Wealth Effect Group CASE STUDY: Dan & Dani first investment property.
Meet Dan & Dani
Dave & Dani discovered Wealth Effect Group when they met our founder Andre on the Inner West Buy Swap Sell Facebook Group. Obviously, money was on their minds!
Two things were high on their list of priority:
1. Paying down the mortgage efficiently
2. Having a property portfolio to help fund their eventual retirement.
They were unsure about how much debt they could afford to carry on one income and with the property market running hot in the inner west. They also wanted to make sure that they were making the most out of the investment opportunities before they were priced out of the market and missed out for waiting too long.
When they came in to chat to us, at what we call a 'Financial Discovery Session', we discovered that Dave, 36, is a building supervisor and Dannii, 32 had left her role in marketing at the local council to become a full-time mum to their two kids, aged four and one. The real question was how could they achieve financial security while raising a young family on only one income, even if it was until the kids had reached school age?
After analysing their situation we determined that investing in property was one strategy (amongst others which we are not covering in this blog) that could be utilised to; enhance Dan & Dani's financial wealth, create future opportunities, and assist with paying down the mortgage.
They had four factors on their side;
1. They had already built some equity in their own home in Seddon and had managed to save some money into their offset account attached to the home loan.
2. They were ‘Cash Fit’ and understood their family cash flow – so we introduced them to CashMaster to streamline their family budget and ensured that they had surplus income to contribute toward supporting the investment and investment strategies without impacting the family lifestyle.
3. They had our 9 point Wealth Effect Property Strategy based on current borrowing capacity and immediate goals and timeframes - Outcome/purpose, LVR, Rental yield, Entity, Purchase price, Type of property, Class Property (a,b or c), Location, negative gearing and let’s not forget depreciation.
4. The Wealth Effect team - Us.
The Lending Challenges
Dave & Dani had a number of challenges we had to overcome together. Going from double income down to one. There has also been tightening of investment lending from banking institutions, Apra inforcing a 10% rule on investment lending which was introduced in 2014. The knock on effect of this is that banks have greater focus on responsible lending and have therefore increased their serviceability rates considerably, to an average of 7.4%.
The other challenge we needed to overcome was to find a lender that would allow Dave & Dani to access their equity without having to provide a contract of sale for the new investment purchase.
WE have access to lenders that will allow you to release the equity in your home, giving you full access to the funds in a transactional account. This method makes purchasing a property easier when paying deposits etc, and the beauty of this is you only pay interest when you start using the money. The method of getting access to the equity available in your property benefits you in two ways;
You receive aggregate lending discounts (depending on the lender of choice).
You only pay interest on the funds when you have used them.
We chose this option so that Dave & Dani will have cash available to put down as a deposit, whilst allowing them to use a multi-bank strategy to enhance servicing, which gave them the opportunity to increase their purchase price to; over $750,000! By increasing their purchase price to over $750,000.00, Dave & Dani no longer had to compete with the first home buyers market.
Dave & Dani could afford to purchase an investment property to the value of $790,000 including stamp duties and other costs. They were now ready to start their search. We suggested that they seek out an investment in a suburb that's close to the city ring (5-10 km’s), like the inner west of Melbourne. This area had favourable macro-economics such as; local town planning allowing for greater housing density and therefore population growth, which creates scarcity in land and pushes up the price of land. We also asked them to consider a family home near infrastructures, like schools, rails, and bus routes.
They managed to secure a property in West Footscray with 3 bedrooms, 1 bath & 2 Car spots on 370 square meters of land at $792,500. They paid slightly above the median house price of $745,000, however West Footscray has enjoyed a Annual capital growth rate for the past 12 months of 9.17%, with a median weekly rental of $550. This trend will continue according to a report from your property magazine.
It's been 9 months since our Financial Discovery Session and we've came up with a holistic financial plan for Dave & Dani who are delighted with their new investment. Although they've only held the property for 6 months, there's already been an increase of $36,221 in growth. I've really enjoyed showing them how this strategy alone was going to help reduce their home loan by approximately 10 years!
Dave & Dani are now well on the road towards their goal of retiring in their mid 50’s, being able to achieve a passive income of $120,000 after tax. They are pleased that they now have the foundations in place to continue to build a solid future for both themselves and their children.
If you're wondering how, why and if you even should invest in your first investment property we'd be happy to explain the process to you. Get in touch with us for an obligation free chat.