Integrating Property Plans with Financial Plans: Tips & Tricks for Self-Employed, Single Parents & Schemes to Get on the Property Ladder (Ep. 254)

Cate kicks off the episode by sharing that the podcast is just a couple of recordings away from it’s fifth birthday!

Kym’s Question

I’m a single Mum of two teenaged kids and business owner. I pay $600 a week rent which is going up to $680 a week in a few weeks. I’ve been trying to obtain a housing pre approval for a few years now. Hitting walls every which way with banks due to interest rate rises and harder rules around lending . Is there a way I can buy into a housing scheme so make my money work for me in the short term to up my deposit?

Dave talks our listeners through some of the hurdles that self employed borrowers face, from financials, fluctuations in income and deductions and timeframes, to heightened scrutiny on loan applications

He also sheds light on some interesting small business statistics.

1. Small businesses comprise 97.3% of businesses in the whole nation.
2. Small businesses are a significant part of the Australian economy, employing around 6.8 million people, nearly half of the country’s total employed workforce.
3. Average incomes:
   • Self employed income – $91,475
   • Employed PAYG income – $99,580

Dave steps through the impact that dependants (i.e. children) have on borrowing capacity:

‘HEM’, the Household Expenditure Measure, as a benchmark to estimate a borrower’s living expenses.

Developed by the Melbourne Institute, the HEM calculates a basic level of expenditure for various types of households—singles, couples, families with children.

And this estimated expenditure is based on data collected in the Australian Bureau of Statistics’ Household Expenditure Survey.

To give you an idea – here are some HEM figures from a major lender:

• Single no kids – $2,214 – Loan amount $501,780
• Single 1 kid – $2,651 (+$437) – Loan amount $458,553 (-$43,227)
• Single 2 kids – $3,141 (+$490) – Loan amount $410,083 (-$48,470)
• Single 3 kids – $3,631 (+$490) – Loan amount $361,613 (-$48,470)

Mike talks through the high rate of rental increase that Kym is facing. What can a renter do if their rental increase is unfair or unsubstantiated? Tune in to hear…

Unfair and unsubstantiated – talk to your property manager and come prepared with comparable rental rates – do this before you go to the tribunal!

The hardest thing about this climate is the massive rental growth.

The Trio chat about some of the initiatives available to those who need a bit of assistance with their home buying.

From National initiatives to state-based offerings, the Trio chat about each opportunity and consider those that could be helpful for Kym to explore.

Shared equity schemes, deposit guarantees, regional opportunities and concessions are some of the items on the discussion table.

National Initiatives:

1. First Home Guarantee (aka First Home Loan Deposit Scheme) — The government guarantees part of your deposit.
2. First Home Super Saver Scheme — You can make voluntary contributions to your super and withdraw it to use as a home deposit.
3. Family Home Guarantee — This scheme is for single parents with dependents. The government assists by guaranteeing part of your deposit.
4. Regional First Home Buyer Support Scheme — This is for those intending to buy property in regional Australia. The government helps by guaranteeing part of your deposit.
5. Help to Buy scheme — The government funds some of the upfront cost of a home in exchange for equity in the property.

Non-government shared equity schemes

Could be worth looking at – Longview and OwnHome

If you just can’t do it with your borrowing capacity and the area that you want to live in, or you just don’t fit the requirements and specifications for government schemes.

We’ve got a pretty well off client in Sydney working with one at the moment – they need $1.8M-$2.2M

That could be a way to get into a higher value property.

The devil is in the detail – understand your obligations and what you are giving up. Their are pros and cons to each of these options.

Claire’s Question

Dave breaks down some of the key differences between the role of a financial planner and a property planner.

1. Some broad similarities
   1. Understanding client situation and long-term goals
   2. Putting together a long-term plan to meet the goals – pathway/roadmap to get there
   3. Looking at the financial outcomes and implications of the decisions to be made

2. Fin Planning

Essentially, a Financial Planner provides advice on:

1. Wealth creation – developing investment portfolio (investment products, shares, schemes)
2. Retirement planning – investments, income projections, advice for transition to retirement, divestment
   1. Aged care planning
   2. Inheritance/death planning
3. Wealth protection – insurances (usually a big part of their revenue)
4. Superannuation and SMSF
5. Business planning – investment advice, succession planning, insurances
6. Property investment – they are licensed to provide advice on property, although property advice is unregulated and are actively discouraged to do this by their deal groups and licensees in some cases.
   1. Partnering up with Spruikers – recommending poor off the plan investments – receiving kickbacks or commissions on this from developers – need to be careful that you are not being flogged a property

3. Property Planning

• We focus on long term planning, with a blend of financial outcomes AND lifestyle events, considerations and outcomes.
  • How the two mesh together – property is the only asset class we live in.
• Financial modelling via our software to look at timeframes and impacts of timing of property decisions – eg: cash flow
• Retirement outcomes from property – passive income and value of assets owned, the properties you might need to hit the retirement mark (not about super – we don’t have an AFSL)
• Property strategy – investment or home next, price point, macro location, micro location
• Property selection education – what does a good asset look like etc
• Negotiation – general guidance on dealing with agents and approaching a negotiatoin
• Mortgage strategy –
• Money management
• We have greater scope to focus on, and we also prioritise greater than FP’s do, someone’s financial goals and timeframes, as well as working arrangements.
• Property is not their wheel house – so they don’t want to stray here
• They may have made their own poor property decisions and have an aversion to property
• There is too much work involved in property advice, that they don’t want to spend the time doing:
  • Property is such a complex asset – it is incredibly personal in terms of preferences (what does the ideal home look like) AND no two properties are the same.
  • It is very different to “here is product X and product Y and the fees and expected yield, pick one”
  • Takes a long time to make a property decision: home or investment, purchase price, location, asset type, yield, capital growth, target tenant

We don’t recommend or sell products, we are pure planning, free from vested interests.

The Trio ponder some of the reasons why some financial planners are less than enthusiastic about property as an asset class.

Risk vs reward ratio is not there.

They’re not allowed to recommend one property over another.

Reversing a bad property decision is much harder than reversing a bad share decision – “You can’t sell a third of a property easily.” Liquidity issues

Buying and selling property takes time and the costs are prohibitive.

Property is unique – unlike shares, it takes a lot of due diligence to buy one property

More taxes on property investing

What are some of the elements that a FP wouldn’t necessarily be across, or be as strong at?

It is important to note – financial planning is largely around recommending and selecting products.

And also, primarily focuses on financial outcomes – not so much lifestyle considerations and outcomes

• Starting a family
• Maternity leave / taking a gap year from work,
• overseas holiday,
• paying school fees,
• when will you purchase a principal place of residence
• moving to a different location.

So, how can investors get the best out of their financial planners, and how can they navigate any perceived negativity about property. The Trio have a few tips to share.

What questions can people ask their FP if they are fearful that they are anti-property?

• Establish whether they are anti-property, or concerned that it’s not suitable right now for YOU
• Ask them why they are recommending an alternative asset class in this instance
• Ask them who else they’d recommend you talk to you if you do still wish to have property in your investment portfolio (this should be telling)

There is room to work with both and particularly if asset diversification is important to you.

Property Planning is a niche and not all Financial Planner’s will have the expertise here to be able to give good sound property advice.

It takes years of dedication to understand and become an expert in property and with many financial planners, it’s simply not their wheelhouse.

Financial planners are the experts in financial products – super, shares, insurances, etc. All of that is really important, so certainly, if you need help in these aspects, see a financial planner.

However, if you need help making good property decisions, you need to seek the help of a property expert.

1. Property strategy – see a property planner
2. Quality asset selection – we can give you the education to do empower you to do this yourself OR engage a reputable BA

If you are dealing with any advisor that is close minded, not considering your needs or preferences, then you need to assess whether they are the right person for you.

But as I said before, it is perfectly fine to leave the super, insurances and shares to the financial planning and leave the property advice to the property experts.

Gold Nuggets:

Cate Bakos’s gold nugget: “To anyone who’s looking to get into the property market and needs a little bit of help…. check out some of the initiatives on offer and familiarise yourself with them.”

Dave Johnston’s gold nugget: Dave expands on his answer for Claire about the role of a property planner versus a financial planner.

Mike Mortlock’s gold nugget: Look at the ‘ad-backs’ and make sure your accountant is providing reliable information to your broker.