• Category Archives Spreadsheets
  • 2 Houses Are Better Than 1

    One of the first things I noticed when looking to get a loan was just how much interest you ended up paying over the life of the whole loan. To purchase a $400,000 property on a 30 year loan would end up costing you around $1,000,000 (assuming interest rate of 7.00%). So you are effectively paying two and a half times the value of the property.

    This didn’t seem too appealing so I looked at the best way to reduce the amount paid in interest. The most efficient way I could determine was to reduce the loan period, which means increasing your repayments. To purchase a $400,000 property on a 15 year loan, it would only cost you approximately $650,000. Saving you $350,000! This is almost enough to buy the same property again. I then wanted to figure out other ways to be able to escape this need to pay such a high amount in interest repayments.

    Unfortunately, to pay off a property quicker, you need to increase the repayment amount. In the example above, the 30 year repayment was $2,660 and the 15 year repayment was $3,600. So where would you come up with the extra $1,000? Then I remembered sitting with my group of friends and talking about investing in property.

    I have talked in another post about the benefits of purchasing a property with someone else, where simply the increase in repayments by using the combined incomes, significantly reduces the loan term and effectively reduces the interest paid. But now I am contemplating something different. Let’s say two people purchase a house together and use their combined incomes to pay off the property ASAP. Then the same two people buy a second house, again paying it down ASAP. So at the end of the day, each person has a house each.

    There would be a lot of complications between what is an equivalent house for each to own and there may be some issues between the two if one believed the other got the better end of the deal, but avoiding all the emotional aspects, and looking at the pure financial side of things:

    Using the following inputs:

    – Each person has a monthly saving of $3,000

    – Initial cost of a house is $300,000

    – Capital Appreciation of 2% Per Annum

    – Interest Rate of 7.00% Per Annum

    Situation 1 – Each Individual buys their own property

    Using this formula in excel – NPER( ) – the repayment period will be 151 months for each person, so a total individual cost of $453,000.

    TOTAL COST – $906,000

    TOTAL PERIOD – 14 Years 7 Months

    Situation 2 – They buy 2 properties together, one after each other

    So the total repayment is now $6,000 per month.

    1st House will take 60 months to pay off. A total cost of $360,000

    To obtain an equivalent house for the 2nd property, assuming the capital appreciation of 2% per annum, the house price of the second house would now be $331,200.00 (after 5 years)

    2nd House will take 67 months to pay off. A total cost of $402,000

    TOTAL COST – $762,000

    TOTAL PERIOD – 10 Years 7 Months

    So as you can see in Situation 2, the total cost is $144,000 cheaper than Situation 1. And also the total period of being in a loan is 4 years less, with both people at the end of the day essentially obtaining the same thing.

    Keep in mind, this is a very simplified example, and there is a lot I have not taken into account. Firstly, if you do buy a property together, you will only be able to use one FHBG and stamp duty exemption or whatever else your government offers you. Also there is the option of, for instance, say you both purchased a 2 bedroom property, then in Situation 1, each person would have a spare room which they could perhaps rent out for extra repayments, whereas this does not occur in Situation 2, until the second house is bought. It is also important to note the preferred option is typically dependent on the capital appreciation of the property, using a low rate (as I used 2.00%) will generally have Situation 2 preferred, but a higher rate (over 5.00%) will generally have Situation 1 as the better alternative financially.

    I have developed a spreadsheet which takes all the above into account and allows for a fairly accurate comparison between the two different methods.

    If you would like a free copy of this spreadsheet, please click this link Spreadsheets


  • Investing in Mining Properties

     

     

    Recently someone asked me about investing in mining properties. Mining properties are very interesting and provide a very unique investing option for any avid investor. The main reason for mining properties being so unique is that the rental yields are extremely high. Look below for a typical example that you can find in a mining town.

    Mining Property in Moranbah, QLD

    Moranbah is a town in QLD, where a friend of mine actually went to go work, when he showed me the properties in the town, that is when I initially found it interesting to see if mining towns actually provided a good investment for myself. Firstly here are some details on the town of Moranbah:

    • Population of just over 7,000 people
    • 200km West of Mackay
    • 1000km North West of Brisbane

    Basically, it is a small country town, not near anything of any note. And yet there is a 3 bedroom fibro home that is selling for $700,000? This is higher than most suburbs in Sydney, and a similar town that did not have a mine would see the property only sell for around $200,000 if you are lucky.

    But look at the rent the mining company is paying for this property, $2,000 per week! Just for comparison sakes, you can get a 5 bedroom house in Vaucluse overlooking Sydney Harbour – LINK

    So here you get a gross rental yield of almost 15%, higher than probably anywhere in Australia, and comparable with the returns you can see in the US at the moment. So what is the deal? Well the big draw back with a mining property is the capital gains, or should I say, the lack thereof. There is no capital gains to be associated with this type of property, as soon as the mine has finished up, the town will go back to what it was before, with the property value reducing back down to approximately $200,000. Assuming the mine operates for another 10 more years, well that would be an 11% drop in capital appreciation every year for 10 years.

    This is where the big issue is, as soon as the mine is done, your house is done too. Whereas purchasing a traditional property, at least you would hope to see steady capital gains in your property in the long term. This is the advantage with a typical property, the oppurtunity of capital gains, whereas a mining property has next to zero potential for capital gains.

    It should also be noted that I do not believe if you purchase a property in the mines, you can rent it out for a year or two, and then sell it for what you paid for it initially. It is typically public knowledge how long the mine will be around for, so as you get closer to this mine closure date, the value of the property will slowly decrease until the mine eventually closes. Of course you may get lucky and be able to sell the property to someone who has not completed their due dilligence and does not realise how long the mine will be there for, and be able to convince them based on the high rental yields.

    So when looking at these properties, you need to think to yourself, are you satisifed with the high cash flow despite the negative capital gains on the property? I guess I was curious to see if it was worth it, so naturally I developed a spreadsheet to test out and compare the two scenarios.

    By inputing a couple different variables, I was able to compare investing in a mining property based on investing in a mining property. The results from my calculations were as I expected, although the mining property was better in the short term (first couple of years), the traditional property became a much more profitable option. So for me anyway, it seems that investing in traditional property is more lucrative for making money, simply due to the potential for capital gains.

    If you would like a free copy of this spreadsheet, please click this link Spreadsheets.


  • Buying Properties with Others

    Living in Sydney, and being a first home buyer, I saw that it would be near impossible for me to afford a house on my own. I believe this is a situation that many young first home buyers would find themselves in. Now I am not saying that buying a property is the best investment to make, it may very well not be given your particular situation. I am just stating that buying your first property at a young age can be very difficult, and if you have a desirable area to live in, well you can almost forget about being able to afford something for years.

     

     

     

     

    One option to help out with purchasing a property at a young age, is to not do it alone. You can buy with friends, family, a partner, husband or wife. Adding a second income to your mortgage repayments is definitely one way to ease the financial strain that can be felt when paying off a home loan. Unfortunately there can be a lot of other stresses that come with not doing things alone.

    Let me take you back a few years when I purchased my first property, I was only 22 when I bought my first home (I am 25 now), and the cheapest house that I could afford in a location that I was prepared to live in was around the $300,000 mark. Having a decent job at the time, the bank was prepared to lend me up to the $270,000 I needed with my 10% deposit. But this meant repayments around $1,800 a month for the next 30 years of my life. Not to mention all the other associated costs with the property, and living costs, I would definitely be under a financial strain, my life would be restricted. In my opinion I think it is important that no investment should take away from your quality of life. There is no point making money in your life, if you have no life to live.

    What seemed to be a logical solution at the time was to purchase a property with my brother, he was 29 at the time, he was still renting but was keen to finally have something more permanent. So now not only with the extra savings he brought it, he also had the extra income to pay down the mortgage. Going to the bank, they allowed us to borrow up to $550,000, but this was not what we needed. We were still only hoping to purchase a property around the $300,000 mark. We did this for a couple of reasons:

    1. We did not want to be under a financial pressure for the next 30 years of our life, we wanted to be able to still live a life
    2. Our aim was to pay off the property in under 10 years, so by purchasing a long way below our capacity, we should be able to achieve this
    3. If one of us lost their income, then the other would be able to cover the mortgage during the other person’s down time
    4. It gave us some leverage when looking at a property, we could increase our desired mark if we found a particular property that we were interested in

    And that is exactly what happened in the end, we found a property that suited both of our needs for $350,000. Slightly higher than our desired range, but it matched everything we wanted so we ended up going for it.

    Now at the beginning, we had to be open to each other about what we both wanted. We both had to be on the same page, otherwise it would never work out. So this was basically how we started, setting up a list of characteristics that the property had to have to suit both of us –

    • It had to be near a train station, preferably one that express trains go to (working in the city typically, I needed to be able to travel there easily)
    • We had to live not far from my brother’s work, he worked in north west Sydney so we could not stray too far from that area
    • Had to live on a quiet road (when I rented I was on a main road and the noise was unbearable for me)
    • Walking distance to shops (I did not have a car and needed to walk to shops)
    • Minimum 2 bedrooms, preferably 2 bathrooms

    Above was the basic criteria we had for a property, there were a few other things, but they were mainly just preferred options and not really essential. Once we had that list set up, and the price range. We were able to set on a location. We were searching around Western Sydney as it was the only area we could afford that matched the above criteria, in the end we purchase a property in Seven Hills for $350,000. A 2 bedroom, 2 bathroom townhouse built in 2004. If you are interested in more information about the property feel free to email us and I can let you know more – streamlineinvesting@gmail.com

    I thought that buying the property would be the easiest part, but turns out that was only half the issue. We had talked before purchasing the property about how we would make sure everything worked out evenly between us, but nothing was set in stone. Being brothers, although not that close, there was still a strong trust between us, and we both knew that we never try and scam each other, so we were always going to be safe in that respect. But there was still the challenge about how to make sure everything is kept even. In the end, I was able to develop a spreadsheet which tracked all the repayments, and other house expenses. It would be simple to just both pay half the mortgage and half the bills. But because we were hoping to pay down the mortgage as quickly as possible, it was better for us to simply pay off as much as we could. This is where the spreadsheet came into it.

    The spreadsheet itself is not too complicated, just tracks all the repayments made by each individual, and other household bills that have been paid. By tracking the repayments it is simple to see who owes who at the end of the mortgage. Before the mortgage I was also able to have a plan on how long it should take to pay off the mortgage, and where we should be at any given point in time. So by tracking the repayments, I have also been able to compare where we are in comparison to where the target is.

    I will touch on this topic a bit more in later posts as there is a lot of information to cover, particular in intial agreements that should be developed prior to entering into a sort of deal like this, which involve exit tactics if either member wishes to pull out. Also with the added experience of purchasing an investment property in the US with my business partner, this will provide more valuable information for people looking to do the same.


  • Rent vs Buy

    It is always interesting to see if it is better for people to rent or to buy. It is a big decision, a huge lifestyle choice either way. Financially speaking there is so much to take into consideration, such as seeing what the RBA is going to do with

    I have always found it interesting, I think that people rush into the decision to purchase a house way to quickly, I mean, it is most likely the biggest purchase we will ever make, and yet we sometimes dive into it giving less thought to what mobile phone contract we will pick. When I purchased my first property (it was a PPOR) I made sure I researched as much as I could to see if it was the right thing for me to do at the time. It is interesting, at the time I thought I was making the right decision, I guess it has been ingrained into the Australian culture that owning your own house is the ultimate dream, and the sooner you can do this, the sooner you will be content. Looking back, I realise I may have made a mistake, not a diabolical one, but just believe I may have been able to make a better decision if I chose to rent compared with buying.

    There are plenty of advantages compared with renting, mainly, typically because the rent paid will be less than the mortgage repayments, it will open you up to a lot more cash flow than if you purchase a property. For example, say you wanted to live in a $300,000 house, you would probably pay around $300 per week in rent. Whereas to purchase the same property, you would be looking at paying around $500 a week in interest repayments, a significant amount less in cash flow compared with renting. These figures do not include the additional maintenance, strata, utilities, rates etc that come along with purchasing a property. The extra funds with renting can allow you invest elsewhere, or to simply have a higher quality of life.

    One more big advantage to buying compared to renting, is if you find out that you make the wrong decision with where you live, it can be so much easier to move when renting compared to if you bought the place. Sure the actual moving is a hassle, but apart from removalist and cleaning costs, it is nothing compared with closing costs of selling a property, not to mention the stamp duty required with purchasing a new property. Further on from this, renting will also give you so much more flexibility with where you can live, mainly because it is cheaper than buying, it allows you to live where you want, rather than where you can afford. And if your life status changes, then you can move to suit your new lifestyle. If you start having kids, you can move near a school, if you retire, you can move somewhere quieter. Of course you can still do this when you buy, but the buying and selling costs make it way too impractical.

    An example of the above is my business partner, Lenny, he works near the city, cannot afford to buy a house anywhere within 40 minutes that is also in a good area, so renting turned out to be the best option. It suited his lifestyle, he can be near where the nightlife is, near his friends. And everything works out great, in a couple years if things changed, such as his office changed location, it is not much of an issue to move to somewhere closer again as long as you continue to rent. If he gets married and starts to have a family, again it is not difficult to move into a more family friendly house.

     

    It is also important to mention that flexibility is not for everyone, there are some of us that want to know where they will be year after year, they want the guaranteed security. When you rent, even with long term leasing, there is always the possibility that your landlord situation changes and the property no longer gets rented out. Whereas when you have a mortgage, you own the place, so there is the security that you will stay put in the same property as long as you want. Finding a new place to rent can be very stressful and frustrating experience, this is the main reason I chose to purchase a property as oppose to renting. 

    So above I have outlined the sentimental reasons and touched on the financial advantages and disadvantages associated with buying verse renting. To look at this at a purely financial standpoint, I developed a spreadsheet which has fairly simple inputs to compare purchasing compared with renting.

    If you would like a free copy of this spreadsheet, please click this link Spreadsheets.


  • Making Extra Loan Repayments

    It may seem obvious to some, but I still do not think people realise the importance of making extra repayments when they do have a loan. I guess they do not see the real benefits of doing this, I guess they are just satisfied with making the minimum repayments.

    Take my brother for example, we purchase a house together a couple years ago, and while we are still paying off the loan, he does not see a problem with us just making the minimum repayments. It is frustrating for me because I am able to see the true benefit of making the extra repayments. Not only can you save tens of thousands of dollars, but by owning the home sooner, a huge weight can be lifted off your shoulder by not being indebted to the bank any longer. Personally I do not like the feeling of owing money to anyone, let alone the bank, so the sooner that debt is cleared the better.

    The most important thing to take into account is realising that you do not need to make significantly higher repayments to save significant amounts of money. I will use the property I purchased with my brother as an example.

    Principal of $280,000.00

    Loan Interest rate of 6.50% (it is variable but we will assume this for now)

    Loan Term of 30 years

    Minimum repayments would be $1,770 per month. So an overall cost of $637,000 for the life of the loan

    Now let’s assume we can put an extra $10 per week towards the mortgage, only $10, does not sound like much, just maybe go out for dinner one less night a week, have one less drink while you are at the pub, not much at all.

    So now with repayments of $1,810 per month, the overall cost would be $609,750. Loan period of 28 years

    So with just $10 extra per week, we have been able to save over $27,000 and 2 years off the life of the loan.

    It is numbers like this that really want me to make sure I put as much as I can towards the loan.

    If you would like a free copy of this spreadsheet, please click this link Spreadsheets.