Be fearful when others are brave

I’ve been MIA for a while busy with wedding plans and honeymoon. But as the year is coming to an end, it is time for me to get back to business and tie up any loose ends. This year I have achieved all of my goals except one- to build a granny flat. I am still in the process of getting a construction loan and the granny flat probably won’t get started until next year.

It has been such an exciting year for property in Australia. With Sydney growing over 11% and record low interest rates it seems like everyone is rushing in to jump on board the property growth. I have been looking around to continue investing but I realised the market is too hot and I fear I will be overpaying for property in Sydney. Hence I have been focusing on improving my cashflow, in the form of a granny flat on my property and also analysing the state of my properties.

Yesterday I organised an inspection on one of my properties with the agent and the condition of it was not up to the standards as what I would want it to be for my tenants. It seemed like the property manager did not report to me any issues the tenants are having such as no screen door for the back door, windows in the kitchen/laundry area not opening at all, cracked floor boards which can be a hazard for children etc. So I have decided that while the growth in property continues in the next few years I will focus on saving money and improving the properties I have so far. I will wait for the off-the-plan apartment to be completed (mid 2015) before deciding to jump into another property- here’s hoping I can be that patient.

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Off The Plan- a gamble or a strategy.

I have been busy organising finance for an off the plan purchase for an apartment in Brisbane. Construction is expected to complete late 2014/early 2015. Everything went smoothly with the help of a property group called “rocketpropertygroup” and an amazing lawyer going through every little detail of the contract with me.

I’m still unsure about this strategy. Buying off the plan is basically when you put a deposit down for today’s price, and hopefully settle in 2-3 years when the price has increased. As the contract is for today’s price, the bank valuation at the end of completion should be more than what you paid for, hence giving you instant equity. The deposit you pay is placed in a high interest account so if for some reason the building is not completed, the deposit will be given back by the developer with interest.

The disadvantage would be if the valuation ends up lower than the contract price, than the bank will force you to put a larger deposit down. So it is important that you make sure you have a 10-15% buffer for extra payment just in case. Basically be prepared for the worst, and you should be fine (I hope)

I’m hoping to try this strategy to take advantage of depreciation benefits as brand new properties have higher depreciation and to also try a new market out of sydney city. Not sure if I am gambling or if this is a valid strategy yet. Time will tell.

Gen-whY Later

Every morning when I wake up with a cup of coffee I open up the Sydney Morning Herald website and scroll down to the property section. Every article about the movement of property in Australia has a plethora of comments from readers whinging and complaining about how expensive and unaffordable property is in Australia. Then there are articles stating that today’s generation will not be able to buy their own home, and the comments from readers making up excuses to why they cannot afford property- it’s the governments fault, it’s the taxation system, it’s the investors, it’s the foreign buyers, it’s the population growth/immigration etc etc.

Last week, my fellow gen-Y friend purchased a $490,000 property. She has been saving since she was 16 and she is now 24. She goes out to dinner and movies with us, travels overseas and goes on holidays at least once a year. Instead of complaining about how expensive property is and spends all her money on alcohol or clothes, she pays herself first. She puts a set amount into an untouchable account each pay week and spends the rest. Simple.

All around Australia there are properties ranging from $50,000 to $50 million. First save, then when you are ready to invest work out how much you can afford. Then find a property in the price range and do your research. It may not be the dream home you were hoping for but not many people buy their dream home first. It’s simply a stepping stone to purchase more property and hopefully buy that dream home one day.

Interested in Interest

When I started off investing in property my main goal was to pay the debt off as much and as fast as I could. Paying principal + interest helped you reduce your debt and forced you to put the money into the mortgage. I never understood why someone would only pay interest and leave the debt at the same level for so many years.

Three years later, and I understand why. Paying interest only is first of all tax deductible in Australia (principal payments are not tax deductible). The money you save from not paying principal can be saved up and utilised to continue investing in more properties. Secondly, even though your debt level stays the same, the value of your property and rental return should be increasing as each year goes by. Obviously this only works if you are disciplined. My worry is if I don’t utilise the extra money for investments and perceive it as extra spending money.

I’m going to convert both mortgages to interest payments only and see how I go with this. The plan is to put the extra money into an offset account until I accumulate a healthy amount to buy again. I should be saving around an extra $300 a week converting to interest only payments.

Do we need a mentor?

So I attend a plethora of property seminars and read all the magazines/books about property. I just can’t stop thinking about what I should do next or how I should approach my goals. Lately I’ve been researching different companies that promote themselves as educators and mentors to help you buy property and achieve your goals. I’m not exactly sure what is involved, but I wonder if I really need to pay someone $10,000 to tell me, ‘you can do it!’.

$10,000 Mistake

I started my career in the health industry in a rural town. I was paid well and had living expenses paid for by the company. Ecstatic about my financial position, I wanted to jump straight into the property market as soon as possible.

Mistake number 1: Rushing into property without educating myself enough about the market and learning better negotiation skills.

I found a property that was in my budget and had a fantastic yield of 5.5%. All the other properties that I searched for in this particular suburb had a yield of around 4%.

Gross yield is the return on the investment before expenses and taxes are deducted. It is calculated by:

Annual rent/Property value x 100 = %

Because the property had many bedrooms and the yield was quite high for the area, many family and friends suggested that it would be too difficult to rent. Luckily this was not the case. I have been able to rent out the property consistently.

Looking back now, the only regret I really have is my naive and poor negotiation skills. I was too excited about the yield and paid $10,000 more than what I could have bought it for. I made an offer too quickly before anyone else had made an offer.

Lesson learnt: Before making an offer, assess the market value and make an offer below this market value. Never make the first offer on paper or in an email, even if the agent requests this as this leaves gives you flexibility to change the offer if required. For example, after pest and building inspection you may need to ask for a discount for any faults to the building.

Call me crazy.

After a long day at work most people relax in front of the TV or read a book. I, on the other hand sit on the couch with the TV turned off, a blank piece of paper on my lap and pen in hand, jotting down numbers and figures. While my partner sleeps in bed, I sit in the living room silently thinking about suburbs and statistics until I feel exhausted.

At a young age I never really had an interest in property. I was carefree. I wanted to travel. I never wanted to be tied down with a mortgage.

Alas, I have 2 mortgages, with the third mortgage hopefully due by the end of 2014. I miss being young when all I had to really worry about after work was which restaurant to eat at or which cafe to go to. But I know I’ve hit a stage in my life known as the “acquisition/accumulation” phase where I feel the urge to increase my assets to the best of my ability.

I blame my uncles and aunts for this craziness happening in my head. The family arrived in Australia as new migrants in the 80’s with nothing but a few set of clothes. With hard work and accumulation, they have been able to do extremely well in the property market. This makes me think- as a person who had the opportunity to grow up in Australia, educated in the Australian school system and with mum’s financial support until I graduated from University- I should be able to achieve more than my uncles and aunts, right?

Call me crazy, but these posts are the thoughts that keep me up late at night.