Fast Money: Profit From Property

By Jason Cunningham

Do your finances control you? Frustrate you? Limit you? Well take control of your money today and get more of what you want from life.

Financial expert and money man on The Living Room, Jason Cunningham guides you through one of the biggest financial decisions of your life, buying property. Whether it be your home or an investment property, Jason will help you put on your investor’s cap and make the most of your property purchase. Fast Money: Profit From Property is a jargon-free, practical guide that will get you started on your journey to financial freedom with bricks and mortar, fast!

• Language: English
• Publisher: Wiley
• Release date: Feb 5, 2013
• ISBN: 9781118612958

Book preview

Chapter 1

Your home is your castle — and your cash cow

What you’ll discover in this chapter:

why property is such a fantastic investment

the changing face of property ownership and loan structures

what equity is and how you can use it to fast-track your financial plan

the difference between purchasing a home and an investment property

renting versus buying.

Looking back to when I was growing up — somewhere between the ‘dark ages’ (when we only had black and white TV in the ’70s) and the Jurassic (Park) period (the early ’90s) — I still can’t believe how much things have changed. In 1975 my folks bought their first house in suburban Melbourne for $25 000. Today there are TVs worth more than that! Despite the differences in house prices, incomes and haircuts, there are still some valuable lessons we can learn from the baby boomers in terms of their attitude to credit and savings. At the same time, however, there are several reasons to challenge entrenched notions of property as our main (or sole, excluding super) investment strategy.

The times have a-changed

Thirty years ago attitudes to purchasing property were a lot different from that of first-home buyers today. My parents borrowed only 50 per cent of the purchase price — meaning they actually saved for a 50 per cent deposit (some readers may need to look up those ‘s’ and ‘d’ words in the dictionary). Their sole focus then was to pay off their home loan as fast as they could. So we had milk crates for furniture until they could afford to buy a lounge suite. Don’t get me wrong, we didn’t eat gruel for dinner, but Mum and Dad, and people of their era, understood and lived the concept of delayed gratification. They worked hard (sometimes a couple of jobs) to pay down the loan, then bought wants such as furniture, holidays and things for the kids. They waited until they could afford it.

This attitude is not for everyone. In this chapter I’ll discuss some of the various home finance options available depending on your situation — whether you’re a first-home buyer or an investor, the size of your deposit and your ability to pay off the mortgage, to name a few. In fact, buying property is the sixth step to getting more money in your life, and in chapters 2 and 3, I’ll examine a range of wealth creation strategies using equity in your property. While seemingly quaint and old-fashioned, I believe there’s definitely some merit in the baby boomers’ dedication to releasing the mortgage noose from around their necks.

We also need to acknowledge that it’s much easier to obtain credit these days, whether that be home loans, personal loans or credit cards. Our parents practically had to name their first born after their bank manager to ensure they could get a loan — these days, the banks come to your house to offer to lend you money. Why the dramatic shift? It’s largely due to the deregulation of the financial sector, which has led to increased competition among financial institutions. Banks have had to become more proactive in maintaining their market share against aggressive and nimble new competitors. As their ever-increasing profits show, lending is obviously very good for business.

These forces have seen lending institutions continually drop their lending criteria. Some lenders now assess pre-tax rather than net (after-tax) income, meaning more clients are eligible for loans. Many offer low-doc or no-doc loans, so you can access considerable credit without providing any proof of your ability to repay it, purely so more people can take out loans. Later in the chapter I’ll discuss the impact of less stringent lending requirements in the personal loan sector.

Types of home loans

The property-purchasing mindset of our generation (x, y, π — whatever we are) has taken on a whole new outlook. As table 1.1 shows, home loans and the way we use them have also changed. Long gone is the good old principal-and-interest loan. More and more homebuyers (and property investors) are taking out 25- to 30-year interest-only loans and don’t really have the focus that our parents did to pay down those loans as quickly as possible. Today, the aim is to get in there and buy a house right now, and keep up with the Joneses while we’re at it, decking the house out in the latest designer furniture (when was the last time you saw a new homeowner ‘making do’ with old furniture or an old telly?).

Table 1.1: comparison of home loan characteristics, 1975 and 2008

There are also other new types of loans such as redraw facilities and offset accounts. Now, don’t get me wrong; if these are used correctly, they can be a very powerful tool in a wealth creation strategy. However, if using these facilities for wants (luxuries) rather than needs, this misuse can be to the detriment of the average person.

All too often I see young clients who have borrowed 90 or 95 per cent of the value of the home, getting interest-only loans and just servicing