As promised last week, this week and next I will cover two different ways you can invest your money to make it work for you. There are many ways you can invest your money and in future episodes I would like to explore them all with you. Well all that I know of. I’m still learning all the time, but for now I will focus on the most well known, and what I have personally done myself, which is investing in property and investing in shares.
Today let’s start with investing in property. How do you make money from property? Hmm how long do we have? There are so many ways you can make money in property. The scope is too big to cover in a short podcast but I will do my best.
Essentially, an investment property is an asset you can buy and then rent out to produce a rental income.
As I said in the first episodes of this podcast I want this to be a platform where you can hear information about what real people are doing with their money and how they are doing it. So I thought it would be appropriate to share my story with you in regards to investing in property.
For most of my adult life the notion of having my own home was something I dreamed about but didn’t think was really possible. I worked on and off in the photography industry and a high and or regular wage was not something I was accustomed to so having enough money to buy a house didn’t seem like a reality to me. In retrospect, I also think I viewed life as happening to me as apposed to happening for me. I didn’t understand the difference or really have the awareness to create bigger for myself.
So what changed? I guess life experience, age and a career change was the turning point for me.
As I said I was working in photography and assisting other photographers. After a time I went out on my own but I wasn’t that great at the business side of being in business and struggled to keep myself afloat. I distinctly remember one summer I was in Mallacoota with family and I had no new work booked and I really didn’t know where my next income was coming from and I was literally sick with worry and anxiety about my future and wellbeing like how to pay rent and have money to eat. It was tragic. I was in this beautiful summer location and was in bed sick and anxious.
It was around that time I decided I had to do something to change my financial situation and went back to university to get my teaching qualification.
Fast-forward a few years to when I started teaching full-time and I couldn’t believe how lucky I was. When you are employed with a salary you actually get paid when you are sick and have a day off. Many of you might be laughing at me now but at that time I had never had a job that wasn’t working for myself or casual employment so I had never been paid a sick day in my life until I was in my thirties. Since then I don’t think I have taken one day of work for granted as I think it is an absolute privilege to have such amazing work condition.
You better believe that once I had a stable income I saved and saved a lot.
I think it was because I knew what it was like to struggle with money…. ( ha I mean struggle without money) and survive on very little that I really respected the money I did earn.
Suddenly saving a deposit for a home seemed like it might be possible. I really really wanted that security and stability that apparently in my mind comes with owning a home.
By saving about 10% of my income it took me about 3 years to save a bit over $20000 but even then with prices in Melbourne at that time, I still felt buying a place was out of my reach. It turned out that my partner got work in regional Victoria so we moved to the country and within the year we had bought a place. Places in regional Victoria compared to Melbourne are so much more affordable. We couldn’t believe what you could buy up there for the same price you could get a one bedroom dog-box in town.
It was the best decision we could have made financially, as that purchase was what got us in the market. We were just fortunate that we ended up in the country due to Louis’s work circumstances, as it didn’t really occur to me to buy that far out of Melbourne as I was in the mindset I had to live in the property so I was always looking around Melbourne.
We didn’t know how long we would be living there so we did have some forethought to buy near the hospital and walking distance to town thinking that we would rent it out if we had to return to Melbourne.
It turned out that we did have to move back to Melbourne. We rented out our house in the country and we found a rental in Melbourne. During our time in the country I keep reading and educating myself and that helped a lot with the process of renting out the property. Let me know if you are interested in hearing more about that. If you are, perhaps I could do an episode about renting out your property in the future. As there is quite a bit to learn with tax requirements when switching your principal place of residence to an investment property.
For reasons I wont get into now we ending up living in a bit of a dive when we returned to Melbourne so we were highly motivated to find our own home. The trouble was we didn’t have job stability and we were aware there was the possibility that we might have to move interstate for Louis’s work so despite desperately wanting our own place we realised that buying a house in Melbourne was probably not the smartest thing to do. I kept up educating myself by reading and listening to investment podcasts and also attending an investment workshop. This was what ultimately convinced me to head down the investment property route. I had wanted to continue building a property investment portfolio but I had always assumed that the thing to do was to buy your own home first. It was a pretty drawn out and a very long decision in the making as I had a lot of emotion tied in with wanting my own home but slowly I opened up my mind to the possibility that the Australian dream of home ownership might be possible by following an alternative path.
I want to explain this to you in a bit more detail so you understand why it might be a good idea to buy an investment property rather than your own home. Don’t get me wrong I don’t think there is anything wrong with buying your own home. It’s certainly something we are still working towards and really want but over time I have learnt that buying your own home first might not be the quickest way to achieving your financial goals and I will explain why.
In Melbourne right now house prices are pretty high. I don’t know about you but I don’t know many people who can easily afford to take an $800 000 mortgage for a shitting run down house that you still have to renovate. We found some places around the $600 000 mark a bit further out in the western suburbs but they either required a lot of work or were very small. For a family of four and a dog a tiny two bedroom apartment didn’t really meet our requirements. Not to mention I just didn't want to be personally responsible for that much personal debt that doesn’t help generate income or capital growth.
So after a lot of researching and education we decided getting another investment property was the best option for us at the time. I think at this point I want to say this was what was best for us and our personal finance goals and capabilities and that’s the point, right? It’s called personal finance because it is personal to you. I guess I don’t want you thinking I’m trying to tell you to do what we did. I’m just trying to expose you to other options that are available.
In terms of the pro and cons of buying a principal place of residence or investment property there are many financial benefits you get from an investment property that you don’t get from your own home. The biggest being that you can pay off the debt of the investment property with the rental income and the interest among other things are tax deductible. When you buy your own home ,you alone are responsible for paying down the debt and your home doesn’t produce an income for you. Just food for thought and options to consider.
Through education I learnt how to research locations and work out an investment strategy and understand the fundamentals for investing in property successfully. This didn’t happen overnight but truly once you start heading down the education path you learn so much and it’s not as complicated as you might think. My motivation to educate myself was to understand what I needed to do and how to do it. By doing this I learnt all about who you need to engage as part of your investment team i.e. mortgage brokers, accountants and buyers agents.
We engaged a buyer’s agent to purchase our next property and I’m so glad we did as it helped everything move quickly and smoothly and we ending up getting a property about $25000 under market value and the rental yield is about 6%. I might have been able to find that myself but honestly I’m not interested in becoming an expect property researcher and sales negotiator. To me the cost of employing a qualified buyer’s agent who does it everyday and has access to off market offers due to their contacts makes sense to me.
In the future I would love to get a buyer’s agent on the show to educate you all about what they do and why it might be useful to engage their services. If you want to learn more about buyer’s agents let me know in the comments below and I will endeavour to find someone to interview on the show for you.
In order to buy the second property we refinanced our first property and set it up so that we immediately had access to the equity to use as the deposit and to cover all the acquisition costs. We actually set it up so that we had enough to purchase two more properties. So we still have the funds to purchase the third investment but haven’t done that yet. I think in another episode I will take you through that process. We used a mortgage broker and utilised their expertise to access these loans and learn about the fact that this was even possible. It’s a little bit more involved but I would be happy to explain it to you in another episode. Let me know if you are interested in this.
I feel like I’m taking about this all very casually but it was not a casual experience. I knew enough from listening to other investors that growing your personal wealth is totally possible through property investing but this didn’t make any difference when it came to the emotions of doing something you haven’t done before, backing yourself and really just cutting out the noise. Everybody thinks they know about property because they live in one but there is actual skill and knowledge required to invest in property so you avoid making big mistakes that can cost you a lot of money.
My biggest challenge was- trusting the team I was working with. What I mean by that is we used a mortgage broker, an accountant and a buyer's agent.
We got advice from our accountant, who by the way is also a property investor and I think this is really important to acknowledge that you actually need to work with people who have done what you want to do. It’s amazing how many people in finance and real-estate there are that don’t even invest in property themselves and yet are in a position where they might proclaim they know what is best to do. I always ask what experience they have and how many properties they have and what type. You can’t assume people know what you think they should know. I grilled everyone on my team and sometimes I felt really uncomfortable doing that but I would rather be that annoying lady asking another question and know that I was working with the right people then be a people pleaser at my own expense because investing in property is not cheap!
I’m not going to pretend that I didn’t have to really stretched out of my comfort zone during the course of the investment process. I had many doubts and was also afraid I was making the wrong decision but at a certain point I just had to back myself and believe that I had educated myself and had taken all the steps I knew to minimise risk. I also had to decide at a point that the people I chose to work with were the right people and I had to step back just a little and let them get on with the job I had engaged them to do. Very scary stuff people but also freakin awesome when it all comes together in the end.
Where we stand at the moment is we are ‘rentvestors’, which means we invest in property but still rent ourselves.
The reason we invest in property is that I want to build a passive income from investments for my retirement and I believe from what I have learnt is that this is possible through property investing. I also invest in shares but that is for next week’s episode.
I hope I have opened you up to learning a bit more about what is possible. There is so much more I want to share with you about the details and actual steps involved in the minutia of property investing. Let me know what aspects you would like to learn more about. I’m a details person so I like to know all the nitty gritty of how to do something. I feel like I only gave you the broad overview today and I am certainly happy to give you more information about particular aspects of property investing in future episodes.
I think it would be good for you to learn about the reality of how we can actually afford to do this as there are a few distinct reasons that make this possible. Like I said we can focus on this in future episodes.
To recap- the main takeaways from this episode are that: investing and working towards your financial goals doesn’t happen over night. I hope you see this from hearing my story.
Getting the two properties we have now required a lot of education, time and professional assistance to get the job done. You don’t have to be a rocket scientist but you do need to put some effort in to researching it.
And finally I believe that if you want to create a passive income for yourself you need to be willing to look outside the square and be open to doing things a little differently. As you can’t do the same thing you’ve always done and expect to get different results. Being open-minded enough to consider an alternative to buying our own home has opened up more possibilities for us and I’m so glad that we over came our fears and went for it.
I hope hearing my story has triggered some ideas of what is possible for you to try when considering your own personal finance.