Sim's Line (very long)
Reply: 1.1.1.1.1.1.1.1.1.1.2.1.1.1.1.2.1.2.1.1.1.2.1
From: Sim' Hampel
Sim's Line: A story about love, savings, and small furry creatures that go squeak in the night.
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... so there I was, 21 years old, half way through uni, and married ! Most of the other guys simply couldn't understand it. For us, it was just so right - we had been going out for exactly 3 years and a day when we got married, and we just couldn't imagine it being any other way.
Of course there were financial advantages to me being married - she was working now full time as a nurse, earning pretty decent money. With that money, she was able to pay off some of my debts - not that they were huge, just under $5000 not including HECS. It also made it much easier for me at uni, paying for my fees and books and such. No more skimping on money, doing everything on a shoestring budget, hanging out for $4.95 all you can eat on Tuesday nights at Pizza Hut (ahh, those were the days). We were by no means rich, but we were comfortable, and I was quite a bit more comfortable than I had been before we were married !
What did she get from the deal ? Apart from a husband who would cook for her (that's gotta be worth something doesn't it ?), from a financial point of view, there was little I could bring to the relationship except debt. But I did have potential - I was about to complete a Computer Science degree, and although the IT industry was in a bit of a slump, and I was certainly not being inundated with job offers, I was confident that I could get a decent paying job when I finished. A cynic might say that she "invested" in me, expecting some pretty good returns !
The first six months or our marriage, we didn't save much. We had bought a new car about a month after getting married - a brand new 1994 model 5 door Daihatsu Charade hatch - it was so much better to drive than the old heap my parents had bought for me. At least it wasn't expensive to run, although being only 21, the insurance cost a bit. My weekend pizza delivery job kept me in small doodads and helped contribute to our finances in a small way. We still have only that car - has served us extremely well for nearly 8 years now.
She had quite a bit of money invested, term deposits, mortgage trusts, even some Woolworths shares. She had been working since the age of about 16 as a checkout chick at Coles, and her father had instilled in her the need to save and invest. For her age, she was doing very well. All the proceeds from her investments were reinvested, so they added up to quite a tidy sum.
About 18 months into our marriage, I finally completed my studies and graduated. My first job was a contract IT position that paid reasonably, but it wasn't what I wanted to be doing. The money was great though, all of a sudden we were a pair of DINKS ! I'd never had so much money in my life. I had always liked playing with figures. I kept very good records of the little money that I had, and I had even started playing with Quicken when I got my first PC, a couple of years before we were married.
So anyway, I worked out that we were paying more interest on our car loan then we were getting from her mostly cash investments, so it didn't take much convincing to use some of the invested money to pay off the rest of the car loan. All of a sudden, we had a lot more cash available to us each month without that debt. The joys of cashflow !
We had furnished our rented unit with borrowed or hand-me-down furniture, so there were a few things we wanted to buy so that we could call it home. We didn't have credit cards or store cards, wouldn't even dream of taking out a personal loan, everything we bought we paid cash for. Of course, we didn't just have lots of cash lying around, and so these new things we wanted to buy just seemed so far away.
It was about then that I discovered this really cool new feature in Quicken that allowed you to set up "savings goals". It worked by creating a fictitious account for a particular item you wanted to buy, and you "transferred" money from your bank account into this account. It was all imaginary of course, but it worked well in that it showed a lower balance in your bank account than you really had, thus you didn't think you had as much money to spend as you really did. At least it worked for me !
So we made a list of things we wanted to buy, prioritised them, set up some savings goals in Quicken and proceeded to put aside money until we could afford these things. Although I'd like to take the credit for all this, it was really my wife's financial discipline (learned from her father) which made us successful in saving. Dining table and chairs, classic timber bedroom furniture, VCR, and other essential things - we became experts at saving and paying cash for things.
Next was the big one, a house. She had wanted to buy a house when we first got married. Rent is dead money and all that. Since I was still studying and she was in her first year of work, and we had debts, it would have been very very tight. I think we made the right decision to wait until we had learned some financial discipline before taking on that level of debt. So we looked at what we could afford to borrow on our salaries, worked out how much deposit we would need, and started saving. We were earning a combined salary of about $60K or so, and managed to save nearly $40K in around 18 months !!! Of course the cost of living in Adelaide was relatively cheap, $115pw rent for a large 2BR single storey unit 4km from the CBD suited us fine.
While we were saving, we started looking for a place to buy. Almost every weekend for 18 months we were out at open inspections, going to auctions, looking around. We got to the point where we were playing this little game. We would go to an open, and before asking the agent how much they were asking, we would look at the place, and both come up with a figure we thought they would ask for. We got very good at guessing right ! Auctions were also good for this, guessing what a property would sell for.
We had a fairly clearly defined area we were looking at to buy in, an area immediately south of the Adelaide CBD, about 10km deep by 5km wide. She had lived in Adelaide almost all her life, and I moved there when I started uni, and both lived within that area the entire time. We were ready to buy after about 12 months of saving and looking, and it took us 6 months of offers, bidding and missing out, and even pulling out of a contract when the building inspection indicated that the roof was likely to collapse at some stage. Eventually we chose a place we had originally passed over - the house was too small, but the block was huge, and had heaps of potential. This was it, the one place for us. They were expecting mid 100's at auction, we had finance approved to $170K and were prepared to spend it all.
Of course, the auction was over before I knew it... and I was the last bidder at exactly $150K. The other guy who was bidding against me came up immediately afterwards, shook my hand and said "well done" - no emotion at all about missing out. I found out later that the reserve was $150K, and put two and two together and realised that we were "bid up" by a dummy bidder. Not to worry, we were prepared to pay $20K more for the place, so we were still happy !
So we moved in at the beginning of 1998, and life was wonderful. Owning your own home - especially the first one, is such a nice feeling. The 5 burner BBQ I bought with some of the spare deposit money was a great touch, and we entertained out under the back pergola frequently.
Then it happened. I was headhunted - offered a job in the "big smoke" which would double my pay. Her sister had moved to Sydney soon after we had been married, so it was an opportunity to go and live somewhere different, spend some time with the sister-in-law and make more money ! The only condition on us moving was that whatever we did, we weren't allowed to lose that house. So we moved interstate after only 9 months of living in our dream house, and rented it out.
She had no problems finding work in Sydney, and with our combined higher incomes, we were saving heaps of money, despite the increased cost of living. Our goal from the beginning had been to pay off the debt, then borrow against the equity to fund a major renovation and extension to our house. So, we set about paying down the debt, and successfully got it to practically zero within 3 years. Another example of financial discipline that we had learned.
I knew we would have lots of cashflow coming in once we had paid off the debt, so I began to look around at what else we could do with our money. We weren't planning on moving back to Adelaide just yet, and doing an extension while the property was tenanted is not really practical, so I looked at investing. All of my colleagues were madly buying dot.com stocks, and sitting with a Comsec window open on their computers in the background while they worked. Shares seemed like the thing to do. I started researching, and even put in an application to buy a sizable package of shares in an internet startup called Spike. Fortunately the listing was way oversubscribed and I missed out. As it turned out, I made over $5000 just by NOT buying the shares !
It was about October 2000 when my father-in-law handed me a well worn and dog-eared book which he suggested I read. It was Jan Somers book "Building Wealth through Investment Property". I liked property, but it just wasn't the thing to invest in these days. But I was searching for something to invest in, so I read it. By about page 5 I think I was hooked. When I discovered she had other books, I ran out and bought them too. Then I discovered the web site and... the discussion forum. I was blown away. I bought book after book, devoured them all. Searched the web, found even more sites... read and read and read, started posting on the forum.
Then it struck me. We had heaps of equity in our house, we had high incomes, we had opportunity, and I now had heaps of knowledge. But I almost had too much knowledge. I saw so many different ways of doing things, I didn't know which way to turn. Every day I read about some new technique, some new style of investing. I wanted to do them all. No, I wanted to do the best way. No, I actually didn't know what to do.
Okay, I admit it. It was analysis paralysis. The bane of people with too much time to think about and analyse things. It's always easier for those who simply have to do something because they have no choice - or their choices are simply limited.
So what did we do ? First step was to refinance our house with an equity loan. Had it revalued - $240K ! We were pretty stoked with that. So now we had equity to play with. We found a pair of 5BR townhouses on separate titles in Adelaide close to a university/hospital, and they had been converted into a pair of 3BR plus a pair of 2BR units. We found them by accident - they weren't advertised, except for a sign out the front. We only saw them because we were in that street looking at another property. Yield at purchase 9.5%, and 6 months later after some rental increases showing almost 10% yield. Not bad when yields within 10km of the Adel CBD are almost entirely below 7%, with the vast majority at below 5%.
We are actually about to settle this week on another 3BR house in the same area, 7% yield (hopefully, but haven't got a tenant yet). This one was a failed contract - we picked it up on the rebound. Another case of being in the right place at the right time.
We are also negotiating on a dual occupancy, 2 houses on a 1500m2 block, subdivision approved pending some work (fencing, paving, carports etc). If we can get it for a decent price, we will hopefully get some instant equity from the deal. But that will leave us pretty much at our limit of servicability. Time to get creative after that.
So what's my strategy ? I'm not really sure yet. I certainly like having my properties pay for themselves overall. When people (non-investors) find out that we've bough yet another property, they almost always exclaim that I earn way too much money. What they don't realise is that I paid for one house completely (the first one), and that was before I earned the big bucks I now do. Since then I have not paid a cent of my own money into any of the property I have purchased.
People keep on at me about the negative gearing benefits I am losing out on. But they are only focused on the short term - they say I have high income, I should be negatively gearing. But I don't want to stay in this job any longer than I have to. If my income plummets because I quit and go start up my own business, then I lose both my tax benefits and my ability to service that negatively geared debt. It doesn't make sense to me to base my investing around something that will lock me into my PAYE job rather than freeing me from it like it is supposed to.
I want to buy some more higher growth properties, but I don't want to have to pay for them. I suppose my overall strategy now is somewhat similar to that expressed by Jeremy - a mixture of cashflow and growth property, with cashflow paying for the holding costs of the growth and the growth providing more equity to purchase more cashflow.
My next step will probably to be investigating some purchases in Sydney, using renovation to create instant equity and to increase rental yields, making it easier to hold them.
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So what have I actually learned in the last 12 months ? How have I dealt with my analysis paralysis ?
One thing I should have remembered from my studies at school and uni, is when things get confusing and complicated, always go back to first principles, go back to basics. Keep it simple ! Spend too much time trying to come up with the perfect plan, and you will never get anywhere.
My advice to people who may be struggling:
1. Keep it simple
If in doubt, go back and read Jan Somers books again. Her strategy is safe and boring. But it works. You will have plenty of opportunity to get creative later. Just start with the simple stuff until you build up your confidence, knowledge and experience.
2. Know your market.
The reason I invest in Adelaide at the moment is that I know my area extremely well. Having lived there for 8 years and delivered pizzas extensively throughout that time - I know just about every street and alley in my area. This makes life so much easier since I do not have the time to be searching on foot for all the deals. I don't have time to be flying over to check out every property that comes on the market. I'm taking my time, picking off the best stuff that comes along and keeping my finger on the pulse as best I can. I do intend to buy in Sydney, but I haven't been looking all that long here, and I don't know much more that the suburb where I live. I hope to change that over the next couple of months.
3. Network.
Some of the best advice I have been given was as a result of me being able to talk frankly to some close friends I have made through this forum and the chatroom. I have been able to ask them about what I'm trying to do with a particular deal. Their questions and comments have challenged my thinking and helped me sort things out in my own mind. Remember, friendship comes first. There are some people who I get nothing more out of the relationship than friendship. I don't expect or need anything more than that. I am fortunate in that there are also some friends I have made who have been willing and able to discuss stuff with me and give me their honest opinion, and I am able to return the service by being a sounding board for their ideas too.
4. Read.
You can never have too much information. Just remember to keep it all in perspective. Just because it has been published in a book, in the media, on a website, in a newsletter, does not necessarily make it correct. More importantly, just because something worked for someone else, does not mean it will or even can work for you. There is no strategy that will work for you other than your own. You need to find your own way. If you get stuck looking for a place to start, go back to the basics.
5. Set and manage your goals.
One simple thing to help you filter out the noise around you. If you have a clearly defined and documented set of goals, you can evaluate everything that comes your way by simply asking "does this get me closer to my goals".
6. Learn the technical stuff.
Someone has to learn all the technical stuff, and worry about the details. At the end of the day, your financial well-being is your responsibility alone. No advisors, no mentors, no professionals, no gurus can make things work for you - they can only point the way, or provide a particular service. If you can get your partner to worry about the details and leave you to do the deals, then great. But someone has to do it. Too hard ? Too much to learn ? Try tackling one subject at a time. One of the fastest way to learn is to try and answer the many newbie questions that are posted daily on the forum. Find a question, look up an answer, post it and learn from the corrections (if needed) that people post. Do not be afraid to be wrong, but be prepared to admit it when you are. Do not be too proud to make mistakes, and be prepared to be humble enough to listen and learn when you do. You will often find that there is no right or wrong anyway.
7. Learn the difference between investing and speculating.
If you don't know the difference, find out. It can have a profound effect on your strategy.
8. Follow the money trail.
Before you accept advice, make sure you know where the money is coming from. Free services never are. Make sure you can work out why someone is giving you the advice they are giving, it is usually money speaking the loudest.
9. Be patient.
Getting rich quick is a low percentage play, most people don't have the knowledge and experience to make it. Think carefully about why you need to do things so quickly. There is almost always another way to get where you want to go.
10. Keep it in perspective.
Life is not all about money. Money is nothing more than a tool that allows you to enable your goals. Money doesn't hug back.
