SLM said:
* buying vs. renting - your thoughts? advantageous or no?
* what are the pitfalls to be aware of: extra costs etc. Home ownership vs. renting.
* To buy or to BUILD?
* Which mortgage lender, and what are the finance options if you have no deposit whatsoever.
* The first home owners' grant - how does this get paid and at what stage of the process? ie. can it be used for the deposit?
* Any other hints and tips you have based on your experiences.
With all due respect I completely disagree with KryalKastle's opinion of buying vs. renting.
I'm one of <5% of Financial Planners in Australia that give qualified advice on direct property investment and essentially clients pay me to structure and offer them investment advice on property, shares, super, tax, risk and asset protection etc, so I know what I'm talking about.
Firstly can I say one of the biggest misnomers in the industry is that "rent money is dead money". That assertion simply isn't true. It's true your paying for someone elses mortgage, but the alternative to that is paying a bucketload of interest cost on your own mortgage for your home.
Now simply paying the interest cost on your own mortgage doesn't bring you any closer to owning your own home outright, all youre doing is keeping your head above water. Which is pretty much the same as paying rent. You're just maintaining the status quo. So if rent money is dead money, so is the interest cost you pay on your own home mortgage... because neither get you any closer to owning your own place outright. In fact... the interest cost on your own home will be far more expensive than the rent.
Let's look at the numbers:
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Option 1:
You buy your own home for $300k. It's basically the cheapest home you can afford, which means its not the home you ultimately want to live in, and it's certainly not really suitable to raise a family in in terms of its size.
at a 7.35% interest rate (which is the standard variable rate less professional discount) your Interest only repayments are $22,050 per annum. Now that's JUST the interest only portion, you will want to make principal repayments on top of that.
Assuming an average growth rate of 7% pa, your home basically doubles in value every 10 years. So in 10 years your place is worth $600,000.
Option 2:
Instead of buying, you rent the same house as in Option 1 which has a market value of $300k.
Average Victorian/NSW rental yields would hover around the 4% per annum mark. So that means that your rental cost would be about $12,000 pa. So already you're saving $10,000 a year than in option 1, and you're living in the same house. In option 1 you're shelling out $22k a year and thats just interest cost, you're not even getting your principal loan amount down.
You take that $10,000 per annum you would otherwise be plowing into your mortgage in option 1, and you use it to invest. For $10k pa you could probably hold investments/investment properties to the total value of $700,000.
Assuming an average growth rate of 7% pa, your investments/investment properties basically double in value every 10 years. So in 10 years your properties are worth $1,400,000.
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So in option 2, you lived in the exact same place as in option 1 for a much cheaper cost, with the money you saved you used it to buy investment/investment properties which after 10 years were worth $1,400,000 compared to the $600,000 your home was worth in option 1. Even after taking into account CGT you are streets ahead in option 2 in terms of wealth.
Another thing to consider SLM is that this $300k place is probably only going to be a transitional home for you. That is, you're not going to want to live in it for a long time, and it's not going to be your dream home... why? Because really it's the only thing you can afford to buy right now.
Given the fact that it is a transitional place until you can afford and then find your dream home, why would you pay $22,050 pa (option 1) to live in it, when you can pay $12,000 pa (option 2) to live in the exact same place?
And as noted by the numbers above, you can use the money you save in option 2 to go on and create further wealth so that down the track you will have a really big sum that you can sink into that dream home and get the loan down to as small as possible when the time comes.
Personally renting pitfalls are highly subjective. I rent and I've lived in the same place for over 3 years and had only one inspection in that time. I put hooks through the walls if I want to hang stuff and I've never had any problems. I find people tend to exaggerate the downsides of renting out of proportion to what they really are.
I'm also not saying that personal home ownership is wrong or financially bad. Ideally it's what everyone should be working towards. I'm just saying that starting off with a personal owner occupied home loan that is really large 80% -> 100% is bad. Because owner occupied loans are non-tax deductible debt and when you have a large one... well that makes for a very expensive combo.
My personal situation? I happily rent and own 3 investment properties.. I'll buy my own home one day, and when I do it will be my dream home. I'll liquidate all the investment props and pour the equity/capital gains I've made straight into the loan. So I will a) have a kickass house worth lots of $$$ and b) it will have a relatively small home loan attached to it which I have to service.
It doesn't make sense to me to keep trading up owner occupied homes along the way. It's very expensive as option 1 above demonstrates, and in the end all I'll be doing is trading up to more expensive homes which equal more expensive loans, with little of my own personal wealth or capital that I'll be able to inject into it to get the loan down because I had to spend it all on high 7%+ interest payments along the way.
SLM I strongly urge you to go and see a financial adviser that has expertise in direct property and get some specific advice. This stuff is really really important and the difference between a good and a bad decision can basically affect you and your future family for the rest of your life. Don't take my word for it, don't take anyone elses word for it, don't solely take advice off a msg board...
