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Save to buy a house outright or buy investment property?

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Louise | 11 Nov 2013, 06:58 PM Agree 0
I am 28 and my boyfriend is 26. We have both started working in a Fly-In Fly-Out job at a mining camp with a combined annual salary of $200,000. As we are on a 4week on, 1 week off roster, we have chosen not to rent or buy a home and simply use our week off to travel or visit family. Our main goal is to save at least $400,000 over the next few years, buy a house with cash and start a family. We are aware of the tax benefits of having an investment property but it seems more appealing to watch our money grow in a bank account than go toward a mortgage. We are also aware of the option of salary sacrificing, however we have not done this yet. Are we doing the right thing by keeping the money in a high-interest account instead of investing and should we consider salary sacrificing or put all of our money toward our house?
  • Ron | 12 Nov 2013, 02:49 PM Agree 0
    Hi Louise,
    I see your dilemma of buying it outright and having to wait for a few years. The question you have to ask is:
    1. How long will it take you to save it up ?
    2. How much interest are you getting in your savings?
    If you buy an investment property now:
    Scenario 1. Basic Example of current Investment property Available
    You pay a deposit of 10% for a property worth $300000.
    Initial outlay : $30k + Stamp duty + Legal Costs = $35k, if you are a FHB.
    Rental Return : $340/week = $17680
    Capital Growth: 6%, which is currently for this investment. : $18000/yr
    Interest Expense : 5% = 15000/yr

    In simple words : by investing $35k now, based on above assumptions(which can be verified)
    over the period of next 5 years:
    Property growth : $390000
    Cash flow : it is positively geared.
    Depreciation : Not to mention the benefit you gain out of this.
    Therefore, either you can keep the money in the bank yielding you interest rates or invest in property every year, finding the investment property like above and make the most of your equity.
    In nutshell : $35k in a year invested = gives you $90k over 5 years.
    You can always argue on figures above, but they can be verified too. It is the type of Investment products we provide to our clients.
    Hopefully you can see the picture and make an informed decision. If you need more information, please ask.
  • Stuart | 12 Nov 2013, 02:52 PM Agree 0
    I'd suggest you purchase your home as quickly as possible. When properly evaluating your options, you need to take into account the capital growth of homes over the next couple of years. Whilst you might be earning a small amount of interest you could in fact be earning growth in the form of equity in your first property, simply by owning something appreciating in value because of where you have purchased.
    Theres nothing wrong with having a mortgage, especially if you purchase strategically, in a growth corridor and in an appealing area.
  • Daniel Shillito | 21 Jan 2014, 11:19 PM Agree 0
    Hi Louise,

    You may have already decided how to proceed, since my reply is quite late to the party! and if so, good luck with your choice.

    Your post has several different aspects to it.

    My first observation would be this: You need to be comfortable putting your money (whether its borrowed money or not) wherever you decide to invest or save. If you are not comfortable, and a mortgage is not for you, then don't let anyone tell you it's the only way! It's simply not the case.

    Many many Australians are comfortable and happy with one major investment in property (their own home paid for with cash or a mortgage) and their savings invested in superannuation for the long term (retirement) and other investments which they can watch grow to build their wealth and security for the future. Having savings in the bank is a very good thing.

    Your first goals in life financially, ought to be to have a financial buffer put aside for rainy days - or when the unexpected happens and you need the cash in a hurry. Mortgages can help you buy property, but they won't provide cash in an emergency if you need it. Typically an adviser would suggest you keep around 6 months of your ordinary living expenses saved away, for those future rainy days, before starting to plan for further investments.

    You mention salary sacrifice as an option, but sacrifice to where or what? If I assume you mean superannuation, then its something to consider, however at your age you have plenty of years before you can access any of the money you salary-sacrifice away until age 60 or 65. You just may want those savings before then for your house.

    It could be that your answer lies somewhere in between the options you mentioned, depending on your attitude to mortgages. That is, save up a really good, extra-large deposit amount for your own home (not just the minimum) and then obtain a mortgage for the balance required to buy your home. At least when the day comes you are sick of working fly-in and fly-out, you will have an asset to show for your hard work.

    Potentially you will be in a situation where you have more flexibility to consider a second property as investment or even something else.

    Property prices do rise and they do fall. Interest rates rise and fall. Your income can rise and also fall, depending on mining projects, the economy and personal factors (like starting a family!). property is not a get-rich-quick-scheme and should be looked at from an 8-10 year perspective, at least. Plenty of things can go not-as-expected in that time, and you should be aware of that,

    Of course none of this is specific financial advice, but general advice.
    Kind Regards
  • ArmanS | 01 Feb 2019, 11:11 AM Agree 0
    Generally speaking you can grow your wealth faster by borrowing and letting the bank's money do its work for you.
    This is called the power of leverage.
    As a very rough ballpark figure, the rental income typically is about the same as the interest cost, so for simplicity let's ignore both of those.
    If you borrow at 80% LVR you effectively borrow (very roughly) around 75% of the total property acquisition cost including stamp duty (and you pay for the stamp duty with cash). So you put in 25% and the bank puts in 75% (three times your own money; in total there are four buckets of money if you like, you contribute one and the bank contributes three).
    So if the property price goes up by 5%, your return on the cash investment is roughly four times, i.e. 4 x 5% = 20%.
    In practice the stamp duty component does not grow in value, so you should revise this multiplier downwards. Further, even though you start off with 80% LVR, over time your LVR will gradually drop, and unless you re-leverage to 80% every single year, you're effectively putting more and more of your "money" (equity) and using less and less of the bank's money, so the multiplier will also be lower if you look at an average return over several years. As a ballpark figure, a multiplier of 3 is realistic over a holding period of 5 years, so your average annual return will be around 3 x 5% = 15%. This is your return on equity, which is much higher than the interest rate on a term deposit or high interest savings account.

    There is another effect called the power of compounding. If let's say your return on equity is 15% in Year 1, and another 15% in Year 2, for both years combined it will actually be 1.15 x 1.15 = 1.32 = 32% (not 2 x 15% = 30%). If this keeps going for 5 years, your total return will be 101% instead of 75%!

    The above is a simplistic way of visualising it. It also assumes the property prices goes up by 5% a year, but this growth does not need to be consistent every year, as long as you have the financial resources to hold onto the property and pay the mortgage. The average property price growth has to be 5% per year over your investment duration, and the rental income (after expenses such as agent's fees and council rates) has to more or less offsets your interest cost. A simplistic way of ensuring this is to see if the rental yield (yearly rent divided by property value) is above your interest rate. You can put in actual numbers to get a more accurate estimate.
  • Harry | 20 Feb 2019, 05:38 PM Agree 0
    Yes through these ways you can save much money but you can also save money from your routine expenses like daily,weekly and monthly.
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