Two Properties, Children Soon- What Next?

[House Hunter]

My partner and I live in Auckland.

We have two rental properties, one in Auckland and one in Hamilton.

Auckland property is ~$760k, has $525k owing on it. Makes $31k in rent. Breaks even at current interest rates. Bought with potential to perhaps move into one day, but now happy to keep as rental.

Hamilton property is ~$380k, has 290k owning on it. Makes 20k in rent. Cashflow positive at current interest rates.

We earn 62k (I) and 76k (her) incomes. We intend to start a family in 2-3 years time and we hope for her to be able to be a stay at home mother. We therefore won't be able to buy another house until she goes back to part/full time employment after the children have begun school (almost 10 years away).

So what should we do for the next 10 years until we are in a position to buy more property?

Simply pay down debt and reduce our borrowings?

[incident]

invest in stocks/bonds/forex to generate more wealth, diversify your portfolio

[Boom]

What is your current living situation - are you renting or living in a third property (with mortgage obligations?) / or living with family?

As that will make a big difference to your financial situation and having kids.

[Rosco]

Hi,

Do you own a personal house? If so what is the value and debt?

With your income of $62,000, after tax $50,000, I'd be concerned about being able to survive. If you don't have a debt free personal house, then a large chunk of your net income will disappear. Leaving you very little left for your families expenditure. You will get some working for families but do you want to rely on this?

I see a major risk being interest rate rises. Your rentals must be very border line at current rates, and if you expect just one income, how would you afford any increases? I would personally look at fixing long term to avoid this risk, still can get around 4.5 or 4.6% for 5 years.

You could look at trading to create more income, but obviously trading isn't easy and is risky.

Ross

[marklowes]

My partner and I live in Auckland.

We have two rental properties, one in Auckland and one in Hamilton.

Auckland property is ~$760k, has $525k owing on it. Makes $31k in rent. Breaks even at current interest rates. Bought with potential to perhaps move into one day, but now happy to keep as rental.

Hamilton property is ~$380k, has 290k owning on it. Makes 20k in rent. Cashflow positive at current interest rates.

We earn 62k (I) and 76k (her) incomes. We intend to start a family in 2-3 years time and we hope for her to be able to be a stay at home mother. We therefore won't be able to buy another house until she goes back to part/full time employment after the children have begun school (almost 10 years away).

So what should we do for the next 10 years until we are in a position to buy more property?

Simply pay down debt and reduce our borrowings?

So without your wife's income you believe you'll be limited due to serviceability?

Firstly you don't earn enough in my opinion to raise a family in Auckland on your 60k. Move if you want a family.

Secondly, I think this shows how stupid banks and the rbnz are in assuming property investors are higher risk even though their income comes from multiple diversified sources.. there is no chance of a rental property getting pregnant and taking a 10 year earnings break, insurance covers foreseeable risks (sounds rough but that's the rational truth).

I think you could move forward by selling in auckland (I know the cult followers will scream that's crazy as all these myths of a magical auckland market that only goes up) and buying properties that yield a lot better.

Fundamentally an asset is valued on the income it produces. More technically, net present value of an asset is based on all its future earnings discounted at an assumed discount rate.

Auckland prices getting so far away from rent would only make sense if people assume rents will eventually grow at a similar degree in the future (growth stocks eg amazon, Facebook, are valued at extremely high multiples (P/E multuple) as its assumed market dominance will eventually lead to massive future earnings.

Can we say the same about auckland property? Will rents all be 2k per week for the average family any time soon? Of course not. Nz structurally doesn't have wages to support such a rent hike.

Auckland is significantly overvalued relative to many regions in NZ.

However, at 3% yields in auckland, it may not actually be overvalued on a global basis as there are becoming fewer and fewer safe place to put money that return any yield what so ever. (People are accepting negative yields just to ensure preservation of capital).

I'd sell auckland, buy 4 or 5 in PN yielding 7% plus, the positive gearing will make servicability better if you have children and capital growth in PN likely to also allow you to move forward dispite low salary.

[House Hunter]

What is your current living situation - are you renting or living in a third property (with mortgage obligations?) / or living with family?

As that will make a big difference to your financial situation and having kids.

We are living in a room in a flat. Once we have a family we will rent a 2-3 bedroom house.

[House Hunter]

My income of 61k would hopefully be higher in 2-3 years time. Perhaps around the 80k mark.

Also, moving out of Auckland is a very real possibility for living/working/raising a family. Tauranga lines up with my industry of transport/freight as being a good option.

[Rosco]

Does 7% gross yield actually get you anywhere? You are talking about investing based on financial fundamentals, and long term 7% would struggle to pay all the costs. In lower value places like PN, repairs still cost similar to Auckland!

At 7% gross yield you might make $1,000 per year if you are lucky at 4.5% interest. This $1,000 profit (if you are lucky!) isn't really going to pay down the loan, so in 10 or 20 years time, you will still have a neutral property if interest rates stay low. If they go up a bit, then the property would be negative.

So for the PN 7% gross yield property to work, you would still be gambling on capital gain. Is this really such a smart idea?

Ross

[Boom]

My income of 61k would hopefully be higher in 2-3 years time. Perhaps around the 80k mark.

Also, moving out of Auckland is a very real possibility for living/working/raising a family. Tauranga lines up with my industry of transport/freight as being a good option.

Yes I would definitely look at living outside of Auckland in those circumstances. Although your income may be higher - a lot of costs may be higher too (food, petrol, insurance, rates, rents).

Being in freight you probably will have a good idea whether anything is going to happen up at North Port. keep Whangarei open as an option as it a similar distance away from Auckland and far far cheaper than Tauranga - you could potentially buy a couple properties there and manage them - but then demand and the type of tenant is probably different to Auckland/Tauranga.

Tauranga does have a better city life/schools etc.

Raising a child is no easy feat even if one parent is staying at home, so in terms of managing the properties consider how hands on you really want to be -

a) do you want to be having to follow up with tenants/stress etc or would you rather get a property manager -
b) consider the cost of having a property manager versus not

If I was in your situation I would not consider investing in houses that are far away from you (PN) without a property manager and as pointed out tradesmen can be just as expensive there - if not more and harder to find than big city if problems go wrong.

It would be pretty tight.

Also, consider whether your wife could take maternity leave and return to work (full time/part time) and what her potential for increases are - as financially it may better for your family if you became the stay at home parent - scary as it sounds!

Come up with pro's/con's list with your wife for every decision. eg. if renting 2 vs 3 beddy house - a 2 will be much more cheaper rent wise and probably require less $$ for electricity to heat, you may even get closer to work etc.

I deeply sympathize - I too am looking at kids soon and def would prefer one parent at home, but based on my earnings vs the wives it would be me being the stay at home parent after her maternity leave was up!

[Nick G]

First of all

a) it's great that you're on to this now.
b) You guys have more than $300K in wealth
c) You have 3 years

If I was in your shoes I would live like as cheap as you can for the next 3 years and accumulate as much cash as you possibly can so that you have more options.

Assumptions (guesses):
Rent: $250pw for your room, $13,000 pa
Groceries: $200pw, $10,400 pa (welcome back to making meals and lunches at home!)
Utilities: $25pw (I assume you split bills), $1,300 pa
Phones and internet: Not sure if your work covers phones but assume $160pm all up so $1,920 pa
Car costs: $15,000 all up? I assume you have 2.
Misc/fun/clothes: $100pw, $5,200 pa
Total: $46,800

With your current combined incomes of $138k, after tax say $110K, you should be able to save nearly $65K pa. Over 3 years that's $195K. If you can cut down on phone plans, entertainment and car usage you might be able to up that by 10K and say you get another 10K in pay raises or bonuses. That's $215K, which plus your existing $300K of house equity puts you in a pretty good spot.

Assume your properties go up 15% over the next two years (total), you then have the option of selling Hamilton, pocketing $150K from that, putting that plus $200K of your cash into your Auckland home and you'll be heading into fatherhood with a $875K~ house on $175K debt, $15K in the bank and you'll be pretty sweet from there.

[PC]

Ha Ha Ha - man are you in for a big change in perspective on life.
Get some sleep - you're gonna need it.
Check the price for a box of nappies (there goes the beer budget).

Bigger things than buying houses to worry about.

[marklowes]

My income of 61k would hopefully be higher in 2-3 years time. Perhaps around the 80k mark.

Also, moving out of Auckland is a very real possibility for living/working/raising a family. Tauranga lines up with my industry of transport/freight as being a good option.

Palmy handles 6x the freight of welly and is growing central freight hub so you'll be in demand there.

http://www.stuff.co.nz/business/8428...ome-withdrawal

The exodus from auckland into more lifestyle friendly cities in happening on a bigger scale than many realise - there are no hard stats on internal migration flows, but next census will provide some insights. I've seen personal experiences of many many people voting with there feet and leaving auckland for greener pastures.

[Livie]

My husband and I are in a similar position as you. We own 2 properties, one a rental and the other our PPOR. We are looking at having children in the next 5 years. We had a great discussion with our mortgage broker about our situation and options going forward. We have decided we would rather live on less now and pay more on our mortgages, for us this involves refinancing and looking at other banks. This would mean we should hopefully have a tiny bit less expenses when we have children and I would stop working for a year max and then return to work full time. If need be and things change we can always sell the rental in the future but the plan is to keep it medium to long term.

You and your wife need to decide what is the most important to you and work from there and you MUST be realistic. From what I read and not knowing you personally you need to be a bit more realistic.

You mentioned in a previous post that you expect your income to go up to $80k in the next 2 - 3 years. Are you going to move job, get a promotion or are you banking on getting 9 - 10% wage increase every year for the next 3 years to reach around 80k?

I would suggest you do a budget on what you are earning now and not what you might earn in the future and what your income and expenses would look like if your wife isn't working. This will give you an idea of what you will be living on and if you can afford 2 properties.

You have a few options but as I said be realistic, kids are not cheap, you don’t want to end up in a sticky situation. My suggestions would sell 1 of the properties; your wife takes less time off work; pay as much as you can off the house you would want to live in and live in it or keep renting if that is cheaper for you.

There are a lot of other options and I’m sure you and your wife would have looked at all of those. Good luck with the future.