Discussion – Superannuation contribution

Recently I have been in discussions about superannuation contributions. And I think some information needs to be spread out to help you in building a stable retirement.

Tl; dr;

  • Employer must contribute super for their employees, minimum of 9.5% of the gross salary per annum.
  • The amount of contribution is taxed inside super account at 15%.
  • You can voluntarily contribute more money into super and take advantage of the low tax break, however it will only be at maximum of $25,000 per annum, including the amount contributed from employer.
  • You can contribute to previous financial years, starting from FY 2019.
  • There are ways to access super to buy assets before reaching 65, mainly via SMSF.

What is super?

superannuation jar
Source: sbs.com.au

Superannuation, or Super in short, is the money put aside by the employer for you to take care of you during your retirement.

The required amount that the employer is required to contribute equals to 9.5% of your ordinary timed earnings per annum, at the minimum.

You cannot access the money inside super account until you are 65 and above, or under certain circumstances.

Why should I contribute more into super?

Since I cannot access it until I am 65, why should I contribute my hard earned money now instead of taking it to buy some investments now?

First off, you are spending money to fund your future retirement, ensuring that you have a better future.

Secondly, most super accounts have investment settings built in, and it is highly encouraged that a young individual as I am, should put all super money into high growth investments. Since I cannot pull the money out in another 30-40 years, it is reasonable that I will see some substantial return thank to compounding effect.

Thirdly, you save tax money when putting more into super.

super contribution comparison

Suppose that the tax is flat out 32.5% for simple calculation. In the case of progressive tax rate, the difference may be lower. But generally, you still save some tax money and increase your net worth better. The tax charged inside super is a flat 15%, and it is substantially lower than our tax bracket. Of course if your tax rate is smaller, this will not make sense.

How do I use my super money before retirement?

The most common way to “access” your super money before retirement is to transfer all of them into a Self-managed Super Fund (SMSF). You will be in charge of this super fund, and therefore has the right to control the money. However there are quite a lot of restrictions that come with the structure. It is best to consult with a financial advisor or an accountant to know more.

Another uncommon way is that some Superannuation company, e.g. AustralianSuper, has an investment product called Member Direct. You can subscribe to this product, and basically it allows you to buy certain shares of your choice within the scope of super. There are also some limitation of doing it this way, and you can only purchase shares.

What I am doing?

It may be best if I try to top up the maximum amount of contribution each year, and later on I may pull them out into an SMSF to purchase a property.

Let’s say I top up maximum of $25,000 per year, after 10 years I theoretically have $250,000 inside super. During that time, if the share market goes the way it has been going in the last 100 years, my investments will compound about 7% per year, leading to the final figure of around $410,829. With this figure, I should be able to purchase a property to sit inside my own SMSF and net me some healthy return.

Summary

There are a lot of interesting things when it comes to Superannuation. I just listed the most common ways to deal with it here. It is crucial to consult professionals who can advise you on the matter. However, it is good to know that there are other solutions out there, all you need to do is ask.

By Tuan Nguyen

Discussion – Cost of home ownership

As someone who used to live in my own house, I gathered a bit of information about the associated cost of home ownership. For this post, I would like to share my experience of the matter.

Tl; dr;

Cost of home ownerships can come in many ways.

  • Closing cost (when purchasing the house)
  • Moving cost
  • Mortgage repayment
  • Insurance
  • Rates (council and water)
  • (Situational) Repair/renovate cost
  • (Situational) Body corporate fee

Assumptions

All figures will be based on the following data (close to what I used to pay, but rounded to make it easier to remember)

  • Purchase price: $400,000
  • Interest rate: 4% pa
  • Rental (in the same area): $350 per week
  • Council rates: $2000 pa
  • Water rates: $800 pa

Starting the journey

To live in one’s home, one needs to buy it first. Here are a quick look at what are the costs to purchase a home.

Total closing cost of buying a house

This, of course, does not include the numerous hours I researched, went to inspections/auctions. But as a rough figure, it is easy to see how much does it take to conventionally take ownership of a house in Melbourne, Victoria (The figure is back in 2016).

Nowadays, there are schemes that help easing the pain when purchasing the first home. For example, you can waive the stamp duty as part of the First Home Buyer scheme; or even be able to borrow up to 95% without triggering Lender’s mortgage insurance. However this is another topic for another time.

For Victoria, there is a way to calculate your expected stamp duty via the government calculator page.

Living in my own house

It is a great feeling of owning a house to live in. Once I moved in, the first cost that I needed to spill out of my pocket is the moving cost. It can vary between $100 to, say a few thousands if you are moving interstate. Luckily, I have a few friends who helped me moving from Ballarat to Melbourne with minimal cost associated. Let’s say it was $600 for hiring movers to do that.

Then, the mortgage repayment kicks in. At $320,000 total mortgage, the P&I repayment each month came down to $1,528. Which means I needed to fork out $18,336 each year from after tax income to satisfy the mortgage repayment. Once in a while you can call the bank to ask for a reduction in rates, which can happen when RBA reduces interest rate, or the bank is running a promotion.

After signing the contract, I was advised to purchase home and content insurance, which came down to about $140 per month. This is because once I sign the contract, all damages (if occur during settlement time) are my responsibility. Since my loan was with ANZ, I had a choice to bundle car insurance with home and content insurance to have a better premium. You can take a look at this to reduce the overall insurance costs.

After a while, local council and water company will start sending you bills regarding the rates. In my case it was $500 per quarter for council rates and $200 per quarter for water rates. These fees you need to pay as part of home owner costs. There is no negotiation on this part.

Situational costs

My house was an old one, so repair and maintenance is kind of compulsory. I normally fork out about 10% of the expected rental in the area, which was $350 per week at the time. Each month the rental income would be $1,516.66, which means I needed to keep about $151 per month, ready for repair. This, should be a part of home ownership 101.

This came in handy when the hot water system failed ($5,000 replacement), and the cooking stove “exploded” ($1,000 replacement). Of course if you live in a brand new house, there is less chance to repair anything. You can ignore this part.

Another cost that can be considered is body corporate fee. This happens when you live in an apartment complex, or a block of units. There is a fixed fee that the body corporate charges each unit, and the owner of those units have to pay for it. The money is used to maintain common areas, such as drive ways, common gardens, etc.

Once thing to note is that you need to read the body corporate paper carefully. Sometimes the body corporate already purchases home insurance. In this case you just need to purchase content insurance. However check with your insurance provider before deciding.

Summary

Ongoing cost of home ownership

The above is a summary of running/maintaining a house for a year. This is not meant to scare you, but to prepare you for what is to come when you decide to settle down and claim home ownership. Figuring out all the numbers before committing is the key of financial stability.

That is all my experience regarding the financial side of owning my own house. These figures of course not accounting for any capital appreciation aspects of owning real estate. However we can go back to it at another time.

By Tuan Nguyen

Discussion – Why am I renting?

Owning a home is the ultimate dream of many people. Some even say it is the biggest investment of one’s life. After almost a year of renting, I now have a better view at renting versus living in my own house.

Tl; dr;

  • Rent when: you are not ready to settle down; you have debts that have high interest rate; you want to speed up your financial state
  • Live in your own home when: you tired of moving around; you can financially support the mortgage; you are aware of costs of owning a house.

Why renting?

I used to live in my own house. It is the Vietnamese way to live in your own house and not paying other people’s mortgage.

However, after a number of years, I came across a concept called rentvesting, which I considered intriguing to understand more. Rentvesting discusses that by renting, you end up saving more money than the cost of owning a home. And by redirecting the difference into purchasing investments, you can get ahead financially comparing to people who are still paying off their home loan.

There are 2 points that needs to be done for this strategy to work:

  • Your rent is cheaper than your would be costs of owning.
  • You redirect all the difference into investments.
home vs rent in the same area

Above is the comparison for my own situation when I tried to figure out whether I should move out of the house or not. The number checked out, netting me $306.89 per month, or $3682.72 per year back in my pocket if I chose to rent somewhere in the same area and rent out the house. Then I can redirect it to the offset account, or saving up for another investment deposit.

home vs rent in the city

But why stop there? I decided that if I rent in the city, it is more suitable for me. Assuming that for each hour commuting I can put into work to just make $10/h, and I waste 3 hours each day commuting at that time.

At my age, settling down is not really a thing to consider. I am happy to move around, exploring different suburbs and enjoy the lifestyle that the city gives.

Benefits when you rent

  • Landlords handle all repairs.
  • Cost of living is fixed, therefore cashflow projections are more reliable.
  • Enjoy lifestyle.
  • Easy to move around.

Why buy a home and settle?

Someone once said: “A man needs a home when his wife says they need a home.” With that in mind, the suitable time for someone to live in their own house is when they want to settle down and ready to live in a particular location for the next 5 years or so.

Why 5 years? Statistics say that Australians tend to move house every 5 years on average. Maybe the kids are grown up and parents have to move to another location closer to schools. Or one person finds a job that are far away and therefore decides to uproot the family.

However, you need to be aware of the costs of holding a house before jumping into the water, which I will discuss in my next blog post.

Summary

Renting versus living in own’s home has been a great discussion over generations. However when we put emotions aside, and focus on what is quantifiable. There are a lot of benefits that can come out of renting, provided that we follow a set of strict rules.

Disclaimer: the information on this website is for general information only.

By Tuan Nguyen

property investment

Investing – my thoughts on comparison rates

So I recently completed a refinance. It took me over 3 months from contacting the broker to the day the account is created. I just want to share some thoughts on the difference between interest rate and comparison rate. And when one is more beneficial than the other.

Tl; dr;

  • Interest rate is the pure rate charged on outstanding loan balance.
  • Comparison rate is interest rate plus certain fees, defined by the banks.
  • If your goal is to smash the loan as fast as possible, high comparison rate is not really an issue.
  • If your goal is to keep the loan for as long as possible, give some thoughts to the comparison rate.

Interest rate vs comparison rate

This is an example of loan package that outline the interest rate and comparison rate, along with the fees associated.

westpac home loan
Westpac investment loan

One thing to note is that when calculating comparison rate, banks like to use these figures: $150,000 loan size, 25 years loan, Principle & Interest payment.

As we can see, the interest rate is 3.84% per annum, which means for a loan of $150,000, you need to pay $779 per month in mortgage.

However, looking at the comparison rate, it is 4.24% per annum, essentially means you need to pay roughly $812 per month in mortgage.

The difference for a year is roughly $395, which equals to the annual fee that they note down in the image above. The fee could be higher if the banks also calculate the account opening fee into the comparison rate.

tables showing the difference between interest rate and comparison rate

When do we need the lowest comparison rate?

This is a bit weird for people like me who just got into property investment. But for investment properties, I want to drag the loan out as long as I can, so I can utilize the borrowed money to keep purchasing. I am willing to pay interest only for as long as I can, because it makes the cash flow better and more predictable.

With that in mind, obviously the higher rate is, the worse the cashflow will be for an investment property. So when I try to find a loan, it is in my interest to find something that has a low comparison rate, only if I intend to hold the loan for a long time.

So when do we want a high comparison rate?

Home loans often have the best interest rate, but sometimes go with a terrible comparison rate because of all the fees associated with it.

However, if my intention is to pay it out in the next, say 10 to 12 years (surprisingly, it is not that impossible to do). I can take the package with low interest rate, but a bit high comparison rate. The reason is that comparison rate is calculated based on a gradual payments for a long time. So by paying extra and/or change the payment period, we can reduce the real rate down to a ridiculous amount.

Example: given the same rates above, let’s say that we want to pay $300 per week into the repayment. With the assistance of moneysmart website, we can calculate the total repayments and how long does it take, as well as guessing the actual comparison rate.

calculations showing early repayments

As we can see, by paying extra into the home loan with the intention to finish it off, the actual rate is even less than the interest rate, since we finish the loan much earlier than expected of 25 years.

Summary

Loans are complicated, and there are a lot more that I cannot cover. It is best to go to a broker and discuss with them your goal. Trust in their expertise to find a perfect loan for you. And if things don’t work out the way you want, a refinance is always an option.

By Tuan Nguyen

stock investment

Investing – Types of orders in stock market

As a novice stock market investor, I often find it confusing about different types of order when buying ordinary stocks. Here are the information I collected for the different kinds of orders.

Tl; dr;

  • Stop order: triggers buy/sell stock when stock price reaches a predefined price. When triggered, stop order becomes market order.
  • Market order: matched the closest orders in the current market, the condition is different between buying and selling.
  • Limit order: Sell price >= trigger price, or buy price <= trigger price.

Stop order

Probably the most complicated one when it comes to buying stock in the normal way.

Supposed that you want to buy 10 stock X, currently trading at $9. You put in a stop order at $10. The market depth is as follow.

Stop order market depth

Now, the order will be fulfilled as follows:

  • 4 stocks for $10 each
  • 1 stock for $9 each
  • 3 stock for $11 each
  • 2 stock for $12 each

Why is this happening?

The stop order triggers at $10, so it starts buying all stocks that are selling at $10, in this case there are only 4 stock. After that, the order becomes a market order (more on that below). And with market order, it will buy stocks from lowest to highest price available in the market, until the buy order is fulfilled.

Market order

When you buy a stock with market order, you don’t care how much you’re paying for it, as long as someone is willing to sell, you are going to buy. The same happens when you sell a stock with market order.

Market order market depth

Let’s examine the same market depth, only difference is that the buying price now is the market price. The order of buying is as follows

  • 1 stock for $9
  • 4 stock for $10
  • 3 stock for $11
  • 2 stock for $12

As we can see, we end up with the same total as the example in Stop order, however the order of purchasing is different. We buy it from the lowest price first, and work our way up. In the sell order, the order is reversed, we sell with the highest buying price first, then work our way down.

Limit order

This is easy to remember, the limit order only allows the broker to buy a stock price when it reaches the trigger price, or lower. And to sell when it reaches the trigger price or higher.

Limit order market depth

With the above market depth, the buy order is as follows:

  • 1 stock for $9
  • 4 stock for $10
  • 3 stock for $11
  • Remaining 2 stock in the buy order

The stock broker will not buy any stock that is priced above $11.

Summary

The 3 different types of orders are the most popular order types in buying and selling ordinary stocks. There are a lot more that we can explore on other form of trading stocks. However they are more advanced and allow you to understand the instruments deeper to use them.

Risks come from not knowing what you’re doing.” – Warren Buffett

By Tuan Nguyen

stock investment

Investing – What are bonds?

Recently I have been taking a (free) course about stock investment. And in a few units we discussed about bond and its components. I think it is a good idea to note down what I learned and hopefully it makes me remember better.

6 James Bonds
Not these Bonds

Tl; dr;

  • Bonds, especially government’s, are considered zero risk.
  • Bond values are dependent on the reserve bank’s interest rate.
  • Don’t look at Current Yield, look at Yield to Maturity figure.

What is a bond?

A bond is essentially a loan of money. Considering company A, they want to finance a project for $500 million dollars. They can go to a bank and borrow that money at 5% interest rate for 30 years. The bank gives them the money and create a loan, but then split that loan into 500,000 bonds, each holds $1,000 in value (this is called par value). These pieces can be sold to investors for, say $1,005 per bond (the $5 extra is called underwriting fee, and that’s how the bank makes money as well).

Corporate Bond explained

Once all bonds are sold to investors, the bank is no longer in the picture. Investors and company A will deal with each other directly. Every year, company A will transfer $50 to investors for each piece they hold. Normally it will be splitted to 2 “coupons”, each coupon is $25 and 6 months apart.

After 30 years, company A will then transfer the full amount of the par value back to the bond holders, i.e. the investors.

Government bond behaves exactly the same. We can replace company A with the government, the bank with the Reserve Bank, and the model still works. The reason why government bond is considered zero risk is because the Reserve Bank can print money (or quantitative easing) if needed to pay back its investors.

How to trade them?

There are a list of bonds available here. Which describe the type, when is the maturity date, the interest rate, etc. However, there are only a few stock brokers that can trade them, for example Commsec, CMC Markets, etc. The list can be found in this PDF.

One thing to note is that bonds often have fixed interest rate. Let’s say one that has the coupon yield (technical word for interest rate, or rate of return) of 5%. Then if the RBA interest rate drops lower, its value will go up, since the government will issue new packages with lower rates now, and existing bonds with higher interest rate is considered more profitable. However it goes both ways, if the interest rate rises, existing bonds’ values will go down.

Another thing to remember is that bond value will approach its face value as it approaching maturity date. The reason is once we reach the maturity date, investors will receive the full amount equals to the par value.

Bond yield evaluation

There are 2 ways to look at the yielding value, with simple interest and with compound interest.

Simple interest

We can find the yield simply by dividing the market price into its payment per annum.

current yield of a bond
Bond current yield

As we can see, the yield is lower if we buy with a higher price than its par value, and vice versa.

Compound interest

The calculation above ignores an important aspect of this financial instrument. What happens when the bond matures?

For this calculation, we assume that all coupon payments will be reinvested in something that will return the same interest rate as the coupon yield. And at the maturity date, we also take into account the full returned amount.

Yield to Maturity explained
Compounding bond yield calculation

As we can see, the Yield to Maturity (technical term for Compounding yield) is much lower than the Coupon yield. Bond market will display both of the rates and it is our job as investors to understand them.

To calculate Yield to Maturity number, you can use this link.

So, when to invest in bonds?

Since bond values goes up if the RBA interest rate goes down, I would say if you expect the interest rate to drop in the near future, they can be a financial instrument worth looking into.

However, most investors look at bond like a low risk investment. This is a great way to preserve wealth and ensure that the capital is secured, and earn a bit of profit along the way.

Summary

Bonds are often ignored as its return rate seems to be low. However, if we can utilize its attributes to our advantage, one can actually profit from investing in them and at the same time, preserve his or her capitals.

By Tuan Nguyen

property investment

Investing – the trash talk with Landfill levy

On February, the State of Victoria rolled out a new program, Recycling Victoria. Among many information about what we will tackle the rubbish and recyclable materials, there is an item that could affect us as real estate investors.

Tl; dr;

  • Landfill levy is increasing from $65.90 to $125.90 per tonne in 2023.
  • Eventually it will be passed down to council rates, i.e. the rates will be higher.

What is landfill levy?

Landfill levy, or waste levy, is a tax applied to waste types by weight. The government designed it to incentivise waste generators to reduce general waste, and increase diversion through recycling. Governments also use landfill levies to fund environmental and sustainability programs to improve waste management.

In a simpler term, it is the tax that home owners pay to get rid of their trash, for the trucks to roll in every week and take the rubbish away and process it. As a result, this levy often mixes into the council rates that we pay every quarter.

How much is it increasing?

According to Victorian Landfill guidance, the rates are increasing year by year, and stop at 2023. In details, they are increasing from $65.90 to $125.90 per trash tonne.

landfill levy 2021 to 2023

The levy for FY 2019-2020 stays the same at around $65.90 per tonne.

This increment will put into Sustainability Fund, which funds sustainable projects and improve the waste management system.

The government hopes to reduce landfill amount by increasing the levy. People will be more inclined to use recyclable products. This implies that the increased amount will pass down to rates payers, i.e. home owners and investors. Expecting your rates to increase by a small amount in the next 3 years is not unreasonable.

Summary

It is good to know the government cares about the environment and has some initiative to promote sustainability environment. However with the increment of rates in mind, we need to be a bit more careful on how we as property investors calculate our numbers.

By Tuan Nguyen

property investment

Discussion – what exactly do you own in real estate?

Recently I ran across some interesting matters regarding what do we own in terms of owning the title of a piece of real estate. I think it is useful to note down and share with people.

Tl; dr;

By owning the title of the land, one has the right to the air above and the earth below.

If you find something valuable, e.g. gold nuggets, in your backyard; it belongs to the Crown.

Air rights

dollar signs on the sky

In Australia, if someone owns the title of the land, he or she has the rights to use the air space above the land.

In Latin, this is defined as follows “cujus est solum ejus est usque ad coelum et ad inferos”Property Rights, 2016. This means “to whom belongs the soil, his is also that which is above it to heaven and below it to hell”.

So we own the airspace, but how far up do we own? Surely it is not as far as the airplane altitude, which is somewhere around 35,000 feet, or about 10.6km. According to the Property Rights, it is as high as to “be necessary for the ordinary use and enjoyment of his land and the structures upon it”. It highly opens for debate of how high can an airspace be. One can argue that if a helicopter flies too close to the house and that stops him from enjoying the land, then it is an invasive of the air rights.

Subsurface rights

Well it is not called “Subsurface rights” in Australia, nor defined separately from the air rights. However, this is related to the land and the mining rights of the soil below the land.

Similar to Air Rights, there is no hard limit on how far the owner of the land can dig. However, you need to obtain a permit from The Crown to be able to dig down for minerals and natural resources.

Which brings us to the most interesting facts…

Valuable items found in your backyard

gold nuggets
Gold nuggets

So what happens if you found something precious in your backyard? Gold, precious gems, or even a natural oil vein.

According to the mineral rights, The Crown is the first in line to say about all coal, oil, silver, gas and gold found on public or private property. Therefore even if you found something valuable, it will be the Queen’s property, and should be returned to her.

Summary

Those are interesting facts about owning the land in Australia. Now we know better about what we actually own, and realize that we actually own more than we know.

By Tuan Nguyen

property investment

Investing – Some thoughts on the Real Estate market

Recently I have been listening to quite a few podcasts and videos about real estate investing. And today I listened to a few pieces of thoughts that I find interesting. Which I decide to note them down for future references.

Tl; dr;

  • Land is a commodity, house is a consumer good.
  • Income growth is a major force to sustain real estate appreciation.
  • Real estate is a strong force to push inflation.
  • Real estate does not produce capital goods unless redeveloping.

House is a consumer good.

“A commodity is a basic good that is most often used as inputs in the production of other goods or services.”Investopedia.

“Consumer goods are the end result of production and manufacturing, which is what consumer sees on the store shelf.”Investopedia.

With the above definitions, we can clearly see that land fits the definition of a commodity, which is a basic input good that is used to produce; or in this case, develop; real estate. At the same time, the house is the final result of the real estate production chain, available for the consumer to purchase.

From this, we can see that if we treat real estate as an investment, the land is what we look at in the form of growth, as it is the only thing that appreciates in value. While the house degrades and goes out of fashion as other consumer goods, or as we call it “depreciate”. I have known about this for a while, but the explanation above so far is the simplest way to describe the fact.

Income growth sustains real estate appreciation

Australian income growth by year

As explained by Ray Dalio, production growth increases income, and as a result, increase affordability and push real estate price. If the income growth has not been too much, but the housing price is still going up, we need to figure out what caused it. At a macro-economics level, there are 2 other things that push housing price up, debt and foreign imports.

With debt, people in Australia rarely buy a property in cash. They almost always borrow most of the purchase amount from a financial institutions. The more we leverage, the more buying power we can afford to purchase one, two or multiple properties. This in turn will push the price up, especially in an auction environment, since everyone has the leverage to pull and they do not hesitate to get the dream house they want. However, without a good income, the buyers soon realize that it is challenging to keep up with the mortgage payments.

Foreign imports are pretty straightforward. People from other countries see Australia as a developed country with a stable government. They start to pour money into the Australian real estate market as an investment, or just a form of wealth preservation. For these people, it is difficult for them to borrow from Australian banks. Therefore they mostly purchase with cash. And because of the vast number of purchasers available with a limited amount of land, they push the real estate price up immensely. The cause of real estate growth is external and we all know external causes are not stable comparing to internal 

Real estate is a strong force to push inflation

Imagine a property worth $100,000 that is rented out for $200 a week. The market is growing for 10% a year in that area. In the next year, the house worths $110,000. Now the landlord has 2 options, either to keep the rent as is, or increasing it to fit the new “value” of the property.

This normally is not a problem for existing landlords, however it can be a big issue for the new investors who just bought into the area. They need to have the rent up to keep up with the mortgage repayment. Therefore the median rental price will be increased, without the change in supply and demand. This is what is known as the cost push inflation, and is generally considered as a bad form of inflation.

Real estate does not produce capital goods.

Probably the most controversial topic, however I think it has a good point.

Unless you are developing/redevelop the land, whether by sub-division, building granny flats or straight out building a new construction, exchanging blocks of dirt back and forth and drive the value up does not help improving the country’s economy since it does not produce capital goods, i.e. goods that are used to produce consumer goods and generate profits.

So would it be better if people do not dump so much money into the housing market, and pour it into other industries that could have improved our economy. In turn, it increases our income, and then increasing the housing market steadily?

I guess people are not patient enough for that to happen. Investing in economy takes time and we will not see a rapid growth in the housing market if that is the path we take.

Some final thoughts.

Is real estate investing good for an individual? Yes definitely. It increases our income by renting out the property. And there are more millionaires who get rich from real estate than any other form of investment in the world.

Is a rapidly rising real estate market good for the economy in general? Probably not, since if it is rapidly rising without a strong base to support; in this case, income growth; we could be over leveraging ourselves into the properties that do not produce enough income for us to keep it.

Summary

There are good and bad aspects of investing in real estate. We normally see it as a good form of investment for ourselves and the family. However whether it is good for the country, that is left to debate about.

Some ideas are inspired by The Economics of Real Estate.

By Tuan Nguyen

property investment

Book review – 20 questions for property investors

Margaret Lomas, the author of 20 Must Ask Questions For Every Property Investor, is a financial adviser who has been operating in Australia for quite some time. And in her book, she discusses about a system to determine if a property is suitable to add into your portfolio.

Tl; dr;

After a rough filter of all regions that you can scan, an investor can apply 20 questions in a specific order to determine if the property is a great one to buy, or quickly eliminate it from the list.

Margaret Lomas believes that capital growth and cashflow can go together, and not mutually exclusive.

Why both capital growth and cashflow can go side by side?

With a good entry price, any property can have positive cashflow. And if you can pick a property before the growth happens, people will be left questioning how you have a great performing property. You do not need to pick the property just before the boom time, rather buying it when it shows all signals of growth, but the market has not moved to reflect the changes.

Since rental income will always be running after capital growth, most people will see the growth first and ignore the rental income when they are out there doing house hunting. But without a good rental income, it can be difficult to hold on to an investment property, especially when you are holding it negatively geared.

People who buy into an area with a steady growth in the past few years, can be left devastated because the growth time is coming to an end. This does NOT apply if the area still shows all growth signals and they are getting stronger. However, most property investors listen to property gurus, or their friends to determine if a particular area is a good place to buy. As a result, their approach is a buy and pray strategy, hoping that the property value will go up and they will enjoy the capital growth one day.

Some preparation before applying 20 questions.

The end goal for us is to choose a property with the best possible chance of growth, while sustain the highest possible cashflow that we can afford.

  • Determine the scanning area: first thing to do is to determine the top level area that we want to scan for a property. For me, it will be the whole Australia. For others, it can be just a city region, e.g. Melbourne regions; or a state, e.g. Victoria.
  • Workout how much you can afford: obtain a pre-approval from a financial institution. However, keep in mind that if the pre-approval says $500,000; it does not mean the bank will lend you that amount. But it will adjust to your financial situation when you actually apply.
  • Scan real estate websites like realestate.com.au or domain.com.au for possible properties that have their indicate price that suits your pre-approval. For example, I want to look for properties with price between $350,000 and $500,000; where the area’s average price is $500,000. Margaret’s argument is that these properties are in the lower end of the area, therefore it is easier to buy and to sell.
  • Dismiss properties in areas that have less than 15,000 population: these areas are too small to sustain a good population growth, and most likely they do not have a good infrastructure or diversified industries that can support a good population growth.
  • Determine the average yield of investment properties in the remaining areas: we want it to be around 4% to 5%. Anything lower or higher show signs of unsustainability.

What I learned after reading through 20 questions?

They are extremely detailed on what to look for in an area in the first 10 questions, which are only concern about the area’s economy, population growth, external and internal growth drivers. This can eliminate most properties in the above list already.

Then we apply the remaining 10 questions, which focus on the property itself. The good thing is that if we stick to the system, at the end, there may be just 1 or 2 properties left, or we are left with an empty list. This does not mean that the method is invalid, it just means that we need to be more patient and wait for a suitable property to come on market. Or just hire a buyer agent to search for us in those areas we choose.

Summary

Overall, this is the most detailed on a system of how to choose a property to invest in that I have ever read. However, property investment is an industry where many fake gurus reside. Whether or not the system is sound, I will need to implement for the upcoming purchase to have a sound proof.

If you want to read the book and discuss ideas, you can obtain a copy here.

By Tuan Nguyen