I’d like to share a story with you that shows the system is broken.
I’ll divulge that I’m an abstainer, a lesser fool on the sidelines with a deckchair and a bowl of popcorn saving like a mad man. I want the dream but not at any cost.
My wife and I are friends with a lovely hardworking couple. He’s a slightly above average income earner, she would be slightly below. They bought a place in the southern suburbs of Adelaide 3 years ago for $340k. They had seen their value rise to $370k. Roughly 3 % per year. I haven’t looked at inflation but it would be very slightly above, not a great return compared to other choices but we knew that.
Recently, they wanted to buy a larger home with an extra bedroom, double not single garage, lower maintenance gardens, more modern etc. It was going to cost them $430k to buy it. Same suburb.
Here comes the insane part. When the bank examined their debt to equity on the old place, cost of stamp duty on the newer more expensive place, cost of agents fees to sell the old place and anything I’ve missed, they didn’t have enough equity to make it work. So it was suggested that, if they came up with some additional money (Borrowed $5k from their family) AND instead of selling their existing place, rented it out, avoiding the agents fees and retaining that $12k as equity, they could make it work.
They now have their new house and the old place as an investment property, worth $800k combined with what I estimate is around $765,000 worth of mortgage, a 5 per cent funny money deposit and complete equity reset.
So they couldn’t afford a new house, but they could afford two. Plus they get the “tax benefit” of negative gearing the rental, which we know is a crock, and they’re doubly leveraged.
He is already salary sacrificing a private use vehicle so I don’t know what “tax benefit” they are really getting or whether this was even considered in detail. Lucky the private use salary sacrificing crackdown was canned in the budget! Some greater fools can be fooled twice.
This is a dangerous development. How long must we wait? My popcorn is cold and I’m over it.
I think I should quit work, run up an amazing HECS debt and leave for the US. If only I didn’t love this sunburnt country, my family and my friends.
I’d like to share a story with you that shows the system is broken.
I’ll divulge that I’m an abstainer, a lesser fool on the sidelines with a deckchair and a bowl of popcorn saving like a mad man. I want the dream but not at any cost.
My wife and I are friends with a lovely hardworking couple. He’s a slightly above average income earner, she would be slightly below. They bought a place in the southern suburbs of Adelaide 3 years ago for $340k. They had seen their value rise to $370k. Roughly 3 % per year. I haven’t looked at inflation but it would be very slightly above, not a great return compared to other choices but we knew that.
Recently, they wanted to buy a larger home with an extra bedroom, double not single garage, lower maintenance gardens, more modern etc. It was going to cost them $430k to buy it. Same suburb.
Here comes the insane part. When the bank examined their debt to equity on the old place, cost of stamp duty on the newer more expensive place, cost of agents fees to sell the old place and anything I’ve missed, they didn’t have enough equity to make it work. So it was suggested that, if they came up with some additional money (Borrowed $5k from their family) AND instead of selling their existing place, rented it out, avoiding the agents fees and retaining that $12k as equity, they could make it work.
They now have their new house and the old place as an investment property, worth $800k combined with what I estimate is around $765,000 worth of mortgage, a 5 per cent funny money deposit and complete equity reset.
So they couldn’t afford a new house, but they could afford two. Plus they get the “tax benefit” of negative gearing the rental, which we know is a crock, and they’re doubly leveraged.
He is already salary sacrificing a private use vehicle so I don’t know what “tax benefit” they are really getting or whether this was even considered in detail. Lucky the private use salary sacrificing crackdown was canned in the budget! Some greater fools can be fooled twice.
This is a dangerous development. How long must we wait? My popcorn is cold and I’m over it.
I think I should quit work, run up an amazing HECS debt and leave for the US. If only I didn’t love this sunburnt country, my family and my friends.
Yep that could work. When you say they can't afford a house, you were referring to equity or their "contribution" but really the key metric is their income, and you don't really know what that is. Two incomes plus a rental income might total more than you think, but if you have genuine details on their income rather than armwaving then we can consider it.
Any expressed market opinion is my own and is not to be taken as financial advice
I think you will also find this scenario is not a new addition but a fairly common scenario for those ma and pa investors with one or two properties. I think it is well trodden path but I'll let others like Peter with more intimate knowledge of the game long term comment on that.
Yep that could work. When you say they can't afford a house, you were referring to equity or their "contribution" but really the key metric is their income, and you don't really know what that is. Two incomes plus a rental income might total more than you think, but if you have genuine details on their income rather than armwaving then we can consider it.
What would happen if they couldn't rent out the first house? Would they lose both houses?
------------------------------ " ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility." - Alan Glynn
What would happen if they couldn't rent out the first house? Would they lose both houses?
Possibly. I think we have assumed that the original house was in an area with reasonable rental demand. If that was not the case then they should simply stay where they are because selling would not be easy either.
Lets assume that they are people with at least an average IQ and think about their decisions. I know that not everyone meets those standards, but most do.
Any expressed market opinion is my own and is not to be taken as financial advice
I think you will also find this scenario is not a new addition but a fairly common scenario for those ma and pa investors with one or two properties. I think it is well trodden path but I'll let others like Peter with more intimate knowledge of the game long term comment on that.
For my money the big trap here is that often the first house is not actually a good rental property and has a lower yield than is really viable as an investment.
Many people on this forum claiming to have really sweet rental deals on just this kind of property from people in just this situations.
That said, it probably is an OK renter if not spectacular, and I'd say Adelaide would be about the lowest-risk of all the capitals in oz at the moment.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
That said, it probably is an OK renter if not spectacular, and I'd say Adelaide would be about the lowest-risk of all the capitals in oz at the moment.
Why is that? Unemployment just hit 7.1% in SA, worst since 2001. I would have thought the risk of being a reluctant landlord would only be higher in Tasmania.
------------------------------ " ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility." - Alan Glynn
"YOU'RE CONDITIONALLY APPROVED FOR A PERSONAL LOAN^.
Dear GloomBoomDoom,
Are you thinking about some new wheels, sprucing up the home or taking that trip of a lifetime? A CommBank Personal Loan can give you the additional funds you need to turn your dreams into reality.
You've been conditionally approved for up to $26000.
Completing your application can take as little as five minutes *. We'll do some simple checks first and if you're approved before noon Monday to Friday, you can access funds the same day~.
You can take advantage of your conditional approval any time before 3rd September 2014, but why wait until then? Apply now and get what you want today.
To apply now, log into NetBank and check your inbox."
"YOU'RE CONDITIONALLY APPROVED FOR A PERSONAL LOAN^.
Dear GloomBoomDoom,
Are you thinking about some new wheels, sprucing up the home or taking that trip of a lifetime? A CommBank Personal Loan can give you the additional funds you need to turn your dreams into reality.
You've been conditionally approved for up to $26000.
Completing your application can take as little as five minutes *. We'll do some simple checks first and if you're approved before noon Monday to Friday, you can access funds the same day~.
You can take advantage of your conditional approval any time before 3rd September 2014, but why wait until then? Apply now and get what you want today.
To apply now, log into NetBank and check your inbox."
It's called advertising. It's up to you, as the consumer, to decide whether you want to buy.
It's called advertising. It's up to you, as the consumer, to decide whether you want to buy.
I just find it odd given I have 10 x that amount showing in the balance of netbank already. That tells me it's not specifically aimed at me but probably every broke dead beat out there.
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