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What to do, what to do...?

Discussion in 'General Investing Discussion' started by Compleks, 17th Sep, 2012.

  1. Compleks

    Compleks Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    348
    Location:
    Melbourne
    Greetings all. Hope everyone is well.

    I don't really have a question today, but I would like to share my current situation and hopefully get some insight and even guidance.

    I'm 26. Still live at home. Have $60k saved. I earn about $60k a year now.

    I want to move out, sooner rather than later. But need to make a few decisions first.

    1) Rent or Buy?
    Nothing new here. Obviously renting will be cheaper and less commitment, but at the end of the day I have nothing to show for it.

    2) How much can I borrow?
    I can probably borrow $300k (maybe up to $350K).

    3) Where to buy?
    I would like to live south east of the city, around St Kilda / Windsor / South Yarra. Can be kind of flexible though.

    4) What to buy?
    Considering location and price, I would be lucky to get a decent studio apartment. Maybe a 1 bedroom apartment.

    5) How to buy?
    Not sure how or if possible. But I was thinking my best bet would be to borrow 100% of purchase price then put my $60k into an offset account. I like the idea of having an interest only loan, then putting whatever else I can save into the offset account. If this can even be done, I don't know?

    Sounds fairly straight forward, but my dilemma is this!
    I don't really want to live in a small apartment or studio. It's just too small and generic really. Well actually, I don't mind a small living space to be honest. But I want some open space to use for training/painting/creating/building and I would love some outdoor space for bbq/gardening. Yeah right, don't we all...

    What I would really like is a factory/warehouse that I can convert. Or something that is already converted or partially converted for residential use.

    Unfortunately my budget doesn't currently agree with my wants.
    Do I suck it up and buy a small apartment for about $250k? Spend the next few years saving like a mad man. Then do I try and pay it off? Sell it? Rent it out?
    Then hope that in 5 years I might be in a position to upgrade.

    Okay, so there are a lot of question marks in there. I know these are questions only I can really answer. I just find it helps to actually sit down and put some of this in writing. Also, I know there is a lot of knowledge and experience on this forum and it's always good to hear from other people. So any comments would be great.

    Sorry for the long post as well. Thanks for hearing me out.

    Cheers.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    How long can you see yourself living there?

    Is there a chance that you would ever move out of the area (eg other side of town, out of town, interstate, overseas)?

    Where do you see yourself in 5 years and 10 years time?

    I think a situation where your expectations are currently beyond your ability to pay for them indicate that renting for the next few years is likely to be your best option - but only if you can continue to save money.

    Do you expect that your income will grow substantially at all in the next 5-10 years?
     
  3. Compleks

    Compleks Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    348
    Location:
    Melbourne
    Ahhh Sim. Always so quick to reply!! Thanks mate.

    Nothing is set in stone I guess. But I'm fairly confident that I will live in Melbourne for the foreseeable future, or at least until retirement in 30 years :)
    I am open to other suburbs if I can find something I like, but will always stay reasonably close to the city (for work/family etc.)

    In 5 years time I can potentially be earning $80k a year.

    At the moment I can usually put away $500 a week in savings. If I were to move out and rent I imagine my saving ability would drop to maybe 3 hundred weekly.

    If I rent I will still be earning interest on my savings.
    But I thought maybe if I bought a small studio (shoebox) for $250k, then weekly repayments would be less than $300. I could still potentially save 2-3 hundred a week. (Im sure I'm neglecting other expenses with owning a property).

    But I thought this way I would at least own something. I know studios/apartments don't appreciate much in value, but I could always rent it out or sell it when/if I have the money to upgrade.

    Lots to consider.
    Appreciate all the help :)
     
  4. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    This is going to be a lazy response because Compleks I think you've probably seen enough of my posts to know my general thoughts. But of course they are just my opinions.

    But in short, if you had to move out tomorrow, I'd be recommending renting.

    Until rental costs have been HIGHER than interest costs on a 100% loan for the same place for AT LEAST two years I think the property market doesn't offer fair long term value to buyers, and as such you'd be better off renting until better values return (which could take years).

    The most banks are still offering variables rates that are north of 6% and rental yields in Australia in major capital cities are between 3.8% - 4.8% depending on city.

    So the obvious thing to do is rent.

    I suspect that over the next two to three years this discrepancy will start to narrow, as interest rates fall and property prices stagnate (or fall) and rents drift slowly up over time.

    The reason I say that rental yields need to have been higher than interest costs for two years is because during deleveraging cycles that we are seeing around the world (and which it seems Australia is also drifting into) it takes a couple of years for house prices whilst interest rates tend to drop very quickly, so it's best to wait a little bit before jumping in so you don't get smashed with a large capital loss by jumping in too quickly.

    And conceptually I don't like people saying "rent money" is dead money when "interest payments" are just as dead, ie "rent" is what you pay when you use something that is not yours, and "interest" is what you pay when you buy something you can't afford.

    They are for all intents and purposes the same thing... people just don't understand how the money system works and good marketing campaigns have conditioned people with bad logic.

    That said, if you want to grow your wealth, then know that the KEY ingredient is "spending less than you earn" and both buying or renting will dramatically increase the "spending" part of that equation and will severely undermine your ability to build wealth.

    So it's just a case of weather not renting/buying severely undermines your girlfriend's happiness more...

    :D
     
  5. Compleks

    Compleks Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    348
    Location:
    Melbourne
    Haha, thanks Chris.
    Luckily I don't have to factor girlfriend happiness into the budget too.

    Guess I'll have to weigh up all the options and $$$ then make a decision.

    Thanks :)
     
  6. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Lucky you - they can be very expensive and can greatly undermine wealth building if you invest in the wrong one...

    :cool:
     
  7. Pete Ramoza

    Pete Ramoza Active Member

    Joined:
    29th Jul, 2012
    Posts:
    40
    Location:
    Brisbane, Qld
    Will be interested to read the outcomes of your decisions... wish I could start all over again, I would quite possibly make some different choices - maybe...

    Good luck with it!