Goodbye Renting

by Tracy Lee Harvey

  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