Hi chrisc83,

Well done with the saving and investment so far! The problem is that very few here are qualified to give the financial advice you're after, which is regulated unlike property investment advice.

You need to consider your risk profile, your current investment yield / growth and your personal goals. You might be able to get a better return elsewhere, but this higher return is likely to come with an increased risk of capital loss. Read up on investing – google books on 'value investing' to give an alternative perspective to the one you'll get from property investment gurus (almost all promote growth investing strategies).

I sure do agree that a great way to increase your investments is to save and invest more. But don't forget to reward yourself too when you reach each of your goals.

Good luck,
F. [cowboy2]

You want to know the secret?….

Yeah baby, set the controls for 1997. Shweeet!

Or just buy when house prices are cheap and rents high, as opposed to today with expensive houses and cheap rents.

Cheers, F. [cowboy2]

Is it just me or is that big font ugly and horrible to read?

Why do you take offence at being called a 'capitalist'?

Forget about the phrase "affordable" for a moment. I think it's inaccurate and causes problems in a discussion such as this.

So what about if everybody hypothetically replaced the word "unnaffordable" with "overpriced"? Potential first home buyers would say "I would love to buy a place, but everything is overpriced" rather than "… but everything is unnaffordable". You're quite correct, many of these people could probably buy the in the exurban areas where you're investing, so by definition they are affordable. They are not buying there because they think the houses are overpriced relative to the benefit they would receive from moving there.

Even if renting in more desirable areas costs the same as or more than buying in the exurbs, the choice of these people to continue renting implies a value decision. The dollar value of all the benefits of moving out (net of the disadvantages of travel time and costs, remoteness, less services, possibly higher crime and social problems), and buying is less than the dollar value they place on staying put and renting (with all its benefits and disadvantages).

This is their choice. It’s not a position that can be criticised by others, but a rational, personal, decision.

Now your position is different. You see the exurban house prices as either correctly priced or under-priced. I presume this based on the fact you’re buying them. So you wouldn’t claim these houses are “affordable”, you’d say they were “cheap” or “reasonably priced” to you as an investor. This again is a position that is not open for criticism, it’s a personal judgement based on the value of these properties to yourself.

See how the heat is taken out of the situation by a simple rewording? Now we have the renters saying “house prices are too high, so I’m not buying” while you’re saying “house prices are cheap, so I’m buying”. Who is right? Both of you.

It’s interesting to consider why renters might think house prices are too high. Here’s a chart of the distribution of house prices in Melbourne* just ten years ago:
*Note: Metropolitan Melbourne, not Exurban Melbourne

Notice that the bulk of houses were in the range of $75k to $175k? This was around 2x to 4x the average annual full time earnings per person. I don’t have a current distribution of prices, but I figure a similar proportion of properties would now fall in the $300k to $500k range. Around 5.5x to 9x average full time earnings. Houses are now a bit over twice as expensive in real terms as they were a decade ago. Meanwhile, despite all the hype over the rental crisis, rents are slightly below their 1997 levels in real terms, having fallen from an average of 34% average earnings to just 28% average earnings. Owning has become far more expensive, renting has become a bit less expensive.

Sure, you get people who are natural whingers and will complain about both rents and house prices. That’s not smart. They’re blinded by the dollar effect and can’t see beyond the nominal prices. I guess in fairness I should point out that people who claim house prices are cheap and that other people (renters particularly) should stop complaining about them are probably suffering some degree of the same blindness. They most likely don’t realise that house prices are currently historically high relative to earnings or rents.

I take it the houses you mention are out west or north-west right? Melton perhaps? Just out of curiosity, do you rent in this area or closer to the city? When you buy, will it be in this area or closer to the city?

Remember, it’s “price” not “affordability”.

Cheers, F. [cowboy2]

Just don't take anything here as gospel! I know you were just being complementary, but it's best to leave matters of law to the lawyers and matters of tax/finance/accounts to accountants unless you can confidently and reliably assess them yourself. You sound like you've been pretty thorough though. Good luck with the unit.

I'm genuinely surprised to hear the following:

I thought it would have been the other way around! Can any of the mortgage brokers check and compare the lending limits of a single borrower for IO and P&I loans? Thanks.

With regard to your specific situation, because you have non-deductible debt on your PPOR this might have a bearing on the overall results of your IO / P&I decision. But forgetting about the PPOR and considering only the investment, I've drawn the same conclusion as you – the benefit of building equity exceeds the pain of paying a little extra. Note: This is not advice. Everybody should assess their own situation. But it works for me.

Cheers, F. [cowboy2]

Much more than that actually. But wouldn't it be easier to chuck it into the loan for 8.5% compounding (minus the lost tax refund) than to keep it out chasing a 4% net return?

As I said, P&I isn't the best decision for everybody. I'm just surprised at the blanket assumption that IO is!

Hi Snowflake.

Others here are better qualified to answer the more technical parts of your question. My advice would be to first clarify your goals and construct a plan to achieve them in the most direct way. Then work out what obstacles you have and how best to negate or avoid them.

You seem worried about cashflow especially with the planned future extension to your family? I notice that the IP is roughly paying its way (if you ignore the deposit borrowed from your parents). The main cost you have is your PPOR mortgage. Clearly, by removing this cost you could largely reduce the cashflow obstacle. If this was most important you might consider downsizing or renting, however, unless you are clear about your goals it’s impossible to know whether this is an option.

Conversely, the sale of the IP for $350k next year (maybe $60k after costs?) might not help your cashflow much if it was used to pay down the PPOR loan. But if your goal is to reduce interest costs and rising rates are a concern, this option might be suitable.

So start with some goals. Not fuzzy things like “financial independence” or “$1 million dollars in equity”, real, solid and achievable goals.

A goal might be “to have no mortgage on our PPOR within 15 years”
Or “to have $55,000 in savings within 2 years to replace my income for 12 months maternity leave”
Perhaps “to have a positive income stream of $XX per XX from investments within X years”
Or even “to hold $1 million in leveraged assets within X years on speculation that future capital gains will exceed holding costs”*

All these goals are achievable. Each requires a very different plan of action.

You should do the same with your investments. A goal might be to make $100k in capital gains by buying a property on speculation that a freeway extension will increase its value by $100k. Or it might be to buy a property to hold for several decades with the intention of eventually receiving an income stream from rent. These are very different, and subsequently, your financial arrangements and plans would be very different.

Instead of asking “should I 1. Keep it or 2. Sell it” which nobody can answer because everybody has different ideas and nobody (perhaps not even yourself) knows your goal, start with the goal and the answer to your question becomes clear.

Cheers, F. [cowboy2]

* Note: None of this should be taken as advice or instruction (especially the big leverage bet). It's just for illustration!

From TIC website

– – – – – – – – – –

I believe we are in the middle of a crisis that is being ignored by the Reserve Bank. On the one hand we have, for instance, the National Australia Bank reporting a 17.7% jump in cash earnings to $4.4billion. This is all money coming out of your pocket or if you are running a business, it is coming out of your profit and going straight to the banks’ net profit.^[1]

I think that it is time that the national disgrace called the Reserve Bank is called to account for the 6 rate increases over 17 months. It is absolutely crazy.

This blatant and dramatic shift in wealth from you to the banks’ net profit is further bought out by a survey by accounting firm KPMG who have found that the profit of our top five banks alone climbed to a record of $17.9billion^[2] in 2007 which gives an incredible 21.2% return on equity^[3]. Nor is this rapacious stealing of your wealth going to deteriorate. Rival accounting firm Price Waterhouse Coopers has predicted that cash earnings for the banks would grow 11.2% in the next 12 months. A big thank you to the Reserve Bank from our greedy banks! The Reserve Bank, in forcing the highest rates in the world^[4] on us, is not fulfilling its charters 1, 2 and 3. Why aren’t the media commenting on this? Thank God we are in safe ‘bricks and mortar’. It is going to be a tumultuous 12 months for Mr & Mrs Average thanks to a very, very average Reserve Bank.

I’m Kevin Young and I’m cranky.
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6071

Now here is the trap; it is a movement of money from the poor to the wealthy so it pays to be aware of that. There is a trap; the second-hand market is full of properties that you shouldn’t be buying; they could be full of hidden maintenance issues.[^5]
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6070

there will be big debates over whether the Governments are being irresponsible in giving tax cuts to the poor workers. There will be comments that this will be inflationary and that the poor workers can’t be trusted with more disposable income. There will be arguments that the huge taxes on petrol should continue. The world’s highest mortgage impost should continue^[6].

The lessons here in the US are completely the reverse. In fact, the huge annual deficits of the Clinton government have been coming down. The latest figures in this morning’s paper show that the federal deficit has declined in the last 12 months by 35% to $161billion. It sounds like a lot of money but it is down to 1.2% of the economy or about half the average of the last 50 years. This improvement is especially remarkable given the huge costs for the Iraq and Afghanistan war totalling around $200billion.

There is a lesson here because clearly the income from taxes has increased despite the lower tax rates. The lesson is lower taxes increasing incentives, increased growth and provides more not less tax revenue^[7].

Wouldn’t it be nice if our politicians started about the worker and not about ivory tower economics? Let’s hope they start thinking about lowering the huge tax we have on petrol and the huge mortgages^[8]…
http://www.tic.com.au/kevin's+blog.aspx?EntryID=5852

Has the Australian Reserve Bank’s high rate policy worked? No. In 1998, we sat on 4.75% and inflation was in a band averaging about 1.5%; in 2007 we are sitting up on a high 6.5% and in the Reserve Bank’s own words “we are near 3% and rising”. High interest rates are clearly a failed policy^[9]. It is failed policy we can compare to other more sensible, in my opinion, Central Banks who operate under a low interest rate policy.

Again, let’s compare this to the United States which, while we were busy raising rates, they were busy lowering rates and saw a steady decline in inflation^[10]. As it dropped rates down from 2001, there was a steady climb down in inflation bottoming in 2004 and in 2004 the US started to raise rates from the bottom of 1% up to its current 5.25%. Guess what? There has been a climb in US consumer prices in contrast to this rise in interest rates. This inflation has gone from just slightly over 1% to sitting just above 2.25% after visiting 3%. High interest rates lead to high inflation^[11].
http://www.tic.com.au/kevin's+blog.aspx?EntryID=10

“It is worthwhile considering that, before the establishment of the Reserve Bank, interest rates remained fairly steady, unlike the current volatility. Fifty years ago, for example, with a similar rate of inflation the official interest rate was steady for four years at 3.8%^[12].

“The financial markets in the United States expect the Reserve Bank to cut interest rates in response to a lagging economy resulting from a succession of interest rates rises, rising fuel costs over the past year as well as ‘lagging house sales’ fearing ‘busting the housing bubble’.

“In contrast, our Reserve Bank of Australia is determined to increase interest rates even further in Australia when there a clear signs that the economy is beginning to slow and latest housing starts down a massive 3% and a housing bubble that has burst^[13]! Our Reserve Bank of Australia is ignoring this ‘burst’^[14], resulting in inflation and rent increases.

“At a time when first time owners are paying the world’s highest rates (except New Zealand)^[15], property owners in the United States are now enjoying the luxury^[16] of falling interest rates.
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

“The RBA has increased interest rates based on the misguided assumption that homeowners were using the rising equity in their homes for consumer spending and that this was having an adverse impact on inflation^[17].

“The RBA’s own extensive national survey of how homeowners used their home equity during 2004 as outlined in its October 2005 Bulletin has found this not to be the case. It found that only 7.3% of equity withdrawals was going into increasing debt,^[18]”
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

“Property owners can also consider renting their owner occupier homes. This is because a $100 mortgage is paid after earning $150, paying $50 tax. Of the $100 probably only say $20 comes off your debt. Earn $150 to pay off $20! Doesn’t sound like good business practice.
“The solution is to simply move out, convert the loan to interest only and rent a superior home. Your cash flow improves dramatically. You receive rent in and your now lower mortgage of $80 is a tax deduction. Your $150 above reduces to $80 and then ATO hand you back $24 (at 30% tax rate). You earn and payout only $56. The greater your percent of debt to property’s value the greater your net benefit.^[19]
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

This raising of rates is demonstrably a failed gamble to contain inflation. If raising rates worked, for instance in 2001, this Reserve Bank would have seen inflation coming down, down and down as it raised rates up, up and up^[20]. In fact, it has no record of success. It is a failed policy pursued, in my opinion, by a discredited central bank in Australia and New Zealand alone.

Why aren’t we matching Canada which has a 4.5% rate? It is a resource based economy as well sitting right next to America. It doesn’t have the huge balance of payments problems that we have because it is a low rate, low cost economy as a result of the low rate.
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6

– – – – – – – – – –

A few comments on Kev's work (refers to added superscripts):
1. No it doesn't.
2. How much from non-mortgage relate fees and charges?
3. Huh? "Return on equity"?
4. No they aren't.
5. Of course, the only properties that can be safely bought are the ones being spruiked by TIC on commission.
6. That 'mortgage impost' is interest, not a tax.
7. Okay, so 'voodoo economics' works. Nope.
8. See 6. above. It's not a tax.
9. Higher interest rates cause higher inflation because interest rates and inflation aren't negatively correlated? That's silly.
10. As per 9. clearly interest rates are the main driver of inflation. Raise rates and inflation rises. Lower them and inflation falls. </sarcasm>
11. In case 10. wasn't completely clear… I cannot believe I'm reading this. "High interest rates lead to high inflation".
12. Real money supply was growing at or below the rate of productivity growth at the time. How about comparing the decades before the RBA took to inflation targetting and the decades after? Average inflation and interest rates were half or less. Oh, but that would be because the RBA dropped interest rates and inflation followed, right…
13. Burst? No it didn't. Watch and learn, amateur.
14. See 13.
15. No they're not. Interest rates are higher elsewhere in the world. Try Zimbabwe.
16. US property owners are not 'enjoying' anything right now. And weren't when the article was written.
17. Did the RBA say this is why they were raising rates? No.
18. "only 7.3% of equity withdrawals was going into increasing debt"???… enough said!
19. What? Let's run the sums. At the moment, for every $100 mortgage payment, $80 goes in interest and $20 to principal. So rent something for $60 instead, and rent the house to a tennant for $60. Now instead of getting $20 in equity from $150 earned ($100 net) and $100 spent, you'll get $20 of equity for $150 earned ($107 net) and $120 spent? Hmm, that doesn't match the maths provided. Can somebody decipher how the investor is ahead in the example?
20. This is simply ludicrous and simple-minded. Where'd he get the idea it works like this?

Oh, and throw in a guffaw over how under the little Bush "the huge annual deficits of the Clinton government have been coming down". Holy crack-a-doodle. Comic genius. Surely? Is this whole TIC thing a bit of a prankie that went horribly wrong and produced massive income streams because 60,000 Australian families (allegedly) couldn't see it was a massive piss-take???

Cheers, F. [cowboy2]

Thanks for the link. They're a bit blinded by popular rhetoric:

I don't know! My challenge to you DraconisV – call your nearest State Revenue Office and ask them. Take a few notes and get back to us here. It would be interesting to hear their response. I'd imagine (Note: IANAL) that if you bought it with no intention of living in it you'd be committing fraud, but it would be next to impossible for them to prove that you hadn't simply changed your intention (providing you paid the money back as soon as you changed your intention, not when they busted you for cheating).

Give them a call and ask.

F. [cowboy2]

That's not the point. If you were under the eye of ASIC, the kind of baseless promises you're making would be against the law.

Cheers, F. [cowboy2]