Listener questions – How do I recover from early investment decisions that were made without a plan? We have our home and plan to start a family, should we buy an investment property now or wait until after we have kids? And more (Ep.154)

 
 

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In this week’s episode, Dave, Cate and Pete take you through:

  1. A question from our listener – Should I invest in property now or wait until after we have kids? My partner and I are in our late 20s, work full-time and plan on starting a family in the next 3-4 years. We bought our first home in 2019 (Woodcroft Adelaide) which we plan on staying in long term. Since then, with extra repayments and the market we have built up equity (~200k useable). As our incomes will be changing with time off for kids, what advice would you have when weighing up the pros and cons of investing now compared with waiting until our incomes are more more steady (ie kids starting school) and we have paid off more of our mortgage.
  1. Crunching the numbers. The key question to answer is whether our listener will be financially secure if they purchase an investment property now and then go on to start a family, which comes with reduced incomes and additional living expenses. The trio crunch the numbers and discuss what price point would be viable.
  1. Buffers and risk tolerance. A fundamental point to consider when planning for an investment is risk management and whether the available funds buffer will allow our listeners to have a good night’s sleep. Risk tolerance is key here, ask yourself, “would I be comfortable if my net monthly cash flow was very limited, neutral or even going backwards?”. If cash flow will be negative during the period of having children, then maintaining a buffer large enough to support a growing family will be a critical consideration.
  1. How does the family home fit into your investment decision? Our listener has done well for himself to purchase the long-term family home, which is large enough for a family with 2 children. Staying in the current home makes it much easier to build an investment portfolio. However, those who are considering embarking on the journey of having children and also purchasing an investment property must consider how their needs from a family home may change in the future once the kids come into the picture. If upgrading is on the agenda, this may mean selling an investment to achieve lifestyle goals.
  1. A question from our listener – How to recover from early investment decisions that were made without a plan? I made a mistake when I began my investing journey in that I did little to no research, had no idea about investing yet decided to jump in head first and buy a couple of properties. I soon learnt there was a touch more to it than just putting your name on a title. I’m wondering if this a common occurrence in your experience, in that people jump into an investment without really having a strategy at all? While they haven’t been a disaster, they had no strategy behind them and I’m wondering if they can make a good fit for the portfolio, or if it’s better to move them on and target something that’s more suited. I suppose my question is something like: How do you recover from early purchases like this, where there is little to no strategy? (Does one ‘need’ to recover?) Or do you just hang on and wait?
  1. Assessing the investments. The trio analyse the listener’s two investment properties for capital growth, yield and quality of investment.
  1. How does gearing fit into the picture? No doubt having a plan in advance of a purchase and understanding what drives outperformance makes a difference, but (and there is a but), even if the property is not outperforming, there is less of a case to sell once it is positively geared. At this point, the properties are very close to becoming cash flow positive and become a set and forget property.
  1. Property is a forgiving asset. Unless the investment is a total dud, property mistakes are rarely catastrophic. Cate explains the key elements our listener has going for them for a very bright property journey in the future.
  1. We’re all geniuses in hindsight. Half the battle is just getting in and making a decision. Could the property decisions have been better? Yes. But it’s not all bad news. For a young couple in their 20’s with already two properties under the belt, they are already underway to having a comfortable retirement, far ahead of most people.
  1. A question from our listener – Capital growth calculations and suburb growth rate. Is there a way to calculate the 3 month, 6 month, 1 year and 2 year growth of a Suburb using excel (2007)? I know you can probably “google” the growth rate of a suburb, but I am keen on working all this out. And are there any hard and fast rules regarding the growth rate of a suburb? I often hear some commentators say short term growth should ideally be this and long term growth should be that too?
  1. Dealing with data. The trio share with our listeners how they can do their own capital growth calculations, but issue an important warning for calculating capital growth over shorter periods of time as there are many factors which may skew data.

Resources

Show notes

Should I invest in property now or wait until after we have kids?

The question:

My partner and I are in our late 20s, work full-time and plan on starting a family in the next 3-4 years. We bought our first home in 2019 (Woodcroft Adelaide) which we plan on staying in long term. Since then with extra repayments and the market we have built up equity (~200k useable). As our incomes will be changing with time off for kids, what advice would you have when weighing up the pros and cons of investing now compared with waiting until our incomes are more more steady (ie kids starting school) and we have paid off more of our mortgage.

We wrote a property plan for clients not too long ago that were in this situation. Mapping out plans, what did it look like before they have kids, what would it look like if they waited, what buffers would they need to have in place to ensure that they were financially secure during this time?

Crunching the numbers

  • Property value of home $650k x 80% = $520k
  • HL $279k balance / $319k limit
  • Accessible Equity – $200k
  • Income current – $172k

What could they purchase an investment property for without having to pay mortgage insurance?

Could purchase an investment in the $500k to $600k feel about right as that allows them to –

  • Not have to borrow more than 80% of the value of the property.
  • Not have to contribute any funds.
  • Increase there buffer. 

EG $650k + $600k = $1,250m x 80% = $1,000,000

HL $280k – Limit $320k – $40k redraw

Inv $680k – Balance $630k – $50k redraw

Rent @ 3.5% = $1,837 pm

Repayment @ 4% = $2,100 pm

Holding costs @ 1% = $500

Shortfall $800 pm @ 32.5% = $540pm true cost

Key questions to ask yourself

Can you afford this today

But then can you afford this when you’re down to one income or 1.5 income?

What is the right buffer to have in place. 

  • Ultimately, it comes down to cash flow, buffer, risk profile and price point.
  • I would suggest working out what is your surplus cash flow today, 
  • Your living expenses today, and you assume extra costs for a child or two, 
  • anywhere you will cut back spending yourself, 
  • and then decide what you would have left over?
  • From there at least ball park you will know if you don’t have much cash left over or if you do.
  • Then you need to factor in your tolerance for risk, because you might be waiting another 4-7 years until you purchase and what is the opportunity cost assuming property values grow at 5% and rental growth at a similar number, for example over that period V’s what you could purchase a property for today.  
  • Risk profile – Then look at if you bought today at that price point or less based on your tolerance for risk, how would you go if your positive cash flow was very limited, neutral or even going backwards, how long would your buffer last etc……..
  • Is this the long term home? Maybe $1.2m down the track. Timeframe, dinner table chat.
  • Play around with what is the price point you would be happy to purchase at today.
  • Great example of why people obtain Property Plans. And why these things can be complex ifyou want to work out the detail

Cash flow is integral – you want the property to work around your family, not your family to work around the property. 

He’s got some sound goals that he’s aiming for, they’re young and in their late 20’s. Happy retiring somewhere between 55 and 60, with $60,000 rental strategy.

Not looking at upgrading the family home – they wouldn’t need to move. 

There might be a few lower priced properties that are delivering a lower rental yield, then they won’t be out of pocket. 

If you do stay in the current home, it makes it so much easier to build a portfolio. 

Investing in property without plan

The question from our listener

I’m wondering if exploring my situation in a little bit of detail could be useful for others. I made a mistake when I began my investing journey in that I did little to no research, had no idea about investing yet decided to jump in head first and buy a couple of properties. I soon learnt there was a touch more to it than just putting your name on a title. 

I’m wondering if this a common occurrence in your experience, in that people jump into an investment without really having a strategy at all?

While they haven’t been a disaster, they had no strategy behind them and I’m wondering if they can make a good fit for the portfolio, or if it’s better to move them on and target something that’s more suited.

I suppose my question is something like: How do you recover from early purchases like this, where there is little to no strategy? (Does one ‘need’ to recover?) Or do you just hang on and wait?

Analysting the property

  1. Iluka – Over 5 years = 6.39% compound growth
  2. Tweed – Over almost 5 years = 2.47% compound growth

How much income are the properties generating?

  1. Iluka $270 p/w – 5.2% rental yield
  2. Tweed $430 p/w – 6.78% yield

Really the big question is what comes next – when do they plan to buy a home, what does it look like and what’s the price range – would it be a stepping stone home or a rental home?

There is less case to sell a property once it is positively geared. 

No doubt having a plan in advance and understanding what drives out performance makes a difference, but half the battle is just getting out there and doing something. 

You’ve already got two, if you just hang onto these and pay them off, you’ll be far ahead of most people 

Some positives

  1. If this was a cash flow strategy, you’ve come close to nailing it, they will be set and forget. 
  2. Unless it’s a total dud, it’s a very forgiving asset
  3. Young – you’ve got a lot of time in front of you
  4. It’s not an expensive gamble considering you’re something that’s almost neutral
  5. Living with parents – capacity to save is very strong
  6. How much you’ve learnt – especially from mistakes. You’ve gotten a lot of learning out of this. 

We’re all geniuses in hindsight – There has been growth, it could have been better, but it’s not all bad news. 

They’re pulling down some good money and they’re young – what is the growth trajectory of their income?

What contribution could they make out of their surplus cash flow to put into their property investment journey?

Is their next project focusing on a home or continue building a portfolio – this is a rentvesting strategy. Be committed to those properties – rentvesting fails when they don’t anticiapte how they feel about getting into a family home and then they have to sell good properties to get into it. 

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: my gold nugget is buy as many properties as you can before you have kids. And start as early as you can. The reality is that your cash flow is much stronger. We spend a lot of money on the fun stuff. If we could only put our old head on young shoulders. Buy as many as you can prior to having kids. For most people the family home will end up becoming a priority, which may mean that properties need to be sold, but it could also put you in a great place to leap frog into the home that you want. 

Cate Bakos – The Property Buyer’s Golden nugget: all about time in the market. Measuring our gains, being patient and not trying to crystalise the gains too soon via a sale. Once you have a property that is cash flow positive, it is easier to hold it unless you have a burning need for those funds. If you hold a property for 15 years, you’ll get the biggest gain from years 10 to 15.

Market Updates

  1. Properties still hotly contested. Cate shares her weekend auction experience at a trendy inner-northern suburb in Melbourne. Despite the looming election, competition was strong and felt like we were back in the throws of September 2021 when the property market was going gangbusters.  It goes to show that quality properties are still attracting competition.
  1. Rents on the rise. Capital cities have been posting mammoth increases in rents, with the trend now that rental growth is outpacing the rate of capital growth. High capital growth performing assets may have lower yields, but it’s likely that rental growth will outperform in the long-run.
  1. How do rising interest rates affect the property market? With many prospective investors nervous about investing with interest rate rises on the horizon, Cate shares data on historical property downturns and increases and how this has correlated with interest rate rises and falls. Read Cate’s blog here
  1. Perth recovery. For the first time in 8 years, the median value of Perth has finally reached a new record price. It’s been a long recovery with many investors and owner occupiers wallowing in negative equity, but following the relaxing of covid restrictions, Perth has recovered from previous downturns.

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