Like many Australians, Ross and Sangita worked hard to achieve their dream of building their own home.
Ross, a chef who moved to Australia from Nepal 12 years ago, has worked two jobs for the last five years: one in the morning, and one in the evenings. Sangita also works full-time in hospitality.
Even with three jobs it took the couple six years to save for the deposit to buy a block of land in Truganina, about 20 kilometres west of Melbourne’s CBD, but they made their dream come true in 2017.
Now they’re exploring another dream — to buy an investment property to help set the pair up for the future using an inheritance they’re about to receive.
“I’ve got good jobs at the moment. I’m working hard [and] I’m making a bit of money. I figure… it’s the right time to invest, because we’re coming into some money,” Ross says.
Research from the Reserve Bank of Australia shows more than 2 million Australians — or 11 per cent of the adult population — had one or more investment properties in 2015. One in five investors are in their 30s, which is the age bracket Ross has just entered. Only about one in 20 property investors in Australia is under 30.
Before they take the plunge, Ross and Sangita want some advice. They want to make sure they know the risks, and that they can afford to pay another mortgage.
To help Ross navigate the issues, he’s working with two financial advisers, who each volunteered their time.
The ins and outs of their three-job income
Between his two jobs, Ross takes home $78,000 after tax, while Sangita takes home $46,800.
Here’s a breakdown of their spending last year.
Ross and Sangita live frugally. They’re able to spend less than $100 per week on groceries as they work in restaurants and get meals at work, and they haven’t taken a holiday in five years.
“The most expensive part of our lifestyle in Australia is going out and holidays … so we closed those doors straight away,” Ross says.
“We are lucky enough [to be] fed at work, so that’s cut our everyday food cost as well. We are not home all day, pretty much, so [that’s reduced] our bills as well.” Laura’s money makeoverWith bills piling up, and more spending on the horizon, 41-year-old Laura finds herself in a financial hole. As a single mum with little support, how can she pull herself out?Read more
Their house in Truganina is worth about $635,000, and they have a $540,000 mortgage. They have $6,000 in credit card debt, vehicles worth $40,000 with loans of $16,000 outstanding, $90,000 in superannuation and $40,000 in other assets, including jewellery and some money in an offset account.
On top of that, Ross has some assets in Nepal from the inheritance, including a property that he’s hoping to sell this year for about $200,000. He was hoping to use the proceeds for a down payment for an investment property.
Ross and Sangita have been looking at apartments in inner Melbourne around the $380,000 mark. They have budgeted $18,000 out of their savings for a trip back to Nepal to organise their affairs and visit family.
The couple is thinking of having children soon, but don’t have any concrete plans. They both want to set themselves up well for the future and are looking to invest in property for the long-term, using the rent to help pay off the mortgage.
What do the experts say?
We put Ross in touch with two financial advisers, Suzanne Haddan and Nicole Heales, who say the couple’s “seriously frugal” habits mean that purchasing another property is definitely a possibility.Salary sacrificing explainedI feel lost when I hear people talking about “salary sacrificing”, and I’m far from alone. I asked the experts what it is and how it works.Read more
Ms Haddan has a few key tips for them before taking any further steps:
- When buying or selling a property, whether in Australia or overseas, it’s important to see an accountant to work out the potential tax implications.
- She suggests they avoid buying off the plan — in other words, buying a building that’s not built yet — as it carries extra risk. “Off the plan locks you into the house, and you don’t want to get caught,” she says.
- Start by paying off debt with the highest interest rate. In Ross and Sangita’s case, this would be the car loans.
Negative gearing could help, but there’s risks and the rules can change
If Ross and Sangita did decide to buy an investment property, the interest on the loan would be tax deductible.
One option would be for them to use the money they were planning to use for a down payment to pay off their home loan, and then borrow the full amount for the investment property using their house as collateral, which would be more tax efficient, Ms Haddan says.Five strategies to help you save more moneyWhether you’re just getting started, or consider yourself an expert saver already, these simple and straightforward tips can help you boost your savings rate and reach your goals sooner.Read more
There are a few things to keep in mind if using this strategy, Ms Haddan adds.
- If Ross and Sangita buy a Melbourne apartment, it is unlikely the rent would cover the expenses. Ross would be able to claim the loss as a tax deduction, but he would still be making a loss. (When you hear the word “negative gearing”, this is what it means.) The idea is that, over time, the value of the property will rise enough to offset the losses.
- Labor has announced it will seek to change the rules around negative gearing if it wins the next federal election. “Before you buy any property, make sure to check with an accountant to see what the laws are at the time,” Ms Haddan says.
- The higher your tax rate, the more money you’ll get back from tax deductions. If the loss is $10,000 in a year, a person who earns more than $90,000 could get up to $3,900 back, while the maximum refund for a person earning $30,000 would be $2,100. This is something for Ross and Sangita to keep in mind when deciding whose name (or names) to hold the property.
Downturns can create opportunities, so there’s no need to rush
Ms Heales says the downturn in the Melbourne property market may provide an opportunity for Ross providing he’s patient.‘Do something you’re going to stick to’: Three methods of budgetingWhen it comes to budgeting, it’s important to find a method that works for you. So, we’ve looked at the pros and cons of three common methods you can use to do a budget.Read more
“Your timing regarding property investing is good. You can put a plan in place and that can work well in your favour. Parts of the property market have dropped and you may find more value in areas of the market than in recent years,” she tells him.
Ms Heales also suggests Ross and Sangita consider looking at townhouses and regional properties as an alternative to inner city apartments — simply because they come with more land.
“When you’re buying an apartment, you only get a small amount of land. As apartments get older, the building depreciates in value, which can counteract some of the gains you might get if the land appreciates,” she says.
Have a buffer and plan for things to go wrong
With Ross and Sangita thinking about children, it’s important they set themselves up to meet their obligations should their circumstances change, Ms Haddan says.First home buyer advicePurchasing a property is often the single largest investment you will make, but it can be a bewildering process. Here are some things you may not know.Read more
When it comes to insurance, the most important thing for Ross and Sangita to protect is their income, Ms Haddan says.
“It’s a bit depressing, but you have to do the ‘what if’ game about what would happen to your family,” she says.7 ways to kick-start your savingsAustralia isn’t a nation of savers, but if you want to start growing that savings account, there are some simple tactics you can try.Read more
Many people, especially first home buyers, may need to borrow more than 80 per cent of the value of their home from the bank, which often triggers lender’s mortgage insurance. This insurance protects the lender — not the borrower — so it’s best to avoid it if you can, Ms Haddan says.
Ms Heales also suggests Ross and Sangita put aside some money from the proceeds of the Nepal sale to prepare for any unexpected expenses, loss of income or children.
“On the other hand, having the right level of personal insurance such as income protection, life, total and permanent disability and trauma insurance — as well as a bit of a savings buffer — will give you peace of mind,” she says.
“You’ll know that if things were to go wrong, you will be alright. At the end of the day, you want to feel safe and secure.”
Slow and steady wins the savings race
It’s great that Ross and Sangita are spending less than they earn and putting some money away for the future, Ms Heales says.
“Investments need to be slow and steady,” she adds.
“Don’t try to take too many risks or be too clever.”
What Ross learned
For Ross, the best thing about talking his situation over with Suzanne and Nicole was the confidence he gained.
“After speaking to Suzanne and Nicole, I realised that what I was planning was not complete. When I talked to them, it helped me think about the options,” he says.
“There were so many things they said that made a lot of sense.”Like this article? Read more about wellbeing, food, work, travel, money, entertainment, sex and relationships and more at ABC Life.Read more
Ross and Sangita recently left on their trip to Nepal. They say they’re not going to be in a rush to find an investment property when they get back, but they’re determined to reach their goal.
“We waited six years to get the house. We are content to wait for the right time. At the end of day, we’re going to face the consequences if we rush now,” Ross says.