This month Steve was asked to provide comment for the Ask The Experts section
for Money Magazine.
(He’s also quoted in the cover story).
We have reproduced here the details and Steve’s response:
NAME: James Joyce (name has been changed)
STATUS: Recently moved and bought a house in a regional town.
QUESTIONS: How do I build a group of people around me with an interest in money and investing? Also home renovation? How should I be reducing my mortgage debt and building up my superannuation savings in the next 20 years? Do I have the right insurance for my needs?
Timing your entry into the property market can be tricky. If you wait for it to go down but it keeps going up, you can be locked out because it is too expensive.
James Joyce has given up on buying in Melbourne where the average house price is $740,000 and takes 9.5 years of median household income to pay off. James ran his own business for 16 years and much of what he earned went into the business. He didn’t buy property or save much but now he is on a mission to build his housing assets and wealth.
He bought a dilapidated house three hours out of Melbourne in a pretty town on a large block which he is renovating. Then he bought a two bedroom house in Ballarat, Australia’s third largest inland city. All up he has paid $300,000 for the two properties. He has interest only loans, the first loan was a 25% deposit and the second was a 10% deposit. Two thirds of the mortgage on the Ballarat home is at a fixed interest rate for the next three years while one third is at a variable rate. What is the best strategy for interest rates? He has recently moved into his Ballarat home and commutes 100 kilometres one way to Melbourne. For the same price as his Melbourne rent, he can fund his mortgage, pay all his rates and utilities plus cover his travel costs into Melbourne. He is renovating the other home and plans to rent it out for more than the cost of the mortgage. He has a budget of $25,000 for plumbing and electricity. But the problem with moving to a new area is finding a community he connects with. What steps should he take? A few years ago, he has visited a financial planner about his insurance needs but was sceptical about their advice and fees. One idea he has is to meet people who are interested in investing. “I would like to build a social circle of people who are great with money and investing,” he says.
A little background in case it is helpful: I am 47 years old, single, no kids, and work part time (three days per week) in a well paid job that puts me on the average Australian income. I have just bought my own home and an investment property – both in regional cities (I could not afford to buy in a capital city). I intend to stay in the home I just bought for the rest of my life, I would like to form social “roots” in the community here that will last the next 40 odd years, and it would be great to have a social group of people that was uplifting so to speak as well as enjoyable.
Cash flow: He has a spare $900 each month
Property 1: $80,000 for home in Horsham, Victoria (300 kilometres out of Melb)
Property 2: $200,000 for a 1980s house in Ballarat
Loans: He has put down a deposit of 10% and borrowed 90%
His brother has lent him $25,000 for the deposit.
He owes $16,000 credit card
Jame’s super (and insurance within super) details are:
James writes: “To complicate matters I have just moved to a new regional city (Ballarat, Victoria) and basically do not know anyone here yet anyway.
James my biggest concern for you is your commute. 20 minutes of driving, a train and two trams to get to work – 2.5 hours each way. I suggest you find a way to:
- a) work from home; (you work in IT) or
- b) find work in Ballarat (or Horsham) or
- c) consider renting in Melbourne on work days. Perhaps a room in West Melbourne (Airbnb) for $39 per night?
This amount of commuting, which you are OK with now, is not sustainable.
The prospects for both Ballarat and Horsham seem reasonable. Ballarat is really a satellite city of Melbourne now. Horsham appears to have lower vacancy rates than my own suburb! It has a base hospital and important transport links.
You tell me that your Horsham property was bought uninhabitable (and still is), and needs about another $15k of work and realistically another 4 months for you to fix. You have $4k in the bank but that will fall to $1k at the end of the month (with loan repayments and living expenses).
Your brother is charging you 5% interest on his loan to you but there is no set repayment schedule. Once Horsham is finished you believe you could rent it for between $170 and $200 per week. I suggest meeting with an agent (not the one who sold you the property) and finding out the bare minimum you need to do to get Horsham rented. And what rent you would get. Then you can focus on what needs to happen soon and get some cash flow happening. It does not need to be perfect, just rentable – you can upgrade later.
Once you get that rent happening, start paying off your home loan, to the bank and to your brother. This debt is inefficient – you don’t get a tax deduction on it.
Consider starting to salary sacrifice into super. You are close to the $80k tax threshold – so this may keep you below that. You could save say 19.5% tax on every dollar you put in – so $100 per month would mean a tax saving of $234 per annum. With caps on super contributions, I encourage all to consider salary sacrificing sooner and more regularly.
I would be wary about finding people who are good at investing, on a social basis. Sometimes this can lead to dodgy investing schemes. Keep your social life and your business life separate.