Author Topic: Not sure which direction to go  (Read 2424 times)

Cimbom

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Not sure which direction to go
« on: May 27, 2013, 12:18:28 AM »
Hello everyone,

I'm 27 years old and from Canberra, Australia. My husband and I are great with saving and budgeting but I'm not sure which direction to go in the short term. We currently own an investment property which is currently yielding 7.9% before expenses. We've had this for nine months and I am pretty sure it is neutrally geared (probably better to wait until 12 months to get full picture due to tax considerations etc). We are currently renting a 1 bedroom apartment for $380/week. While we're happy living here, we are planning to move to a bigger apartment (2 bedrooms) as we really need the extra space. This will mean we pay at least $430-450/week in rent. We would like to stay in the same neighbourhood as it is really conveniently located and allows us both to walk to work. We don't own a car and don't really want one at this stage. I am hoping to start my own business at the end of the year and will do this full-time if my income exceeds my current work income.

Renting seems pointless to me as we can buy the same apartment for pretty much the same price or less (if we only pay the interest payments). We would pay more than the interest but keep this in an offset account so that it functions the same way as paying down the principal but with better access to our money. We can then pull this money out in about 5 years, when we think we will move out, and convert the property to an investment property. By this time, my husband will have completed his medical double degree and we will be able to afford something a bit bigger and more conveniently located to his future work.

One thing I'm having trouble deciding is if we should buy an apartment in our current building, which is about 15-20 years old. We love the location and the views and our current apartment manages to stay warm-ish in our cold winters which means we only need to have the heater on for 3-4 hours in the evening, compared to many of my colleagues who pretty much don't turn it off. There is a 2 bedroom one for sale at present and with a small amount of work (replace flooring and some updates to kitchen), it will look great. It is also really affordable with the weekly interest payment on the mortgage likely to be about $350. However, our neighbourhood is going through a lot of changes at the moment with about 4 new apartment developments in progress.

This has left me a bit concerned about the future appeal of our potentially lovely but older apartment. I'm wondering if instead of buying the older 2 bedroom apartment in our building, we should buy one in the newer buildings instead. These cost about 50-80k more than the one that we're considering. However, when it comes down to it, as long as they are structurally sound, apartments are largely the same in my view - just some empty rooms with some kitchen and bathroom fittings added in. If we can do some small updates to the older one then on the inside, they will largely be the same. I can't help but feel like I might be making a mistake by buying an older apartment though and the allure of "new" is quite strong. I'm not sure how I can reconcile this but would appreciate your input. I also wonder if renters will be prepared to pay a small premium to rent a new apartment compared to an older one, meaning our one won't be their first priority.

Secondly, while we do save very well (40% of our after-tax income most months - about $2000), I have a bit of an addiction to travel. I actually have a spreadsheet on my laptop where I've made up about 10 itineraries for future trips I'd like to take. I know it's not the most frugal hobby to have but do you think it's OK to indulge in this hobby say once a year if we are saving and investing well? We are aiming to buy another investment property in the next 1-2 years and about one a year for 5-6 years after my husband graduates and think that the compounding effects of inflation, capital gains and good cashflow will set us up quite well. I have been having some health problems lately which leave me quite stressed at times. I've had 3 surgeries in the last 5 years and these have left us out of pocket quite significantly. Travel helps me feel more optimistic and gives me something to look forward to each year.

Our finances:
My income: $63,000 - this is $900/week after deductions
Husband's income: $22,000 (works part-time) - $350/week after deductions
Investment property: Worth about $180,000, mortgage of $150,000 at present. Rent covers all expenses except incidental repairs.
We pay rent of $380/week
Other expenses (monthly) of $450 for food; $100 for electricity; $40 for two mobile phones; $60 for home phone and internet; $150 for health insurance; $20 for home contents insurance; $80 in bus fares for my husband; $50 for take away (twice a month); $50 for clothing/entertainment/misc; $40 for medication; $200 personal loan repayment; $200 credit card payment.
Liabilities: $6,000 personal loan (used for husband's study costs) and $7,000 credit card (for surgery I had in January).
Savings: $30,000
I have about $30,000 in superannuation at present. We also both have life insurance paid through our superannuation.

We would have a lot more savings if not for my husband's past university expenses which cost $10,000/year (now able to be deferred as he has become a citizen), immigration expenses and my surgery costs.

Apologies for the very long post and thanks in advance for reading. I look forward to your replies :)
« Last Edit: May 27, 2013, 12:35:59 AM by Cimbom »

cerberusss

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Re: Not sure which direction to go
« Reply #1 on: May 27, 2013, 01:14:51 AM »
I can only give you some thoughts, not really a strategy or something; I'm just a 37 y/o guy that's now living in his 3rd house.

That said, buying is expensive. You want to buy and stay there. However, if you get pregnant (unexpectedly or because your planning changes), you might want a real house with a garden. Since you're 27, do not discount this possibility. That would make me lean towards the flexibility of renting.

You make it sound as though buying the apartment will be an investment, but personally, I'd not look at it as such. It's only half that, because you're going to live there for a couple of years. And who knows what will happen in that time? In the meantime, this purchase will be just that, a purchase. Not an investment.

There's something else, and that's when you start your own business, you need to run it for, say, 5 years in order to get a mortgage. That's because the bank wants to see at least 3 consecutive years of good numbers. Since your own business is so risky, I wouldn't want to bet on that. I know I made plenty of mistakes before getting a more solid grasp on entrepreneurship. Thus if you really want to buy, buy now, or count on buying a house on your husband's salary in five years.

The question of buying a new or a 20 year old apartment, that's a detail in my opinion. Do some calculations and let your preference weigh in.

Concluding, I'd say: keep saving everything you can, and think twice about buying an apartment.

The way you talk about these holidays, I feel you put a lot of emotional value in those. I'm not sure if that's a good idea. I'm not a therapist but I've talked to one extensively :-P  and I'd say -- don't get so hang up on these holidays. Instead you might want to consider being at peace with your current health situation. Because then it matters less, if you are forced to skip one.

Cimbom

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Re: Not sure which direction to go
« Reply #2 on: May 27, 2013, 02:22:57 AM »
Thanks for your reply.

In terms of getting pregnant accidentally, that is highly unlikely due to the medication I'm currently on. Even if we have children, I'd be pretty happy living in an apartment or similar. I like the fact that they are cheaper in terms of bills and also maintenance costs. It is also good because having a smaller living space provides a disincentive from buying lots of consumer-y items. Our neighbourhood is quite nice too.

I'll still work the same hours once I start my business, with the view of cutting down my job hours if it takes off. If it doesn't, I'll just continue working as normal.

I agree with your view regarding travel. I do find it difficult to put the thought into practice though. I definitely need to work on that.

limeandpepper

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Re: Not sure which direction to go
« Reply #3 on: May 27, 2013, 05:20:04 AM »
Hi Cimbom, welcome!

Okay, bearing in mind that I'm no property expert... these are just things that I've picked up through talking to people who know their stuff, and hopefully I'm regurgitating correctly.

In regards to whether to buy an apartment in an older or newer building. I guess first of all you want to look at the body corporate fees. New buildings often come with lots of bells and whistles (gyms, pools, lifts etc) which can drive the cost up. Even when the mortgage is paid off, you still have to pay body corporate, so that's something to think about. On the other hand you have to watch out for body corporate in old buildings too, look at the sinking fund and what kind of maintenance that might be likely to crop up in the future.

It's a generalisation but in some ways older apartments can seem to be more robust. The walls tend to be thicker and more solid, making rooms more soundproof. On the other hand, older apartments may have asbestos lurking within, though it should be pretty safely hidden away unless you're fully hacking into it for renovations etc.

Personally, while I'm open to the idea of buying property, I'm a bit hesitant because they're so expensive in Australia. I also still prize flexibility and diversification quite highly. However, if there's a good deal and it's within my budget, I'd probably be keen. So run the numbers and consider what is really important to you, etc., and see how you fare.

As for travel, I'm biased. I love it and if all goes well, I may spend most of next year traveling. This is something I've weighed up against the temptation of an earlier financial independence. And I am fine with it.

Some people don't get wanderlust. But hey, I don't get a burning desire to have kids, which can cost just as much as travel, or more. ;)  To each their own.

You will have to weigh things up yourself. If you are already the type who is sensible with money then think about it in even more depth and detail if possible. It is up to you as to whether travel is worth potentially delaying financial independence.

happy

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Re: Not sure which direction to go
« Reply #4 on: May 27, 2013, 07:34:58 AM »
Why don't you check out some rentals either on the internet and/or in person and see if there is any difference between a new and old apartment?