What is inflation?
Inflation is usually defined as being the general rise in the price of
goods and services. However, because the prices on items increase, the
current fixed wage, salaries and pensions shrinks, which causes
uncertainties for investment. This in turn restricts the growth of
economies.
New Zealand
As a comparison to the market in general you will see that the
western world for the most part (in the past), has worked in conjunction
with each other. That is, when one economy is under stress so are the
others.
The inflation rate during the 1970s and 1980s put the economy in a
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precarious state of uncertainty. The extremely high inflation rate in the
1970s in indicative of a struggling economy. New Zealand is particularly
vulnerable to the changes in crude oil prices. As an importer of oil
products, the 1974 oil price shock affected the terms of trade unlike that
experienced since the 1930s. This impacted heavily on the nation’s
economy at the time.
But it also had a radical impact on the other western nations during
that time including Australia, Great Britain and the United States.
The message here is to gain as much informed understanding of your
own country’s economic growth as possible, by finding out what can
have a significant effect on that growth and to monitor your own affairs
to be ready. One of the most important aspects of owning your own
home is to be informed. By being informed you are insuring yourself
against the impact of that change. Decisions made need to be educated
decisions with your eyes wide open.
I mention in my last book that we tend to live in ignorance by either
getting caught up in nonsense, unimportant journalism via magazines or
commercial advertising rather than sourcing important relevant
information that can guide us through some major, life-long decisions. It
is a good idea to become familiar with newspapers, TV programs and
websites that include world news, world trade issues and economies so
that you can make an informed decision, and have a better understanding
of the type of impact that decision might have on you and your family in
the future.
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Mistakes you can make in real
estate but learn from. .
Wrong move
In 1984, my first husband and I built our very first home in Adelaide,
South Australia. It was a house and land package. Our house was small
and it didn’t come with insulation, a driveway, fencing,, a retaining wall,
carport, paths, curtains, heating, air-conditioning, a cross-over on the
curb or even enough drain piping to meet the road (another added
expense). We needed to find the money for each and every item. This
required a concerted effort in constantly saving for the next thing and
always going without.
But this was also a time when something else was happening. The
housing market was on the move again after a long difficult time for
most home owners. In fact, by the time our house was complete (to the
standard we could afford); the cost of housing was going up at
approximately $2,000 per week. This was a considerable sum of money
in those days. We had, by default, bough tit at a time that was considered
the right time to buy and make money on property. If I had known then
what I know now I would never, ever have sold.
But my husband and I were very young, having our first child and
within a year of building the house it was valued at double the amount of
money we had borrowed. We sold and walked away with over $20,000.
More money than either of us had ever known before. We thought we
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were well-off… but in fact we weren’t.
This was also a time when the only way of securing a loan for a
mortgage was with a bank or building society. If you weren’t a first
home buyer you had to have at least a third of he deposit in order to get a
loan. Well, of course the market had continued to climb steadily for a
while and we were now buying back into a market that was at a much
higher price.
When we tried to get another loan (even though we had a good
deposit), the banks refused to give it to us. We couldn’t meet the strict
stipulations that banks required at the time.
We eventually purchased another home by borrowing more and
paying a higher rate of interest to a building society. But we made
another fatal mistake. We spent money on cosmetic changes to the house
such as a revamped kitchen with new tiles, laminated bench tops and
floor coverings, all installed within a few weeks of moving in. Then my
ex-husband was offered a franchise of his own in another State a few
months later and it was his dream to have a small business of his own.
This would probably his only opportunity (we thought), so we decided to
move back to Adelaide to follow his dream. Money was tight so we
thought our only option was to sell the new house, which we did, at a
considerable loss.
There are a number of options we could have followed, but no one
provided us with the wherewithal to do them and we didn’t bother to
check any of them out. Why would we, if we didn’t know they existed?
As a result, we went into a new business with very little capital, the
added cost of moving interstate again and nowhere to live. It took a great
deal of saving (almost starting from scratch) to put enough money
together to build another home of our own years later.
When you get your own property
You must look after your assets
So now you’ve got some assets, what next?
Rule of thumb…
Don’t trust anyone.
There is absolutely no one who will care about your assets or money
like you will!
Yes, you can go to all the financial advisers and property experts in
the world, by all means listen to their valuable knowledge and ways of
doing things but - again, they will still never have the same vested
interest in your financial assets like you do. You can learn from them,
take heed of some of their tricks of the trade, go away and learn some
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more but - when it comes to putting anything that involves your assets
into action make sure you feel comfortable with the transaction.
We all have a gut instinct and in many case we allow ourselves to get
bullied into doing things we never really felt sure about from the
beginning, but don’t let anyone bully you into a decision. Always,
always, take time to digest. Go away, sleep on it or take a week for you
to think about it.
Don’t ever be afraid to say no.
Your gut instinct is a powerful tool that doesn’t get the recognition it
deserves.
When you just don’t know what to do - there is a simple answer as to
how to act.
Do nothing!
If it looks like a snake, smells like a snake and acts like a snake -
guess what?
It’s a snake!
You have a responsibility to make sure that your assets are checked,
main
tained, and paid for, but most importantly, “You got to love it.” If
you don’t love it, it won’t love you.
Of course, there are times when you need to hand some of the looking
after over to someone else like an agent or accountant because you
simply can’t do everything or because you’ve amassed so much you
don’t have the time.
However, even then you and only you must ensure that all things are
running at their optimum level. Don’t hand too much over without
having your finger in the pie on everything you own.
We’ve all seen people who have invested vast amounts of money,
often their life savings, into a sure thing or a company that collapses
following the sound advice of a financial guru. Research and research
again.
What not to do at the point of sale
If you have singed a contract on a property you need to be aware of a
number of important factors. I write this as my younger brother had just
purchased his first home. He signed a contract ‘subject to finance’,
which was a good move!
This means that even if you have had approval in principal from your
financier, it does not make it definite. It is always best to put ‘subject to
finance’ when you are purchasing your very first home unless you have
all the cash up front.
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I always put it in even after purchasing many properties and knowing
full well I have the finance available. It is there just in case. I also make
the contract subject to a building and pest inspection. This is one cost
that is well worth it. The initial out of pocket expense may save you
from purchasing something that could cost big bucks, not to mention the
inconvenience of renovations needed from white-ant destruction. A
building and pest inspection will highlight any potential problems you
might encounter and allows you to pull out of the contract if something
significant is found.
First home must do's...
When you do get into your first home there are some absolute musts
you need to do in order to stay on top of the loan and get some equity
under your belt.
Whack as much off the loan as early and as quickly as you can,
particularly in the first year.
Make your first payment of the mortgage the first week after the
settlement. If the bank tells you that the account isn’t set up as yet, ask to
make the deposit early anyway. Remember this is the first step in
bringing that loan down and getting disciplined about the payments.
Treat your mortgage payments like rent and pay them weekly. This
will put you ahead in payments and give you some breathing scope when
or if things get tough down the track.
If things get tough financially, try to re-work all other outgoings and
cut back, but whatever you do make sure your house is the last to go,
NOT the first!
Maintain your home to the best of your financial ability. Don’t ignore
little things that need doing because they can become much bigger in
cost and may have been easily fixed in the early stages.
Insurance
Hint - Make sure you don’t scrimp on insurance.
Whether the property is your own home or for
investment purposes, you must make sure you are
adequately covered with insurance.
If it is an investment property even your insurance
payments are a claimable tax deduction.
Insurance is obviously important for a number of
reasons, such as if the house burns down or gets
flooded, if a tree smashes into your roof or if the
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glass pane in the shower screen splinters and needs replacing. These
seem obvious reasons for insuring but when you insure for investment
purposes there are other aspects to the insurance you may not be aware
of. For example, there is rent default insurance, an extra insurance that
covers you if a tenant defaults on the rent or there is an impending court
hearing about the tenancy and you aren’t getting your usual rental
income. There is a limit as to the amount you can claim and it is usually
an extra cover you have added to your contents and building insurance.
Other considerations may be the amount of liability insurance for
when or if someone injures themselves on the property (namely the
tenants) and there may be a likelihood of suing for damages. In addition,
you may not think you need contents insurance if the property is let
empty, but you do. Contents insurance in this instance covers you for
light fittings, kitchen appliances, curtains and carpets etc. The amount of
cover you apply to your property is one you need to research because
there are way too many considerations and equations to mention and the
cover needs to fit with your set of individual circumstances and needs.
But don’t scrimp!
If your property is under a body corporate, building insurance is
usually covered within your body corporate payments but you still need
to insure the contents. But don’t assume that the body corporate covers
everything in regards to the building. Find out.
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Summing up
The ‘blow out’ in home mortgage, as described by the media, could
be seen as the negative side to prosperous, global, economic growth
because demand becomes even higher with investors sourcing bricks and
mortar. This in turn creates competitiveness in the market and the prices
rise further, impacting on the ability of the people to get into the market.
So the best way to deal with that is to create some solutions to the
problem… correct?
Governments have been forced to consider new initiatives including
access to superannuation for a house deposit, tax concessions on
mortgage repayments for owner occupiers and a housing shared-equity
scheme targeted at low to middle income earners.
All of these possible solutions have the ability to ease the pressure on
housing affordability. In particular, the use of superannuation as a
deposit has proven to be successful in the USA and other countries. But
generally speaking, first home buyers are fairly young and don’t have
much superannuation accrued as a result, so what do you do if that is
indeed the case?
Furthermore, all signs indicate that the economic growth will
continue for at least another three years so - do you live in hope that the
situation are implemented quickly, if at all, or do you make the move to
get into the market right now?
That is a question only you, the potential purchaser, can answer - after
all, life is all about choices and whatever you decide will affect you one
way or another.
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Before-tax dollars versus after-tax dollars
It is very important that you try to gain some understanding of how
before-tax dollars work as opposed to after-tax dollars if you are really
going to invest in property of any kind, even your own home.
When you go to purchase your own home to live in, it is usually done
with after-tax dollars. This means that tax has already been taken out of
your income via wages, salar
y your remunerations. Whatever you have
left after tax is usually about 30% to 50% less than what you actually
earn (depending on your rate of pay) because the Tax Office has already
taken its cut. What is left in the hand is what must be used to pay off the
mortgage and nothing is tax deductible on an owner occupier home.
Before-tax dollars are exactly that… before tax is taking out. In this
instance, the costs associated with investments such as interest
payments, insurance, rates, maintenance, in fact most items pertaining to
the investment property can be used to offset the tax you would normally
pay without deductions.
These are tax deductible and as such allows you to claim some of the
costs back.
Not getting legal advice
The cost of not getting legal advice and checking out your financier
can have long-term ramifications for you, so please don’t scrimp or
avoid checking things out. It really is a small price to pay when you are
not only investing in something as valuable as property but you are also
investing in your emotional future.
Providing a roof over your head
Apart from providing a roof over your head, I believe property is the
most secure way to financial independence. While real estate may not
always rise continuously it is a surefire way of getting passive income.
That is, income that will always… eventually grow. If… you hang onto
it!
In other words don’t sell… ever… or at least until you have
accumulated enough assets to enjoy a good return and/or want to retire.
The once expected old age pension, together with welfare support, is
grinding to a halt. Even if you are fortunate enough to actually get the
pension, that conservative amount is for surviving… nothing else. If you
don’t have a few income streams your final days won’t be one of
travelling around the world or enjoying a luxury beach side lifestyle.
You just won’t be able to afford it.
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Even if you have managed to pay off your own home, the consumer
price index, rates and maintenance alone will eat away at your pension
and you’ll be hanging onto your house by the skin of your teeth!
However, if you start purchasing properties while you are earing an
income (and it doesn’t have to be a big income), the end result will be
Goodbye Renting Page 20