Finance advice
Paul Glossop

How saving money can actually cost you money

By Paul Glossop

What I’m about to say may shock or conflict with many people’s habits, however, I’m only presenting one option (proven to be a very powerful option) for those with the right habits in place: saving money if, not allocated correctly, can cost you millions over your lifetime!

I’ll share a personal story. In the mid-2000s, fresh out of university, I had a friend secure a great job in a prestigious private school (‘all inclusive’) and she was saving exponentially every year.

Her thought process was to save for 15 years and in that time, she would have $750,000 in cash and in her words, ‘she would buy a home in Sydney for cash’ and be set for an early retirement. I did ponder this position at the time and initially it did seem to have merit.

However, my financial mindset quickly shifted to discussions with her explaining that even after five years, she would have the opportunity to utilise her cash as deposits for over $1 million in property at 20 per cent deposits plus closing costs.

By 2009-12, I was personally investing heavily within the Sydney market (which at the time was very flat) – the market fundamentals were excellent with low unemployment, high population growth, under supply of stock and sound cash flow.

I personally did very well out of those investments 10 years on, and the Sydney portion of my portfolio has remained cash flow-positive from the outset (even factoring in the 7 per cent interest rates at the time).

Fast forward to 15 years, I ponder how different the outcome would have been for that same friend if she had the correct financial literacy and had her barometer set correctly with a true understanding of the power of both leverage and cash flows.

With some quick calculations based on a $250,000 cash deposit which she had saved up over five years by 2010, this could have been leveraged into approximately $1 million in property (likely to be split between two to three separate assets) at a 20 per cent deposit plus closing costs (granted she had purchased correctly with a continued focus on balancing her personal cash flows).

Fast forward to a decade and that same $250,000 in cash would have created an asset base of $2 million market value and a pre-tax gain of close to $1 million.

If the investments were targeted correctly, she would have also remainder cash flow-positive and in that time also saved the $50,000 p.a. which she was doing, living in campus with all expenses paid. That would calculate to an additional $350,000 which would be offsetting her debt and would give additional cash flow.

In short, based on the calculations below, she could have expedited her pathway to owning her own home far sooner given the growth which has occurred in Sydney over the past 15 years and had a very handsome passive income position within 10 years.

The crux of the story is that Sydney is no longer the market for double digit gains and Melbourne is now entering this same cycle of modest gains, potential periods of sideways/negative growth.

However, that same friend will now need to work an additional 15 years of her life based on my calculations because she didn’t take action when she could have.

I have huge respect for the sacrifice and good habits which are required to stick to a strict savings regime, however, with the right amount of financial literacy and the correct team around her, life could be very different today.

There are most certainly still some outstanding opportunities throughout the Australian property market; the key is taking action and ensuring that you have the right people backing you and ensuring that you don’t become another ‘if only’ story.

Happy hunting!

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About the Blogger

Paul Glossop

Paul Glossop

Paul Glossop is the founder and director of Pure Property Investment. Paul has built a substantial property portfolio, focusing on the fundamentals of property investing. He founded Pure Property Investment to enable investors to experience a truly holistic approach to property investment. From the initial consultation to the acquisition of the property, Pure Property Investment is a true partner for its clients through the entire journey. We specialise in sourcing properties Australia wide that are below market value, positively geared and primed for capital growth.

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  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
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The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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New data from Mortgage Choice shows that property buyers continue to choose variable rate home loan products, as demand for fixed rate home loans fell for the eighth consecutive month. 

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According to the company’s latest national home loan approval data, variable rate home loans accounted for over 82 per cent of all home loans written throughout May 2018 — up over 2 per cent from the month prior, and almost 7 per cent higher than the 12-month average.

Mortgage Choice CEO, Susan Mitchell, said this trend will continue as borrowers develop apathy towards the RBA’s stagnant cash rate.

“Indeed, we continue to see borrowers opt for the flexible nature of variable rate home loans which may offer a redraw facility, offset accounts and the ability to make extra repayments. These features are not typically associated with fixed rate loans.

“While a fixed rate product provides repayment certainty, variable home loan rates have been relatively stable for a prolonged period of time giving borrowers little incentive to fix.”

This week’s Housing Finance data from the Australian Bureau of Statistics found that 52,116 home loans were approved throughout April, down 1.4 per cent from the previous month.

Ms Mitchell said she is unsurprised that the value of investment loans dipped — falling 0.9 of a percentage point to $10.7 billion in April.

She said this could reflect tighter lending standards and serviceability policies.

“However, May data may show an increase in investment loans following APRA lifting the cap on investor loan growth at the end of April,” said Ms Mitchell.

Ms Mitchell also noted that the number of first home buyer commitments as a percentage of total owner-occupied housing finance commitments rose to 17.6 per cent in April 2018, from 13.7 per cent in January 2018.

“This increase is significant and first home buyers seem to be propping up the market.”

Ms Mitchell said she expected home loan demand would be maintained.

“[Due to] a combination of factors, such as historically low interest rates, easing property prices and access to FHOGs.”

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Buyer ‘apathy’ behind mortgage preferences
object(stdClass)#1214 (52) {
  ["id"]=>
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  ["title"]=>
  string(57) "The benefits of investing in a decreasing property market"
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  ["introtext"]=>
  string(150) "

The Australian property market is arguably in a softening phase, and this can have both positive and negative effects for property investors.

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In this episode of the Smart Property Investment show, Real Estate Gym’s Tom Panos joins host Phil Tarrant to discuss how investors can take advantage of this decreasing market by leveraging off of the reduced urgency in the sales process.  He also discusses the importance of researching up to date sales data before investing and looks at the state of the Australian property market as a whole.

With many property investors also selling property throughout their journey Tom reveals the best months to buy property in Australia, shares his thoughts on why an auction is not always the best method of sale and how as a purchasing decision it can lead to over-paying.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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The benefits of investing in a decreasing property market

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