Property Planning Case Study #4 – Do we buy in the capital city or regional centre (we plan to live in both), before or after we have kids, how will parental leave impact our price range, should it be a home OR investment & that can become a home? Just another day in the world of being a Property Planner (Ep.161)

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

1. The conundrum. This case study follows the journey of Jason and Amy, who wanted assistance deciding whether they should purchase a home or investment, before or after they have kids, how their cash flow would change as they start their family, what cash savings buffers they should have in place, and how much they should spend and which location.

2. Introducing Jason and Amy. David shares Jason and Amy’s key circumstances and of course, their lifestyle and property goals which are driving their decision. Jason and Amy are a couple in their early 30’s, yet to start a family, living in one of Australia’s major capital cities. Their long-term plan was to continue living in a capital city, but thought they may move to a regional area in the short-term to be close to family and have some additional support as they start having children.

3. Starting a family with your eyes wide open. The trio discuss the importance of understanding (and being comfortable) with the impact that starting a family will have on your cash flow. This could be the difference between holding on to a property and panic selling when savings start to go backwards.

4. Modelling the scenarios. Two scenarios were modelled for Jason and Amy, one to purchase their home now for $1.1M or an investment that could become the long-term home for $1.5M.  The trio discuss the pros and cons of each scenario.

5. So, what did they choose to do (and what was the compromise)? Tune in to find out which scenario Jason and Amy went for. Were they successful and what was the compromise?

6. The risks of rent-vesting. The trio discuss the dangers of rent-vesting when the desire to get into the long-term family home takes over and some clever ways to work around this proactively.

Resources

• Ep#5 – The lifestyle vs Investment conundrum 
• Ep#27 – How many properties do you need to retire wealthy?
• Ep#81 – Holiday houses – delirium or dream? 
• Ep#92 – Property planning and your next purchase – critical considerations and why modelling financial outcomes is vital to success
• Ep#143 – Property Planning Case Study #1 – What’s our next move? Renovate our home and invest, sell the home and upgrade or upgrade and convert the home into an investment
• Ep#151 – Property Planning Case Study #2 – Can we have it all? Purchase a part-time investment Airbnb doubling as a holiday home, and could become our downsizing home, all without compromising our lifestyle despite our low cash flow, and still strive to achieve our rental income goals for retirement?
• Understanding your lifestyle goals and strategy
• Beware of an investment sprinkled with a little lifestyle
• How will your mortgages serve you in the long run?
• Five mortgage strategies that can grow your wealth
• How our mortgage strategy helps us to hold properties
• How to succeed with Property and Create your Ideal Lifestyle
• Mortgage Strategy 101 – YouTube video series.

Show notes

Introducing Jason and Amy

In this case study we introduce Jason and Amy and share with you they how we unpacked their property conundrum so they can buy their first home to start their family in.

Jason and Amy are a couple in their early thirties, currently renting in one of Australia’s major capital cities. 

They wanted assistance with working through making their first property purchase, and how to maximise their capital growth outcomes for what is a lifestyle decision. With children on the horizon for Jason and Amy, they wanted to ensure that they were across the financial implications of Amy returning to work on full time OR Part time basis OR not at all.

Financial overview

• Employment income – total $ $295k
  • Amy Income is $162K full time + $18k bonuses
  • Jason income is $115k full time
• Kids – 0 – Expecting in 2022
• Living expenses – $66,000 p/a ($5.5k p/m)
• Rent – $31,000 p.a. ($2,607 pm)
• Possible changes in the short-mid term
  • Cost of Raising a child
  • Child care – depending on work capacity
• Surplus cash flow p/m – $6,886
  • $(2,439) if Amy is on Maternity Leave
• Total Available funds – $358,000
  • Savings – $318,000
  • Shar portfolio – $40,000
• Super – $79,000
• HECS/HELP – $71k
• They were reasonably risk averse, and both rated themselves ‘2 Conservative’

Lifestyle Goals

• Would like to purchase one home in their lifetime before downsizing 
• Beginning their family in the short term, which has implications on Amy’s ability to work while increasing their expenses
• Would like the flexibility to move to a regional city to be close to family. 

Property goals

• Next Property Decision – Want to buy their first home, however, were unsure which location
• Property Strategy – Given how important property purchase decisions are, they want to ensure they have the right strategy and expert-driven advice to support that decision making.
• Their preferred property pathway:

Financial and Money Goals

• To ensure they make a good decision on their first property purchase that could set them up to make future property purchases.
• Want to retain some flexibility to relocate in the future
• Money goals

Scenario 1 – Home $1,100,000 – 90% LVR

Why

• Top end price point that should allow them to purchase a property that could be their home to provide the best opportunity for it to become their long-term home OR be able to live in it for at least 7-10 years which usually covers most market cycles to minimise risk of in-and-out buying and selling costs if they need to sell to upgrade.
• Provides them greater ability to purchase a quality dwelling in the location of their choice.
• Achieves their Surplus Cash Flow Money Goals.

How

• Cash contribution – $176,000
• LVR – 90% LVR
• No LMI – Due to Amy’s profession, their lending is available for an LMI waiver with a major lender
• Total lending – $990,000

Money Goals Outcome

• Surplus Cash Flow Money Goal Achieved – $4,402 per month assuming a principal and interest repayment at 3.0%, this is greater than their goal of $1,740.
• Post Maternity leave Surplus Cash Flow – Their cashflow is negative should Amy receive no income. In order to have positive cashflow at this stage of their financial journey Amy is required to receive approximately $85,000 annually, which represents 50% of her current income this is estimated to produce $104 per month assuming a principal and interest repayment at 3%. At this stage they have set aside an additional $1,290 for social, which is considered discretionary spending and is something that they are able to reduce should their cashflow require it.
• Available Funds Money Goal Achieved – $182,000 is greater than their Available Funds goal of $86,000.

Pros

• They could purchase either their long-term home or a stepping-stone home that they are happy living in for up to 10 years. It will be important to define:

• Firstly, how long they anticipate their Lifestyle needs will be met at this new property, and 
• Secondly, their plans, and specifically their estimated timeframe for when they expect the property will no longer meet their Lifestyle needs and they will want to upgrade due to family or lifestyle requirements and live elsewhere. 

• They have the unique opportunity to achieve their long-term home today and this option should be fully explored considering the benefits before making a decision. By purchasing the long-term home:
• They will have a clear run at developing their investment portfolio without any disruption or need to sell to get into a future home. 
• A higher price point can allow them to achieve their lifestyle goals and purchase a superior home in a superior location. 
• They are maximising their purchase price which provides they with the opportunity to purchase the best quality home that will allow them to live in it for the longest period.

Scenario 2 – Investment that becomes Home for $1,500,000 – 90% LVR

Why

• Top end price point that should allow them to purchase a property that could be their long-term home and meets their Money Goals.

How

• Cash contribution – $240,000
• LVR – 90% LVR
• No LMI – Due to Amy’s profession, their lending is available for an LMI waiver with a major lender
• Total lending – $1,350,000

Outcome

• Surplus Cash Flow Money Goal Achieved – $5,586 per month assuming interest only repayments at 3.50%, this is greater than their goal of $1,740
• Post Maternity leave Surplus Cash Flow – Their cashflow is negative should Amy receive no income. In order to have positive cashflow at this stage of their financial journey Amy is required to receive approximately $55,000 annually, which represents 30% of her current income. This is estimated at $60 per month assuming interest only repayments at 3.50%. At this stage they have set aside an additional $1,290 for social, which is considered discretionary spending and is something that they are able to reduce should their cashflow require it.
• Available Funds Money Goal Achieved – $118,000 meets their Available Funds goal of $86,000.

Pros

• By purchasing an investment that can turn into a stepping-stone or ideally a long-term home

• Achieve Lifestyle Goal Sooner – Purchasing the long-term home will be the best move for them to achieve their lifestyle goal.
• Simplification – They don’t need to purchase another property dedicated to lifestyle during their lifetime if they select the property well, and they are then able to focus solely on investing when cash flow permits.
• Achieve greater asset value – This provides the opportunity for more capital growth should the property market continue to grow in value as it has historically and they select a reasonable quality asset. 
• Minimise the risk of selling – Reduces the likelihood of needing to sell to upgrade allowing them to focus on building an investment portfolio that can help them reach their long-term goals.

Cons

• The main risk with this decision is the extra cash flow risk from taking on a higher mortgage. 

The outcome

• Moved ahead with Scenario 2 – purchased an investment/stepping stone home for $1,500,000
• This will allow them to remain flexible with their future, and allow them to purchase the highest quality asset possible.
• They chose to use a Buyer’s Agent and they worked with one of our preferred partners whom we receive no kickbacks from.
• Purchased for $1,500,000 in a major capital city within 6 weeks of delivering the property plan. 

Overall, the client purchased the property with full clarity over their financial future considering their plans to start a family, and their options regarding the number of days Amy will decide to work.

Their decision also allowed for the flexibility to either move regionally to be with family, or to stay in the major capital city. Purchasing a high-quality asset and getting this first property decision right, allows Jason and Amy to lay solid foundations for their property journey, which will propel them to create their ideal lifestyle.

Additional Cash Flow Modelling while starting a family

Cash Flow One: Feb 2022 – Feb 2023 (first child) 

Property purpose 

• Remain an investment  
• Rental income – $3,125 p/mth (2.50% yield) 
• Repayment – $3,375 p/mth (3.5% rate) 

• Holding costs – $1,250 p/mth (1% p.a. of property value) 

Income 

• Jason – $105,400 (11/12 of your current $115k income, to allow one month unpaid leave) 
• Amy – $65,000 (3 months full salary, 3 months at 3 days per week, 6 months unpaid) 
• No bonuses for Amy 

Living expenses 

• $3,034 p/mth for the 12 months. 
• Rental cost – $2,607 p/mth ($31,284 p.a.) 

Outcomes:  

• Cash flow – $42,808 annual surplus cash flow – $3,567 monthly surplus cash flow 
• Available Funds balance beginning of 12-month period (Feb 2022) – $118,000 
• Available Funds balance end of 12-month period (Feb 2023) – $160,808 

Cash Flow Two: Feb 2023 – Feb 2025 

Property purpose 

• Becomes their home, therefore no rental income 
• Principal & Interest repayment – $5,813 p/mth (3% rate) 
• Holding costs – $1,250 p/mth (1% p.a. of property value) 

Income 

• Jason – $115,000 (current FT income) 
• Amy – $97,767 (3 days per week for the full 24 months) 
• No bonuses for Amy 

Living expenses 

• $4,026 p/mth for the 24 months. 

Outcomes:  

• Cash flow – $9,445 annual surplus cash flow – $787 monthly surplus cash flow 
• Available Funds balance beginning of 24-month period (Feb 2023) – $160,808 
• Available Funds balance end of 24-month period (Feb 2025) – $179,698 

Cash Flow 3: Feb 2025 – Feb 2026 (second child born Feb 2025) 

Property purpose 

• Remains your home, therefore no rental income 
• Principal & Interest repayment – $5,813 p/mth (3% rate) 
• Holding costs – $1,250 p/mth (1% p.a. of property value) 

Income 

• Jason – $105,400 (11/12 of your current $115k income, to allow one month unpaid leave) 
• Amy – $65,000 (3 months full salary, 3 months at 3 days per week, 6 months unpaid) 
• No bonuses for Amy 

Living expenses 

• $3,034 p/mth for the 12 months. 

Outcomes:  

• Cash flow – $1,271 annual cash flow deficit – $106 monthly cash flow deficit 
• Available Funds balance beginning of 12-month period (Feb 2025) – $179,698 
• Available Funds balance end of 12-month period (Feb 2026) – $178,427 

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: Taking bigger risks when you’re younger, because time is on your side. Compound capital growth over time is one of the greatest ways to grow your wealth. Everyone knows much more about inflation, wages track somewhere around inflation. Proportionately over time, the debt becomes less due to inflation. Generally when we’re younger wages will grow over life time. This can encourage you to take some extra risk (within your comfort bounds). Certainly before you have the impost of kids because they certainly are game changers. 

Cate Bakos – The Property Buyer’s Golden nugget: Should we make a pre-auction offer or wait to go to auction? You need to have a reason why, if you’re doing it because you don’t want to go to auction, you could be doing the worst thing. Some vendors experience the worst of it on auction day, realisation that they’re not in 2021 anymore and they could be the most malleable on auction day. They won’t be prepared to sell for a hot price at all, they’ll be expecting a strong price. It shouldn’t be based on avoiding auction day. 

Market Updates

1. Investors making a come back

Cate discusses the return of the investor. Enticed by less competition, higher rental returns, tight vacancies and longer tenures, investors are coming back into the market and taking advantage of the opportunities.

2. RBA lifts rates

Dave shares with our listeners that once again the RBA has lifted the cash rate by 50 basis point to a target of 1.35%. This will flow through to the lending market variable rates. Many economists are tipping that the cash rate could climb to as high as 2.0% or possibly more. The move is largely to tackle the current inflationary environment, with inflation forecast to peak later this year and then decline back towards the 2-2% range in 2023.

3. Understanding vendor motivation

Cate shares some hot tips for prospective purchasers on whether you should put in a pre-auction offer and why entry level family homes are still going strong despite the softening market conditions.

4. Adelaide is at the top of the charts over the financial year

Pete shares some exciting news for his home town Adelaide which has snuck into the top position over the last financial year with 25.7% annual growth over Brisbane’s 25.6% annual growth. Can Adelaide do it again over the calendar year? Interestingly, Brisbane may overtake Melbourne in median house price. Watch this space!