RBA confirms focus on lending standards as prices soar
The RBA has restated its intention to monitor trends in housing borrowing and the maintenance of lending standards “ca...
Investors are often torn between entering the market sooner and taking the time to save up for a deposit. Which of the two will actually help you realise your investment goals faster?
According to investor Brad Beer, saving too much for his first deposit to avoid paying mortgage insurance is one of his biggest regrets.
At 20 years old, he was understandably too careful about handling his finances because, at that time, he didn’t necessarily have much to go by with.
Looking back, he would have made a lot more money had he educated himself enough to be confident about taking bolder steps.
He said: “At the time I bought, the market was moving quickly and if I had to bought sooner, 12 months earlier, I would have made a lot more money.”
“If I knew a bit more about finance and wasn't scared of the things associated with finance, like mortgage insurance, then I would have made some more money at that early stage and leapfrogged quicker,” the investor added.
Aside from being able to find the best locations and pick the right properties, he realised that being able to manage finances well is another of the true secrets to property investment success.
Fast forward to the present, Mr Beer considers risk management as one of the most important skills he had honed through the years.
According to him, while debt may be a daunting thing to carry around, you can learn to use them to your advantage: instead of wasting precious time and effort on running away from debt, you could be growing your portfolio.
He highlighted: “Property is the vessel that makes the money, but the money in finance is how you get there. Controlling of the risk associated with that and then being able to sleep with those risks is important.”
“Some people can't sleep with debt very well, but I'm fine. However, I wasn't when I was 20 years old. I saved money to buy my first car and my second car, and probably my third car.
“Then, you realise that you've just got to actually learn how to use these things properly as opposed to run away from them. Would be something I'd grab myself on the scruff of the neck of,” Mr Beer shared further.
Typically, budding investors are asked to save 20 per cent of the purchase price as deposit, which amounts to a lot of money in most cases. On top of the deposit, you also have to consider other associated costs, including stamp duty, conveyancing costs, professional fees and building and pest inspection fees among others.
Waiting and saving will help you avoid additional expenses, including the Lender’s Mortgage Insurance (LMI) while keeping your loan-to-value (LVR) ratio low—increasing your chances to secure a home loan of your choice.
According to a QBE Lenders’ Mortgage Insurance survey, the average time it takes for a buyer to save up for a first purchase deposit is around four years.
In 2017, 49 per cent of buyers chose instead to shoulder mortgage insurance costs to get into the property market faster instead of saving for a bigger deposit.
This strategy may prove to be beneficial if you successfully enter a growing market that can provide a good balance of cash flow and capital growth.
Take this situation for example: It’s the middle of 2000s. Person A plans to save $750,000 in cash within 15 years, buy a home in Sydney using the cash and be set for early retirement. Person B, on the other hand, chooses to utilise the savings as deposits for $1 million-properties.
In five years, around 2009 to 2012, Person A would have saved up around $250,000—a long way to go based on the $750,000 target—while Person B will have leveraged the same amount on two or more assets in Sydney. Back then, the Sydney property market was flat and poised for growth and with strong fundamentals including good job growth, high population growth and undersupply.
Provided that Person B was able to pick the right properties and balance cash flow and capital growth on the portfolio, the asset base created would have $2 million market value and a pre-tax gain of almost $1 million after a decade. Considering the upward movement of the Sydney market for several years, the assets bought in the capital city would have also remained cash flow-positive.
Had Person A followed the same strategy, the dream of owning a personal home would have been realised sooner given the amazing growth that the Sydney market saw in the past 15 years. It may also be possible to enjoy a significant passive income within 10 years.
If, for some reason, Person A decides to invest now instead of saving up, it would take longer to achieve the same success that Person B had since Sydney is widely considered as past its prime, with little potential for the same double-digit gains that investors experienced years ago.
At the end of the day, deciding whether to buy now or wait and save comes down to financial literacy, opportunity cost and long-term growth.
There are different opportunities at different times in different Australian markets, which is why it’s important to know when to take action and when to stand by.
Mr Beer strongly encouraged his fellow investors to keep their eyes open on market behaviour, continuously educate themselves and seek backing from the right professionals in order to make the best decisions.
He said: “90 per cent of winning is beginning, so you've got to give it a crack, but you have to do the proper research and learn. Don’t have a crack without covering your risks and understanding.”
“At the same time, don't be afraid to jump in and keep having a crack on the way through,” the investor concluded.
Tune in to Brad Beer's episode on The Smart Property Investment Show to know more about how he manages his finances to continue growing his portfolio.