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The Fierce Girl's Guide to Finance

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home ownership

Some realtalk about buying property – and how to get it done

I’ve changed my mind about something. Something important.

I’ve said on this blog before that if you don’t buy your own home to live in, it’s not the end of the world. As long as you choose some other way to build your wealth, you don’t have to freak out about not getting on the property ladder.

And financially speaking, that holds true.

But I think I missed something important: human emotion.

Having just settled into the new apartment I bought, I realised I’d been denying something to myself. I like having my own ‘patch of dirt’. It fulfils a deep human desire to be settled and to feel some control over my destiny.

This feeling was compounded by the dramas of trying to get my bond back. The exit cleaners didn’t do a good enough job, so I found myself Gumptioning walls in my lunch hour.

A detail was missed in my ingoing condition report, so I was accused of leaving holes in a wall. And then there was the threat to make me pay for an electrician to change a light bulb that was out.

I fought tooth and nail, and in the end they only withheld $8.80 for said light bulb. But it reminded me of the way the cards are stacked against renters in this country, along with short leases and pet bans.

So, this is my advice for the yet-to-be-homeowners. Do everything you can to get your foot onto the first rung of the property ladder.

It might take a while, and it might mean making sacrifices, but it’s one of the most important things you can do with your money.

“But wait”, I hear you say. “I’ll never afford a property in this crazy market”.

And if you’re in the very lowest income band, that may be the case. But for someone earning  decent (or even ok) money, especially early in your career, it’s totally possible.  And here are three ways you can go about it.

Rentvesting – There are two hard parts of buying a property to live in. Scraping up the deposit and then repaying the loan (known in the industry as ‘servicing’).

If you go down the route of buying where you can afford and renting where you want to live, you remove that second challenge by having rental income.

If you live in Sydney or Melbourne, being a first home buyer is really bloody hard. There aren’t really any bargain suburbs left, even on the outskirts.

But if you look elsewhere, median house prices look far more manageable. Perhaps it’s just out of town, like the Central Coast or the Bellarine Peninsula. Or it might be regional, such as Wagga Wagga or Ballarat. Or a smaller capital city such as Hobart or Adelaide.

I am not giving you hot tips on all of these as investment property destinations. I’m simply naming places where you can pick up a house for the price of a small garage in Sydney.

How do you work out where to buy? Well you can do a ton of research yourself, looking at the supply and demand drivers. Talk to people in the area. Visit it for yourself.

Or you can work with professionals whose job it is to research these things, and provide recommendations.

I am most definitely NOT talking about the guys who try and spruik you an off-the-plan development in the outskirts of a holiday town.

No, I’m talking about real professionals whom you pay for their services. Like any such adviser, choose carefully, look at their results with other clients and use your bullshit detector. But for the clueless or nervous, this can be a useful way to avoid buying a dog of an investment in a far-flung place.

Family Guarantees – This approach works where you have the ability to service a loan (i.e. a decent income) but trouble saving a sizeable deposit. Your parents can use the equity in their own home to act in place of a deposit. Say you have 5% saved for a $500,000 property, but need 20%. They promise to cover the missing 15% if anything goes wrong and you default on the mortgage.

This is different to just getting a lump sum gift from the parentals (let’s admit, that’s the dream solution). It means they don’t have to actually come up with the cash (unless things go wrong – see below).

Of course there are risks involved. The biggest is that you default and the lender demands some or all of that money your parents promised. Some lenders also require the guarantor (i.e. your folks) to cover the mortgage repayments if you fall behind yourself.

And lenders will generally require the parents to get independent legal advice before going ahead, so that’s an additional cost.

You’ll still need to prove your ability to save and be a responsible adult – lenders want to see proof of ‘genuine savings’. But family guarantees can get you into your own place sooner and avoid the cost of Lenders Mortgage Insurance (which banks hit you with if you have less than a 20% deposit).

Play the long game – Maybe it’s going to take you five or ten years to cobble enough together for a home. But in the Monopoly game of life, that’s not actually very long. If you live to 85 that’s less than 10% of your life!

It drives me nuts when I hear people say things like ‘well I’ll never afford to own property so I’ll just spend my money and enjoy myself’.

No! Just because you can’t afford it now, doesn’t mean you can’t ever afford it.

First of all, there’s the power of compound interest: 10 years of slow and steady socking away will actually see you get some free money in there too.

Secondly, just because you earn this much now doesn’t mean you will forever. You can climb the ladder, increase your education, change career, start a side hustle, marry money … ok scrap that last one. But seriously, there is always an opportunity to do more, be more and earn more than you do now. So don’t rule out a big goal.

The hardest part in a long game is staying motivated. If your timeline is five years, saying no to another overseas trip or buying clothes from Kmart instead of Lorna Jane can get old real quick.

So, don’t be afraid to do things like set SMART goals, make a vision board (as cheesy as it sounds) and track your progress regularly. Hey, maybe even ‘treat yoself’ to a reasonably priced reward when you hit milestones.

I have a plan to pay off my mortgage in 12-15 years (depending on what interest rates do), so some of this stuff will be going on in my little world.

I have specific and aggressive retirement goals, and this is what will keep me from making poor decisions about money.

I’ll never give up martinis, but will I drop twenty bucks on them in a fancy bar? Hell to the no! (I will totally make them at home.)

Oh hey, homemade martini!

That’s because I have done the numbers on repayments, and I know that paying an extra $250 a month can cut five years off my mortgage. And then I think about not having to get up and schlep to an office five days a week, because I’m doing my own semi-retired thing, and it motivates me!

So, my message to you is: don’t despair! With a clear goal and some good behaviours, you too will one day have the pleasure of telling your property manager to get fucked. (Note: this only happened in my head, not out loud).

 

 

 

Don’t panic! Well, actually, panic a little.

I’ve been at the coalface recently.

Not literally digging up coal and stuff, but hearing the stories of everyday Australians and their money challenges. I now work for a large financial planning and mortgage business, so I see lots of different ways people are winning or losing the big Monopoly game of life.

So here are some things I really want to tell you.

We are entering uncharted territory, in terms of our economy and society.

We are going to have far more people, living far longer, with unprecedented levels of debt.

This sounds like a big, impersonal statement, but has a lot of implications for each of us as individuals.

For example, if you’re Gen Y or X, like me, your parents could well be retired for 30-40 years. They will likely spend their retirement savings on their holidays at first, then their general living expenses and then aged care (which is bloody expensive). We, their kids, will be lucky to get much of an inheritance.

Key takeout: We will have to look after ourselves one day.

We are buying homes later and paying more for them.

Australians are going to have mortgages for a long time, and many people will limp into retirement (or some form of it) with a debt.

This hit home to me when I was talking to the head of our financial planning business.

I’m trying to work out whether I buy a place to live in, and he’s asking me all these hard questions like ‘what do you want to do in 10 years’ (I don’t know, other than it probably involves Botox).

And then he said, well, what if you retire in your 50s? (Unlikely, I’ll concede, but my dad managed it at 53). Will you want to still have a mortgage? And then it dawned on me that if I get a 25-year mortgage I’ll have it in my 60s!  What the actual fuck.

Now of course I can get a small mortgage and pay it off sooner. But if I do the minimum, that means I’ll literally be in debt for decades.

The age people my age can access super is 67 (aka ‘preservation age’), so I couldn’t even tap into my super to pay off that debt until then. (Which is what people are doing more and more, then having not much super left to live on).

Key takeout: We should probably rethink our retirement age and smash our mortgages as fast as possible.

Maybe you can’t afford the home you want, right now. But you can probably afford a home you don’t like, in a few years.

I know, that’s confusing. Why would you buy a house you don’t like?

I have said before on this blog that buying property isn’t the ultimate be-all and end-all to life. Certainly that’s the case when we’re younger. But nobody really wants to be old and homeless.

There’s a growing group of under-40s who despair of ever getting into the market. But that’s because lots of us want to live in expensive places like Sydney.

One option is to buy an investment in a more affordable place – often regional cities – and sit on it for a long time. Most people who have ‘dream homes’ didn’t start with them. They upgrade over time.

The key is to do something, as soon as possible. What scares the hell out of me is the idea of not owning anything in old age.

I heard a customer story the other day about a couple, in their 60s, owing hundreds of thousands on a home loan. Their combined income was less than $75K per annum, both casual. They may never pay off their property. Or the husband might die and leave his wife on her own earning $19K a year. Yep, these are real people and I have no idea of their backstory. But I really don’t want any of my Fierce Girls to be in this position one day.

Which brings me to my final key takeout: Please start soon. Actually, start now.

Start what? Saving, being serious, investing, adulting, not wasting money on crap. The sooner you build a foundation of wealth, whether it’s a little share portfolio or a savings account or a cheap investment property, the sooner you are giving yourself a bedrock for the future.

And the power of compound interest means the sooner you start, the less painful it will be. Don’t put off the idea of wealth building, even if it  means starting small.

And if you’re not sure where to start, then have a look through the extensive Fierce Girl archives. Because the blog is about to celebrate its first birthday! Yay! So you have a year’s worth of fierce tips to work with. Enjoy! (Now that I’ve scared the shit out of you haha).

Photo credit: https://www.flickr.com/photos/cedwardbrice/ 

Can I afford my own home? Part II

home

We discussed the pros, cons and Beyonce lyrics relevant to home ownership in Part I.

So, you want to go ahead and buy your own little patch of paradise? (If by paradise you mean a modestly priced abode in an affordable suburb).

Great, let’s do this!

How much do you need?

Shit’s gettin’ real now. You’re going to need a large amount of cash as a deposit. Ideally, 20% of the purchase price and the stamp duty (there are some stamp duty exemptions depending on the state you live in, but overall, it’s a tax you pay for buying a house. I know, WTF, as if it isn’t already crazy expensive).

So let’s assume, conservatively, you are buying a $500K property. You will need to save $100,000.

This would give you a 20% Loan-to-Value Ratio, or LVR. This a big deal to banks – and they get all antsy if it’s much lower than this.

However, maybe you find a deal where you only need a 10% deposit. That’s fine, but they will charge you Lender’s Mortgage Insurance, which is a total scam in my view, but it protects the bank if you default on the loan. I know, poor banks, needing ALL the protection cos they’re doing it tough.

The price of LMI depends on how short of the 20% deposit you end up. They tend to whack it on top of the mortgage amount, which is good because you don’t need to save the money for it, but bad because you end up paying interest on that amount too.  In our example, LMI would cost almost $9000.

How will you save this much?

By not spending it on other things. Sounds obvious, but there is a long way between saying ‘I plan to save a cool $100,000’, and actually getting there. And on this long road is a lot of  saying ‘no’ to things.

No to $20 cocktails. No to taxis home after said cocktails. No to overseas holidays. No to expensive phones you upgrade every two years. Look, the list goes on.

Saving money is kinda hard and boring. So is paying a mortgage actually. In this example where we borrow $400,000 (after saving 20%), the repayments will be over $2000 per month (on a 4% interest rate). Totally doable, but not exactly conducive to a lifestyle of luxurious ease.

And this is what the bank wants to see: that you have been practising the saving game for a while now. You need to demonstrate a savings history – which is why, even if you have awesome folks who gift you a deposit, you still need to show you aren’t blowing your paycheque on cocaine and hookers every week. Or even every second week.

Savings and wise investment

Homer hilariously disparages the concept of ‘savings and wise investment’ in this scene.

Sadly, there are no fortunes to be made with bacon grease these days. And even saving is pretty tough on its own. If you have a sensible time frame to save a deposit, you might consider investing it first.

The era of low interest rates is great for borrowers but shit for savers. Even the best high-interest accounts are only paying around 3% interest, and inflation is around 2%. So every year the value of your money actually only grows by 1%.

One option is to invest in a managed fund or ETF that delivers a higher return. Now this comes with its own set of risk and reward, so don’t just take my word for it (you could even see a financial adviser). But the idea here is that you have an interim investment strategy to boost your returns, if this is whole property idea is a long-term goal.

Playing the long game

My friend Gigi is in her early 30s and lives in New York (thanks E3 visa!). She wants to buy an apartment there one day. (That sounds pretty way out, but in fact it’s the same price as Sydney, maybe even less.) So here is what she does:

  1. She has been saving part of every pay since she was a graduate – i.e. it goes straight into an account that she doesn’t dip into for new clothes or nights out.
  2. She still has holidays and does fun things, but that is a separate budget. She pays herself (to her savings) first.
  3. She puts it into a share portfolio that bubbles away while she plays the long game. This means instead of getting 2-3% she has been getting 5-8% returns (depending on the shares and the time period).

So it’s probably a few years yet until Gigi bags that apartment. But guess what, she started early, so even if she waits five years, she will be well under 40 when that happens. Considering we live a bloody long time these days, Gigi will have a good 50 years of owning property ahead of her.

Gigi and me: living the dream in her (rented) NYC pad
Gigi and me: living the dream in her (rented) NYC pad

So how do you get started? Break it into small steps.

  • Open a dedicated online savings account, for that one purpose. Set up direct debits to it on payday. Don’t touch it.
  • Use the savings and mortgage calculators on MoneySmart to work out how much you need to save, and over what timeframe. It will give you a goal to aim for.
  • Do a budget. For realz. Give it a go at least. Look, here is an easy one! Just get a handle on what goes in and out, so you can see where to trim.
  • Start practising saying the magical phrase ‘Sorry, I can’t afford that’.

Can I afford my own home? Part I

fairydoor

We all have goals. Beach body by December (any year will do). A pair of red-soled Louboutins (paid for by someone else). Squat twice my own bodyweight. (Oh, is that just me?).

And many of us want to buy property, and wonder if it will ever be within reach.

So, can you buy your own home?

I don’t know. But I can ask you a bunch of questions in response. This is a pretty long post, but it’s really important, so please stay with me. There may be cocktails and topless waiters at the end*.

What it comes down to is this: why do you want to buy a property?

Is it because your parents told you that you should? What, like they told you to stick at the job you hate, to always have safe sex, and to stay away from that bad boy despite his amazing biceps? Some parental advice is definitely sound, but often unheeded.

And some advice is based on a time when there were four TV channels, seatbelts were optional, university was free, and houses cost 4 times the average salary, not 20 times. So unless they pony up with a deposit for you, your parents’ advice should be taken with a grain of salt. They mean well, but they built their wealth in a different era. What worked then may not work now.

Do you hate ‘throwing away dead money’ on rent? Sure, your hard-earned cash is heading into the pocket of some landlord (probably a babyboomer with a free uni degree).

But here’s the thing: you can afford to rent a nicer place than you can afford to buy. I live in a sweet inner-city apartment with my flatmate who is an interior designer. It looks like a Vogue magazine. My rent is exy but not ridiculous. And I estimate it’s a third of what I’d be paying to actually own the place.

If you’re happy to live somewhere less fancy (i.e. outside a capital city) then the maths of buying can stack up. Go nuts in Wagga Wagga. I won’t be joining you though.

Interest costs money. A lot of it.

Home ownership is seriously expensive. Not only are there maintenance costs (ever replaced a hot water system? See ya later $2000), or strata fees (at least $500 a quarter, up to a couple of thousand) or council rates (starting around $1500 a year). There is the eye-watering cost of a mortgage itself.

Say you borrow $500,000 over 25 years. You will actually pay nearly $300,000 in interest (at 4%, which is a record low rate in this country). For the first years of a mortgage you pretty much only pay the interest (on minimum repayments). The value of the home is (hopefully) increasing over that time, but when people say ‘I doubled the value of my house’, that usually doesn’t include the cost of the mortgage. The graphic below (from the MoneySmart calculator) shows the interest payable in light pink – it comes to $294,755.

Source: Moneysmart.gov.au
Source: Moneysmart.gov.au

If you are living in the home, then of course you saved on rent and had somewhere to crash. Just bear in mind that the numbers aren’t as simple as property-obsessed parents/real-estate agents/taxi drivers would tell you.

Is it because you have a burning desire to renovate?

Well here is my experience. Renovation sounds fun, and those bastards on the reno shows make it look so easy and cheap. BUT they have a team of tradies who do the real work and actually charge at least $50 an hour to people like you and me. And also, living without a functioning kitchen for ages is a grind.

Renos have their pluses, but being inspired to renovate by The Block is like being inspired to diet by The Biggest Loser. I.e. It’s fun to watch on TV but hellish IRL.

Is investing the answer?

Perhaps you aim to buy an investment property somewhere you can afford (but wouldn’t live). This is fine, but just make sure that you RUN THE NUMBERS first.

At the end of the day, buying a residential property is nothing more than an investment. And there are lots of ways you can invest your money. Owning a share in a property (where the bank owns the rest) is just one option in the exciting world of finance. However, it’s very popular. (So is dub-step, Pokemon and the Kardashians; the world is a confusing place).

But here are some reasons why it’s so beloved by Australians:

– People get it. You can drive past your property and think ‘yep, there is my wealth’. If you own shares, you can pull out some pieces of paper and look at them, but it’s not really the same. (Although you could listen to Beyonce on this one: “Always stay gracious, best revenge is your paper”).

– Negative gearing is a thing. If you spend more on repayments and other costs than the you receive from rental income, you can deduct that loss from your taxable income. Say your repayments cost $20,000 but you only get $15,000 rent. The amount the tax man can slug your salary now goes down by $5000. Also, the interest you paid on the loan can be tax deductible. (It’s pretty complicated, you can learn more here).

But the thing to remember on negative gearing is that whatever costs you can write off on tax, they are still costs. That is, you still had to put your hand in your pocket and find that money. The $5000 came from your pay. It’s a deduction and not a refund. It’s not all magical free money, just because you get some of it back.

– FOMO. Another driver of our property addiction is that Australians see how much ‘other people’ have made on property. Well, I am sad to say it, but if you’re buying in the next five years, the big gains in the market have probably all been had – prices are likely to grow much more slowly after the recent go-nuts boom. (Millennials and Gen-X get screwed by old people again!)

Yes, you will get rental income. However, right now (July 2016), RP Data says, “gross rental yields for houses are currently at 3.2% and unit yields are 4.1%, both of which are record lows”.

Yield is the rental income as a percentage of the property’s value. It’s low right now because the property is sooo expensive to buy in the first place. (This could be a whole separate discussion, so let’s park it for now and say property is doing ok, but not amazingly, as an investment).

The other thing about tax

There is one last point about buying property that nobody every really explains to novices: Capital Gains Tax (CGT), where the government takes a cut of any great investment you make. Say you make $100,000 profit on an investment. They will take a share of that (based on a complex calculation best explained by an accountant) once you sell the investment and reap the profit.

This applies to shares or property investments – but there is one big exception to this rule: you don’t pay CGT on the home you live in. So the $100K you make on an investment property gets taxed, but the hundred-G’s are all yours if you lived there. (This is why people downsize when they retire – they take the tax-free profit and bank it as their nest egg).

So what’s the answer?

I know what you’re saying. “Just tell me whether to buy a house already!”.

To be honest, if we take all of these facts together, the best option is to buy your own place in a cheap, unlovely area and live there for 20 years til it gentrifies. That is actually what many of our parents did. The suburb in southern Sydney, where I grew up in a red-brick 1960s bungalow, now has a median price of close to $1 million. I can’t sufficiently convey to you how far away and unexciting that place is, and yet if my folks had stayed there, they would now be millionaires, just by sitting on a house they bought for $100,000 in the 1980s.

But for fierce girls like us, it’s harder. We like our comfortable lifestyles. Many of us have credit card or university debts. It’s hard to save the $50K deposit we’d need for even a modest property.

So I am not saying a property is a bad investment. I am not saying you shouldn’t buy your own place. I am just saying it’s not the ONLY way to make money, and it’s not the magical route to untold riches that it was for our lucky, once-in-a-century baby boomer parents.

And if you don’t buy anything for the next decade, or ever, THAT’S OK. You aren’t a loser. You aren’t on the path to homelessness. That is, as long as you do this one thing… SAVE AND INVEST. (Ok, that is kinda two things).

Please make sure that just because you don’t have a mortgage, you don’t piss away every dollar you earn. Take the money that you’d be spending on a mortgage, and do something useful with it. Save it. Put it in super. Buy shares, buy REITs, buy bonds, buy a managed fund … there are plenty of other ways to make money.

Just make sure you have a plan to build your assets over time – which is essentially what home ownership is all about. That, and choosing homewares, obviously.

*Subject to availability.

Part II: Still want to buy a property? Here’s what you need to do.

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