Hopelessly confused about housing (Australia)

[Geta]

Hi all.  I came across MMM around six months ago, and it's changed my whole mindset about life.  My wife is on board, and we're now working on making FI a reality.  We wish we'd realised this much sooner, but are now making changes to make it happen.

We are in our early thirties and have two kids, aged 9 and 6.  We live in Melbourne, Australia which is one of the most livable cities in the world - but also unfortunately one of the most expensive.

We hope to retire within a decade.

Income  -  190-250k

My wife and I both work as contractors in unrelated fields.  Our income tends to vary, especially my wifes income which is pure commission.  My gross income is roughly 70-80k, and my wife has just returned to work and expects to make at least 120k but hopes for closer to 170k.

Expenses  -  66k once car is sold

Our living expenses are in flux as I'm currently selling my car (bought pre-mustache, hoping for 55-60k) but owe around 35-40k on it.  My wife's car lease finishes in September and has a 12k balloon.  The money from the sale of my car should cover the 12k balloon on hers, plus buy another cheap car for me with a little left over.  We plan on moving to one car in the future but can't do it yet.  Our total car payments are currently nearly 2k per month, but this should drop to zero by September.

Other living expenses, not including housing or the current car loans, are about 4k a month.  We should be able to lower that a bit further as we go.

To summarize, once the car loans are gone we should have a gross income of 190-250k and yearly expenses of around 48k not including housing.

We currently pay $1456 in rent per month, which is ridiculously cheap for a three bedroom unit in our area, bringing our current yearly expenses (without the car loans) to around 66k.

Assets  -  Zero, soon to be ~400-500k

My wife was off work for a while and then working part time, and we haven't managed to save much.  We currently have 62k in cash, but most of this is for tax which had been deferred from a previous year in my business so effectively we are at more or less zero.  However my wife has been back at work for around six months and she doesn't get paid her commissions for roughly that long (she gets a refundable retainer in the meantime) so when that starts to come in we should be able to start growing our net worth quite quickly, particularly once the car loans are gone.

I do have an investment property near Brisbane which I bought when I was about 20, which has been terrible and is on the market.  When it sells I should get about 15-20k out of it.

We don't have any other liabilities - we have a rewards card which we pay in full each month.

A few months after starting our FI journey my grandmother passed away and I learned I was to receive an inheritance of around 300-400k.  The next day was Christmas day, and my parents in law informed us that they intended to gift us 100k for a house deposit.  We were understandably stunned.  I should have the money from the inheritance by the end of the year, and my parents in law intend to give us the 100k when we buy a house.

The Goal  -  2 - 2.5 million

We're still not sure about this one. It would be less if we owned a home outright, somewhere around this amount if we were renting.  This figure will likely change as we get closer, but it's the ballpark of what we want before we RE.

The Dilemma

Although the rent is very cheap, we've been in our current unit for around seven years now and we've outgrown it.  My wife in particular hates it.  It's ugly, small, falling apart, has recent mould issues with a leaky pipe or similar that the landlord is putting off fixing and really, it's rather depressing.  It's also in one of the dearer areas of Melbourne (Caulfield South).

Despite its shortcomings, if we moved out and back in the next day we'd probably pay $500 a week instead of $335.  We have it cheap presumably because we've been there that long.

My wife works in the outer western suburbs, so has a solid hour and half round trip.  I work in an area from around St Kilda down to Beaumaris and greatly benefit if I live in that area for work (I work as a contractor on call for 14 hours a day, and the system assigns jobs based on time to arrival).  If I lived outside the area I'd still need to be close to it for when I switch over with employees etc.  My wife may also move, possibly to Brighton which is the next suburb over, but also possibly at some stage to the outer SE suburbs.

This makes it almost impossible to be close to both of our work areas, and locks me into one of the most expensive areas of our city.

House prices are ridiculous and many think we're in a bubble.  My parents in law are pushing us to buy - they've made all their money in real estate like many baby boomers.  I'm not at all convinced we'll see the same high growth over the next 10-20 years as I don't think it's sustainable.  Interest rates are at record lows and some suggest we're headed for a recession or big slow down.  Not many of my mates can afford to buy.  Houses needing lots of work or in some cases knockdowns are going for over a million in many areas we're looking in.  Brighton and Hampton are out of the question, but once affordable suburbs like Bentleigh East and Moorabbin are being advertised at around 700-800k and going for 1.1 and upwards in some cases.

Housing is the one area we're really unsure where to go with.

It's not like the States here - you've got a few major cities dotted around the coast.  Sydney prices are worse.  My skills aren't transferable at all meaning moving really isn't an option.

As I see it we have a few choices:

Move out and rent (at least $600-700 for anything 3 beds in the area that isn't a complete dive), stick all our savings in index funds.

Buy something in the area for 900-1 mil, spend more doing it up.  Pay the mortgage down?  Then start saving?

Buy a block in the area, knock it down, use my incoming inheritance to build a new home, sell it after a year or so and hopefully profit?  (My wife works for a builder and gets a discount).

Down the track, we'd like to travel, frugally, a lot.  We also love hiking and would like to try some big bike packing trips.  Long term, post retirement and when the kids have moved out we like the idea of owning something in the CBD or inner north (Fitzroy etc) that we could easily rent out short term - a week or so booked through AirBnB while we are on a two week hike would see us come out ahead financially.  If we owned a home in the suburbs it would be harder to rent it out short term.

Perhaps we should look at buying our long term place there now, stay renting and pay it off, but then I'm buying into what I think is an overpriced market to invest.  Then again if prices soften I would think the inner north would be pretty insulated.

I really don't know which way to go - everywhere I turn I read conflicting opinions.

While ultimately we need to make our own decision, I'd really love to hear what others might do in my situation.

Cheers!

[nath]

Hi Geta

I am a fellow Melbournian and a MMM fan the last couple of years.

Have always been interested in real estate, and with a similar age (early 30's) and income to you, my wife and I have amassed 5 properties in the bayside / inner city areas you are talking about. We are now multi millionaires and I am only a few years off FI and saying goodbye to the day job.

As MMM would put it you need a face punch with a net worth of zero. But it could be worse i guess. If you had saved a bit more money over the years of earning such high salaries, you would really be getting somewhere with this inheritence that is about to arrive.

My suggestion is simple, that will put you on a path to success for the next 10+ years.

You have roughly $500k arriving this year. Put this to good use and buy yourself a $500k house outright. Apartment or liveable house in a normal area without too much driving distance to one of your jobs. It is very do-able in Melbourne still and a $500k can get you a near new wonderful apartment in a premium location such as St Kilda Rd, Docklands or South Yarra, or a Normal house in an area like Oakleigh South, Keysborough etc.
If you *must* take out a small mortgage with it to get a better property, then keep it manageable say $200k or so and pay this down quickly.
Consider this a stepping stone, not your dream house, and in 10years time you can get a new house .
Forget prices going up or down on your own home as its a place to live and keep.

Next use your 'savings', from not having a mortgage and expense reductions, to funnel into fast tracking your investments. Think 20% deposit investment properties which are neutral / positive geared with tax benefits. Also share portfolios index funds in vanguard. The Aus sharemarket is at record highs but divident investments are something like 10% per year. not bad at all for snowballing returns! My rock solid advice is do not leverage the family home, ever! Always have seperate deposits and use different banks to buy property.

With a paid off house and close to $100k per year savings from your jobs, congratulations you are less than 10 years from retirement.

If you cant wait until the end of the year for your big inheritance to arrive, use the $100k the inlaws are offering and buy a house straight away and move out of your "dead money" rental. It will still to be paid off in 6 months time.

All the best

Nath

[deborah]

If you are not sure where you want to live, and your jobs are potentially moving around, I'd rent. There is a huge cost in changing houses that eats up any profits you make unless you stay in a house for a while. You sound like you might be in the feeder area for Melbourne/MacRob high schools, so you would have the best cheap secondary schooling available if you stay in the area.

Moving a little bit south and east (away from the bay) should be cheaper, and closer to your work without impacting much on your wife's commute. If she has only recently started doing this full time, I would wait a few months before looking for anywhere new to live, to see whether the commute is too much for her in the longer term. It might be easy for a few weeks, but if it's a strain over time, you would just have to move again.

If you are going to buy a house, it would be worth while for your wife to check out how the three different commutes (brighton, SE suburbs and outer western) work out for that area before you buy (for instance, during holidays checking what the commute route would be like by doing it in peak hour, or setting off early from your house, getting to the proposed location and doing the commute from there to the outer western suburbs). Google can also estimate the travel times.

It looks to me like your expenses are very high, so you may need to work out how to trim them down more.

Knocking down a house soon after you have bought it just means you would have to rent as well as checking what is happening during the build and having a horrendous commute. I am sure this is not a frugal way to go, as well as being a recipe for marriage breakup. Buying a house that should be knocked down and living in it for a few years, while working out what you will do is much more mustashian. Selling it again before knocking it down means you have the recipe for a good house price (the worst house in the best street is worth an awful lot more than the best house in the worst street). But if your wife is in the building industry, you might do well out of it.

I actually don't think baby boomers have made money in real estate. Generally when I have looked at the prices people have bought and sold for, including the extensions and renovations they have done, the interest they have paid (I was one who paid 18%, and that really eats up any increase in capital value) and the stamp duty etc. that they have paid, they would have done better in other investments. Housing made baby boomers save - that is all.

[Geta]

As MMM would put it you need a face punch with a net worth of zero. But it could be worse i guess. If you had saved a bit more money over the years of earning such high salaries, you would really be getting somewhere with this inheritence that is about to arrive.

Believe me, we're kicking our selves for not realising what was possible sooner.  That said we've only very recently started earning better money, for many years we were on around 100k combined or less with two young kids in childcare - still plenty of saving we could have done though, with a different mindset.  No use dwelling on it though, on with the future!

Put this to good use and buy yourself a $500k house outright. Apartment or liveable house in a normal area without too much driving distance to one of your jobs. It is very do-able in Melbourne still and a $500k can get you a near new wonderful apartment in a premium location such as St Kilda Rd, Docklands or South Yarra, or a Normal house in an area like Oakleigh South, Keysborough etc.

I've just been looking on realestate.com.au - I think the third bedroom is the killer, yet with a 10 year time frame that will take the kids from 6 and 9 to 16 and 19.  I really don't know if it's fair for them to share a room right through their teenage years.

Still, it's an intriguing idea and not one I'd really considered as a use for the money, although I suppose it really is the most obvious in a way.  I just can't see many for sale in that kind of price range with three beds and two car spaces (for apartments).

Think 20% deposit investment properties which are neutral / positive geared with tax benefits. Also share portfolios index funds in vanguard. The Aus sharemarket is at record highs but divident investments are something like 10% per year. not bad at all for snowballing returns!

This is where it gets interesting.  I'll admit, the idea of owning a modest home outright and being free to keep expenses low and pump money into investments and watch them grow appeals to me!  What sort of areas are you talking about as far as properties go?  I know you can find positively geared properties in some regional areas, not sure about the city.  I guess the key phrase there is 'with tax benefits'?

Appreciate your advice.

Geta

[alsoknownasDean]

I'd probably say that as so much is still up in the air at this stage (especially your wife's work), to continue renting for the time being. There's also the issue of changing schools as well.

As far as area goes, I guess you've got that balance between price/your commute/your wife's commute. Oakleigh might be OK for your wife's commute as it's not too far from the Monash, but is it a bit far for you? Further down the Frankston line might be OK for you (ie: Mentone or similar), but it'd be likely a bridge too far for a commute to the outer west (fine for a Brighton commute though).

I quite like the Carnegie/Murrumbeena area in the southeast, but yeah, expensive (hence why I don't live there) :)

If your wife can get the gig in Brighton, then that would help a fair bit. Having jobs on the opposite sides of the city (and huge commutes) isn't healthy long-term :)

Haha, I totally agree that prices here are crazy. Here I am thinking about buying in a couple of years and thinking that anything over $300-350K is too expensive (for a two bedroom unit). :)

[Geta]

If you are not sure where you want to live, and your jobs are potentially moving around, I'd rent.

My area of work is fixed, and as mentioned it really does benefit me being inside the boundaries in terms of more jobs, and therefore more income.  However we may have to look outside that area in order to get costs down, and I'll have to sit in the car all day rather than being home in between jobs.  A trade off either way.

It looks to me like your expenses are very high, so you may need to work out how to trim them down more.

I'm sure we do still have progress to make there!  When my wife gets home from work we're going to sit down with our budget and see where we can tighten up further.

Buying a house that should be knocked down and living in it for a few years, while working out what you will do is much more mustashian. Selling it again before knocking it down means you have the recipe for a good house price (the worst house in the best street is worth an awful lot more than the best house in the worst street). But if your wife is in the building industry, you might do well out of it.

We started thinking about this after studying a few.  One example sold for land value, then they built a house on it and sold after another year or so.  We worked out rough figures, and calculated that they would have made close to half a million on it in a couple of years.  Even if we got the costs way wrong, at least a couple of hundred.  They may have gotten particularly lucky, but it got us thinking about it.  I think we'd be biting off more than we could chew at the moment though.

[Geta]

As far as area goes, I guess you've got that balance between price/your commute/your wife's commute.  Oakleigh might be OK for your wife's commute as it's not too far from the Monash, but is it a bit far for you? Further down the Frankston line might be OK for you (ie: Mentone or similar), but it'd be likely a bridge too far for a commute to the outer west (fine for a Brighton commute though).
--------------
If your wife can get the gig in Brighton, then that would help a fair bit. Having jobs on the opposite sides of the city (and huge commutes) isn't healthy long-term :)

The driving sucks (and it's expensive!)

We've been struggling with that issue of which area to live in, as well as whether to rent/buy/build etc.  Ultimately we decided that since my area is fixed and my wife will always be moving around with her work that it makes the most sense to anchor ourselves here.  That also means we can remain close to school/scouts/other family which is a benefit.  The downside of course is the cost of housing here.

[nath]

Hi Geta

Thanks for the reply,

As I think you understand a modest but reasonable house that you can own outright will make you richer, (in life, and financially). while blocks of land and expensive renovation properties will make you poor.

If your kids are in school and you cannot move you should look to neighboring suburbs, 500k or so should find something 3 beds in the south of Melbourne. Don't forget to factor in stamp duty and other expenses. Don't forget borrowing a small amount is still ok. A 200k or so mortgage at your salary would be paid off in 2 years.

As for investment properties the world is your oyster. Most metro properties with a 20% deposit are now immediately positively geared thanks to low interest rates.

[deborah]

I've just been looking on realestate.com.au - I think the third bedroom is the killer, yet with a 10 year time frame that will take the kids from 6 and 9 to 16 and 19.  I really don't know if it's fair for them to share a room right through their teenage years.

Still, it's an intriguing idea and not one I'd really considered as a use for the money, although I suppose it really is the most obvious in a way.  I just can't see many for sale in that kind of price range with three beds and two car spaces (for apartments).

Well, if you get a house with two bedrooms, that could be converted in 6 or 7 years to three bedrooms (or when you had the money), you could buy a cheaper place outright. Make sure you look at places with this in mind.