Author Topic: Reader Case Study - how much house?  (Read 3035 times)

ynotme

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Reader Case Study - how much house?
« on: May 30, 2015, 06:48:34 PM »
Hi all

I’ve been lurking and reading MMM from when the site first launched. I’m from Australia which is relevant due to the high property prices here. I’ve finally registered and hoping the forum can help me get some clarity on next steps.

I work in the corporate world and have always wanted to escape however I earn well and value financial independence so continue in my career. I have taken time off to travel and live overseas, at times up to a year, but then always returned to what I know. If I was FI, I would stop working right now.

I always lived within my means and saved. In the last 5 years, I have committed to working and saving to reach FI as soon as possible.

Goal:
I have defined Financial Independence as:
1. Home that I love living in
2. $30k pa investment income to cover my expenses and one-off purchases

Note: My expenses have been less than $25k pa over the last few years so I know this is enough.

Assets: Edited to remove numbers for privacy

Liabilities: None

Current Strategy:
•   Saving 75-80% of income and investing into share portfolio till December 2015 when I expect it to be ~$X00k.
•   The apartment I am living in was always meant to be an investment and I hoped to rent it out and buy a house. If I do this, between the rent from the apartment and the dividends from my shares, I should receive ~$30k pa (goal 2 achieved).
•   To live on $30k pa, I do need to own my home so my next goal was to buy a home I want to live in long-term.

Dilemma:
My dilemma is that I would like to buy a house as my ideal home. I live in Australia and property is expensive here. To stay close to family and friends and live in an area I would like to live in, a house would cost me $800-850k.
I know homes are much cheaper in the US and other parts of the world but high property prices are the reality in Australia.

I do earn well but buying and paying off a house would be another 10-15 working years which is a long time. I could live in a cheaper part of the country but then would be more isolated from family and friends.

I could stay in my apartment but even then would have to work, save and invest for another 5-6 years to reach FI.

My questions are:
1.   How could I meet my goal in the fastest way possible?
2.   Would you work for another 10 years to pay off a house? Would you consider it worthwhile?
3.   For Aussies – what % of your assets do you have tied up in your own home?

Edit: updated the post to remove exact numbers for privacy reasons
« Last Edit: July 25, 2015, 08:16:55 PM by ynotme »

forummm

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Re: Reader Case Study - how much house?
« Reply #1 on: May 30, 2015, 07:00:09 PM »
As you say, those prices sound really expensive to us in the US. Is there really nothing else available to you that's cheaper? My house cost me about 25% of what a lot of my peers spent, and my house is just as enjoyable as theirs. Isn't there an option for you to do the same?

ynotme

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Re: Reader Case Study - how much house?
« Reply #2 on: May 30, 2015, 07:20:18 PM »
I could move further away and buy a house for approximately the cost of my apartment. I wouldn't do it yet as the commute would increase quite a bit.

I'm really struggling with how many more years I'm willing to work to pay for a home. I know it's individual so am open to hearing how others have weighed this up.

alsoknownasDean

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Re: Reader Case Study - how much house?
« Reply #3 on: May 30, 2015, 07:22:01 PM »
As you say, those prices sound really expensive to us in the US. Is there really nothing else available to you that's cheaper? My house cost me about 25% of what a lot of my peers spent, and my house is just as enjoyable as theirs. Isn't there an option for you to do the same?

Possibly way out in the sticks, or the crappy areas of town. I'm assuming the OP is from Melbourne or Sydney, prices are pretty high in most areas.

OP, have you considered selling the apartment and buying a house with the proceeds (and a little more)? You'll still have to keep working to reach FI, but it seems that the only way you'll be able to reach FI soon is to move to a cheaper area.

ynotme

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Re: Reader Case Study - how much house?
« Reply #4 on: May 30, 2015, 07:38:13 PM »
@alsoKnownAsDean - yes I am also considering selling the apartment to buy a house. It would be CGT-free and I could take a smaller home loan.

Once I pay off a house, I could consider working part-time and take a slower path to full-FI.

forummm

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Re: Reader Case Study - how much house?
« Reply #5 on: May 30, 2015, 07:45:24 PM »
Again, this is from the US and may not be at all helpful, but a lot of the expensive real estate markets in the US are actually much cheaper for renters than buyers. Could you save a lot by renting? Could you invest all that money you have in your house and have the total returns after inflation pay for your rent and give you something left over? Like if your property taxes on your current home are $12k per year (just guessing 2%), a rent of $2500/mo would be a lot better deal than owning your home.

ynotme

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Re: Reader Case Study - how much house?
« Reply #6 on: May 30, 2015, 08:32:41 PM »
@forummm - thanks for the suggestions

I did rent for years before buying and didn't mind it. It may be harder now to go back to renting after owning my own place but that's just a preference. The reason I ended up buying property is that Australian property just keeps going up and I felt like if I didn't have something, my other assets may not keep up with the property price rises. I could keep the apartment and rent it so I stay in the property market. 

I'll need to compare the various buy and rent scenarios. It might be worth renting and living in a house to see what the value is to me before I commit to buy as well.


zolotiyeruki

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Re: Reader Case Study - how much house?
« Reply #7 on: May 31, 2015, 12:55:59 PM »
I'm curious--what do you think is driving the high cost of housing in Australia?  It seems like prices like those would drive a lot of building, which would drive housing costs back down.  Is it a shortage of available land?  High cost of labor? Stringent building codes?  Taste for high-cost building materials?   

ynotme

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Re: Reader Case Study - how much house?
« Reply #8 on: May 31, 2015, 01:46:56 PM »
There are a lot of debates about why Australian property is so high.

As a previous poster said, property prices aren't high all over the country. Prices are high in Sydney and Melbourne. Also Perth prices rose after the resources boom as a lot of mining companies are based here and the workers were paid very well during this time which drove prices up.

Some of the factors are:
- There are very few cities where companies are head-quartered, mainly Sydney and Melbourne. This means the majority of people need to live and work in these cities rather than the population being spread out.
- Population growth in Australia is primarily through immigration. Again migrants move to Sydney or Melbourne for the jobs which increases demand.
- Sydney has limited land that can be developed as it is bound by the water and national parks. Melbourne has still got plenty of land which is being released in a controlled way by the state government. This keeps supply and demand steady as bringing house prices crashing down would not be popular with developers and the voters who do own property.
- In the cities, the majority of housing is still low density. There are high rise buildings now being built in the CBD but most people rent these in the short term and will still want to buy a house longer term.
- The tax laws here favour property investment and a lot of Australians view property investment as safer than the sharemarket / stockmarket.
- Home prices increased a lot when 2 income families became the norm.


By the way, the $800k I estimated above is based on me compromising and moving to a lower cost area. If I wanted to buy a house in the area I am currently living in, it would be >$1 million for a 2 bedroom house with very little land.