Case Study - 26, inheritance of 250k "towards house", Australian housing issues

[AustralianMustachio]

UPDATE - cut to my most recent post at the bottom of the page for the shorter, updated version of my current situation. (Blue writing)

Hi everyone,

I am 26 years old and live in Melbourne, Australia. For most of my life so far I haven't really given enough thought to money, and I am just starting to understand it better now. I love this website and all the tips on living frugally, and am taking much on board. My goal is probably the same as everyone here - eventual financial freedom.

I am to receive an inheritance of 150K from my grandmother who sadly passed away last year. My income is rather low (see below for details) and this is by far the largest asset I will own, so I want to invest it as wisely as possible.

There is the directive in the will that 100K of it be used to "go towards my first house." The other 50K is free to do with what I choose, as long as it's some sort of investment. There is also a family trust in my family that will provide me with 100K "towards my first house." So my parents are suggesting this - that I find a house for 250K and invest in it. Either to live in, or find a rental property.

However this worries me somewhat, as it seems like I'm putting all my eggs in one basket. The housing market in Australian cities is apparently at some of the highest prices in the world. I'm worried that if my entire inheritance is put into the real estate, and it goes down, I will lose pretty much everything.

At this stage, my plan would be this - invest 150-200K in a tiny amount of real estate, if I can find something. A single tiny apartment in or near the city, or a small house in the outer suburbs, or a house in a smaller town in my state. And then invest the rest into index funds, stocks, bonds, etc. to give me a little bit of diversity.

Or is it simply a good idea to try to buy a house for 250K, and thus have an asset and start receiving rental income?

My parents have told me this - simply just buy a house. However in my case, with my income much lower than theirs and no other assets, I am quite concerned about the "all the eggs in one basket" scenario.

Any advice would be greatly appreciated

Other info:
- I am a musician fresh out of Uni (I started Uni later than most) and at this stage my income is around 20-30,000 a year.
- I have no debts.
- I don't really want buy something more than 250K and thus have a mortgage and my parents seem to agree with me on that.
- I pay around 8,000 a year in rent, but live in pretty much the best and most central area of the city, which helps a lot with music work.
- I have a small car worth around 8-10,000 that I own, and use for transporting musical gear to gigs etc.
- I am obviously looking to increase my income as much as I can, but for now, that's what I'm earning.
- If I could help it, I don't really want to move at the moment - my house is a great deal, a wonderful location and incredibly close to everything I need, including my work which takes me around the CBD and inner suburbs.

EDIT - changed my income to a more accurate estimate

[limeandpepper]

At this stage, my plan would be this - invest 150-200K in a tiny amount of real estate, if I can find something. A single tiny apartment in or near the city, or a small house in the outer suburbs, or a house in a smaller town in my state. And then invest the rest into index funds, stocks, bonds, etc. to give me a little bit of diversity.

If I found an absolutely excellent place that is value for money, then I would consider spending more on it, but I, too, would be inclined to spend less than $200k, if possible, and avoid a mortgage. Granted, it'll be difficult in Melbourne, but you can get a studio or, if you're lucky, a one-bedroom somewhere. When choosing a property, I would go for 1) a place that I could happily live in myself and/or 2) a place that will rent out easily for a decent yield. That way even if property prices crash, it doesn't matter so much because you're not in it only for the capital gains.

Also, well done on going the musician route and I hope you do well! I studied music, too, but gave up on it as a career. :p

[Melody]

I don't know much about the Melbourne housing market (Perthie here) but note the following:
1) You will likely be able to get some first home buyers assistance to add to your deposit.
2) Your income is low don't under estimate the costs of home ownership (eg strata fees, council rates, repairs, home insurance etc) as you have limited ability to absorb these. Also costs of purchasing - termite inspection, building report, loan establishment etc.
3) You are making 2/3 of minimum wage - clearly I don't know your situation but I can almost guarantee there would be many options for doubling your income even if it involves some non music hours in a cafe job, or teaching music from your home. You may wish to consider this as it will give you more options for the future. It's also hard to advise you on how to invest the money when it's hard to know if your sub-minimum wage income is likely to be a short term blip or a permanent lifestyle choice.
4) If you borrowed $100,000 at 5% over 25 years you would have to repay $135 a week. ($7k annually). You would stop paying rent ($8k per year) and might be able to rent out a room ($8k a year?). You'd come out ahead (cash flow basis) doing this than buying  place for $250K which will only accommodate one person. It may be easier to rent out a 2 bedder than a studio and it may meet your future needs better (again this sort of depends on if you anticipate income growth in the future). Alternatively with 250K down you would be positive cash flow on more expensive stuff too depending on the rent if you used the house as a rental property. This is something to consider if you think potential growth is significantly better on something more expensive (i.e. a house rather than a unit, or a development site rather than a small block etc). I wouldn't buy an average investment in cash over borrowing 50k-150k in order to get a property with strong investment potential.
5) It's ok to do nothing if you are waiting to see what your earnings might turn out like. Pop it in a term deposit and give yourself 12 months to investigate and to better know your earnings. It may take a while to educate yourself about your local RE market and Tax Law. 
6) Tax - If you're chasing capital growth you'll want to establish the unit as your principal place of residence so any future gains will be non taxable. Somersoft forums are a good resource or get a book about real estate by an Australian author from the library.

Hope this helps. PS would love to see your budget as you are clearly super frugal!

[aj_yooper]

Sorry to hear about your grandmother's passing.

Good advice ^ offered.  I like your frugal lifestyle and thoughtfulness.  Going slow will really help you.  In the US, people usually need to be in a home for at least 5 years in order to recoup their costs of purchase.  Are you locked into a given location?

[goodlife]

My advice to you would be to do nothing for the next 12 months or so. It was very well meaning of your grandmother to stipulate that you have to buy a house (she may have wanted to make sure that a younger version of yourself doesn't waste the money on sth stupid), but you are probably not educated enough/established enough at this point to make such a big decision as buying property of such value really is. If I were you, I would put the money in some kind of fixed deposit (interest rates in AUS are quite ok anyways) and wait 12 months before doing anything. Educate yourself on the real estate market, tax, homeownership and watch what happens this year in general to prices etc. I would not make any kind of rushed decision. Is there any stipulation that you have to buy a house by a certain deadline? If not, then I would just leave the money sitting for an even longer time. You are very young and who knows where you will be/what you will do/who you will meet by the time you are 30. I think waiting is not a bad idea. I played with the thought of buying a property at your age as well. So glad I didn't do that. Turns out I live on a different continent now (3 years later). LOL. There is no harm in waiting in my opinion, get smart first, see how life pans out then buy a property when your life is at a stage where that makes sense.

[AustralianMustachio]

Thanks for the responses so far, they have been very informative.

To make an edit to my original post - I think that my income will be probably closer to 25-30,000 this year. Last year I was studying and had support from Centrelink, this year not, which is what I was taking into account with my initial estimate. This year I'm not sure what my income will be yet, but 20,000 is probably a fair bit lower than what I'll make.

Seeing as though I've changed my mind multiple times in the last few days about what to do, and after reading these excellent replies have changed my mind a few times more - I think I won't be buying anything anytime soon. I will have to wait and understand things better

I just wanted to do something relatively soon, as the money I get will be worth less later due to inflation.

[totoro]

You are in a great position right now.  At your age and with this amount it is a significant leg up in life. 

Could you find something you would like to live in and could rent a room out as well for this price?  If so you will make the $8000 after tax income you are currently paying in rent immediately.   The rental income would likely pay for all expenses and utilities and a bit extra.  You might generate an almost tax exempt return of 4% on your cash.

I understand your concerns about property prices.  I don't know your market so I can't really comment.  Canada has gone up a lot with no crash.  Who knows what is next. I will say that if you are an all-cash buyer a drop benefits you more if the drop is caused by rising interest rates.  You won't be affected because you don't have to borrow.

Your inheritance/trust money is to be used to buy a house but it seems as though if you sell after you are allowed to do what you will with the cash? 

[Kaminoge]

I just wanted to do something relatively soon, as the money I get will be worth less later due to inflation.

Surely it's somewhere that it's appreciating at the inflation rate at least?

You seem like a smart person - I like the idea (a few posts above) to hold off for a little while, do some research, and get a handle on the property market. I'm no expert on Melbourne but I know that in Brisbane $200,000 wouldn't get you much at all. I'd say spend the time finding something that will be a good investment. Also check out if you are eligible for any government grants by living in the place for a while - decide then if that's something you want to pursue.

When I bought my first place I lived in it for a little while to qualify for the first home owners grant and then moved out and have rented ever since. But I always buy with investment in mind which means I'm not thinking about where I want to live but where other people will want to pay to live.

Personally I'd buy property. Keep living frugally and then find some sort of investment to use the rental money on.

[frugaldrummer]

First of all, good luck with the music career!

Second - it could be a HUGE boon to your music career to have a home all paid for.  The freedom that will give you is enormous.  But I agree with some of the other posters, I wouldn't spend all of the $250k.  If you can find a place for 150-200k (including repairs and remodeling that might need to be done) that's preferable - then you still have a nice $50k savings for emergencies, vehicle purchase, etc.

Consider buying a place that you can build some sweat equity in, like a place that just needs cosmetic work - paint, flooring, stuff that you could do some of yourself.  Consider buying a place that you could live in yourself if you wanted, or a place that you could easily share with a roommate.  I agree that if you buy something that you could enjoy living in or that will return you a decent rent, then the fluctuations in the value of the housing market don't have to affect you as much.

Alternatively, as a musician, you might consider investing in a cheaper, more rural house that has space for a music recording studio?  Just a thought.

Take your time and pencil out each option, considering income from roommates, renters, repair and maintenance costs, etc.  You do have an advantage as a cash buyer, you can take your time and scoop up a distressed property when it comes available.

[AustralianMustachio]

Surely it's somewhere that it's appreciating at the inflation rate at least?

It would be, but I believe the Will gives me a certain amount (100K) when I buy a house. I don't know much about Wills, but I figured that amount would be fixed, not adjusted for inflation. So if I buy within a year, or if I buy within three years, I still just get the 100K.

If it's gone into an appreciating fund, waiting "for when I buy a house", then that would be great. But I'm not sure. I'll have to have that clarified with my parents, when all the stuff with the Will is finished.

Your inheritance/trust money is to be used to buy a house but it seems as though if you sell after you are allowed to do what you will with the cash?

Yes this is true.

You seem like a smart person - I like the idea (a few posts above) to hold off for a little while, do some research, and get a handle on the property market. I'm no expert on Melbourne but I know that in Brisbane $200,000 wouldn't get you much at all. I'd say spend the time finding something that will be a good investment. Also check out if you are eligible for any government grants by living in the place for a while - decide then if that's something you want to pursue.

When I bought my first place I lived in it for a little while to qualify for the first home owners grant and then moved out and have rented ever since. But I always buy with investment in mind which means I'm not thinking about where I want to live but where other people will want to pay to live.

Bingo. I want to buy something with a strong ability to rent out. With my uncertain income at the moment, I would be somewhat reliant on rental income to pay for the housing maintenance costs. So if I can manage it, I'd like to get something around the 200K mark (maybe all 250K if i find a really great investment).

However you're right - there's not much for that price range in Melbourne. So what would the options be?
- tiny single bedroom places in or near the city?  - Probably quite good for rental, but I don't think I'd ever want to live in a shoebox
- small house much further out from the CBD? - this is tempting for me. I could probably find a two bedroom place, which might result in more rent. I also would much prefer to live in a place like that, but it would make work very hard. I teach out of my centrally located home at the moment, and I'd have to change to driving to students houses. Gigs and other music work would all have a huge travel time lumped onto them.*

Anyway, thanks so much for all the replies. This buzzing forum really is such a great resource. For the time being I'm going to do what I've been most advised to do - wait, learn as much as I can, and be patient :)

*Also, I'm not sure if tenants are as easy to find in locations which are much further from the city.

[melonade]

I'm not too sure about Melbourne property but just wanted to suggest UBank for the other $50k. They have an decent interest rate (4.26% or 4.62% depending on how much you contribute monthly) and your money is accessible whenever you like if you do decide to buy property or invest it elsewhere.

Check them out https://www.ubank.com.au/ubank/web/products/savings-account

[Kaminoge]

Surely it's somewhere that it's appreciating at the inflation rate at least?

It would be, but I believe the Will gives me a certain amount (100K) when I buy a house. I don't know much about Wills, but I figured that amount would be fixed, not adjusted for inflation. So if I buy within a year, or if I buy within three years, I still just get the 100K.

If it's gone into an appreciating fund, waiting "for when I buy a house", then that would be great. But I'm not sure. I'll have to have that clarified with my parents, when all the stuff with the Will is finished.

Your inheritance/trust money is to be used to buy a house but it seems as though if you sell after you are allowed to do what you will with the cash?

Yes this is true.

You seem like a smart person - I like the idea (a few posts above) to hold off for a little while, do some research, and get a handle on the property market. I'm no expert on Melbourne but I know that in Brisbane $200,000 wouldn't get you much at all. I'd say spend the time finding something that will be a good investment. Also check out if you are eligible for any government grants by living in the place for a while - decide then if that's something you want to pursue.

When I bought my first place I lived in it for a little while to qualify for the first home owners grant and then moved out and have rented ever since. But I always buy with investment in mind which means I'm not thinking about where I want to live but where other people will want to pay to live.

Bingo. I want to buy something with a strong ability to rent out. With my uncertain income at the moment, I would be somewhat reliant on rental income to pay for the housing maintenance costs. So if I can manage it, I'd like to get something around the 200K mark (maybe all 250K if i find a really great investment).

However you're right - there's not much for that price range in Melbourne. So what would the options be?
- tiny single bedroom places in or near the city?  - Probably quite good for rental, but I don't think I'd ever want to live in a shoebox
- small house much further out from the CBD? - this is tempting for me. I could probably find a two bedroom place, which might result in more rent. I also would much prefer to live in a place like that, but it would make work very hard. I teach out of my centrally located home at the moment, and I'd have to change to driving to students houses. Gigs and other music work would all have a huge travel time lumped onto them.*

Anyway, thanks so much for all the replies. This buzzing forum really is such a great resource. For the time being I'm going to do what I've been most advised to do - wait, learn as much as I can, and be patient :)

*Also, I'm not sure if tenants are as easy to find in locations which are much further from the city.

Ahhh, I get it about the $100,000. In that case I can see why you don't want to wait too long - however a year won't make a huge difference and doing good research can mean a lot better result in the end.

I understand why you don't want to live in a shoebox but let me assure you, if the location is good they plenty of other people will. I own 2 places that are under 40 sq m in Brisbane and I've never had any trouble renting out either of them (at rents I think are ridiculous) because of the location.

Personally I would plan to keep renting (unless there's some money involved in living in the place as there was for me) and buy for investment. If you're like me you'll be able to rent a cheaper place than you buy.

[AustralianMustachio]

Urgh I typed a longer reply but lost it because I wasn't signed in. Doh.

Thanks Kaminoge, the idea of buying and renting out a single unit in the CBD is certainly very attractive. However I just read this thread recently, and have some concerns about all my inheritance going into a single house.

https://forum.mrmoneymustache.com/real-estate-and-landlording/does-the-1-rule-work-in-australia/msg193348/#msg193348

The thread talks about how Australian housing is comparatively expensive and rents low. This is pretty much the opposite of what I want, with a limited budget to buy a rental place and looking to grow a nest egg

People are speculating that prices might plummet. I know this is speculation, but it has me concerned, since if I get something for 200K I will have pretty much all my net worth in real estate. I think I've read about the Australian "housing bubble" that will be "popped soon" across the internet a dozen times recently. Some of those predictions seem to have been happening for years and it hasn't happened yet, so who knows.

My parents think the single unit is a good idea. When I voiced my concern about prices falling, they simply said I shouldn't worry since I shouldn't be looking to sell at all. Their investment strategy is pretty much buy and never sell. I like this approach, but I feel like they can afford that with their income. At this stage my income is much lower than theirs, and if the value drastically dropped on my one massive asset (massive to me), it would affect me much much more

Edit - fixed link

[Kaminoge]

I'm typing on my phone so I'll keep this short but there are a few reasons I think your situation is quite different to what is being discussed in that thread.

1. You HAVE to buy some property to get the money (well part of it).
2. You will be in a position to buy with no mortgage. If the bottom fell out of the housing market (which I don't think it will) you won't be risking losing the house - you'll simply get less rent than you were hoping for OR decide to move into it yourself.
3. You say a massive drop would hurt you much more than your parents but actually it wouldn't really - you're young, you won't be in debt for this and you've got plenty of time to just wait out any downturn.

Now on the other hand if the "bubble" bursts I'm totally screwed ...

[Melody]

Last time there was a "correction" in Perth (late 2007?) not all properties corrected equally... may blue chip and up and coming older 'hoods that were gentrifying went up. A boss at my old job was friends with Gavin Hegney so I got to go with him to a presentation. What went down? Housing estates (house and land) in the outer suburbs. (The presentation focused on single homes not units so not sure what the deal was with units). So investing well can protect you from a minor correction (10%???) although it might not help if prices were to fall 50%.

Traditionally people have used multiples of average wage to determine if the market is too hot or not. Perhaps googling this will be helpful for you, although I think there are some caveats - in the early 60s for example food would have consumed a far larger portion of household income, and a television cost 2 weeks of pay. Now food is very cheap relative to income (I make just above average wage and food is less than 5% of my pay) and a really nice TV is less than a day's work.Falling other costs (food, electronics etc), a desire for fancier dwellings and the increased prevalence of dual income households (there probably weren't too many of these in the early 60s) would naturally lead to some sort of upward trend over time, but the data is still useful.

I would be careful around purchasing anything under 50sqm. Why? Banks will typically lend no more than 60 or 70% for properties under 50sqm. Sure, you don't need the bank to lend to you, but can you see the potential natural cap this puts on your capital growth? (E.g. you buy at $200K, average buyer needs 30 or $60k to get a look in... many average buyers don't have this so they buy the $300K two-bedder with 5% down $15K cash. Is this wise... probably not, but people are impatient and especially with First Home Buyers, the trend is towards small deposits (google this too - I can't remember the exact stats). The point is you can only resell your apartment to people with 60K saved, the person with the bigger apartment can sell to anyone with over $15K saved - guess who has more potential buyers. And buyers are what creates capital growth - your property is only worth what someone else will pay for it.

[Kaminoge]

Some good advice there but I'm just going to argue a little in favour of the under 50 sq m. I'd go for location over size in an investment property any day. I don't think a tiny inner city apartment is going to have huge appeal to first home buyers anyway so I wouldn't worry too much about them not being able to afford my place due to mortgage limitations. I'd say those kind of places appeal mostly to investors looking for good rentals and investors can generally get their hands on the money regardless of the banking issues.

While it's true that your apartment is only worth what someone else will pay for it it isn't correct to associate number of buyers with the capital growth. You only need ONE buyer. So as long as it's a property that will generally appeal (again I'd say location) then you'll be able to find someone to purchase at whatever the fair market price is.

[Melody]

Location doesn't have to equal inner city though. For example, in Perth we have hubs other than the CBD (Midland, Armadale, Fremantle and Joondalup) with employment, shopping restaurants, hospitals, universities etc as well as train-links into the CBD  which are popular with both renters and buyers. Yes Joondalup and Armadale are 30kms from the CBD (half an hour by train), but they are still popular locations (Joondalup rents are especially high, nearly as high as CBD rents, due to  large university campus, and training hospital and thus a large number of renters, it's proximity to the ocean and status as a "master planned city" also increase it's appeal.)
Yes, I would avoid housing estates on the edge of the city as these tend to lack facilities and transport, but a "hub" could be an other alternative.

I'd also avoid any apartment in an overly large building - if there are many apartments for rent/sale at once it could spiral into a race to the bottom for prices.

[Kaminoge]

Good points there.

I'd also say to make sure you take management fees into account. Personally I look for no elevator (which fits in with your idea of smaller blocks) and I prefer to pools etc. Although having said that there are no hard and fast rules. My best ever investment is in a fairly large complex with a pool.

[SwordGuy]

Perhaps the lawyers in charge of the money will let you set up a property purchase fund that's invested in the stock market.    Justification: money won't buy a decent house (by lawyer's standards, don't mention MMM!).  Would allow the money to grow until you have enough to pull out for a house.  If you have to, offer .005% (of profits in any year) to the lawyers as a trustee's fee.

[Minion]

Some good advice there but I'm just going to argue a little in favour of the under 50 sq m. I'd go for location over size in an investment property any day. I don't think a tiny inner city apartment is going to have huge appeal to first home buyers anyway so I wouldn't worry too much about them not being able to afford my place due to mortgage limitations. I'd say those kind of places appeal mostly to investors looking for good rentals and investors can generally get their hands on the money regardless of the banking issues.

While it's true that your apartment is only worth what someone else will pay for it it isn't correct to associate number of buyers with the capital growth. You only need ONE buyer. So as long as it's a property that will generally appeal (again I'd say location) then you'll be able to find someone to purchase at whatever the fair market price is.

What caveats are there regarding finance based on less than 50sqm - larger deposit?

[Kaminoge]

Banks are less keen to lend. Want a higher deposit or some kind of mortgage insurance. At least that used to be my experience. I'm not sure if it's across all banks.

A woman I consider a mentor once told me "if you owe the back a quarter of a million dollars that's your problem; if you owe them 25 million that's their problem"  the idea being that if you're a big enough customer they'll treat you better to keep you as their client. I must say in my case that's very true. Getting the first loan was hard (of course the fact that I didn't live in the country I was trying to get the loan in didn't help) and in the end the only people that would lend it to me was the bank I'd had an account with since I was a little kid. But as my portfolio has grown I've found it easier and easier to get loans without much hassle - I owe enough money now that they'll pretty much lend me more for anything I want so the 50m sq. rule isn't really an issue.

[Melody]

When I talked to Bankwest the bank manager said 30% deposit, no PMI available (i.e. I needed to put in a minimum of 30%). At the time Bankwest was offering me a home loan on something larger with 5% down. (And I have HUUUUUUUGE regrets not taking it - identical house two doors down recently sold for $90K more! - but at the end of the day I thought I was doing the right thing. I had 5% cash down-payment which equaled my student loan balance and only a little in retirement accounts, so I think my net worth might have been like $15K. To add insult to the injury my rent is now higher than the payments on the house would have been.)

[Minion]

Thanks. Kaminoge, just curious which suburbs of Brisbane your small unit investment properties are located?

[Kaminoge]

In the centre. Quite close to the Gabba. Nice easy access to the city if you're walking (across the pedestrian bridge) and close to the river and South Bank. Unfortunately not with views of the river though. That would be nice.

[AustralianMustachio]

UPDATE

I have spent the last few months trying to educate myself about finance and investing as much as possible. I have been researching things online, going through modules on the ASX website, played the ASX share market game and invested in companies with fake money. Most of this has centred around stocks / equities. I know very little about real estate investing. However this is what must change, as the current thinking of me and my parents is that I will invest in an apartment in Melbourne, for up to 200k. As recommended by people above - I will not be rushing into anything, and I will then use the rental income to invest in some index funds / ETFs.

So I have been looking into places to invest in Melbourne up to 200K, and this pretty much means a tiny studio or student accommodation. These places seem to be very high yield and a good investment, some with annual returns of 8 or 9% (However I am assuming this is gross return, and not taking into account strata fees. See links below!). These look very attractive to me, but as I say I am very green.

My questions:

What are the issues regarding investing in small apartments / student accommodation? If the yields are so high, why doesn't everyone invest in these? Less capital growth perhaps?

What about issues with keeping it occupied? I know some places can only be rented to students. How does one go about finding a place that will frequently be filled?

Thanks so much for all the help you guys have given me already, it's really been great. All this real estate stuff seems so imprecise and vague to me, but I guess that's just because I'm beginning to learn about it. I ask my parents about it and they have great advice, but also seem to be equally vague - "buy a place with high rent and never sell it" is pretty much it.

Some examples of places I've looked at online:
http://www.realestate.com.au/property-apartment-vic-carlton-117351727
http://www.realestate.com.au/property-apartment-vic-carlton-116909651
http://www.realestate.com.au/property-apartment-vic-north+melbourne-117288955

[marty998]

My questions:

What are the issues regarding investing in small apartments / student accommodation? If the yields are so high, why doesn't everyone invest in these? Less capital growth perhaps?

What about issues with keeping it occupied? I know some places can only be rented to students. How does one go about finding a place that will frequently be filled?

They a cheap/crap because:

1) banks won't finance them, or will but with lower LVRs
2) can have high management/strata fees
3) can be locked into rental share arrangements with other investors (i.e. cost of vacancy in some units is spread between all owners)
4) the above reasons mean there is a lack of demand from property investors
5) therefore this all leads to low capital growth outcomes

My advice is to buy a proper investment property - yes spend $500-$600k for a decent inner suburban city one - and have your tenant pay it off for you. You won't have much of a negative gear with a deposit of $200k, if anything you should be cash flow positive from day 1.

Don't be afraid of a mortgage. We all start off with big ones, but for property investment, you don't ever have to pay it off. Just go interest only.

And read this site:

www.somersoft.com/forums

[former player]

You have $50,000 free and clear from your grandmother's estate, and $200,000 which is yours only if you buy a property.  You are 26, are building a career and have not mentioned either debts or dependents, so I'm assuming you have neither.  You are in a good financial position already, and I would say the future looks good for you.

You are worried about losing money if you buy property and then real estate goes down in value.  It is highly unlikely that you will lose much money if any.  Mostly the people who lose money on property are the ones who pay more than they can afford, lose their income in a recession so can't pay the mortgage and have to sell at a loss during that recession.  That isn't you, is it?  Plus you will be buying primarily for rental income, and rental income keeps coming in through property recessions.

As long as you buy in a place people will always want to live (city centre, or a hub - buying near a big hospital is always a winner because there will always be health workers coming and going who will want to rent) a rental property will give you a steady extra income for what is effectively a nil outlay (you can't use the $200,000 for anything else, and won't even get your hands on it unless you buy property with it, so it effectively doesn't exist to you as a cash sum to invest or spend anywhere else).  It's nice if you can buy a place you would like to live in, but if you can't afford that, buy a place someone who is like you but without your particular needs and tastes (eg as to size) would like to live in.   Given your caution about buying property, I wouldn't suggest going very much more expensive and getting a big mortgage: it's a scheme that can work well, but I get the impression that's not where you want to be at the moment - which is understandable given that you are putting together a career in a notoriously unstable and frequently underpaid profession.  Would a small mortgage (say $50,000) plus your inherited $50,000 for a total of $300,000 put you into first-time buyer one bed flat territory in a good location, rather than a studio/student accommodation?  There is always going to be demand for one bed flats in good locations, so there is a very good chance of it retaining value and being easy to let or sell.  You could even probably pay a $50,000 mortgage out of your current income even without rental income, so the risks to you of a mortgage that small are extremely low.

In short, buy a decent one bed flat in a location where young professionals go to work, which has good facilities within walking distance, and public transport on hand, spending up to say $300,000, and then stop worrying about it all and go make music!  Good luck.

[socaso]

I wouldn't want to be a first time homebuyer without leaving myself some sort of financial cushion in case of emergencies. Perhaps you could spend $230k and leave about $20 for repairs and maintenance? Also I don't know about the situation in Oz but here in the states cash buyers are preferred by sellers because they can move faster on a sale and don't have to wait for the banks. Because of this they tend to get better deals.

[AustralianMustachio]

socaso - I am with you with the financial cushion idea. I think I'll definitely need something like this

marty - thank you for the frank dot points, and the recommendation of the somersoft forums. They are just the thing I need to have a look over. Think that forum was mentioned above too, but I must have missed it the first time.

former player - thank you for your advice too - it was bang on. Especially the part about not worrying about it any longer and making music! This is exactly what I needed to hear. I feel like i've been obsessing over it all a bit too much, and it's been detracting from my musical pursuits. The pressure of having to successfully invest such a huge chunk of money, whilst knowing very little about investing, has been high on my mind lately.

I will report back any updates as they come :)