The evils of Negative Gearing?

article_05082013Barely a day goes by in the media that there isn’t an article published discussing the challenges of the Australian housing market and how much prices have risen over recent years. The long held ‘Great Australian Dream’ of owning your own home is frequently trotted out to tug at the heart strings of TV viewers when trying to find a suitable scapegoat for sky high property prices. Throughout much of 2014, focus was being placed on foreign investors landing on our shores with suitcases full of money and pricing us locals out of the market. Currently the place for blame is on negative gearing. Whilst I’m happy to agree that negative gearing may have had some contribution to price rises, it’s important to take into account the huge amount for factors at play here. Although I’m no economist, it doesn’t take a genius to realise that the combination of negative gearing, foreign investment, historically low interest rates, ease of finance, ongoing agent under-quoting and the sense of urgency portrayed in the media all play a role. Not to mention the fact that almost 70% of Australians choose to live in capital cities and that there is only so much land available in these relatively tiny pockets of our enormous country. Geography and demographics certainly play a role.

Of course I’m biased…but while I do think that negative gearing has an important role to play in supporting investors and in turn the housing market in Australia, I agree with statements made regarding investors only investing in property simply for the tax advantages. To me, purely investing for the benefits of negative gearing is completely the wrong approach (although plenty do it). Following here are two videos worth a watch. The first is a clip from ‘The Project’ on Network 10 which aired last night and fired me up to write about this topic. Pay careful attention to the generalised statements and overall tone of the clip, it’s enough to make you go out and push the nearest property investor under a bus. The second clip by well known Australian property investing wunderkind Nathan Birch is intriguingly entitled Negative Gearing Sucks Balls. Nathan’s explanation about negative gearing and why people get caught out by it is spot on in my view. My thoughts? Negative gearing is a useful bonus for investors but certainly not a reason in itself to invest in property. Check out the clips below and make up your own mind!

Renovation Rescue – Doing the sums $$$

house moneyAlthough I’ve been absent from the blog over the Christmas and New Year period I’ve had the calculator not far away as I’ve done the final figures on the renovation to see if the time and effort put into the project was worth it. Whilst I’m not endorsing sharing all of your finances in a public forum like a blog I think it’s important to delve into this project to show that it’s something manageable by most people and that it won’t break the bank. For that reason, following are the basic figures about the purchase, renovation, financing, valuations and leasing of the property.

The purchase

Purchase Price = $112,000
Deposit = $11200
Mortgage Insurance = $1664
Conveyancing = $1875

Total Purchasing Costs = $14739

Renovation Costs

Materials = $5187
Trades = $791
Utilities = $270

Total Renovation Costs = $6248

Financing

Mortgage amount = $102,000
Weekly Mortgage repayment = $121

Rental

Rental Amount = $160
Management Fee = $10.56

Weekly net rental = $149.44

Valuations

#1 = $165k – $175k
#2 = $145k – $155k
#3 = $140k – $150k

So what does this all mean? The total cost to purchase and renovate was just under $21,000 (including the deposit). If I just purchased the property and did nothing to it but rent it out it still would have cost $14739, still would have been worth $112,000 and would be lucky to rent for $130/wk. With the renovations the valuations showed quite a range. While the first one was clearly an overestimate (get me $175k and I’ll sign on the dotted line!) finding a mid-way point and doing the comps with what is for sale at the moment (see this similar unit currently for sale) $150k would not be unrealistic. The rental amount also rose with it being snapped up for $160/wk within a few days of being on the market.

So for just under 3 weeks work the $112k property rose in value $38,000. Take away the reno costs and purchase costs (excluding the deposit) and it’s a nice profit of $28,000. Looking back now it’s great to think that for each day of work the value rose about $1500. I can imagine most people would be happy earning that!

Noting that I’ve decided not to sell but to lease it out the net rent is $149 with mortgage repayments of $121. The remaining rent totals $1456/year which will go towards rates and maintenance. Factor in the depreciation at tax time and I’m confident that this will be a positively geared property. And with over a 7% return you’ve got to be happy with that! Although there are a lot of numbers to digest, I hope that this demonstrates that investing and renovating doesn’t need to cost the earth and you can still make a tidy profit with a bit of hard work. So now it’s time to focus on the next project which was already in the pipeline whilst the renovation was going on. More on that soon…

Exciting news!

In the interests of blatant self promotion I’ve attached the following image…more news to come soon!

IA

2014 property advice from the stars…literally!

zodiac-signsHappy new year everyone! For a lot of us the start of a new year brings us the opportunity to evaluate what we’ve been doing and kick off with a few New Year’s resolutions. For some it’s giving up cigarettes or losing weight, for others it might be to do with family or financial matters. If you’re thinking about taking the first steps to getting onto the property ladder or making further progress from what you have already done then it’s a great time to set some goals and think about how you are going to get there. Whilst I always suggest that you evaluate advice very carefully and make sure there is some good evidence to back it up, I just couldn’t resist re-posting the following that I discovered online today – Your Property Star Guide to 2014! Keep in mind that this is not rigorous evidence-based research…but who knows, if the stars and planets align…

FIND out what the stars have in store for buyers, renters, sellers and landlords in 2014. You probably noticed the record number of auctions and house prices during 2013. Was it written in the stars? Yes, Jupiter rules expansion, hope, confidence, and optimism, while Cancer rules home, family, real estate and ancestry. Jupiter, in Cancer since June 27, 2013, will remain until July 17, 2014, creating another property market boom. From mid-2013, our property market went gangbusters and peaked around December 12, 2013 when Jupiter trained Saturn in Scorpio, a powerful astrological aspect for maximising your return on investment. Jupiter will be retrograde until March 6, 2014. This typically delays settlements, encourages gazumping, withdraws properties from sale and creates problems with “finance subject to approval” agreements. Jupiter inflates expectations; vendors can get greedy holding out for the highest price. Until 17 July 2014 while Jupiter remains in Cancer, buyers will seek bigger homes, particularly with three or more bedrooms to meet the current baby boom, but also to accommodate older family members. On July 17, 2014, Jupiter enters Leo which rules love, fun, leisure, sports and children. Homes near parks, beaches, sports facilities, entertainment, shopping and coffee precincts will appeal enormously as will nearby childcare centres and schools. Apartments near these areas, with pools, BBQ areas, stately lobbies (mirror and glass), fashionable addresses, impressive views and large balconies or courtyards for entertaining will dominate demand.
ARIES
You could make a fortune buying, selling, leasing, developing, renovating, or investing in property on April 30, May 6, 24 and June 8. However, an ultimatum from your boss or tough business conditions may force you to move, sell, lease or relocate on July 4, 22 and 28. An impulsive home purchase or DIY project is a bad idea on July 9, 25 and August 1 however on those same days, an older family member may provide your first home deposit, suggest property-related tax offsets or leave you real estate in their will. Your partner may disagree with your property plans on July 19. While Mercury is retrograde from June 8-July 16, you may experience delays or reversals with your paperwork. A property expert may give you a fantastic insider’s tip on house or land yet to be advertised on June 29, July 19 and 24.
TAURUS
Jupiter in your solar fourth house of home and family from July 17, 2014 ushers in a 12-month window for you to expand your property portfolio, your physical home and perhaps your family, too. On July 25, August 19 and September 26, you may find the home of your dreams, finish renovating, or plan a party at home. Saturn in your solar seventh house of relationships suggests your past or present partner may disagree with you about buying, selling, renovating, decorating or investing in property on August 3, 9, and 27. The Full Moon of August 10 points to crunch time around career choices vs. domestic obligations. You will adore spending time with your family, entertaining guests or househunting for the home of your dreams on July 25 and August 19, with a big change due in your domestic environment from the New Moon of July 26.
GEMINI
An extra source of income may dry to a trickle until March 7, 2014 while Jupiter is retrograde in your solar second house of income, putting projects and investment plans on hold. You might want to get your property refinanced, valued, insured or left in a will to a loved one on August 22, September 4 and 15. In other cases, a wealthy family member may help you with your home deposit or mortgage or can introduce you to an architect who can help you maximise your home value with a subdivision, for example. On August 25, 26, September 10 and 22, you may decide to spruce up your home office, look for a house that’s closer to your workplace, do domestic repairs for yourself or tenants, or consider getting a pet for the kids, companionship or daily exercise.
CANCER
Your and your partner could disagree regarding a home purchase, sale, renovation, extension, repair, or investment on January 1, April 23, June 15, September 10, October 5 and 9. You may upset your landlord, tenants, flatmates, real estate agent, architects, tradies or council official if you’re arrogant on January 8 and April 23. You may have to find new business premises without much warning on April 23, June 25, July 1, September 13, October 8 and 11. Invest in real estate, buy high-end fittings for your renovation or splurge on homewares on September 11, October 11, 14, 17, 18, 21, 23 and November 1. You may move, sell, renovate, decorate, extend, renew your lease, invest or improve your property following the New Moon of September 24. Schedule DIY jobs on October 10, 17 and 20. When Mercury goes retrograde from October 11-26 you could play phone, email, contract and meeting tag with property industry people.
LEO
An insider tip could net you a bargain on May 24. Take care you don’t overextend yourself buying a bigger house, apartment, holiday house, investment property, or renovation on August 1, November 10, 14 and 23. You may refinance your home loan, team up to buy real estate, get a house as part of a settlement, receive a tax refund to put towards your home deposit, or be left property in a will on August 7, October 28, and November 12. Undertake domestic chores from DIY repairs to cleaning out the garage on August 15, 26, November 2, 4, 17, 18 and 22. You may find a gorgeous home or decide to redecorate on October 27. Mercury goes retrograde on October 5-November 11 pointing to delays in property matters and unresolved family issues. You could move, sell, renovate, invest in property or revise your household arrangements following the New Moon of October 23.
VIRGO
Don’t let your partner make domestic repairs nor buy property on September 22, November 20, 27 and December 1 as it’ll be Mr Bean-quality without the comedy. Invest in property, apply for your first mortgage, refinance it, or check how you can claim tax expenses on your home/s on October 5, November 27, December 5 and 6. You may get some amazing insider info that helps you snap up a property on October 9, December 5, 12 and 15. From the New Moon of November 22, you’ll be action stations at home, probably getting everything ready for the holiday season with your house ready to receive guests by the Full Moon of December 6. You could be ultra-busy on December 8, phoning, negotiating, emailing or meeting with real estate industry people regarding a house purchase, sale, lease, renovation or investment.
LIBRA
You could decide to buy, sell, lease, invest, renovate, develop, get pregnant, ask your adult child to return or move out and/or to insist your (grand) parent/s need nursing care as soon as New Year’s Day, with more news likely on January 7, 11, November 11, December 21, 22 and 25. You may make long-term financial commitments about your home or an older family member on January 6, 11, February 25, and December 2. Your (grand) parents may need your help on November 2, December 14 and 27. You may have to cut working hours or make your office into their new bedroom to take care of them. You could be very upset about domestic issues on January 16 and March 3, while you and your partner could disagree about your family, housework, or whether to relocate or buy a property together on November 13 and December 21.
SCORPIO
You may feel burdened by domestic issues, caring for elderly (grand) parents, or property commitments on 26 January, February 12, 19, March 11 and 30. When Mercury goes retrograde from February 14-March 1, you could experience delays in dealings with tenants, landlords, real estate agents, tradies or council officials. Take a creative approach to balancing work and family commitments on January 16, 29, February 19, March 19 and December 21. After the New Moon of January 30 you may make the leap to freelance or consulting work, launching your own home or property-based business, or joining the family company, especially if you get “an offer you can’t refuse” around the Full Moon of February 14. Listen to your intuition and look for helpful clues regarding a property you’ve got your eye on January 25, February 15, 16, March 15 and 30.
SAGITTARIUS
Domestic bliss, from finding the house of your dreams, enjoying a family reunion, moving in with a lover to welcoming a child or puppy, is yours on February 24, March 23 and April 11. You may find, buy, sell, lease, relocate, restore, renovate, decorate or invest in property on March 1, 4, 27, 28, April 18 and May 24. You may receive a no-strings-attached gift of money from a family member, a tax refund, inheritance, divorce settlement or grant then. You may need to make alternative accommodation arrangements for an ageing (grand) parent on March 14, April 3 and 25. When Mercury goes retrograde from February 7, not fully operational until March 21, a building project may suffer delays or you may rethink a particular domestic arrangement. You could also experience further property confusion when Neptune goes retrograde from June 10-November 17.
CAPRICORN
The New Moon of March 30 suggests you may move, sell, buy, lease, renovate or invest, or involve yourself more heavily with your parents, but your partner seems disenchanted with the idea (or your family) on April 1, 15, and May 19. Don’t give your household members ultimatums on April 3, 15, 22, and May 15 unless you can bear the consequences! A company relocation (whether it’s a longer commute or you have to sell or rent your house) could sour domestic happiness on April 9, 15, 16 and May 11. Great property or family news is likely on April 2 and May 18. You may discover you’re pregnant which could thrill – or shock – your family accordingly. When Uranus goes retrograde from July 22-December 22, your twenty-somethings may boomerang home for a while. Some of you may have to rethink your parents’ home care arrangements.
AQUARIUS
You may discuss, read, email or sign documents about moving, selling, buying, leasing, renovating or investing in property on April 27, 28, and June 4. Some of you may buy beautiful furniture, homewares or artworks. The New Moon of April 29 suggests a new domestic chapter is likely soon. You may have to take care of an elderly or ill family member while other Aquarians could discover they’re pregnant on April 30, May 4 and June 9. You may start a new job which requires childcare arrangements or organise a cleaner to do regular housework tasks on April 30, May 6 and June 18. Business demands could intrude upon your family or alternatively, your boss may harshly question your dedication if your house purchase, renovation or development is interrupting you at the office too much on May 3, 11, and June 13. Trying to juggle family members and your superiors will requite delicate handling.
PISCES
Don’t make hard and fast decisions about property transactions on May 11, 29 and June 30 because you won’t be thinking straight. That so-called “renovator’s dream” could end up The Nightmare on Elm Street. You may join the family firm, work (more) from home, set up your office in your house, hire home-based employees, or organise a household roster on May 13, 31 and July 13. You could buy, sell, lease, design, renovate or invest in property on May 15, 18, June 6 and July 7. The New Moon of May 28 suggests you could be moving, changing flatmates or welcoming the pitter-patter of little (furry) feet but you might find your plans get delayed from June 18-July 2 while Mercury is retrograde. You may play email, phone call, text message or meeting tag with vendors, buyers, landlords, tenants, real estate agents, tradies or council officials then.
You can access the original article here

Renovating Housing Policy

mza_8623053361525323846.170x170-75The Grattan Institute was formed in 2008 as an ‘independent think tank’ intended to develop public policy for Australia. This week there has been a lot of media commentary about a publication by the institute addressing housing policy in Australia. Renovating Housing Policy was published on October 20th and states:

This report looks at our complex housing system as a whole. By quantifying the major government outlays on the private housing system, it reveals the cumulative impact of housing policies both on individual choices of where and how to live, and on productivity and inequality in our cities.

The initial part of the report examines some fascinating trends and demographics related to home ownership in Australia, there is interesting data presented on the change in home ownership rates over the last 100 years as well as examination of current ownership rates by age as well as earnings. It then continues on to look at renting in Australia and it is from here that the information presented starts to become increasingly relevant to property investors. There is also significant focus within the report looking at the different government support provided to property owners versus those who rent a home. The report states that support for residential property investors costs $6.8 billion a year,or about $4,500 per year for each investor household. If you want to skip to the really interesting part though I’d suggest heading straight to page 36 where the recommendations commence. There are three main recommendations looking at stamp duty and property tax, reform of tax incentives for property investment and also reform of the private rental sector.

Whilst I certainly don’t agree with all of the proposals there appears to be some strong evidence available to support the statements being put forward. What I have found interesting is the way that it has been portrayed in a range of media and particularly the comments that have been posted by readers. I’d be eager to hear people’s thoughts on this as it would have a significant impact on property investors should these recommendations be put into practice. Don’t be afraid to comment below! Click here to read the article.

You can also check out some of the following media articles, don’t forget to check the reader’s comments, it’s certainly stirred up some debate!

The Age property section – Domain

ABC News

The Herald Sun

Business Spectator

Your Investment Property Magazine

MoneySmartAu

Moneysmart-compassThanks to my good friend and avid reader of my blog Renee for reminding us of the great website  www.moneysmart.gov.au and also their Facebook page. The website is full of great (and sensible) suggestions and ideas looking at money management, borrowing, credit and importantly property investing just to name a few. It’s an Australian site but a lot of the information could be utilised wherever you may be living. The Facebook page poses regular questions to readers about their own thoughts on money management and contains some excellent (and provocative) discussions. Posted yesterday was the question ‘Do you think it’s easier to rent or buy a home?‘ Check it out and see what people are thinking. Is there a right or wrong answer to this question? The range of discussion suggests maybe not! There is also a MoneySmartAu YouTube channel that has a range of videos on some really useful money management ideas.

Tip 4 – Get Intimate With Money

769867-australian-moneyOne of the great things about starting the journey of property investing is that you don’t necessarily need to be on an enormous pay packet to do it. Many people assume that to invest in property you need to have a lot of money to start off with. I’m sure that many of us know of people who are making big bucks in their jobs but are still struggling come the end of the month to pay the bills and are sometimes heard saying ‘If only I had more money/got a pay rise/won the lotto’ etc… One of the key things to realise when considering investing is that it’s not how much money you have it’s how you manage the money that you do have that matters. Look at the examples that we hear about of people that do win the lotto. There are numerous unfortunate stories of people winning millions of dollars but just a few short years later they have gone through the lot and have nothing to show for it. Just simply having money doesn’t equal knowing what to do with it. Learning how to manage money (and not just in relation to property investing) is one of the key skills that I’d suggest is essential before embarking on any property investments.

For a lot of people talking about money is simply not something that is done. It could be for many reasons be it cultural, historical or just something ‘not done in our household’. For some people discussing money might be seen as rude or obnoxious (and I’m sure in some cases it is) but think about the reasons why it’s worth discussing. I’ve read comments by several authors on personal finance regarding the lack of money management that is taught in schools. Maths, science and english are staples in many a school curriculum but what about finances, budgeting and investment? For many adults we need to either choose to learn about these things or (as unfortunately many people do) cross our fingers and hope that the lotto win comes though. Whilst I still get the occasional lotto ticket I’m not relying on the one in several million odds to get me to where I want to be. The choice to learn about managing your own money should be a simple one (and I hope for you it is) but unfortunately for a lot of people it still falls into the too-hard basket. If you’re still reading, let’s assume that it is something that you are keen to learn more about. Remember, there is a big difference between someone talking (and learning) about how to manage money in order to do it well versus someone simply talking about how much money they have!

saving-money-piggy-bankWhilst the title of this post is about becoming ‘intimate’ with money, what I mean by that is that it’s important to know as much as you can about your own finances and to learn to manage them rather than sit back and hope for the best. This isn’t about learning how to become a millionaire, it’s about knowing what you have, what you are doing with it and how you can start to make it work for you…hopefully the millionaire part comes later! For many people this step can be challenging, particularly if money is not something that you are used to discussing or learning about. For some, simply getting over the mental hurdle of ‘but I don’t earn enough to have to worry about it’ is the first step. My thought is that whether you’re a 10 year old putting pocket money in a piggy bank or an executive on a 6 figure salary you can always learn something new when it comes to managing your money. It’s also an ongoing process that you need to commit to as the way you manage your finances changes as you go through life.  One thing that I’ve found (and I can feel eyebrows being raised in skepticism now) is that as you get better at it you will start to see the benefits of managing your money and it can change from what may have felt like a chore into something that can be enjoyable…you’ll have to trust me on that.

I have learnt a lot about managing money over many years but I’m the first to say that I still have plenty to learn. Let me finish this post with a few of the most important financial management lessons that I learnt that have really stood out to me.

  • Start learning to save. This seems like a simple lesson to learn but it’s one of the hardest to start putting into practice. Whatever pay packet you receive there is always scope to start saving but in a world where we all want the newest  things yesterday holding onto that money can be difficult. This link to the Moneysmart website will provide some useful tips as well as a nifty savings goal calculator.
  • The difference between good and bad debt. This is an important lesson when it comes to investing in property as debt is a key part of it. The difference between the two is significant though. Basically, one is debt for an asset that goes up in value and one is dept for an asset that loses value. Think a house vs. a new car. See what Oprah has to say about it here, although I don’t think she needs to worry too much about money…
  • Beware of credit cards. We all have one (or several) and they are a part of life but its amazing how credit card debt can have a huge influence on an individua’ls personal finance. Learning to live and manage credit cards is crucial for everyone with some plastic in their wallet. Check out this credit card calculator and see how long it takes to pay it off. The example below could apply to a lot of peole.

There are innumerable financial lessons to learn when it comes to managing your own money. If you’ve got some that you found beneficial share them below!

11 personal finance basics brought to you by ‘The Golden Girls’ | Marketplace.org

A fellow blogger Donny Wise over at TheWiseMe.com referenced one of my recent posts and alerted my to this little gem of information about personal finances. The original version at http://www.marketplace.org/topics/your-money/11-personal-finance-basics-brought-you-golden-girls also has some great clips that demonstrate the financial wisdom of Dorothy, Blanche, Rose and Sophia. A perfect light-hearted Sunday post!

mydonnywise

 

 

 

I was sunburnt and watching Golden Girls in the middle of the night last weekend for hours. This gave me a little chuckle…

 

http://www.marketplace.org/topics/your-money/11-personal-finance-basics-brought-you-golden-girls

 

11 personal finance basics brought to you by ‘The Golden Girls

 

The quartet of charismatic retirees known as “The Golden Girls” taught us a lot about the power of friendship. But the popular sitcom that originally ran from 1985-1992 — and still lives on in syndication — also had plenty of personal finance lessons mixed in with the laughs. The obvious one, of course, is to save money by sharing a lovely Miami waterfront home with your three best gal pals. But here are 10 additional take-home tips from Blanche, Dorothy, Rose and Sophia that will help you fatten your wallet.

 

1. Keep earning money, even during retirement.
Sure, their retirement may have appeared cliché…

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