Show notes – 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:

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.

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