# Buy your house first or last?



## kid hustlr (20 September 2015)

Was thinking about this one today. In regards to attempting to retire as early as possible is there a general consensus as to whether one should rent and invest or buy there PPR and pay of the debt first before investing?

Obviously there's a huge amount factors which come into play but I was wondering if anyone had any literature or thoughts on the topic.

Given my current life situation and the absurdly low yields (or put another way, cheap rent) offered up by Sydney property, I wonder if it skews the equation in favour of becoming a permanent renter and investing the difference?


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## tech/a (20 September 2015)

There are better times for everything.

Now in my view it's better to rent.

If you want something to do with your money 
You can get smart and develop

Live in one as your ppr and sell the other.
Start the next one and sell the one your in
And you'll avoid capital gains on that one.
Rinse and repeat until you own you ppr.


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## kid hustlr (20 September 2015)

CG benefits of renovating a ppor are hard to pass up and are probably the best way for starters to get a jump ahead in my view.

Harder with a wifey and kids tho tech!


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## tech/a (20 September 2015)

Yes true
I do understand.


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## kid hustlr (20 September 2015)

I guess I was also thinking slightly more passive investing. Development is pretty involved and requires a strong skill base (one beyond me)


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## tech/a (20 September 2015)

Not really

It's like every other business venture
A numbers game.
Then the selection of a good project builder
Takes away that skill set requirement.
A small development of 3 is best for beginners.
2 is difficult to turn a profit.

A good project builder will walk you through it.
Align yourself with real-estate agents who can find land for you
Or knock overs.(houses to demolish)

Find out about council rules for development.
Worth the time to investigate
With your finance bent you'd be surprised how 
Easy it can be.


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## sinner (21 September 2015)

haha! tech you crack me up...



> Development is pretty involved and requires a strong skill base (one beyond me)




Nah mate, easy as.

Just so long as you know all of the following stuff in advance without any prior experience, past mistakes learned from, plenty of capital, connections, etc:



> It's like every other business venture
> A numbers game.




I like numbers games, just bet it all on red, right? Oh wait, that is a colour.



> Then the selection of a good project builder




Pick names out of a hat?



> A small development of 3 is best for beginners.
> 2 is difficult to turn a profit.




They mention this in the manual, page 57 I think. You did read the manual didn't you?



> Align yourself with real-estate agents who can find land for you




I think I left the divining rod right next to the hat...



> Find out about council rules for development.




"on display at the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying beware of the leopard"


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## kid hustlr (21 September 2015)

there must be a pretty simply formula:

something like - if rent costs abc and i can get return xyz on my money then if xyz > abc rent and invest?


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## The Falcon (21 September 2015)

Mental wellbeing viz. wife and blighter/s and hassle that comes with renting needs to be added to that formula too...my view, get the house. PPR equity will then provide a cheap LOC which is deductible debt for your investments. Pay down the mortgage, then redraw via the LOC.


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## tech/a (21 September 2015)

Perhaps I can re phrase your response into a meaningful set of questions
for the benefit of others.



sinner said:


> *haha! tech you crack me up.*..




Thanks I enjoy humour.



> *Nah mate, easy as.
> 
> Just so long as you know all of the following stuff in advance without any prior experience, past mistakes learned from, plenty of capital, connections, etc*:




Im sure its not that simple How do I go about thing with out the likes of prior experience,limited capital and connections?




> *I like numbers games, just bet it all on red, right? Oh wait, that is a colour*.




What are the numbers I really need to know?




> *Pick names out of a hat*?




What di I need to look for in a builder?




> *They mention this in the manual, page 57 I think. You did read the manual didn't you*?




Interesting I've not seen this before ---Can you elaborate on this point?




> *I think I left the divining rod right next to the hat*...




Think this would be harder than it sounds.
How do I get agents to work on my behalf
Don't they have the sellers interests above
mine?.




> "*on display at the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying beware of the leopard*"




Who would I see at local councils and what sort of questions should I be asking?


*Always happy to help Sinner!*
Without personal gain and I know that really irks you
I have no angle!


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## sydboy007 (21 September 2015)

with what's going on in the economy how secure do you feel you income is over the next 2 to 3 years?

What's your views on house price growth and rents?

Rents are stagnating to falling now.  Not sure where you live but dig around the RP data stats to get a feel of the drop in momentum in the market.

Auction rates in Sydney have started to fall.

personally I'd be keeping my power dry for the next 12-18 months, but then I was saying that a few years back as well.


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## kid hustlr (21 September 2015)

sydboy007 said:


> with what's going on in the economy how secure do you feel you income is over the next 2 to 3 years?
> 
> What's your views on house price growth and rents?
> 
> ...




All these views effectively build into what I perceive is a formula you could come up with though?

eg. (and this is an example)

I have a $1,000,000

To rent a house costs 40k a year, to buy it costs 1 mil (total cost).

Rent argument:
If i put the 1 mil in the share market i get 7% return before tax 5% after.

that's 50k a year gain less 40k in rent = 10k a year return or 1% on my 1mil.

Buy Argument:
property must be worth 1,010,000 at the end of the year to justify buying

AKA, property must go up 1% in value to justify buying over renting - atleast mathematically.

Does that make sense/Am I on the right track?

Effectively based on assumptions you probably get to a point where you say "if I can get xyz on my cash then I'm better off investing and renting rather than buying"


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## tech/a (21 September 2015)

> I wonder if it skews the equation in favour of becoming a permanent renter *and investing the difference*?




My apologies I seen to have mis understood you.



> If you want something to do with your money
> You can get smart and develop






> eg. (and this is an example)
> 
> I have a $1,000,000




How close is this to real.
Having a $1mill Mortgage and 
Owning a $1 mill home and what you can do with the equity
are two vastly different scenario's (Banks would be good to around $4mill)

What's yours in actuality?

Your *Investing the difference *doesn't mention what that's likely to be------Perhaps ETF's Their as conservative as blazes and as boring as hell but preferred it seems from the Academia fraternity of this site.

Sold One of my apartments on the weekend (Auction).
Unit 4 320 The Esplanade Moana SA. 
Also Owned Unit 5 which I sold last financial year.


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## sinner (21 September 2015)

The Falcon said:


> Mental wellbeing viz. wife and blighter/s and hassle that comes with renting needs to be added to that formula too...my view, get the house. PPR equity will then provide a cheap LOC which is deductible debt for your investments. Pay down the mortgage, then redraw via the LOC.




We can't provide financial advice here, just FYI.

Personally, I rent. Gives me mobility (which I think has lots of value) and avoids the potential to get stuck in a depreciating asset.


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## CanOz (21 September 2015)

Tidy looking properties Tech, what have the auction clearance rates been like in Adelaide?


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## kid hustlr (21 September 2015)

sinner said:


> We can't provide financial advice here, just FYI.
> 
> Personally, I rent. Gives me mobility (which I think has lots of value) and avoids the potential to get stuck in a depreciating asset.




I was kind of hoping your brain can come up with the opportunity cost formula I'm looking for!


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## tech/a (21 September 2015)

CanOz said:


> Tidy looking properties Tech, what have the auction clearance rates been like in Adelaide?




Generally pretty good.

I ran a few TV ads on this to get a bit of interest a month out.
Sold to one of those.
I set a pretty high reserve and settled $9k under my reserve.
Which was a little over fair price for the district.

Developments I sell off plan.


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## sinner (21 September 2015)

kid hustlr said:


> I was kind of hoping your brain can come up with the opportunity cost formula I'm looking for!




I thought I just gave it!

Either the house is a PPR, in which case no such relative valuation equation applies and what should matter to you is your ability to pay off the nut over the long term and benefits/detractions to your life (for me, as stated, mobility and not having leverage on a perceived overvalued asset take priority). Don't treat it like an investment, it isn't one.

Otherwise it is an investment, in which case the standard relative valuation technique of *any* investment decision applies. Buying a house to develop it, rennovate, rent it, etc is no different from buying a crane or bulldozer if you think about it. People get emotional over realestate but from the investment perspective it's no different to any other thing. The cashflows largely resemble that of a bond.


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## McLovin (21 September 2015)

sinner said:


> I thought I just gave it!
> 
> Either the house is a PPR, in which case no such relative valuation equation applies and what should matter to you is your ability to pay off the nut over the long term and benefits/detractions to your life (for me, as stated, mobility and not having leverage on a perceived overvalued asset take priority). Don't treat it like an investment, it isn't one.




I'm in this camp. I hated, hated, hated renting and after having lived in a few cities around the world for work when I moved back to Sydney I really wanted my own patch of dirt. It turns out I managed to buy just before prices sky-rocketed, but that was certainly not an objective. I paid for half the house in cash, the rest is a mortgage. I don't lie awake at night wondering how I'd pay my mortgage if XYZ happened and that's how I like it.

I appreciate where others are coming from with the idea of renting, but I just got sick of it. I reckon before one goes down either path they need to carefully consider what they want beyond just the financial objectives.


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## Craton (21 September 2015)

Ah, the great Aussie dream!

Renting is fine if one is single, young, mobile, intransient but in the end, renting is dead money. Renter is paying off someone else's loan.

Sure renting allows flexibility but as an ex-renter, our rental was never truly a place one can call "home". It's hard to explain to the tin lids, that no, we can't paint the walls purple or build a swimming pool. Worse, it's distressing to be given the out-of-the-blue "eviction notice"...

Anyway, as mentioned it comes down to what one wants further down the track. Don't forget, when one is young all seems possible, as one ages though the mind is willing but the body doth protest too much.


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## tech/a (21 September 2015)

> as one ages though the mind is willing but the body doth protest too much.




Wisdom is meant to come with age---so Ill go with that.

Supply wisdom and employ willing bodies!
That's how I do it!


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## sinner (21 September 2015)

Craton said:


> but in the end, renting is dead money




I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense. 

I pay money to live in a domicile. Unless I miss out on the domicile bit, how exactly is the money dead? It fully and capably achieved its purposes of providing me with 4 walls and a roof! I find it so strange, like saying that bus ticket money is dead money. All I wanted was to get from point A to point B today, so I should spend $20,000 on a car.

Most Australians are completely sheltered in this perception, if you go to Europe you can see the renter:landlord ratio is essentially the inverse of what it is here and people hold the much more sane perception of merely paying for the cost of living expenses.

One could argue that having to pay $200,000 (interest + principal) over the life of a $100,000 loan is dead money, but the joys of a property bull market and resulting theoretical capital gains have saved most from having this realisation.


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## kid hustlr (21 September 2015)

Example of what I'm getting at

Surely it's all numbers?

Changing the assumptions (especially perceived after tax return) to fit your situation, then decide which is the better option?

I might be way off here and missing plenty...


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## kid hustlr (21 September 2015)

sinner said:


> One could argue that having to pay $200,000 (interest + principal) over the life of a $100,000 loan is dead money, but the joys of a property bull market and resulting theoretical capital gains have saved most from having this realisation.




Agree with this - in the ends its an opportunity cost.

As I said, interested in your brain's view of my quick lunchtime example


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## skc (21 September 2015)

Kid,

As per most of these type of questions... there is no one correct answer. There are some facts and there are some perspectives which makes the "right" answer unique to different people.

Here are my random views...

1. From a cashflow perspective, renting is almost inevitably cheaper than owning a property. You need to take into account both the cost of capital (which may be the mortgage rate or the opportunity cost, depending on how you finance the property) and the cost of ownership (rates, insurance, land tax, upkeep etc) which are significant. 

2. There are frictional costs associated with property transactions. When you buy you pay stamp duty, lawyer fees, bank fees, building inspections etc etc. When you sell you pay lawyer fees, marketing costs, agent fees etc etc. These transaction costs can easily be 3-6%. So when you see the "median" house price is up 5%... chances are you aren't breakeven yet. That's why they often say 7 years is the minimum time you should own a property.

3. Median house price is just an indicator... it will have some influence on the next time you transact your property... but it's not a guarantee. i.e. don't treat it like the last price of a share. Every property and each transaction is essentially unique... and the last +/- 5-10% in price easily comes down to specific circumstances like skill of the agent/auctioneer, desperation of the buyer/seller, amount of marketing, weather of the day, presentation of your neighbour's yard etc.

4. Property development is not simple or easy. There are so many rules and regulations... you need to ask yourself what "value add" do you bring. It's no different to going into any other new business...you don't even know what you don't know. It doesn't mean one cannot learn or acquire such knowledge... it just means you should be in a strong financial position when you do so (or have a really experienced trustworthy partner).

4. Non-financial considerations are obviously important as well... but I won't list them here. I would just say this... as a husband and Father myself, there are aspects of owning your home that trump most financial metrics. But no... it doesn't trump affordability.

5. IMO... if you are not in property already today then there is probably less urgency to be in property in the short term. The heat has clearly come off and chances are high for a period of stability or consolidation (if not actual falls). During a period of little or no property price growth, the renter's hand actually grow stronger - assuming they continue to spend / save / invest in the same manner as before. 

Best of luck.


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## sinner (21 September 2015)

kid hustlr said:


> Agree with this - in the ends its an opportunity cost.
> 
> As I said, interested in your brain's view of my quick lunchtime example




You seem hell bent on receiving a formula. I do have this in my notes:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0


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## skc (21 September 2015)

Craton said:


> renting is dead money.






sinner said:


> I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense.




+100. I hate that saying. Interest payment is just as dead as rent payment.

The numbers for renting is simple... the renter is paying <5% to enjoy something that the owner is paying >5% to own. And in return, the owner gets a *chance *at leveraged return in capital. It's not a foregone conclusion who would be financially better off.


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## skyQuake (21 September 2015)

Quick! Time to jump on to the bandwagon!

Heard a good saying:

Unless you buy a house outright, you're either renting the place or renting the money for it


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## Value Collector (21 September 2015)

skyQuake said:


> Unless you buy a house outright, you're either renting the place or renting the money for it




Thats very true, but the cost of renting the money goes down over the years, your property rent should rise atleast with inflation, the principle of the loan is fixed, or should decrease as you pay it down. So apart from flucuations in interest, the cost of renting the money reduces compared to your inflation adjusted wages.

In 20 years your rental payments on a property might have quadrupled, but the renter of the money might not even have a loan anymore, and is left with just property costs which probably make up 20% of the rental cost.


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## CanOz (21 September 2015)

skyQuake said:


> Quick! Time to jump on to the bandwagon!
> 
> Heard a good saying:
> 
> Unless you buy a house outright, you're either renting the place or renting the money for it




Buy them with the banks money and then plop down the funds in an offset account. We paid $1.75 in interest last year...


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## sptrawler (21 September 2015)

sinner said:


> I thought I just gave it!
> 
> Either the house is a PPR, in which case no such relative valuation equation applies and what should matter to you is your ability to pay off the nut over the long term and benefits/detractions to your life (for me, as stated, mobility and not having leverage on a perceived overvalued asset take priority). Don't treat it like an investment, it isn't one.
> .





Agree with you, your ppr only keeps the rain of your head, it isn't an investment.

The investments, other than your ppr, put the food on your table.

Also, the one thing you can't buy is time, often people get to an age where there isn't time to buy the ppr, many of my mates have reached the age and it isn't funny.

Not only are your investments going up, usually the cost of a suitable ppr, is also.


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## sinner (21 September 2015)

Value Collector said:


> Thats very true, but the cost of renting the money goes down over the years, your property rent should rise atleast with inflation, the principle of the loan is fixed, or should decrease as you pay it down. So apart from flucuations in interest, the cost of renting the money reduces compared to your inflation adjusted wages.




That's a pretty strange perspective...you mean "apart from the fluctuations in the cost that closely tracks inflation specifically to compensate lenders for the costs of inflation"?... 



> In 20 years your rental payments on a property might have quadrupled, but the renter of the money might not even have a loan anymore, and is left with just property costs which probably make up 20% of the rental cost.




Rents track wages not some magical number that goes up forever.

In 20 years the money renter might not have a loan anymore but the $ cost spent so far by the property renter will be significantly lower. *Especially* if rents quadruple.

Because, you know, the economy is all connected, what with wages and growth and inflation and interest rates...they're actually not the isolated factors you seem to be portraying them as.

I mean, is there really a _ceteris paribus_ situation where rents quadruple? Come on...


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## kid hustlr (21 September 2015)

Slightly confused by the discussion now and don't want this thread to turn into a 'what's likely to happen with prices' thread.

I hear everyone's view on needing a roof and the wife wanting a family home etc etc but I'm sorry your PPOR is still an investment and a big one at that. 

You can't simply say 'oh its your PPOR' don't count it.

If that PPOR is likely to gain at 10% a year vs nothing then that is a factor.

if putting your money in the PPOR means you get 0% return whilst you could put it in the stock market and get 20% thats a factor.

Ultimately, given the linkage of the economy it's likely the disparity isn't that large but you understand the point im making.


take the business man who can invest in his business and make 100% a year returns. he would be silly to put money into the mortgage rather than reinvest in the business.

As such surely you asses your situation, assess your views of likely returns going forward and make a decision. It's clearly not black or white but its definitely an investment decision


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## satanoperca (21 September 2015)

kid hustlr said:


> Was thinking about this one today. In regards to attempting to retire as early as possible is there a general consensus as to whether one should rent and invest or buy there PPR and pay of the debt first before investing?
> 
> Obviously there's a huge amount factors which come into play but I was wondering if anyone had any literature or thoughts on the topic.
> 
> Given my current life situation and the absurdly low yields (or put another way, cheap rent) offered up by Sydney property, I wonder if it skews the equation in favour of becoming a permanent renter and investing the difference?




You are looking for numbers without supply any to work from to start with.

Ie what is current net income?
Is the household dual income?
Do you have dependants or plan to have in the future?
How safe is your job in the current market place?
How much deposit have you saved?
Do you have any plans in the future to build your own business?

And most importantly if you were to buy a PPOR, what LVR would you be looking at? If it is below 80% you should investigate buying a home. If it is greater than 80% then keep saving.

Do you currently trade/invest in shares and what has your returns been like over the last 5 years.

Are you risk adverse? Ie are you willing to bet everything on the house or not.

I personally believe that paying off your PPOR as fast as you can is the best investment you can have. Once paid off it is up to you whether your risk/use some of the equity for other investments.

There is no magic formula.


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## sinner (21 September 2015)

kid hustlr said:


> You can't simply say 'oh its your PPOR' don't count it.




Um...you asked what "I simply say", so I think I can, and it actually represents my best intentions and opinions. Are you the saying police now? 



> take the business man who can invest in his business and make 100% a year returns. he would be silly to put money into the mortgage rather than reinvest in the business.




He might be silly, or he might have different priorities than making 100% per annum on every single dollar. Warren Buffet comes to mind, I think he paid $35,000 for his house in the 50s, with a salary of about $12,000 and ~$175,000 in net worth.


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## kid hustlr (21 September 2015)

satanoperca said:


> You are looking for numbers without supply any to work from to start with.
> 
> Ie what is current net income?
> Is the household dual income?
> ...




All good points. Especially the risk adverse one.

Not sure the future income influences my decision NOW though. I'm trying to make a decision for the future witht he cash I have now.



sinner said:


> Um...you asked what "I simply say", so I think I can, and it actually represents my best intentions and opinions. Are you the saying police now?
> 
> 
> 
> He might be silly, or he might have different priorities than making 100% per annum on every single dollar. Warren Buffet comes to mind, I think he paid $35,000 for his house in the 50s, with a salary of about $12,000 and ~$175,000 in net worth.




Sinner I would never doubt your thoughts for a second.

Buffet is just brilliant.


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## Value Collector (21 September 2015)

sinner said:


> That's a pretty strange perspective...you mean "apart from the fluctuations in the cost that closely tracks inflation specifically to compensate lenders for the costs of inflation"?...
> Rents track wages not some magical number that goes up forever.
> 
> ...




What I meant was that interest rate fluctuates up and down over the years, but your interest charge is going to be based on a fixed principle eg $350,000. the principle wont increase with inflation. if you bought your home in $1995 with a $150,000 loan and never paid off any principle, your wages (and rents) would have increased due to inflation, but inflation would not increase the size of the loan, so a 1995 renter, is now paying 3 or 4 times the rent he was then, where as a home owner is paying roughly the same rent on the money (if he hasn't paid down the loan)

and the gap between renting money and renting property increases more and more the longer the time frame.


> I mean, is there really a _ceteris paribus_ situation where rents quadruple? Come on




In the markets I am familiar with rents have quadrupled since 1995, 

The property owner also with see the positive effect of the capital value of the home increasing with inflation, even if capital growth is only inline with inflation.


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## Value Collector (21 September 2015)

kid hustlr said:


> I'm sorry your PPOR is still an investment and a big one at that.
> 
> You can't simply say 'oh its your PPOR' don't count it.




I agree, it is an investment, it is a capital outlay that will return value to you over time that has a real cash value.

while it doesn't produce income directly, it stops you having to pay rent which is kind off the same thing.

If you put $500K into bonds paying 4% and then use that interest to pay your rent, most people would agree you have a $500K bond investment, So if you instead put that $500K into a property and it eliminates your rental expense then that in my opinion is also an investment.

I think it also becomes a better one, because the principle value of the bonds would not increase with inflation, the principle value of your house probably will, the interest income the bonds won't increase over time but your rent will, so the expense that your own home is offsetting is growing.


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## sptrawler (21 September 2015)

kid hustlr said:


> Slightly confused by the discussion now and don't want this thread to turn into a 'what's likely to happen with prices' thread.
> 
> I hear everyone's view on needing a roof and the wife wanting a family home etc etc but I'm sorry your PPOR is still an investment and a big one at that.
> 
> ...




I see the ppr as a necessary cost, as opposed to an investment, but that is only my opinion.
From my perspective, an investment is something that requires selling, to realise the investment. Therefore it has to be something that isn't clouded by personal emotion, you may want to flip ppr's, which can be a very good plan.
As long as the other partner is happy to do that, once someone becomes attached to the ppr and doesn't want to sell it. It no longer is an investment, it becomes a roof over your head.


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## Value Collector (21 September 2015)

sptrawler said:


> I see the ppr as a necessary cost, as opposed to an investment, but that is only my opinion.
> From my perspective, an investment is something that requires selling, to realise the investment. Therefore it has to be something that isn't clouded by personal emotion, you may want to flip ppr's, which can be a very good plan.
> As long as the other partner is happy to do that, once someone becomes attached to the ppr and doesn't want to sell it. It no longer is an investment, it becomes a roof over your head.




A share that pays dividends that you never intend to sell is still an investment, a property pays a weekly dividend In The amount of rent it offsets that you would normally have to fund from another income source.

There are share holdings that have been held in families for generations, and probably never be considered for sale, this doesn't stop them being investments, contributing value into the family. Whether you intend to sell something or not isn't what qualifies something as an investment.


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## sptrawler (21 September 2015)

Value Collector said:


> A share that pays dividends that you never intend to sell is still an investment, a property pays a weekly dividend In The amount of rent it offsets that you would normally have to fund from another income source.
> 
> There are share holdings that have been held in families for generations, and probably never be considered for sale, this doesn't stop them being investments, contributing value into the family. Whether you intend to sell something or not isn't what qualifies something as an investment.




Yes of course it is, I've made quite a big profit on a ppr in the past and I'm still getting it in the ear.
There is nothing wrong with sit and hold, also there is nothing wrong with sell and take a profit, it is all personal perceptions. 
That is what makes us all different.


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## Value Collector (21 September 2015)

sptrawler said:


> Yes of course it is, I've made quite a big profit on a ppr in the past and I'm still getting it in the ear.
> There is nothing wrong with sit and hold, also there is nothing wrong with sell and take a profit, it is all personal perceptions.
> That is what makes us all different.




Yeah, allow me to share my personal perception.

Say I buy an investment property for $500,000 and it delivers me $20k a year free cashflow after costs, no body would disagree that's an investment, it's storing a lump sum of value and it's producing a return, and the capital value and income will generally grow atleast with inflation.

So that's an investment.

Now if I evict the tenant, and move in myself, I feel it's still acting as an investment, it's still storing value, it's still providing the inflation hedge, and most importantly it's still producing $20k a year in value, it's just that rather than get that $20k per year in cash, I am consuming it directly.


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## Smurf1976 (21 September 2015)

After allowing for rates, insurance and basic maintenance my PPOR (owned outright) is saving me at least $15K a year (haven't checked the exact figures recently) that I'd otherwise be spending on rent. 

Whilst I can't get the capital out without selling, it's an extremely reliable source of returns via rent not paid. That's money that I don't need to get hold of by some other means be it working or investments.

So I do consider it to be an investment on account of the ongoing, very regular and reliable albeit rather modest, returns it provides.


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## sptrawler (21 September 2015)

Smurf1976 said:


> After allowing for rates, insurance and basic maintenance my PPOR (owned outright) is saving me at least $15K a year (haven't checked the exact figures recently) that I'd otherwise be spending on rent.
> 
> Whilst I can't get the capital out without selling, it's an extremely reliable source of returns via rent not paid. That's money that I don't need to get hold of by some other means be it working or investments.
> 
> So I do consider it to be an investment on account of the ongoing, very regular and reliable albeit rather modest, returns it provides.




I tend to think an investment, is something that is bought to supply an income, or to be sold later for a capital gain.

If you were buying a ppr on the basis of saving rent, you would buy the cheapest house that could accommodate your family.
Most people buy a house because they like it and think they can afford it, the rent savings in most cases is a by product and is easily cancelled out by borrowing costs. This is where calling it an investment, gets cloudy.IMO

To realise the stored capital, the house has to be sold.

Having said all that, I think it imperative low to middle income earners, own their own house as early as possible.
Then concentrate on building investments, to supply them an independent income, to do both is difficult.


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## Craton (22 September 2015)

@tech/a. 







> Wisdom is meant to come with age---so Ill go with that.
> 
> Supply wisdom and employ willing bodies!
> That's how I do it



Yep, I'm hearing you but I was thinking of health not strength.

@sinner and skc







> I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense.



Those on a more/larger disposable income may see things different to those on the lower socio/economic scale.
I understand we all have different circumstances and attitudes but allow me to relate a couple of tales of two battler couples I know well. We were all in the same boat of being renters at the same time, my wife and I chose a different path.

First couple of battlers I know have rented the same place for over 25 years along Salt Pan Creek, Sydney. They bemoan the fact that they have no savings/assets, live week to week and that they've helped the l/lord pay 2 times the value of the property in that time. 
Mind you, they have raised a family there as well. Now that they are both in their mid/late fifties, he with health issues, they'll be renters forever.

Another battler renter couple also mid/late fifties I know living in Port Noarlunga, Adelaide. He has just passed away (RIP Mark) thanks to prostate/colon cancer, raised a family, again living from week to week and what has he left his family?
Zero savings/assets and a widow wondering how she'll make ends meet.

Flipping property aside, the fact that your PPR is CGT free shouldn't be dismissed out of hand and should be considered in one's retirement planning. The earlier the better.

Spout what you like about renting and dead money but the fact is, renting only serves the l/lord and I know who'd I rather be. Oh, and for the record, I'm not against renting.

@sptrawler.


> Having said all that, I think it imperative low to middle income earners, own their own house as early as possible.
> Then concentrate on building investments, to supply them an independent income, to do both is difficult.



Starting as early as one can, darn straight and pay as much extra into that mortgage as possible right from the get go.

Get some equity into it and then the opportunities flow.


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## Value Collector (22 September 2015)

sptrawler said:


> If you were buying a ppr on the basis of saving rent, you would buy the cheapest house that could accommodate your family.
> Most people buy a house because they like it and think they can afford it, the rent savings in most cases is a by product and is easily cancelled out by borrowing costs. This is where calling it an investment, gets cloudy.IMO




The savings would work just as well if you were to buy a house of the same level you would normally rent.



> the rent savings are easily cancelled out by borrowing costs




not really, if you bought a $500K home and paid it off over 30 years you would pay about $500K in interest, which sounds like a lot, but it's not.

If you rented that home, paying $480 per week, over 30years you will pay $750,000 in rent, but in reality you will have rent increases over 30years, so probably end up paying well over $1,000,000 in rent, so you will end up outlaying more money over time and not end up owning your house.


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## skyQuake (22 September 2015)

Value Collector said:


> The savings would work just as well if you were to buy a house of the same level you would normally rent.
> 
> 
> 
> ...




But in your example, the $500k home would have >$480/wk in repayments. (assume 5% rates vs 5% rental yield)
$480/week only covers interest expense.


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## sptrawler (22 September 2015)

Value Collector said:


> The savings would work just as well if you were to buy a house of the same level you would normally rent.
> 
> 
> 
> ...




As I said in the earlier post, low to middle income earners, should buy a house as early as possible. It also IMO, should be a basic house, for shelter not a McMansion, $500,000 is a ridiculous amount for a low to middle income earner to borrow.
Yet to have a reasonable retirement, they require a house, paying market rent on a pension is difficult, if not impossible. To have any chance of owning a house outright, and have income producing assets, is difficult unless the house is bought for a realistic price.
IMO too many young people today, are trying to enter the market, at the second or third house level. This is putting them under mortgage stress immediately, which makes it difficult for them, to see the light at the end of the tunnel.

As I said it is only my opinion, from my personal experience and the experiences of my family and friends.


The high income earners, have much more flexibility and are generally in a position, with many more options.
But returning to the above title, if I was a low to middle income earner, I would buy the house first.

If I was a high income earner, a lot more scenarios have to be considered.


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## Value Collector (22 September 2015)

skyQuake said:


> But in your example, the $500k home would have >$480/wk in repayments. (assume 5% rates vs 5% rental yield)
> $480/week only covers interest expense.




As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)

however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill, also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000

renting is cheaper in year one, but gets more expensive over time as inflation and demand pushes up rents.

Buying is more expensive in the early years, but gets cheaper every year until finally the house is paid for and all you have to spend money on is ownership costs, which are about 20% of the cost of renting.

So buying is harder in the early years, but eventually you have a decent asset, and your housing costs are 20% that of a renter.


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## sinner (22 September 2015)

Value Collector said:


> As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)
> 
> however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill,




That is some funky magic maths you've got there VC.

So interest is $500k, and the house is $500k, but apparently you only pay $750k on the lifetime of the loan?

Magic!

Weird though, because when I use the same calculator the magic doesn't work and it appears to just show plain old reality... i.e. $1mil over the lifetime, assuming a constant interest rate for 30 years when rates are at historical lows




If I try for the 15 year fixed to get some cashflow certainty happening...oh look...more reality...





> also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000
> 
> renting is cheaper in year one, but gets more expensive over time as inflation and demand pushes up rents.




Yayyyyyy linear extrapolation forever into the future. Rents will be $1,000,000 per week and wages will still be $20/hr, I am sure. As *I* said, rents do not track inflation, they track wage growth.


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## Value Collector (22 September 2015)

sinner said:


> That is some funky magic maths you've got there VC.
> 
> So interest is $500k, and the house is $500k, but apparently you only pay $750k on the lifetime of the loan?
> 
> ...




No,

I said the Interest Bill on the loan would be $500K, I wasn't factoring in the principle payment because that's not really a "cost", it's a form of saving, you get the principle back when you sell the property.

The $750,000 I mentioned is the cost in rent when you pay $480 / week for 30 years. but that's unrealistic to think rents wont increase at least with inflation, so the actual rent over 30years would be double that.




> Weird though, because when I use the same calculator the magic doesn't work and it appears to just show plain old reality... i.e. $1mil over the lifetime, assuming a constant interest rate for 30 years when rates are at historical lows




Yes, you will pay $1,000,000 over the life of the loan, but as I stated above, only $500,000 of that is interest, the other $500,000 has accumulated as equity which when you sell you will get back, but also you will probably get a lot more than that, because inflation would have pushed up the value of the home.





> Yayyyyyy linear extrapolation forever into the future. Rents will be $1,000,000 per week and wages will still be $20/hr, I am sure. As *I* said, rents do not track inflation, they track wage growth




Don't you think rents will rise with inflation over time?

Wouldn't it be silly to assume that in 30 years you could still rent for $480 per week?

Yes wages will rise with inflation too, but both the home owner and the renter will see their wages rise with inflation, but the renter will have a rental payment that's increasing with inflation, where as the home owners interest bill steadily reduces over the years as the loan is repaid, and once the loan is repaid, the owners cost of ownership will be rates, maintenance, insurance etc which is about 20% of the rental amount.


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## sinner (22 September 2015)

Value Collector said:


> Yes, you will pay $1,000,000 over the life of the loan, but as I stated above, only $500,000 of that is interest, the other $500,000 has accumulated as equity which well you sell you will get back.




I really don't understand how it is OK to just gloss over assumptions like being able to sell the house back at a value greater than or equal to what you paid.

It's not OK. Don't gloss over it.



> Don't you think rents will rise with inflation over time?
> 
> Wouldn't it be silly to assume that in 30 years you could still rent for $480 per week?




What's silly is linear extrapolation informed by recency bias, especially when forecasting 30 years out.

No, I do not think the coming 30 years will be like the last 30 years. 

Take a look at Japan, and how foolish any such assumptions and extrapolations made in the year 1985 would appear today, regardless of how valid they appeared at the time. (or the USA in 2006, or Greece in 2003, or whatever).


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## tech/a (22 September 2015)

And now for something Completely Different.

*I agree with Sinner.*

In most part anyway.


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## Value Collector (22 September 2015)

sinner said:


> I really don't understand how it is OK to just gloss over assumptions like being able to sell the house back at a value greater than or equal to what you paid.
> 
> ).




This conversation started, because some one made a comment that you are either going to rent a property, or rent money.

My point here, is that the interest bill is most likely going to be a lot less than the cost of renting, and that in general the interest bill reduces over time, where as the weekly rent is almost 100% guaranteed to rise over time.

So you have the situation where the owner, has a weekly interest bill that will reduce from roughly what the weekly rent is, to zero over thirty years, where as the renter will probably never see a long term reduction in weekly rent, and if we are honest, will likely see a massive rise in rent over thirty years.



> It's not OK. Don't gloss over it.




I don't think its ok to gloss over the value his equity will have by claiming the $500K in principle payments is an expense in the same way the interest bill or rental payment is.

The principle payment accumulates, and represents the owners ownership interest in the underlying property.

the property will always be worth something, even if he over paid by 20% initially, he will still get a large chunk of his principle back, so its not an expense, but after 30 years of inflation, even without real growth, the amount in dollars he gets back will be more than his principle payments.




> What's silly is linear extrapolation informed by recency bias, especially when forecasting 30 years out.




What's your guess as to the inflation rate over the next 30 years, I thought you believed there was a chance of lots of inflation, hence your gold position?





> Take a look at Japan, and how foolish any such assumptions and extrapolations made in the year 1985 would appear today, regardless of how valid they appeared at the time. (or the USA in 2006, or Greece in 2003, or whatever




Do people in japan not have to pay rent?


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## skyQuake (22 September 2015)

Value Collector said:


> As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)



$480 interest repayment + principal repayment
vs
$480 rent payment + asset investment

apples with apples etc.

For this example I thought we were going to compare pure interest only vs pure rent.



> however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill, also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000



That depends on whether you think house prices will increase. Assuming that the rental yield stays constant. If house prices fall, then rents will get cheaper


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## Value Collector (22 September 2015)

skyQuake said:


> $480 interest repayment + principal repayment
> vs
> $480 rent payment + asset investment
> 
> ...




either way, you would still have a rising weekly rent that is likely to triple over 30 years, compared to a interest bill which would likely remain largely stagnate, see for yourself, put a 4% rental increase each year on the $480 for thirty years 

Also, the capital value of the house would probably increase at least by inflation so even an interest only loan would likely see some equity generation over time.

the main phenomenon I am trying to point out is that apart from the ups and downs in interest rate, the owners costs are largely locked in and unaffected by inflation, where as the rental has the ever present inflation pushing up his costs.

____________________________

But also, principle payments onto a house are a very good form of saving, especially to those who would find it difficult to maintain the discipline of saving over the years.



> That depends on whether you think house prices will increase. Assuming that the rental yield stays constant. If house prices fall, then rents will get cheaper




rents won't drop just because prices fall, rents are based on supply and demand of rentals.

In the GFC houses prices plummeted in the USA, but rents didn't fall by the same amount, rental yields increased.


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## skyQuake (22 September 2015)

Value Collector said:


> either way, you would still have a rising weekly rent that is likely to triple over 30 years, compared to a interest bill which would likely remain largely stagnate, see for yourself, put a 4% rental increase each year on the $480 for thirty years
> 
> Also, the capital value of the house would probably increase at least by inflation so even an interest only loan would likely see some equity generation over time.
> 
> the main phenomenon I am trying to point out is that apart from the ups and downs in interest rate, the owners costs are largely locked in and unaffected by inflation, where as the rental has the ever present inflation pushing up his costs.




Point taken. Inflation will help owners as opposed to renters (unless you think there's going to be deflation


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## satanoperca (22 September 2015)

skyQuake said:


> Point taken. Inflation will help owners as opposed to renters (unless you think there's going to be deflation




Glad for the tongue in cheek comment. There seems to be no inflation anywhere in the western world, there does seem to be an abundance of cheap credit and a massive amount of QE money pumped into the system over the last 5 years and still no inflation.

So one can only assume, if there wasn't money printing on a massive scale world wide, we would be in a deflationary death spiral but how long can you keep the deflationary genie happy.


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## sinner (22 September 2015)

Value Collector said:


> This conversation started, because some one made a comment that you are either going to rent a property, or rent money.
> 
> My point here, is that the interest bill is most likely going to be a lot less than the cost of renting, and that in general the interest bill reduces over time, where as the weekly rent is almost 100% guaranteed to rise over time.




Yeah man. We get the point. It's not a hard point to understand. What I am saying is the assumption (what you refer to as "most likely") is dumb. You can prove this simply by trying to lock in the interest rate and see what happens. First of all, nobody is dumb enough to let you lock in a rate (at least, in Australia) for 30 years. Second of all, you can see the implied future rate when doing such a lock in is >7% per annum. 

I already showed this above. The interest bill rises to >$700,000.



> So you have the situation where the owner, has a weekly interest bill that will reduce from roughly what the weekly rent is, to zero over thirty years, where as the renter will probably never see a long term reduction in weekly rent, and if we are honest, will likely see a massive rise in rent over thirty years.




All certainty for the owner, nothing but not nice probablies for the renters?



> I don't think its ok to gloss over the value his equity will have by claiming the $500K in principle payments is an expense in the same way the interest bill or rental payment is.
> 
> The principle payment accumulates, and represents the owners ownership interest in the underlying property.




And as the principle accumulates, the unmaintained value of the property depreciates and so on. It isn't so simple. Dumb to treat it like it is.



> the property will always be worth something, even if he over paid by 20% initially, he will still get a large chunk of his principle back, so its not an expense, but after 30 years of inflation, even without real growth, the amount in dollars he gets back will be more than his principle payments.




I guess we better hope he didn't overpay by 30, 40, or 50% then? Or that we don't have 30 years of deflation? That wage growth outpaces growth in costs? and so on...

Another title for the man, AssumptionCollector.



> What's your guess as to the inflation rate over the next 30 years, I thought you believed there was a chance of lots of inflation, hence your gold position?




Obviously unlike you I don't believe there to be one magical isolated factor called inflation. I recognise that there are different forms of inflation, some which lead to virtuous cycles in the economy and others which lead to negative feedback loops. The inflation you are talking about is the inflation of the last 30 years, i.e. all I'm hearing from you is how well I would have done to buy a house in Australia (first) in 1985 as interest rates went down in constant clip nearly every year to their current historical lows.

Yes. Real assets, good.

No. Leverage, bad.

Is caveman style simple enough to grasp?



> Do people in japan not have to pay rent?




Ever looked at historical rents in Japan? My guess is not. Good luck plugging 4% rental increase into a model there. You'd be lucky to get that over a decade at the current rate.


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## Value Collector (22 September 2015)

sinner said:


> Yeah man. We get the point. It's not a hard point to understand. What I am saying is the assumption (what you refer to as "most likely") is dumb. You can prove this simply by trying to lock in the interest rate and see what happens. First of all, nobody is dumb enough to let you lock in a rate (at least, in Australia) for 30 years. Second of all, you can see the implied future rate when doing such a lock in is >7% per annum.
> 
> I already showed this above. The interest bill rises to >$700,000.




Even at $700,000 its still roughly half what the rent will be once you factor in rental increases.




> And as the principle accumulates, the unmaintained value of the property depreciates and so on. It isn't so simple. Dumb to treat it like it is.




Who said you shouldn't maintain your property, maintaining the property is included in the ownership costs, when I said eventually the owners cost reduces down to about 20% of the cost of renting, property repairs etc are factored into that.   




> I guess we better hope he didn't overpay by 30, 40, or 50% then? Or that we don't have 30 years of deflation? That wage growth outpaces growth in costs? and so on...




Obviously if you feel an asset is grossly over valued, you don't buy it, none of my arguments were saying todays prices are good or bad, I was discussing the general theory behind ownership vs renting. 









> Ever looked at historical rents in Japan? My guess is not. Good luck plugging 4% rental increase into a model there. You'd be lucky to get that over a decade at the current rate.




and what's the interest rate you would be using to calculate the owners interest bill there? 

and how does that compare to the rental yield the renters are paying?


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## Smurf1976 (22 September 2015)

sptrawler said:


> I tend to think an investment, is something that is bought to supply an income, or to be sold later for a capital gain.




Personally I've always taken a two step approach to investment overall. One is to invest in things which produce an income. The other is to invest in things which reduce my need to have an income in the first place. There's a role for both in my view.


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## trainspotter (22 September 2015)

We all need a roof over our heads whether it be Investment or PPOR it depends on your circumstances. Property is another vehicle to drive wealth. Same as passive income streams from dividends. Me personally it worked out that I was 23 and it was February 22nd 1991 on a budget of 3 x 1 and 3.5 times my income. This is not because I got the Toorak McMansion. I got the basic no paint to walls and 105m2 of living areas. A starter house. A roof over my head. A starting point. 

Would I do it again. You betcha


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## tech/a (22 September 2015)

Smurf1976 said:


> Personally I've always taken a two step approach to investment overall. One is to invest in things which produce an income. *The other is to invest in things which reduce my need to have an income in the first place. *There's a role for both in my view.




You never got married Smurfy?


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## sptrawler (22 September 2015)

Smurf1976 said:


> Personally I've always taken a two step approach to investment overall. One is to invest in things which produce an income. The other is to invest in things which reduce my need to have an income in the first place. There's a role for both in my view.




We are on the same page, I see one as an investment, the other as a savings plan.


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## sptrawler (22 September 2015)

trainspotter said:


> We all need a roof over our heads whether it be Investment or PPOR it depends on your circumstances. Property is another vehicle to drive wealth. Same as passive income streams from dividends. Me personally it worked out that I was 23 and it was February 22nd 1991 on a budget of 3 x 1 and 3.5 times my income. This is not because I got the Toorak McMansion. I got the basic no paint to walls and 105m2 of living areas. A starter house. A roof over my head. A starting point.
> 
> Would I do it again. You betcha




Agree completely, I was 25 had three kids and had a fibro and tile house jinkered onto a block. 1982 $14,000 +$4,000 to get septics, leach drains, electricity conected.
Then a ton of work, stripping out plater board & re gyprocking, rewiring, building a bathroom, actually rebuilding the whole sorry mess.
Would I do it again, you betcha.
At least I owned it.
It would have been a whole lot easier, just to take a loan and buy a house and land package.
But would I be in the financial position I am now, no way, mostly you get out, what you put in.


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## luutzu (22 September 2015)

sptrawler said:


> Agree completely, I was 25 had three kids and had a fibro and tile house jinkered onto a block. 1982 $14,000 +$4,000 to get septics, leach drains, electricity conected.
> Then a ton of work, stripping out plater board & re gyprocking, rewiring, building a bathroom, actually rebuilding the whole sorry mess.
> Would I do it again, you betcha.
> At least I owned it.
> ...




Good man.

Yea, would have been nice if we could just write a cheque and pick the colour for the walls. Then visit harvey Norman to decide what taps matches the deco... For us it was whatever we could get on Graysonline. 



----

Regardin houses:

As the Chinese said, I own all your stupid houses now! haha...

Ok, kidding aside, as a Chinese saying goes: First have a peaceful home, then work to build prosperity.

If you can afford it, yea sure... have a mansion or two. But if you're most people, a house is for shelter, set down some roots, keep the family warm and safe... all so you can work towards a career or build a business. 

To take on too much debt for a big house you can't really afford might not be a good idea. To then use negative gearing and whatnot to take on two more is really asking for it.


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## sptrawler (22 September 2015)

luutzu said:


> Good man.
> 
> Yea, would have been nice if we could just write a cheque and pick the colour for the walls. Then visit harvey Norman to decide what taps matches the deco... For us it was whatever we could get on Graysonline.
> 
> ...




Spot on, when I bought and transported my house, I thought I must be stupid but I wanted to own it.

When I talked to my Mum about it( I was only 25), she said " the kids won't remember the floor coverings, or the curtains".
"They will only remember if it was a happy house".

Jeez she was so right, it was the happiest time of our lives, goals were plentiful and easily achieved.

Hard days, but happy days.


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## luutzu (23 September 2015)

sptrawler said:


> Spot on, when I bought and transported my house, I thought I must be stupid but I wanted to own it.
> 
> When I talked to my Mum about it( I was only 25), she said " the kids won't remember the floor coverings, or the curtains".
> "They will only remember if it was a happy house".
> ...




True. Us kids are real close because we bunk together for a decade or so. My two brothers and two sisters were still bunking until only a few years ago when one graduated and others were about to.

So yea, while the kids won't mind the curtains or the floor boards, real men at work does mind though 
I worn out a few gloves and a few finger tips checking to see if the plaster joints were smooth after each sanding. Who would have thought those suckers were so abrasive.

Yea, a man's house is truly his castle. I bet it would be hard for you to trade that house of yours. Mine's a tiny tin shed but man, I know I won't like my future mansion by the Harbour as I do this little guy


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## kid hustlr (5 October 2015)

tech/a said:


> My apologies I seen to have mis understood you.
> 
> 
> 
> ...




Tech,

What was the sale price and rent on these bad boys.

Is Moana considered a 'nice' area?


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## tech/a (5 October 2015)

kid hustlr said:


> Tech,
> 
> What was the sale price and rent on these bad boys.
> 
> Is Moana considered a 'nice' area?




5 with better views went for $400K
4 $381k

We had them as holiday rentals.
$26K a year 30% occupancy (each).
Basically November to March
Then odd ones throughout the year.
$1200 a week Dec to Feb Still have the same regulars.
New owners have taken them on.


Bought them in 2002 for $170K av.

Moana is a southern beach suburb.
I like it I live here. The closest beach to the city
where you can drive on the beach
Google Moana Beach South Australia (There is a Moana in the US) images for an idea.


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## VSntchr (5 October 2015)

tech/a said:


> Google Moana Beach South Australia (There is a Moana in the US) images for an idea.



Looks like a nice area Tech/a. 
I did picture you with shorter hair though!


Moana named Adelaide's best surfing beach


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## tech/a (5 October 2015)

VSntchr said:


> Looks like a nice area Tech/a.
> I did picture you with shorter hair though!
> View attachment 64584
> 
> Moana named Adelaide's best surfing beach




Remarkable likeness.


----------

