Listener questions – Top investment tips #1 – How price point drives strategy, optimising deductions, financial goal, how the future home factors in, the dangers of buying a bargain and more (Ep.123)

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

  1. How does your future home fit with your investment strategy? One of the biggest pieces of the puzzle, which is often forgotten about, is how your future home plans will fit into your investment pathway. Having a clear understanding of how your investment purchase could impact your ability to purchase your future home is critical. Many end up having to sell properties to secure their dream home and this is one of the biggest killers of wealth that we come across. Happily, this can all be avoided with some planning.
  2. Removing shades of grey – home vs investment. When purchasing a property, it’s important to be clear on whether it’s a home or a an investment. You will make it really hard for yourself and risk missing the mark if you conflate the two. When trying to overlay investment principles on a home, you may end up with something that you don’t love and life is too short!
  3. Set your money goals for surplus cash flow and available funds buffers. To work out what is an ideal price range for a comfortable purchase that won’t break the bank, you need a clear understanding of your cash flow and expenses. This is a difficult exercise in and of itself, however covid has added an extra layer of complexity as people aren’t spending as much as what they typically would have. Go through your expenses and determine what your living expenses are likely to be post-purchase, you may even discover areas in your spending that you can improve on. Set money goals of what you would like your surplus cash flow and available funds buffer to be after the purchase, and this will help you determine what price point you can afford.
  4. The traps of looking for a bargain. Hunting for a bargain at the expense of quality is one of the biggest mistakes that you can make and finding a bargain on an A-grade property is a rarity. If you find that a property is priced on the lower end, you need to ask yourself why? Is the property compromised and how? In a strong market, don’t expect to buy a bargain and remember, to secure a property, you need to be willing to pay more than anyone else!
  5. What is your financial goal for the property? Determining whether you are targeting capital growth, yield or a balance of the two will feed into the location and dwelling type selection. This is not a black and white option, it is a scale with many shades of grey in between. Picking the right shade of grey will depend on your debt retirement strategy and the end game. Do you plan to sell at retirement or pay down the debt and live off the rental income?
  6. Putting in place your mortgage strategy and pre-approval. The Property Planner shares some tips on how you can optimise your tax deductions through your mortgage strategy and reduce your non-deductible debt!


Show notes

  • Factoring in your future home purchase into your investment strategy 
  • This is often not thought about when putting together the investment pathway.  
  • How your investment purchase now could impact your ability to purchase your future home.  
  • Selecting poor assets costs money, but not forward planning is the biggest killer of wealth, because people have to sell their properties to purchase the home that they want.  
  • Although people have grand intentions to purchase a property every year or every 2 years, there’s a reason why people retire with only 1 or 2 properties. It’s hard to do and most people will prioritise the family home. If you haven’t been able to hold it for 7 to 10 years, you may be lucky to get some good growth, but you could have also purchased in a flat or negative period.  
  • Are you buying a home or an investment – no shades of grey 
  • You will make it really hard for yourself. If you try to overlay investment principles on a home purchase you could buy something that you don’t love. And life is too short to do this.  
  • If you’ve determined that it’s only a stepping stone, and it’s a 7 out of 10, then you’ve made the decision to make the sacrifice.  
  • What are your money goals for surplus cash flow and cash buffers 
  • What is your price range for a comfortable purchase? 
  • You need to understand your cash flow and expenses – most people are not  
  • Times are different in covid lockdown, most people haven’t spent as much – what are your living expenses likely to be post-purchase.  
  • People will discovery areas that you can improve in – cut back on.  
  • This is what is required to accurately determine what you can afford and that should drive your price range, not what the lender tells you is your maximum borrowing capacity.  
  • The traps of looking for a bargain 
  • When you look for a bargain for an A-grade property, it’s exciting but it won’t happen often. Hunting for a bargain at the expense of quality is one of the biggest mistakes that you can make.  
  • You shouldn’t spend everything that you have on hand, but you should be willing to spend what you are comfortable to spend. If a property is lower priced, then you need to ask yourself why – what is the compromises? Don’t expect to buy a bargain in a strong market. To secure a proeprty, you need to be willing to pay more than anyone else to be the winner.  
  • If you understand what a quality property looks like, then you need to put your best foot forward, because if it is quality, other people will also want to buy it. 
  • What is your financial goal for the property 
  • Capital growth, balanced or yield? 
  • This will feed into the location and dwelling selection. Your goal is going to play a part in selecting what to buy and where.  
  • Think about the debt retirement strategy – what is the end game? If it’s buy and hold and pay them down and you want to retire with full portfolio intact, then you’ve got to make a decision about property selection that enables you to pay them all done.  
  • If your decision is to get to retirement and sell some or sell all, then you can gear towards capital growth.  
  • It is a scale with shades of grey, you need to pick the shade of grey that will work for you.  
  • Goal for retirement for rental income – $60,000, $2,000,000 at 3% rent 
  • Mortgage strategy and pre-approval 
  • Investment property – how are you optimising tax deductions through this decision. Do you have non-deductible debt. Do you have equity in a home, borrow entire purchase price plus costs. Keep your savings to reduce non-deductible debt.  
  • Build up your savings to purchase the home in the future.  
  • Optimising the ability to keep the property when you go to purchase the future home. Plan for giving yoruself the best chance not to have to sell it. 

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: after getting clear on your price point and goal for the property, the next step is to select the macro location. A few things to consider there is whether you own an existing portfolio – diversification could be a consideration. Have you purchased in our major capitals? Do you have land tax considerations that you own property in one state and are there any property cycle considerations to think through?

Cate Bakos – The Property Buyer’s Golden nugget: for everyone who has done the pre-planning and are set on their journey based on a strategy that is right for them and have their mortgage strategy set up to roll out the rest of their plan, the worst thing that you can do is make an informed decision and then listen to other people who were not part of your journey program. The biggest mistakes I see people make are unravelling a good decision that they’ve put a lot of thought into because of the green eyed monster.

Market update

  • Labour shortage predictions. As ABC News shared, Australia is looking at having over 100,000 vacant jobs in the construction sector, including builders, tradies and project managers. This is likely to have a big impact on the state and federal government planned projects as well as residential builds. This will most likely influence purchasing decisions as well, as people looking to extend or remodel may opt to purchase instead of waiting it out on a long construction waiting list.
  • Vacancy rates. In the latest vacancy rates released by SQM research, five of our capital cities have vacancy rates below 1%, Brisbane at 1.4%, Sydney at 2.7% and Melbourne at 3.5%. Melbourne and Sydney have the highest vacancies, due to the languishing CBD rentals, which currently sit at 8.4% and 8.2% respectively. For the rest of Australia, the rental market is extremely tight, based on an industry accepted  rate of 2% being seen as the equilibrium. Future overseas migration is expected to add further pressure to the rental market, creating a need for investors, (or government to apply considerable funding to public housing.)

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