levels of other States in Australia and therefore the ability to buy
property at a reasonable price with a reasonable return was much more
attractive to the investor. Furthermore, WA had a history of lagging
behind in property then surging and it hadn’t surged for many, many
years. A mining boom erupted in WA and this in turn incited (what
seemed like overnight) a property boom.
To say I am kicking myself for not investing in WA a few years ago
is an understatement, particularly since I had foreseen the boom long
before it had arrived. I’d watched the economy of WA intently for some
time while keeping an eye on world trade. I was born and bred in
Western Australia so was familiar with the State’s geographical
locations, its property highs and lows and the many resource it boasted
that the world was now demanding. Mindful of this, I strongly believed
that a mining boom was about to emerge and that we (my husband and I)
needed to buy some property in what West Aussies refers to as the Sand-
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groper State.
I made several attempts to convince my husband that we needed to
look more laterally with our investments and Western Australia was
definitely a go-er. Unfortunately, my husband who had never ever been
to WA was a bit sceptical. Western Australia, as far as my husband was
concerned, may as well have been another country altogether. To him,
the step into investing into a State so far away and into the unfamiliar
(for him) with regards to the people, legislation, trends and geographic
locations spelt uncertainty. Basically, he wasn’t comfortable with the
idea and I didn’t want to unnerve him so didn’t pursue the idea. Hence,
we didn’t buy there.
Since then, prices have doubled and indeed tripled in some parts of
Perth. A colleague who now lives there informed me that hundreds of
people were fronting up to open inspections and buyers were offering
over $20,000 more than the asking price! Enough said!
My second attempt at investing in another State (and just as
unsuccessful), involves South Australia in a suburb known as Hallett
Cove. Why? Because I used to live there (for eight years) and knew it
was one of the last sea view locations left in Oz that was at a very
reasonable price.
After living and working at many locations throughout Queensland
and New South Wales, I discovered that property with sea views were at
a premium just about everywhere in Australia. Hallett Cove was only 30
minutes from the city, built high up overlooking the ocean, and was at a
very affordable price. I could foresee that home owners, retirees and
investors alike would be very attracted to the location in the near future.
South Australia was similar to Western Australia in that it had never
really met with the same property boom seen by other States, and the
prosperity of SA has often lagged behind economically. This is in part
due to the poor performance of its main industries including car and
component manufacturing and the competitiveness and downturn in
wine prices worldwide, with South Australia producing over half of
Australia’s wines. It is for this reason that apart from being known as the
Festival State, SA is also referred to as the Wine State. Other exports
include wool and wheat. Another consideration is the weather, which
until recently may be a contributing factor to why people haven’t
necessarily flocked to South Australia. It is very cold and grey during its
long winters while the summers can be excessively hot and dry. One
other reason prosperity hasn’t flourished since the early 1990s may be
due to the collapse of the State Bank.
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But I digress.
After much consideration and research, South Australia was the place
I wanted to buy into late last year (in particular Hallett Cove) because I
could see that investors around Australia were struggling to find
affordable investment properties with a half decent return and SA was
one of the last port of calls. Secondly, with housing prices soaring in
WA (which borders SA), many people in Western Australia might
consider moving to a more affordable location not too far away. Thirdly,
I’d read about plans for mining in SA to be further developed and
expanded with high potential growth. Sound familiar?
As mentioned previously, Hallett Cove was a suburb that had
wonderful scenic views of the ocean with a relatively small price tag.
So… what happened? Basically, for want of a better word, I
procrastinated. Less than a year later I discovered that Hallett Cove real
estate had moved hastily and done very well, thank you very much. In
fact the Housing Commission house my best friend once owned recently
sold for a staggering amount of money and the market had only really
started moving when I was thinking about buying there.
Nevertheless, I still bought in South Australia based on all the other
reasons I outlined previously, just not in the location of choice. But after
the fruition of my prediction in WA and then the escalating price in
Hallett Cove, my husband is now a whole lot more interested in listening
to my justifications for wanting to buy in other locations.
In summary, where to invest is a choice only you can make because
you need to feel at ease with the location for your own reasons.
However, researching and gaining a good understanding of where the
environment of choice is going can make all the difference to how your
investment grows.
What else do I absolutely need to know about home
occupier versus investment property?
The way you pay each of the loans is what you absolutely need to
know.
Both loans have completely different agendas and therefore the way
you pay the loan off is intrinsic to how you will benefit in the long term.
As you have already read, there are the AFTER TAX dollars and the
BEFORE TAX dollars so to work it the best possible way for you, you
need to look at each discipline differently - but make sure you stay
disciplined with both.
With your first home as a home occupier, the money you have earned
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has already been taxed and you’re unlikely to get any of it back from an
owner occupier property, but you want to reduce the loan as quickly as
possible because (in most cases), the interest is calculated daily but the
loan repayment is usually organised monthly, unless - you have the due
diligence to get the loan taken out fortnightly or even weekly (which
most banks don’t like doing). The banks will argue that getting the
amount taking out each week won’t necessarily make much of a
difference to your long-term loan. I would argue that if the loan is
calculated daily, then each and every payment is bringing the loan down,
which could amount to an awful lot of money over the course of the
loan.
In fact, I applied this very same concept to my first property on the
Sunshine Coast. I made weekly payments and treated the payment as if I
were still paying rent, but in actual fa
ct I was disciplining myself to
make the payment in order to bring the loan down.
One other important note to make is that I made my first payment the
first week I took possession of the premises. Why? Because the moment
I started my payments I was reducing the loan substantially. The sooner
you start reducing the loan the less interest payable and the fewer years it
takes to pay off.
Another aspect about this line of disciplined payment is that you will
generally be in front with payments because you’re paying even when
you’re not necessarily required to pay. Some months have a four-week
payment period while others may have a five-week payment period.
When payments are made every single week regardless of the due time,
the loan rate comes down significantly and before you know it you’re
actually paying off the principal.
What is the principal?
The principal is the actual money you have borrowed for the property
which does not include the added interest. Most of your loan repayment
is made up with interest and you therefore pay little off the principal if
any!
For many years you’re likely to be just paying off the interest of the
loan if you make payments as per the requirements of the lenders,
because that’s what they want you to do. After all, the sooner you pay
off the loan the less interest the lender gets. But if you really want to
reduce the mortgage and own your own home sooner you need to be
paying off the principal as well. That’s where regular and more frequent
payments come in.
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The other bonus for paying off the principal is that it means you have
more equity in your home for other purchases or investments in the long
term ( more on that later).
Start paying your first weekly repayment the day
the settlement and/or loan documents are in your
name. Then make your payments on a weekly or
fortnightly basis thereafter. You could organise
to have a weekly amount direct debited from
your bank account (but make sure the weekly
payments add up to either the same monthly
repayment or a bit more). Then you’ll always be
in front.
I do offer a word of caution, though, to people who are considering
buying into a property investment conglomerate. These are the schemes
that offer a higher rate of return for a period of time, and where the
property is often bought off the plan before the building being erected.
There are many property investment schemes which may appear
financially lucrative with high-profile backers, influential advertisers and
leading companies as sponsors which can seduce you into thinking
you’re on a sure thing.
Don’t be deceived by any of it. In the past year, a third leading
property investment company in Australia has gone under with others
worldwide experiencing the same downfall. These are often prominent
companies with high ranking leadership and thousands of investors who
hve lost an incalculable amount of money.
The main problems associated with property trusts are the timeframes
by which the development may take. In some cases it make take several
years and in the meantime a number of economic, legislative, and/or
personal factors may have changed. Disputes may arise, slowing
production of the development or even halting it for a period of time. It
is also unlikely that an investor would gain any return on their
investment until completion of the project.
On the other hand there are other more secure schemes known as
property trusts, which can and do provide a safety net for their investors
but, as with any investment, the less risk the less return.
In the case of first home ownership and/or investment the concept of
property trust is not entirely unworkable, but I would not recommend
this type of investment as a place to start.
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Personally, I have never felt comfortable leaving my investments in
the hands of anyone other than me. If I make a blunder, miscalculate, or
just don’t get it right, then I have the ability to see the signs coming and
can then work at rectifying the problem. For this reason alone I will only
ever invest in something I have at least some control over. Whereas, in
the case of a company going under you’re in the hands of the directors
and the liquidators if or when it all falls over.
This brings me back to home-like investments, that is, houses, units,
townhouses or beach huts that can be bought and managed
independently by you. When I say managed by you I don’t necessarily
mean that you need to manage it exactly. I mean that you have choices as
to who will look after it while the main cost involved will be the
commission each month. These investments can be managed by you or
someone else. Either way you get to see each month just how the
investment is going while at the same time it is providing you with the
option to change anything you believe needs changing.
Did you notice that I didn’t include land in the list of home-like
investments?
Land is a great asset to have long term if you can afford the
repayments on the loan and the rates without any return. But if you’re
planning to start from scratch, land can be a cost that can stop you
progressing financially. If you’re going to start with an investment, you
need to get a return on that investment, even if it doesn’t cover all the
costs. Receiving rent from your investment helps you survive in the
short-term and contributes to a much better tax return at the end of the
financial year because you can claim on the losses. Land only takes
money from you without providing much back until it grows in capital
growth. Incidentally, land also attracts a capital gain when you sell it.
But as is reiterated many times throughout the book - land is a great
thing if it has an income-returning building on it. The land content of a
building is where you will make the most capital in the future. The more
land content the better your return because it is the land that appreciates
in value the most. However, the building on top of the land has the
ability to give you an income, i.e., rent. If the building is a unit, the land
content is very small. On the other hand, a house or duplex resides on a
larger parcel of land and is therefore more likely to increase in capital
growth at a higher rate.
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Saving
How to Save, Save, Save!
Start by accessing some free money!
FREE MONEY - Is there such a thing?
Yes there is…
For instance a credit card can give you free money.
“You have got to be kidding, right?”
A credit card can be a great source of free money if you use it
correctly.
How your credit card can work for you.
Not against you.
Having a credit card need not be a bad thing IF it
is used correctly. In fact, it doesn’t just provide you
with FREE money but is also a tool that can help you
make more money.
Yes, more money.
It’s all about the discipline (there’s the word again) on how you
use it.
For example, I currently have one credit card, that’s right, only
one.
Why do I need one?
I only have one because I like to be disciplined about paying it on or
before the due date. I use it for absolutely everything I purchase, and this
includes shopping, petrol and clothes, etc, but I also have all my
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insurances, school fees and medical expenses directly debited from the
credit card. Every transaction can earn me Frequent Flyer Points and in a
period of time I may even get a trip out of it!
Meanwhile, my bank balance isn’t being touched by regular
withdrawals. Of course I sometimes need a little cash for incidentals
such as the odd carton of milk, but I ensure that my withdrawals are in
line with the bank allowance so as to not incur any extra fees and I keep
the bulk of my income in an account that is either off-setting my home
mortgage or earning interest.
Here’s how I do it. My own income from employment, rental
properties and investments has been accumulating in another account. I
use that accumulation of money to off-set my own home loan. My home
loan interest is accrued daily but the more money I have in my personal
account off-setting the mortgage the less interest I pay and the more the
principal I pay off, reducing the loan amount and the time. My own
money is working for me while I am using someone else’s money to live
on.
A credit card gives me the ability to use money for a period of
time (in my case up to 55 days) interest fee, while my own money is
working for me by earning interest in the back or other investment.
At the end of the 55 days when the credit card account is due, I
withdraw the exact amount of money owed at that time and pay the
card off entirely and don’t incur any interest.
This takes discipline!
HINT
You can organise with your banks to have the
credit card amount paid via direct debiting, but
as you might imagine it’s not something they
promote. After all, they make a lot of money
from people who pay the minimum amount each
month and even if you just leave the payment one
day overdue, you will be hit with an interest
Goodbye Renting Page 8