Home' API Magazine : October 2014 Contents 30 n APIMAGAZINE.COM.AU n OCTOBER 2014
big dollar investment and typically triggers
significant transaction costs upon purchase
and sale, so it’s important to invest in advice
upfront as it’s usually more costly to reverse a
poor decision later on.
It’s also prudent to seek advice beyond the
property itself. Identifying the right property
to purchase is clearly important, but hard
work can be undone if ownership structures
aren’t properly considered, inappropriate
lending arrangements are in place, effects
on cash flow aren’t accounted for and the
tax implications of owning and later selling
haven’t been considered and planned for.
Further, the need for personal insurances
such as income protection should be
evaluated upfront and an exit strategy should
be in place from day one.
You also need to be mindful of longevity
risk by ensuring your property plan is able
to sustain you financially with respect to
increasing life expectancies.
As part of generation Y, on one hand and
from an investment perspective, you have
time on your side. This, to an extent, means
you have more time to recover from poor
investment decisions today than someone
who’s older. You also have more time to
realise profit outcomes from your portfolio.
On the other hand, however, you need to
consider the impact from increasing life
expectancies, from a financial perspective, is
more significant for younger generations. To
illustrate this point, if we consider your life
expectancy today – age 81 according to the
Australian Government Actuary (AGA) in
conjunction with your goal to semi-retire at
age 33, we can determine that your property
portfolio has to contribute to your existence
over a 48-year period. Furthermore, the
AGA data also reveals that as you get
older, the likelihood of you living longer
than your life expectancy at a younger age
increases every year. In other words, today’s
projected funding period of 48 years is likely
Compounding all of this is the reality
that government assistance (such as the age
pension) may not exist once your generation
retires. You’ll therefore need to be 100 per
cent self-funded and investing in professional
advice now will maximise your chances of
In terms of a property plan, my first move
would be to make the third purchase now.
Maximising your equity and rental income
position over the next 10 years needs to be
a priority if you want to wind back at work.
Time in the market is important in this
regard. With the renovation, make sure it’s
planned and executed well to maximise the
increases to capital value and rent.
I agree that Geelong West offers capital
growth potential, however, another benefit
of the area is that rental yields on houses are
higher than the Melbourne average, making
them more affordable to own. This also frees
up more cash flow for your next purchase,
which, from a diversification perspective,
should be in a different part of Melbourne.
In this regard, I’d focus on established
areas within 10 kilometres of the Melbourne
CBD. All amenities should be in place and
transport links to the city well established.
Compared to outer suburbs, buyer and
rental demand is typically stronger, which
can mean a lower-risk investment and more
scope to increase rents.
The flipside however are higher prices,
which make the negotiation skills of an
independent buyers’ agent invaluable.
Budget wise, I’d focus around $450,000.
Your borrowing capacity is possibly more
than this but I’m mindful of maintaining
a healthy level of surplus cash flow so you
can reduce debt over the next 10 years.
A lower purchase price also keeps debt
against your principal place of residence to a
minimum. At this price point, an apartment
or townhouse would be the options. Either
way, I’d look for something existing in good
condition that could be rented straight away,
but with scope to manufacture value/increase
the rent later on e.g. cosmetic updating,
converting the existing courtyard to an
alfresco area. Character properties may offer
greater growth potential and saleability.
Off-street parking is desirable near the
city and for apartments, it’s worth checking
with the council to see if a car park can be
Focus on suburbs that have tight
regulations surrounding apartment
developments. If high-rise development is
permitted look elsewhere. Properties meeting
the criteria discussed will be negatively
geared, however, your surplus cash flow of
$20,000 per annum plus should be more than
sufficient to cover the loss, while still making
extra loan repayments.
Once settled and tenanted, set about
reducing the loans over the next 10 years,
starting with the equity loan against your
principal place of residence.
Consider a cosmetic renovation/value
add on the new purchase down the track.
Structure all loans on an interest-only basis
for the maximum available interest-only
term. Borrow 80 per cent against the new
purchase and the remaining 20 per cent
plus fees and a buffer amount against your
principal place of residence.
Keep the buffer amount in an offset
account. Buy another 15 years of flexibility by
refinancing, just before semi-retirement. API
Are you facing a fork in the road and not sure
what to do next with your property investment
journey? Email firstname.lastname@example.org
and we’ll do our best to share your story in an
upcoming ‘Fork in the Road’ segment.
This information is of a general nature only and does not
constitute professional advice. You must seek professional
advice in relation to your particular circumstances before
acting. This information is also to be read subject to the
disclaimer on page 6.
f Purchase another property in Melbourne,
spending about $450,000 and focusing
on eight per cent return per annum.
f Avoid the Geelong area for diversification.
f Make sure every renovation dollar creates
two, i.e. spend $40,000 on a renovation
to create an $80,000 equity gain.
f Work out your goals and priorities and
how to achieve them.
f Obtain advice from independent
f Focus on established areas within
10 kilometres of the Melbourne CBD.
f Spend about $450,000 on a unit or
townhouse in a smaller block.
f Take out interest only loans and keep
a buffer against your principal place
EXPERTS’ SUGGESTIONS IN A NUTSHELL
Jack Stevens owns not one but two
properties in Geelong West. The commercial
and residential suburb of Geelong recently
copped a lot of media attention after
hundreds of workers were sacked when the
Ford car manufacturing plant closed its
doors. But Jack is still confident about the
area and is even considering buying a third
“Geelong West is an area with expected capital growth,” he says.
“It’s had strong capital growth over the past five years and it’s close to shops, cafés,
quality schools, transport and the CBD.”
GEE HE LOVES GEELONG WEST
FORK IN THE ROAD n Jack Stevens
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