% of your rental income in tax.

    These calculations don't include the interest you'll pay on your mortgage, or maintenance costs. Keep in mind, maintenance costs are likely to be higher for houses than apartments.

    I don't think mum and dad investors are really considering all these costs when they blindly sign up to decades of debt slavery for the opportunity to take advantage of negative gearing or potential capital gains.

    Is it really worth it when prices are already so high and your potential to obtain further capital gain is limited?

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