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.
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.
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.
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.