In the beginning...

[RJM]

Hello everybody!

I've been following this forum as a silent observer for quite a while now and have been greatly encouraged at the beginning of the road to a better future. On the advice given to other 'beginners' in the property game, my wife and I have decided to buy our own home first and are underway with reducing this first loan.

Our dillema is this : we're both only a few years out of uni and having very few debts (we own our cars, no credit debts etc.) Our only expense other than living is our home loan. We have no kids (yet...) and while we have so few expenses and two incomes, we figure it would be a great time to start investing.

Most of what we have read suggests owning (or at least be well on the way to owning) your own home before investing, but we're concerned that by the time we own our own house we may be on one less income and higher living expenses (if you follow my thinking...)

We'd love to find someone who could go through some numbers with us and help us work out what would be the best option for us. (We're in Vic, if that makes any difference.)

Any thoughts / advice from those who have been there and done that?

Regards,

Ryan.

[Kevmeister]

There is so much conflicting and/or opposing advice, it is very difficult to know what to do.

The idea behind an investment is that it must be earning you money. Some properties will do this for you by way of earning more in rent than the interest bill is on the loan (positive gearing); some properties will do this by way of achieving good capital growth but initially you will be paying out-of-pocket each month (negative gearing), whilst the growth "catches up".

If you can find a positively geared property now, the property is earning its keep and therefore it would be very smart to buy now, so long as you pay a reasonable price for it. It won't/shouldn't be a burden when you drop to one income or start a family, provided it is managed/insured correctly, and interest rates don't go through the roof.

If you buy a negatively geared property now, you'll get a double-whammy effect. Firstly, it reduces your abilty to pay off your home faster, because you'll be directing surplus cash away from your home loan towards the IP, secondly it puts additional burden on you to keep funding the property if you drop to one income or wish to start a family.

And, in either case, any increase in interest rates always pushes you further into negative gearing territory.

This is not to say negatively geared is all-out bad, it just demands a different set of circumstances to support it. If you can pay off your PPOR and and service the IP on one income, it might still be worthwhile.

Once the value of a negatively geared property increases sufficiently, and Rental Yields are generally tied to the property value, then sooner or later such a property will become positively geared. This depends on the interest rates, but then interest rates are tied to inflation and Rental Yields also bear a correlation to inflation (or to interest rates if you prefer). I have seen projections anywhere between 3-15 years for this to happen, but a property with 8% cap growth, 4% rental yield, and 6.67% interest might become positively geared in the 8th or 9th year. Increase the growth to 9% and the property becomes positively geared in perhaps the 7th year.

So, negatively geared might still be practical depending on how long you expect to wait before losing that second income.

There are obviously lots of personal factors to consider too, for example job security. Personally I think job security is only going to continue to get worse - the idea of a "job for life" is gone for a large proportion of Australians I think.

My 2 cents worth.

Kevin.

[Lily House]

Hi Ryan,

Your question is not an easy one to answer. A lot depends on your circumstances and your risk profile.

If you have significant equity in your home you could use it to start investing. You don't have to wait until you have paid off your home completely. How much risk are you willing to take on? You have to be able to sleep at night.

Some people would suggest that property has plateau-ed and that shares would be a better investment at the current time. However, if you decide property is for you there are also lots of ways to invest. Do you only invest in positive cash flow - or negative gear in the hope of higher capital gains? Are you are hold, or do-up and sell type of person? There are many different paths to follow - or create your own unique way of investing.

My advice for now would be to read, read, read. Read about all the different ways of investing (in property and other), and really educate yourself. You may then find that something jumps out and really grabs your interest. In the meantime keep up the good work (with your wife) by using your dual income status to pay down your home loan. That way once you have decided what direction you will take, you will have the 'cash' to jump!!

You have taken the first big step and started to think about your future. A lot of people don't even get this far - especially not at your young age. Keep learning and you will get there. Good luck.

Lily

ps. For more specifics about your exact finance abilities right now, perhaps talk to a mortage broker, or even just your local bank manager. They will at least be able to give you an idea of how much you can borrow based on your current equity and incomes.
As you are based in Melbourne, it also might be worth your time making an appointment with Dale and having a chat to him about your circumstances. He is not a financial advicer (as far as I know) but he is a very cluely accountant, with an interest in property.