Simon Street and his wife wanted to jump-start their investment journey after they got married a few months ago—but should their first purchase be a principal place of residence or an investment property?
The couple has been saving for a house deposit for the past eight months and has just started looking into properties in the eastern suburbs of Sydney. Should they aim to buy an investment property this year using a part of their savings or continue to save so that they could purchase a more valuable family home?
According to Smart Property Investment’s Phil Tarrant, purchasing a property is a very emotive decision, especially as you’re starting a new life and building a family.
He said: “You're going to make a choice whether … you want to have a home or you want to look at potentially realising your savings by creating an investment … That's a choice that you need to make. It's not one for [anyone else] to really touch.”
“Often, property investment always isn't about the numbers. Sometimes, you got to follow your heart and your emotion … follow what's right for you,” the avid investor added.
Mr Tarrant and Pure Property Investment’s Paul Glossop, who have both spent years creating wealth through real estate assets, share their insights on building a good property portfolio:
Before making a decision, review your total savings and determine how much you want to save and how much you’re willing to spend. Most houses in the eastern suburbs of Sydney costs more than AU$1 million, so budding investors who want to purchase a house in the area need a good amount of savings.
Stamp duties, legal fees, and several holding fees also add to associated costs.
Letting your money sit on a bank account isn’t really helping with your wealth-creation efforts, Mr Tarrant said.
He explained: “That's cool if you've got the capacity to save … but … your money is not really working hard for you if you got it packed in a bank account.”
In Mr Street’s case, the fact that his wife already has an investment property with her sister adds complexity to the circumstance. According to Mr Tarrant, there might be unrealised equity in that property and Simon and his wife could either draw equity out or liquidate the asset so they could continue growing their portfolio.
“There is potentially quite a lot of unrealised equity in that property … You've got look at whether or not … you want to move quickly, whether you'd liquidate that asset and use any proceeds from that to … add to your savings so you can buy a new house, or you keep that and … you could potentially refinance ... and draw some equity out of [it] and use [that] as well,” he suggests.
Mr Tarrant and Mr Glossop encourage budding investors to visit the bank or a mortgage broker in order to make the best financial decisions.
Both Mr Tarrant and Mr Glossop have decided to rent while they are building their property portfolios.
According to Mr Tarrant, he opts to put his money into high-growth properties and enjoy the benefits of increasing equity rather than have his savings sit in a bank account and get only around 2 per cent interest.
He said: “[Purchasing] a principal place of residence … [is] not really for me right now [because] rather than have my savings sitting in a bank account … I've got it working for me in property.”
“At a point in time, I'll draw down on that equity and that is what I would use to be my savings [for] … getting to a property to buy for the family,” the avid investor added.
Paul shared: “I personally have been … rent-investing ... for a number of years … and built a significant portfolio in the background. Basically, by [doing so] … my money can work a lot harder.”
There are a lot of things you can do with a property as an asset—develop, renovate, and subdivide, among many others—but you can never change its location.
Mr Glossop highlights the importance of doing research and seeking the advice of professionals to make sure that you’re investing in the right area. The property’s proximity to schools, transportation, and other significant structures will dictate the demand for it and, ultimately, the growth it can achieve.
According to him: “What's important to you is the schools … [its] proximity to transport, [its] proximity to work. All of those things come into play."
“There is a … lot of transaction cost that goes with buying; it's very expensive to get in and get out … Unless you're certain that this is the property, I would … probably really consider that part first and foremost before you even talk about numbers,” he added.
Building a reliable financial team will help you understand the ins and outs of the real estate industry. As a buyer’s agent, Mr Glossop makes it a point to lay out all possible strategies for his clients based on “objective numbers”.
For example, he said: “Let's say it's a $2 million house, and … at this stage in the Sydney cycle, let's realistically expect the Sydney property market to go relatively sideways for the next three to five years."
“Eastern suburbs will average about 3 per cent growth rent to you on a good day, [so] if you put $2 million, that's about $60,000 a year in rent if you're working off 3 per cent.
“If your property has gone sideways and you've bought it and you're paying 4.5 per cent on a principal and interest loan, that's about $90,000 a year it's costing you to hold a property that doesn't go up in value,” he explained further.
According to him, by renting and “testing” the property, you could potentially save around $25,000, which you can add to your deposit for another property.
“Hopefully, with that [additional] investment, you're going to get out in the sides or in the peripherals, getting them working harder than what that [single] property would otherwise do,” Mr Glossop said.
Aside from considering immediate returns and growth, it’s also important to study how your investment and your finances will work in the long-term.
Mr Glossop advises against getting a big loan for an owner-occupied property at the beginning of your investment journey because it will affect your ability to service the next properties you will add to your portfolio.
He said: “If your intention over the long-term is to build an investment property portfolio and [you hitch] your cart to a big loan … now, good luck trying to get additional cash in the next three to five years to invest."
“Unless there is going to be significant earnings or a windfall of cash, you're going to become one [of] those statistics of 82 per cent of people only ever owning one investment property,” the buyer’s agent added.
In order to keep growing your portfolio, think about how you will access money throughout your journey as early as when you make your first purchase. Target properties in different markets that can consistently make your money work.
Mr Tarrant explained: “[It’s all about the] utility of your money. Yes, you can buy a house in Eastern Suburbs [but] it's probably not going to go up in value, and if it doesn't go up in value, it means you're never going to be able to … extract that realised equity gain and put that in [another] investment property.”
Aside from holding costs and interest repayments, consider tax consequences that come with investing in properties.
At the end of the day, choosing between buying a family home or an investment property depends on your personal priorities. Discuss plans with your family, as well as with professionals, so that you could weigh your options and arrive at the best conclusion.
Mr Tarrant said: “Goes back again to our original comment: Sometimes, you've got to put other priorities ahead of making money … If that's living in a nice home in the eastern suburbs with your wife and potentially creating a home for a family, you got to weigh that out.”
“Money doesn't always matter. Sometimes, you're going to be happy [without it] … If a home is 'happiness' for you … you can follow that dream,” the avid investor concluded.
Tune in to Paul Glossop’s Q&A episode on The Smart Property Investment Show to know more about the Victorian State government changes to subdivisions and the requirement for a garden space, and how they think it will impact affordability and cash flow in the future.