In episode 5 of the Inspire & Inform Show Andrew & Colin will be tackling the difficult question if 2020 is the right time for you to buy your first home. There are a lot of incentives currently available fir first home buyers but should you be taking the plunge? What are some of the things you should consider?
Please see below for the full transcript of this video
Hello, everybody, welcome to the Inspire and Inform episode five series. My name is Colin Lee. I’m a founder and CEO of Inspire Realty. Joining me tonight I have Andrew Koleda. He’s a friend of mine, a confidante and someone I have a lot of respect for in his analysis with regards to property investment in the market. Tonight we’re going to be talking a little bit about the markets about whether 2020 is going to be the right time for you to buy your first home. If you’re a first home buyer. We’re going to cover a few things, which will include weather, well, really it’s a case study, as well and looking at some incentives that is on offer. There’s a number of government incentives, as you may have realized from our previous blogs. So we’re going to just talk very briefly on it. But we really want to know, we want to show you a snapshot of what it actually means for a case study for a couple. Also, Andrew will cover what are some important considerations you really need to think about prior to either buying your first home Or should you be rentvesting and building your property portfolio first? And the other the other question is, can you really afford to make the repayments so we’re actually going to go dive in a little bit more detail with some cash flow analysis, considering you know, what it would mean for you to buy your first home versus buying an investment property And what is the overall picture going to look like? And then we’re going to answer the question of if there are any alternatives for you in this current situation? So how about we get started? I’ll get Andrew to, to talk about Terry and Linda.
Fantastic. Thanks very much, Colin. And what exciting times to be alive. I guess it’s a really topical issue that we wanted to pick tonight. It’s the start of a new financial year. A lot of people using this opportunity to review their priorities and really think and plan about where they want to be and what sort of future that they want to build for themselves. And in the midst of the Coronavirus, I guess pandemic. The government’s actually putting out quite a lot of incentives to encourage first home buyers to think about entering into the market. And it’s well all over the news. A lot of the media outlets are having a field day around this first home buyer topic. And we thought we’re getting a lot of questions from our clients about it and we thought we’d really dive right in and share some insights. So. So tonight, as Colin mentioned, I wanted to go through a little bit of a case study for you that I’ve put together, really, to try and I guess separate it out, there’s been a lot of a lot written and I’ve read a lot around, you know, what’s the criteria? How much income? and what’s the purchase price across different states? And I think, you know, these incentives have been out there for a little while now. And I think a lot of people are on top of that, but we wanted to sort of take a case study and use that case study to really sort of bring it into a real life scenario, as opposed to sort of going through the facts and figures in too much detail. So we’ll take a quick dive into what incentives are on offer and really wanted to chat about some important considerations, because a lot of the incentives are there. But it’s what should that should I actually if I was this, this case study that we’re going through, are you listening, should we really be taking advantage of these? What are the things that we need to consider whether or not buying our first home at this time, given the incentives that are on offer is the right choice for you? And then we’re going to dive in my favorite topic, being a very analytical person gonna dive into some numbers and have a look at you know, what it would actually cost us to hold on to our first home should we choose to buy it in this scenario, and we’re going to compare that against some potential alternatives. As Colin and I were chatting just before we came on air. I’m quite an avid rentvestor and we’re going to dive into that because I was very interested to put this exercise together to see, even if we factor in all the government incentives, what is from a dollars and cents point of view, what might be the best financial decision for us to make? And I wanted to see, and honestly, I used it as a fact check for myself to see if I’m still on the right path, even given these incentives. So we’re going to dive through that tonight. So I picked Terry and Linda, I don’t know why. It’s Terry & Linda. I made that up. But the case study we’re going to focus on is is Terry and Linda. They’re a couple with no kids. They live in New South Wales. Yes, there are all the incentives differ depending on the state that you’re in. But we’re going to focus tonight on the study in New South Wales, if you have questions or live somewhere else across the country and want to get a good understanding about how these incentives apply to you, feel free to reach out to us we’d be more than happy to help.
In this scenario, they each earn $95,000 per annum PAYG. So, not self employed. They’ve got a $65,000 bucket of savings that they want to dedicate towards purchasing their first home, there looking at a new apartment in New South Wales for $650,000. Good luck if you can find it. The apartment also commences construction in September 2020. And just before we dive into the numbers, I do want to say that this case study is definitely something that’s made up. It’s general information only. We’re not we’re not here to give you advice because we really don’t understand your personal situation. But the reason why I chose this particular case study was, it’s almost the maximum amount of incentives. It’s the perfect or ideal case study to maximize everything that’s on offer for first home buyers in New South Wales. So it’ll be interesting to see how the numbers stack up.
Andrew if you dont mind if I pause you there for a second. Funny, you picked Terry & Linda but I’ve actually worked on a client that’s very, very similar. In this, they’ve bought a slightly more expensive apartment. So the incentives were not maximized. Just because it’s very hard, like you said, to find, you know, an apartment for $650 in New South Wales, you can find a one bedroom, and they earn slightly less so it’s it’s very close. But I also want to make a point you didn’t quite touch on this, but there was a previous slide that you that you showed land sales skyrocket as buyers pounce on home builder grant. It’s just very interesting. I’ve been getting so many inquiries from home from first time buyers. And I was literally talking to a developer, land developer and builder in New South Wales as far as Werrington Austral, that sort of area Leppington and he’s saying the land sales have just been flying through. In the past, you used to be able to reserve land for $1,000. And if you don’t go through with it, you get a refund. Now the developers land developers are holding on to your thousand dollars and not refunding it because this it’s just so popular. So just thought I’ll make that point.
Yeah, no problems. And probably similar to your client in this in this case study. There’s quite a few incentives that are available to Terry and Linda. So as they are first home buyers in New South Wales, they’re entitled to a $10,000 first homeowner grant. They’re entitled to not pay stamp duty on their their purchase, because it’s priced at $650. So that’s about a 24, or just under $25,000, saving. As part of the first, I always forget which one it’s called, which ones are called the LMI saving Colin?
The LMI saving? that’s the first home. Oh, that’s a good question. You’ve got me, you’ve got me there, First Home Loan Deposit Scheme.
First Home Loan deposit scheme. That’s the one!
So that will guarantee you up to 15% of your loan. So you don’t have to pay so if you have 5%, you don’t pay the LMI on that 15%, which is quite a fair bit of money, actually.
Yeah. And just to clarify what LMI is, it stands for Lenders Mortgage Insurance. So typically, when a person goes to borrow money from the bank, if they have less than a 20% deposit, the bank wants a little bit of extra security that you’re going if you were to ever stop paying the mortgage they would want security that they’re going to get money back. So it’s actually funny. It’s insurance but not for you. It’s insurance for the bank and you for the luxury of using that you have, you have the obligation to pay the premium. But so the first home loan deposit scheme, essentially allows you to, or the government will guarantee the 15% if you only put a 5% deposit down for a certain number of placements, which I believe I think it’s 10,000 just got released today. And, yeah, so quite a significant saving for you.
Andrew, in in this case study that you’re, you know, this client, Terry & Linda has $65,000 so that’s actually a 10% deposit. Hypothetically, if Terry and Linda don’t have 65,000 and then you have 32,500 that constitutes that 5% Just for your information, the higher your LVR is, in case you don’t know what LVR that’s your loan to value ratio. In this case you’re borrowing 95% from your lender or bank, the LMI increases fairly significantly. So I would guesstimate that your LMI If you did borrow 95%, and you’re not covered by FHLDS, you’d be paying well over $20,000 in LMI.
Definitely a significant saving. And yeah, so just going on, because they’re apartments that they’re looking at purchasing actually commences construction in September 2020. They are eligible for the home, the home builder grant, and it is quite an important thing is it’s also very difficult to find, I guess new developments that commencing at a time that’s within three months of actually signing the contract, which adds another layer of complexity of getting access to all of these things and maximizing it, but if you sum up in total of rebates and savings that Terry and Linda are actually getting, it’s about well, just under $73,000. So that’s not cashback, that’s a combination of rebates and savings, because obviously the stamp duty and the LMI, they’re not getting that cash back is actually in the form of a saving what they would have had to pay without these incentives. So it looks like a pretty attractive option for many people. And it’s spurring a lot of activity as Colin identified in the market. So what are some of the things that Terry and Linda need to think about? Well, as we already alluded to, there’s not too many options available in New South Wales under 650 thousand dollars and in order to find something that suits this and maximizes the incentive that are on offer. Well, Terry and Linda might have to start looking at areas that may not be quite as desirable to their lifestyle or whatever requirements or close to work, they might, whatever suits their personal circumstances, they might have to move further out west if they work in the city, and that’s going to have quite a large commute time or whatever it may be for them. And this kind of forces, Terry and Linda to buy with either a combination of their heart and their budget, but not necessarily their heads. And what I mean by that is potentially across. One of the things that’s a I guess a fundamental side of property is that there’s not one property market. There’s multiple property markets within Australia within each state, and they all move in different cycles. And so because in order to maximize the incentives that are on offer Terry and Linda may have to choose something which may not have or may not be in the right stage of the cycle within Sydney, for example, and potentially overpay or not get as much value out of their purchase. So they’re kind of limiting or funneling down their options, if they choose to completely focus on maximizing the amount of incentives that are on offer. Yeah.
Because there are certain is that you have to work towards to maximize it, and therefore, you know, you’d have to find something that works within that. And so you may have to make sacrifices, like Andrew saying, maybe move a little bit further out and not live the lifestyle that you you really want.
Correct, correct. And I guess one of the things that I’m personally quite passionate about is whether a buying a first time or investment and which option is right. There’s no right or wrong answer, emphatically right or wrong answer. It’s really down to people’s personal circumstances. But the question I always ask when making any decision, is this in line with my long term goals? Have I even stopped and paused and thought about where I’m at and where I want to be? Or am I simply following I guess, from a personal side, the lessons of my parents, this is the way life’s supposed to go. You finish school, you go to university, you go to university, get a job, you get a job, you get a partner, you buy a house, you pay down the mortgage, that’s how life’s supposed to go. That’s the story I was told. And I guess for me, going out and buying my first home wasn’t part of what I actually wanted to create I did not want to just follow some path because that was what how it was supposed to go. I sat down and thought about my plans and goals and objectives and make sure that every decision that I make is in line with those. And that’s going to be unique to me. It’s unique to you, unique to Colin, unique to everyone.
That’s right. I must admit, though, Andrew, you know, because you are, your strategy’s aligned with where you’re supposed to go. So your ultimate goals. Sometimes that may mean that you may need to pay the price or make certain sacrifices along the way. But it’s important for you to know what you want, because that means you have a goal to head towards and your investment decisions or financial decisions areaffected by those goals that you’ve spoken about. Andrew
Correct. It’s about making decisions with eyes wide open, and knowing what the pros and cons are of each decision and then making an informed decision.
And part of part of actually making an informed decision is really considering what the opportunity cost might be of making any decision. So what other decisions could I make? what am I, if I went out there and bought my own home, what am I giving up? And that’s an important consideration to take into play. And also cash flow. As I’ve mentioned in previous sessions, I’m a huge advocate of really knowing your numbers and understanding your cash flow. Because whether it be your first time, whether it be an investment property, it all of it comes down to being a long term investor. And your ability to hold something over the long term really depends on your ability to meet your cash flow obligations. So really getting a good understanding. And I’m going to give an example of what that might look like for Terry and Linda. So let’s say Terry and Linda wanted to go and buy their first home here, what would it cost them on an ongoing basis to hold this property? So the purchase cost is 650,000 they put a $65,000 deposit down. After getting their rebates on theei grants, the first home owners grant and the home builder would add up to be about $35,000. So what I’ve assumed is, if they keep those rebates in an offset against the loan that they’re taking out, they might have a loan from the bank of $550,000 in this case.
Just a note that, Andrew, just to make a point here, those rebates on settlement, you cannot use that to settle on the property. So you should still be able to, you must consider your, your borrowing and you need to be able to borrow the full amount and not consider the rebates to be utilized as part of your settlement just to be to be clear,
That’s a very good point. Colin, thank you for that. So what is it going to cost Terry and Linda? So for the sake of simplicity of calculations I have assumed that Terry and Linda take out an interest only loan, and they’re paying 3% per annum, which I think is reasonably on the mark there with what’s available if not better, potentially. So on that interest payment, they’d be paying about sixteen and a half thousand dollars. They need to factor in things like strata, which if the building might have some amenity, they might be paying $4,000 a year, some sort of insurance to insure their contents etc, as well as paying their council and water rates. So what that means is their total annual holding cost is about just under $23,000. But it’s important to note when it comes to looking at the holding costs for a principal place of residence, that this this holding cost is actually after an after tax cost. That’s a very important thing to understand. So when it comes to your own home, you earn your money, you pay your tax, then you pay your cost with what’s left over. And that’s really different to an investment property where you earn your money, you pay your costs, and you pay tax on what’s left over. And once you get into the nitty gritty, it really makes a significant difference to your holding costs over the long term. But the interesting thing about particularly Sydney, buying, buying your home in Sydney, although the dollar cost of renting in Sydney is actually quite high. In terms of a percentage of a purchase price, or I call it yeild. The cost of actually renting in Sydney is considerably lower than many other parts of our country. And the reason for that is obviously Sydney prior to COVID, you know, from probably 2012 through to 2018 went through a significant boom in prices that most people would be aware of. And one of the interesting dynamics about how property actually works in terms of cycles is that when a property market is growing so significantly quickly as Sydney was, you know, 10, 11% per annum rents or yields struggled to keep up with that rate of growth. And that’s the reason why potentially Terry and Linda might be able to rent the same property. They’re looking at purchasing for hypothetically $440 a week, which equates to about three and a half percent yield, which is reasonably on the median mark for Sydney at the moment. So what would it look like if Terry and Linda decided to rent the property they were looking to buy and go and purchase an investment somewhere else, what what would the equation look like? So same purchase cost 650,000. They go and purchase somewhere else, let’s say Queensland for example. They put down their $65,000 deposit. Now they’ve got to pay their stamp duty. Now they’ve got to pay their LMI. So assuming that this loan was able to get approved, and it’s, there’s some questions about that, but I wanted to keep the numbers the same for consistency sake, so you can demonstrate the point. Assuming they could get that loan approved. They’re now borrowing 623,000 roughly from the back. So now we assume the same again interest only repayments at 3% per annum. They’re paying just under $19,000 per year. The same strata levy now they’re paying landlord protection insurance which is a really important tip for property investors make sure you have landlord protection insurance in case your tenant has a party buggers up the place.
Council and water rates the same, but now they’ve obviously got rent coming in from their investment property. And the interesting thing is because they now have across the country in order to choose where they purchase an investment property. Different markets have different rental yields, for example, some of my properties in Queensland are attracting a 5% rental yield. So, depends which choices they make, but they’ve got you know, 32 and a half thousand dollars worth of rent coming in, they’ve got to pay some additional costs. So their property management cost, there’s probably a few others that I need to factor in there. But I just want to keep the example a little bit simpler to help highlight the point here. But also even if we factor in their paying, they’re $440 a week or $23,000 a year in rent to live in the place that they would have bought in Sydney. Their annual holding costs prior to tax I should have written there is just over $17,000. So I know that’s a lot of numbers. But the high level point is, that there are about over five and a half thousand $5,600 better off per annum by choosing to rent where they were going to buy and and buying an investment property somewhere else. Now this is even after we factored in stamp duty and LMI and not getting any of the other grants that we spoke about which were available to Terry and Linda, if they chose to buy their first home. So it’s really really interesting how their numbers have actually worked out in this scenario. And this is this is purely a factor of being able to achieve a higher yield on their investment property. Then what they’re paying by living or renting where they live. They’re paying three and a half, and they’re earning five. And it makes such a difference to the numbers, even before we start talking about things like tax. And these kind of analytics actually give Terry and Linda some choices. So they have essentially three choices that they can sort of do with this excess money. They can either keep putting it back into their investments, I call it a machine if you like, and start paying down some of that debt and effectively getting ready for the next purchase over time. The second thing that they can do is they can use this excess money to spend on living and lifestyle. I mean, that’s 100 bucks, hundred bucks a week or over that, you know, go out to dinner once a week. Which potentially they couldn’t do if they were in their own home. Third thing but or the third thing that they could do is they could potentially look at renting something in Sydney worth $540 a week and live a little bit closer to work or bit more convenient location or whatever is on their heart. But there is a price to that as Colin correctly identified and that price is I guess, really, what does security means you? for some people security is around cash flow and numbers which is the case with me. Some people security means walking, opening the door after a hard day’s of work and walk into their home and that feeling of hey, this is mine. Even that was really the banks But anyway, but but also, I guess it’s really what’s what’s the value to you, there are some drawbacks to going down this path. Well, what If the owner of this place that you’re renting wants to kick you out, or if we have children, what school they’re going to go? Are they going to be close to mum & dad? all those personal reasons are things that you can’t quantify in a calculation like this. And this is really the point that I wanted to draw to all these incentives all fantastic. If the decision to buy your first home is the right one for you, all bonuses, but what I wouldn’t the way I wouldn’t be looking at it is because of this, I should do that. It’s because I want this, this is the bonus and it’s just making a decision with your eyes wide open, and I think that’s really the point.
Yeah, no, absolutely. Andrew. I really like how you’ve gone right down into the detail. And you have two scenarios. One is, you know, as a purchaser and owner occupier, and the other ones as an investor, I think you made a really good point before. That as long as it’s in alignment with your ultimate goal, sometimes you may need to, you know, make some sacrifice a little bit earlier on. I certainly know of an investor who’s built a fairly sizable property portfolio in his 30s. It’s got about eight investment properties, and he’s a rentvestor. And he categorically tells me that, you know, if he had bought his first property in the place that he’s living in, which is worth nearly $2 million, that would essentially prohibit him from building his portfolio in the speed, in the manner that he has. So sometimes you got to look at what your overall strategy is. And if you’re willing to make the sacrifice of reinvesting now, which actually Andrew, you are rentvestor yourself,
I am, I’m a big advocate.
I know you are. And I also have worked with a lot of first homebuyers and to be quite open with you, I’m kind of you’ve really got to understand what’s really important where your heart is, as well. But if it’s purely a financial decision, I can definitely see how you know, you’re better off financially, you know if you went down the rentvesting part, but I’m curious to know what sacrifices Have you made Andrew? as a rentvestor just so people can understand what it’s like and be in that frame of mind of what it means to be a rentvestor. Andrew
Sure. I’m getting married in September. So my partner doesn’t necessarily agree with the way I see the world. And that’s why I’m so passionate around getting that understanding of what security means to you. So that means security means building the investment portfolio and eventually the cash flow will come from that and I hold security in that cash flow. To her the security is walking into the house as I explained and saying all this is mine, no one can take this away from me, put the picture up on the wall or put build the pool or do what you want to do. So you know, the sacrifice along the way is, you know, prior prior to being there, I was all about the numbers. But, you know, moving away from having that, I mean, that’s obviously an aspiration for me as well. But saying, hey, I need to wait for that. And the reason why I want to the other reason why I want to make this sacrifice is a lot of people will, you know, let’s take Linda and Terry’s example, they go, Well, all I can afford is $650,000. Now, I can pretty much guarantee you that that’s not going to be their dream home. And so in order to wait for that feeling, and then going back to my scenario, wait for that feeling of, Hey, I own this, this is what I want. I chose not to go down the upgrader path. You know, so fast forward. Fast forward. You know, Terry, let’s say Terry and Linda by this $650,000 place. Fast Forward five years, seven years now they’ve got a kid, okay, well, the two bedroom apartment they’re going to buy in the western suburbs somewhere is not enough for them. They need to Okay, well, we need to sell that go and buy the house and then maybe one more upgrade, they end up with a dream house but not having it now around delayed gratification for me really means that because the challenge with going down that path is for a lot of people. The harsh reality in Australia is that super and the age pension is just not going to be enough to deliver the lifestyle that they want. So they go down that upgrade path and then pay down their debt. Where does the income come from in order to be able to support their lifestyle once they’ve decided to finish working? So the sacrifice that I’ve made is essentially delaying that gratification. You know, it’s still an aspiration for me to go and buy my own home but not yet.
It’s down the track. So it’s short term pain for a longer term gain for you.
You don’t mind short term pain. You live in a fairly nice place, Andrew, so you can’t.
That’s the rentvesting side.
So just just to wrap up, because we’re going over a little bit as usual, we’ve covered off the reason for this equation working out is they are paying three and a half percent yield in Sydney and earning 5%. elsewhere. It’s important to note that the number the rough numbers that we’ve covered tonight have been have not taken into account depreciation and or negative gearing, which could be another several thousand dollars per annum, that Terry and Linda would be better off but I wanted to keep it in pre tax numbers to sort of really highlight the point because ultimately negative gearing and depreciation is not a strategy. It’s more of an outcome. And so we’ve covered off that they had, you know, the choice to live where they want or in a nicer place that suits their requirements now, and again, it’s another thing is around age. How does Terry and Linda know, depending on what age they are, if they’re young, where they want to live for the next 10 20,30 years, like I honestly can’t even make that decision for myself today. So that’s another reason to do that. No right or wrong answer. But having having said so, I think for some people, if these incentives are the enabler for them to be able to get into the market, and they don’t have a choice, should I buy my first home? Or should I invest fist? If it’s a, well, I either buy my first home or I don’t buy anything? I think, you know, basically, it’s probably a pretty wise move for them to take some sort of action. And yeah, I think we’ve really stressed the point around need to make the decision with your eyes wide open and in whatever decision that you make. Because these are hundreds of thousands of dollars worth of decisions, this is not going to the shops and buying a shirt. It really needs to be in alignment with their longer term goals. And as long as you use that as a guiding principle to make whatever decisions in your property journey, whether that be first home or investment, as long as you use that guiding principle, you’re never going to go too far astray.
Yeah, thank you very much for that, Andrew that that’s really you know, a lot of depth and details to what what you’ve showed us. And if you have a particular situation that you want us to do your numbers for you, please feel free to get in touch with us because this is obviously for Terry and Linda. So everyone’s situation is different. If you keen to have a chat with us, jump on our website, www.inspirerealty.com click on the Get Started and share with us your details. We’ll be in touch with you within 24 hours to have a free 45 minute consultation just to understand your scenario and to work out a bit of your finances as well. And then also to walk you through the options, if you are considering as a first home buyer to buy your own place, certainly you know if that’s important to you, and that’s in alignment with your longer term goals. And that’s your priority at the moment and you don’t want to, you know, give up your lifestyle, then, you know, have a chat with us, because we can certainly show you some options. But what’s really important to know is you need to really figure out your strategy. And as Andrew has quite rightfully identified, please know your numbers know what alternative alternatives out there are there for you. So we’re going to be running our first first homebuyer webinar, and that’s going to be happening on the 15th of July. On Wednesday. Actually, it’s not a Wednesday isn’t
A Thursday evening, more details will follow very shortly. But if you’re interested in that, we’ll go to obviously in a lot more depth as to what’s on offer, and go through a couple of real life case studies as well. But we’re very excited to present knew that first webinar, there is, you know, in New South Wales alone is, you know, up to $85,000 in potential rebates and savings that you could potentially take advantage of. But I also want you to really think about, you know what it would be like to invest. So that would be happening on the 15th of July. Probably the best thing for you to do is to subscribe, like our page on Facebook. It’s facebook.com/inspirerealtyaustralia, or if you’re already online, you know, just just like it. And when the webinar is on, we’ll we’ll let you know. So thank you so much. Have a good night. Thank you so much, Andrew, once again.
Good evening. Thank you. Thank you very much Colinand thank you, everyone.
Yeah, good night.