How should Steve get started?


1 . Analysis

Firstly we need to find out what the limits are for Steve.

A . Borrowing capacity.
After researching multiple lenders, the result is that he can borrow about $1.9 million to buy an investment property. This takes into account an assumed future rent for the property. Being single and having his rent paid by his employer contributes greatly to Steve’s borrowing capacity.

B . Equity/Savings.
Steve has $60,000 in savings and, by his own admission, he could save a lot more if he was a bit more disciplined. He estimates that he could easily save $2,500 per month if he put his mind to it.

2 . Recommendations

a . Strategy to purchase an investment property.
Although Steve has substantial borrowing capacity he has little in savings and this limits his purchasing ability. To build his portfolio he will have to be patient.

Option 1:
Steve could acquire a house and land package property in Queensland for around $400,000. When acquiring a house and land package stamp duty is payable on the land component only, which will save on the initial cash required.

Borrowing would be at 90% of the purchase price, with the rest being financed by his savings.

He would need $46,000 from his savings to complete the transaction as follows:


As Steve will have to pay interest from the day he acquires the land it is imperative that he starts saving his $2,500 per month immediately. He still has a $14,000 buffer but his priority should be to rebuild his savings to $60,000 to keep a comfortable buffer.

I only recommend this type of acquisition because Steve has a considerable saving capacity and has undertaken to adopt the strategy I recommended for him, which includes building his savings as quickly as possible.

Option 2:
Steve could invest in an off-the-plan property with settlement in around 2 years time. For a $400,000 property he would need a deposit of $40,000. This would give him time to build further savings and increase his buffer.

As Steve needs to commit to the property before finance is approved he will need to be confident in the property being priced adequately.

Option 3:
Steve could concentrate on increasing his savings to about $100,000 before investing in property. This would be the most conservative approach but, in an increasing market, he would miss out on capital growth which is the key to creating wealth.

b . Other considerations.
We will be looking at setting up an offset account for Steve against his investment property (once acquired), and transferring his savings into it. This means that he will earn interest on his savings at the same rate as he pays his mortgage.
As Steve is keen to build a larger property portfolio than just one purchase he understands the need to continue to save, putting this extra cash into his offset account. This will enable him to have a ready deposit towards his next property purchase.

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