I never thought that I’m going to buy a house for investment. I didn’t even “care” about any investment at all. So many people told me that they have read one of the best selling book, “Rich Dad Poor Dad“, and I should read it too. I couldn’t care less. I’m not aiming for munnies and riches, just a simple but happy life. I’m not a risk taker kind of person too, so hearing the word “investment” scared me a bit heh heh.
The “best” investment that I’ve ever had was to store my savings on the ING Savings Maximiser (which gives me around $100-$200 of interests per month AND of course, taxed around 30% by the government at the end).
If you were like me, I’d recommend you to read on why I’ve decided to go for a property investment, why it will benefit you (in a nutshell), and this post should provide you a basic background to understand what property investment is all about.
I’m 30 years old now. I’ve only got a full time job when I was 27. It was a harsh world out there. After I graduated, I was left with casuals and semi full-time jobs that would give you bonuses only when you finished a project. It gave me a steady income for about $500-$1200 only a month, for 2 consecutive years.
Now, three years of savings (full time job salary) wouldn’t get me anywhere, especially when it comes to buying a house here in Melbourne. Property has gone mad nowadays and a good house with a good location will cost you around $350,000. Of course, you have to get a mortgage (a home loan) from a bank where you have to pay interests (from the loan) and the principal (the price of the house itself) monthly for say around 20-30 years.
When buying a property, you want to avoid paying the Mortgage Insurance (if you borrow more than 80% of the house price, you have to pay a once-off Mortgage Insurance for some amount of dollars), so you are aiming to pay 20% deposit of the house to avoid paying this.
Now, 20% of say $350,000 = $70,000! Where would I get that money from a 3-year savings?? Luckily, I’m not married yet, so I thought, alright, I can save more until I get married. Wrong! Property values always increase and it will definitely be more than my savings!
A friend of mine, who’s working as a property investment consultant, invited me to a seminar, which explained what property investment in Australia is all about and I was stunned. So, this is the secret to property investment in Australia (and how a person can have 10 houses). I’ll try to summarise the concept of property investment in Australia in point forms to make it easier to understand (hopefully):
- Banks will happily give you a loan up to 95%! (and some will give you 100%) of the property price (for investment)
- You are not obliged to pay the principal (your house) per month, just the loan interest itself. In fact, it’s good if you don’t!
- You are eligible for a massive tax return (I didn’t know about this before)
- When your property value has increased (and it will), you will get an “equity”. This equity can then be used as a downpayment for your second house, or can be “cashed in” if you wish. So if you buy a house for $350,000 and if a year later its value has increased to $375,000, you’ll basically have $25,000 “virtual money” in your pocket (I’m just using an example here, so don’t jump up and down if you get less than $25,000 of an increase in a year).
- Every expenses related to your propety can be claimed on your tax return.
- Your loan interest + expenses minus the income that you’ll get from the property (of course you are going to rent it out) will give you a negative balance (called negative gearing). This negative gearing is not bad, but in fact can be used to further cut your taxes. If your salary per annum is $50,000 say and you get a negative gearing of $4,000, your taxable income is $46,000 instead of $50,000 (less money being thrown away to the Howard *ahem* Rudd’s government).
According to some advive that I’ve got, you’ll roughly spend around $600-800 a month for the loan interest (for a $300k house with 95% loan from the bank- AFTER the tax return). Of course, this is just a rough estimate. However, as you can see here, you basically pay a small amount to keep the house and honestly, that amount is definitely much smaller than the property increase that you’ll get out of the house.
Once you have enough equity, you can then start buying the second house if you want, for another investment. After having several houses for a number of years, you’ll have enough equity to repay one of the houses that you own, you will also have a lot of assets and if you buy the property in the right area, you’ll rack up equity pretty quick! My aim at the moment is to get enough equity so that in several years time, I can get my own house. This time, I’ll have enough “cash” to pay up the downpayment deposit!
Still confused? Don’t hesitate to put comments here, ask questions, and I’ll be happy to introduce you to my friend who was the property consultant that I talked about ealier in the post. On the 1st of December 2007 (a few weeks ago), I officially bought my first property investment. Phew, it took me a while to make the decision (lots of thoughts and what ifs). If I have known about this earlier, I’d already be rich by now lol.
I’m pretty much waiting for the land to settle in February next year and busy trying to find out a good Mortgage loan plan. I’ll write the next part of my story next time. Feel free to subscribe to the comments here or my feed for the next part of my story!
Taking the first step is always the hardest!