Wednesday, March 30, 2016

Home is where the heart is (and the media room, and the third bathroom, and the four bay garage....)

Attention all home owners.  I have some bad news.  Contrary to popular belief, your home is not your biggest asset, it is actually your biggest expense.  I'll just let that sink in while I introduce our next lesson from George Samuel Clason's "The Richest Man in Babylon".

Lesson 5: Make your house a profitable investment

Yes, a profitable investment.  To do this, we need to draw on a couple of the previous lessons.  When looking for your house, do not go in with a "Keeping up with the Jones'" mentality.  Work out what you need space wise, and where you would like to live.  I live in a unit, which suits me well because I'm never home and enjoy low maintenance living.  However, it is not in a ritzy part of town because it doesn't make sense to sink that amount of money into something that is not creating an income.  Make a list of your wants and your needs with your significant other (if applicable), and purchase wisely.

The next thing we need to consider is living within your means.  What are the ongoing costs associated with your house?  This includes your mortgage payments or rent. Now, I'm not saying that it's possible to live for free, because it's not.  I'm just saying that you need to be realistic with your expectations.  Let's go through an example:

Asset value $350,000, mortgage at $320,000 at 4.99% = $15,968 in interest per year.  Insurance, body corporate, rates etc. = $3,684. Stamp duty (Queensland) and legal expenses = $4,500. This means that I am down $24,152 in initial expenses for the first year.  To put this in perspective, I am negative 6.9% for the first year and, all things being equal, I need to make at least 5.6% every year in capital gain to cover my mortgage, body corporate and insurance expenses. 

If I want to break even when I sell the property in 10 years, then the property market needs to have increased by 5.7% year on year, or a value increase of $201,020.  So I will need to sell my dated, used asset for $551,020, just to recoup the expenses, not turn a profit.  Not impossible, but definitely something to think about when looking at possible purchases.  Remember, you are sinking your hard earned cash flow into this asset, hoping that the property market moves in the right direction and you get it back.  That's a lot of eggs in the one basket, and every dollar that gets eaten up in your mortgage is a dollar that could be out there working for you and bringing in an actual income.

So, before you get tied up in the colour of the blinds, stop!  Will this property help you reach your goals, or become a hindrance?  It may be pretty and in the "right" area, but you can't sell the bathroom to pay the paper boy.
By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011


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