Author Topic: Australian Property or ETFs?  (Read 1103 times)

MrsV

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Australian Property or ETFs?
« on: April 06, 2021, 03:35:19 PM »
Hello!

I'm interested to hear people's thoughts - knowing full well we need to do our own research and make our own decisions.

My husband is 49 and I'm 47. We took the old fashioned route, I guess, of focussing on paying our mortgage down first before investing to much in shares. I really regret that now I understand the power of compounding. To be honest, until 12 months ago and finding this group, I never really considered the idea of early retirement being something within our reach.

Having said that, we have a reasonable amount in our superannuation - around $630K for me and 250K for him (we lived overseas for some time so put my husband's retirement contribution from the employer into our mortgage). We have around $35,000 in ETFs which we just started when Covid hit. I've lost my job due to Covid but had a side business which I now focus on full time and am able to take a wage to nearly replace my job, but there is no certainty compared to a steady income (I literally don't know how I will go week to week). My husband earns decent money but is still ploughing away on getting the mortgage paid off (due to be done in 12 months), even though he knows with interest rates that extra money would be better in ETFs. He admits it is an emotional thing to be mortgage free - a sleep well at night benefit.

Until this recent crazy property spike, we had decided to try and put as much as we can into ETFs to try and bridge, say, five years between when we can access our super and when we would like to semi-retire. I imagine we will both always work part time but our goal is to travel as much as we can while we are young enough to enjoy it (my family is riddled with arthritis and I was diagnosed with it in my spine at 42 and am certain it is in my hands already - just an example of what I mean, but also the fact that we never know what is around the corner so we want to get as much in while we can!).

We did buy an investment townhouse around 10 years ago and I think THAT particular decision put us off property investing  - it has done okay, just okay as in it isn't a loss, but had it been a house it would have doubled in value. Partly, I think we've perhaps been a bit lazy with it and if we spent a bit of money on it (we had one tenant trash it and we were overseas so just paid for a huge tidy but, really, it needs a repaint and new carpet). The mortgage is $320 K (the purchase price was $350K) and we used to get $450 a week rent but it dropped to $390 with a single mother who struggles to pay the rent we've been too soft in raising her rent :) The property would be valued at $480K in its current stage and with a renovation quite a bit more - similar new properties next door, same size, are going in the mid $600s. It is in a good area around 7km from the city and close to a train line (but not too close - walking distance but no noise) that is being done up as part of a huge city project, so the fundamentals are there long-term.

Anyway, point being, as the experience wasn't great, we didn't go down the property route more. Easy to say now we should have - this past 12 months has been mad, almost like living in 2002 again (I always regretted pulling out of a house investment that year as I was pregnant and felt uncertain).

With this hot market we are wondering whether to buy another investment property. I know, buying at the peak is not smart - but we are thinking that while it is interest rates driving it all now, once Covid is finished immigration might see property at least stabilise at its new high, rather than go backwards. We are torn between breaking the rule of DON"T buy at the top of a market, and wondering if this is actually NOT the top of the market and it has a little ways more to go.

I'm keen to hear other from other Australians about their thoughts with property - do you think skilled immigration will keep driving demand when Covid is over even if interest rates rise somewhat? My worry with ETFs and us being so late to the party - putting so much into Superannuation never thinking we'd want to retire early - is that we have limited time, say 6 years, to see real benefits from compounding.

Thanks!



mjr

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Re: Australian Property or ETFs?
« Reply #1 on: April 06, 2021, 10:26:45 PM »
Not sure why you're beating yourself up having paid off the mortgage rather than invested in ETFs early.  That kind of talk is easy in hindsight, not easy at all looking 10 years ahead.  Even then, so what ?  The money has gone into lowering the mortgage and you'll be free of mortgage paymernts soon and have oodles of cash to invest.

The thing about property that I don't like is that it is a big stonking asset that you can't partially liquidate.  People get all excited about their property gains, but to realise them you have to sell and then you're almost certainly up for 50% CGT.  Kind of takes the shine off, don't you think ?

Equities, though, you can easily fine-tune how much you need to sell, if at all. Dividends do very nicely, especially Australian ones with franking credits.  Yields on an investment property are not very exciting and significantly eroded by all the fees associated with invesment properties.  The real gain is capital gain which takes you back to my CGT point.

Real estate in an SMSF is pretty much immune from the CGT downside, but you still have the all-or-nothing problem regarding realising the gains.

My real estate exposure is my PPOR, that'll do me.  Everything else is in equities.  My parents built a 6-pack of units 20 years ago.  I get to look after them now, with a steady stream of maintenance items for me and refurbishments required.  I compare the units to my equities which sit there and require no maintenance at all.  Easy choice.

MrsV

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Re: Australian Property or ETFs?
« Reply #2 on: April 08, 2021, 03:20:33 AM »
Thank you so much for your thoughtful reply. I really appreciate it.

You sound like my husband when you talk of the maintenance -- every time we have to replace a dishwasher or send an electrician to our investment property he says Vanguard never calls him needing work done! He really loves to maintenance free aspect of shares.

We've got a ways to go topping up that balance we need to get us from 55 (ish) to 60 when we can access our superannuation, so perhaps we stick to our original plan and get as much as we can tucked away into the three ETFs we've decided to focus on.

The only other thing we might consider is buying a small apartment now in a suburb we want to live in when our teenagers leave home, so we can access and live off the rent on our current (large) family home. So, any property we buy now will have a modest mortgage,  and will stack up financially, but will also be a future lifestyle decision which will release cash-flow with rent for some of those years in our early retirement.

Thanks again!

marty998

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Re: Australian Property or ETFs?
« Reply #3 on: April 10, 2021, 12:55:10 PM »
You guys are doing well. I agree that paying off the mortgage isn’t a bad thing - better to be in a position where you don’t have a PPOR mortgage heading into retirement and having to raid super to pay it off.

A lot can be done in 5-8 years. A good thought exercise would be considering how much your after tax income would be over that time and working out how much of that you’d consider “free cash” for saving and investments.

 I’d vote for renovating the townhouse just prior to selling it, after you semi or fully retire. This will minimise your eventual CGT on disposal, because your marginal tax rates will be lower.

The net proceeds from the sale should tide you over until 60 when you can start your super pensions.


MustacheAndaHalf

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Re: Australian Property or ETFs?
« Reply #4 on: April 13, 2021, 06:56:49 AM »
We did buy an investment townhouse around 10 years ago and I think THAT particular decision put us off property investing  - it has done okay, just okay as in it isn't a loss, but had it been a house it would have doubled in value. Partly, I think we've perhaps been a bit lazy with it and if we spent a bit of money on it (we had one tenant trash it and we were overseas so just paid for a huge tidy but, really, it needs a repaint and new carpet). The mortgage is $320 K (the purchase price was $350K) and we used to get $450 a week rent but it dropped to $390 with a single mother who struggles to pay the rent we've been too soft in raising her rent :) The property would be valued at $480K in its current stage and with a renovation quite a bit more - similar new properties next door, same size, are going in the mid $600s. It is in a good area around 7km from the city and close to a train line (but not too close - walking distance but no noise) that is being done up as part of a huge city project, so the fundamentals are there long-term.
Did houses double in value recently, or years ago?  People who prefer houses may look at townhouses when house prices are too high.  If you renovated the townhouse and sold it, would that be enough to pay off your mortgage and bridge you over in retirement?

Given one of you recently lost a job, I think that emphasizes the benefit of having lower monthly costs, and of paying down the mortgage.

Investments have a lot of uncertainty, and typically when they drop sharply (like 2020), that's also when people are out of work.  It's important to have an emergency fund when you invest because of that volatility.  And if the job market is bad long enough, that emergency fund might not be enough.

So paying down a mortgage reflects a choice to have less uncertainty.  If you still have many years to pay it off, it might be worth checking if it's worth refinancing to a lower interest rate.

MrsV

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Re: Australian Property or ETFs?
« Reply #5 on: April 17, 2021, 11:19:09 PM »
Thanks Marty and Mustacheandahalf ... just back on the forum here after a while off so apologies for being so quiet! Great thoughts from you both.

I'd not thought about renovating the townhouse just before we retire to sell - that is a great idea. Hopefully, my side business will become a steady income, and we can achieve all our goals. Still, if not, this is worth falling back on to get money into ETFs to hopefully help support us when we need that bridging in our late 50s before we access superannuation. It feels great now having this pointed out - another insurance policy!

Although my husband loves the idea of ER - or probably more financial independence really - he does the sort of work where he could take a contract for several months or years if needed, so we can also fall back on that  (hopefully).

We actually had been looking for some time at an inner-city area we see ourselves living in when the kids move out - somewhere smaller to base ourselves when the dream of extended travelling becomes a reality. We'd been reasonably seriously looking the past year, and apartments in Australia, or at least  where we are, took a big hit the past few years and were not a great investment. We've been watching the development approvals and weekly sales supply, and the particular area we want to base ourselves in has some significant infrastructure starting late this year.

Long story short, an apartment in a position (both the suburb and location within the suburb) we like came up for a great price due to a contract crash and we grabbed it. With interest rates so low, the income will come close to paying for itself for the next three years and this coincides with our son finishing at an expensive school. Of course, our own mortgage will be finished in 18 months too. So, we leaped knowing when fixed rates finish for us, should the worse happen and payments go up significantly, we will have loosened some current expenses. Houses have taken off in our city, but apartments haven't quite yet - although the supply in this area has dried up somewhat compared to even a few months ago.

The difference with this scenario is we didn't buy a house in, say, Orange or Toowoomba purely as an investment. Our thinking is we are buying somewhere we have long envisioned living for half the year when we are older, and that having this will allow us to unlock rent on our family home in ER, too (assuming we don't want to sell it, then - but I've regretted selling every property we ever sold so love the idea of keeping it as long as we can to access later, especially if the rent is split between us both in retirement, thereby being okay tax-wise).

And Mustacheandahalf - your thinking is ours exactly and the only reason we kept this townhouse which hasn't been a fantastic performer (rent dropped from $445 to $395 since we bought it, primarily due to an oversupply of apartments hitting the market in our city in late 2016/early 2017). But what we do have is a large townhouse with three good size bedrooms, two bathrooms, a small back yard and a great position. Once we do it up, it offers a small home to a family and, we are hoping, a wonderful alternative to a small apartment. Houses are going crazy here in Australia and lots of people will be priced out of the suburban home with a large yard, so something like this should hopefully be an appealing alternative.

Thanks again, everybody - feeling okay about this because, as my sister keeps reminding me, we've invested in a future lifestyle we've said we wanted for years and aren't just doing a spreadsheet analysis. I think the rent on our family home will help a lot in ER, and gives peace of mind that if the market is going through a bad time, we won't be necessarily forced to sell a heap of shares or work any more than we need to top things up.

My husband's final dream is an apartment on the beach in an LCOL country in Asia we love and where we want to spend several months a year in ER! I'd be happy to rent via Air BNB each year, so we will see how that pans out after the pandemic.
« Last Edit: April 18, 2021, 03:21:09 AM by MrsV »

alsoknownasDean

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Re: Australian Property or ETFs?
« Reply #6 on: April 18, 2021, 02:31:54 AM »
My concern is one of diversification. A PPOR and one IP, sure, but much more than that and there's a risk of putting too many chips in the 'Australian residential property' game. Although of course there's housing and there's housing. A house in a desirable area in a capital city or an inner regional area is likely to be a safer bet than an off-the-plan apartment or a house in a single-industry town.

Alternatively I guess you're going to have a significant exposure to shares through your respective superannuation balances.

MrsV

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Re: Australian Property or ETFs?
« Reply #7 on: April 18, 2021, 03:27:31 AM »
Thanks for the response ... You are so right! And I didn’t sleep for the first few nights because of this going round in my head. I’m still nervous ... but this is it for us for property! We’ve got nearly 1 million in shares if we consider super (where most of our funds actually lie) so are currently tilted too far in residential property and do need to balance the share exposure. That is our goal for the next five years. Every month we are now buying ETFs. I know we missed a lot of the compounding benefits, but figure best to start in our late 40s than wait another decade! And, Marty’s suggestion of selling the townhouse as we enter ER actually made feel a little better, knowing we could fall back on this to access the collateral there should we want to jump sooner. It does feel as though a bubble is brewing ...
« Last Edit: April 18, 2021, 03:35:43 AM by MrsV »