33 – Gifts

With Christmas fast approaching, the question occurred to me “should we send our tenants a gift?” I debated the same question in September when the current tenants moved in but I didn’t really have a chance to act as I was only just back to work full time and somewhat preoccupied with finalising the construct/inspect/handover/tenant process. At the time, the property manager said some landlords do house warming gifts (bottle of wine, movie voucher, etc) and others don’t. The property manager would have actually organised something for us.

Personally, I can’t make up my mind between keeping a “professional distance” to avoid issues that might otherwise come up and fostering a relationship to encourage the longevity of the tenancy. I suspect there is a middle ground. I’d like our tenants to connect the concept of their home to our house to encourage them to respect and care for the property—which of course they may do anyway. Of course the extra prompting from a gift if they turn out to be bad or “mid-tier” tenants!

We’ve never met these tenants but their first inspection went well (the next is due soon) and they’ve been reliable if not slightly ahead on their rent. That said, they’re not a typical two adult/two child family and, being reasonably young, I don’t expect their household to remain intact for more than a few years as their personal situations evolve due to work, relationships, life events, etc. Of course that’s no reason not to be generous.

An impromptu discussion at the office among co-workers who have been renters themselves and some of who are also new landlords in their own right indicated some of us have received Christmas gifts from landlords and others haven’t. I’ve written in the past about our close relationship with one of our landlords, from who we received an occasional Christmas card. As per the image above, it seems some landlords will go so far as free rent—which is extremely generous (but perhaps not a great business decision).

I haven’t made up my mind about this yet and, knowing us, we’ll barely have time to think about gifts for each other and our immediate family let alone interstate tenants. I’d love to send them a card at the very least but I wonder if that would be considered a bit miserly.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

32 - Preparing for the Second Build

It’s been a little quiet here but for good reason: I’ve been back to work after a few years as a stay-at-home dad. In other words, Gemma is on maternity leave following the birth of our second child and her paid leave recently ran out.

Now if you’re a bank or lender, you’d probably worry about loan serviceability with neither of us working, two dependent children, a PPOR loan, and an investment loan to repay. According to our mortgage broker, Nathan, women on maternity leave statistically don’t always go back to work. So to keep things ticking over I’m back to the bad ol’ 9-5.

Of course serviceability only matters if we were to apply for another loan. The existing loans are already in place (and being repaid) so the banks don’t care what we get up to.

And that point naturally leads to the announcement that we’re looking at a second investment build. Having now been back at work full time for a few months, we may even be eligible to borrow again sooner rather than later, which is great.

As with the first IP, we’ve got unused or “lazy” equity in our PPOR. What that means is the value of our family home is worth more than what we owe the bank, thanks in part to appreciating property prices and the fact we’ve gone to great lengths to pay down the loan and thereby save on interest charges. That equity can now be used to fund the deposit and costs on an investment property through a line of credit secured against our family home.

Rounding up, we used around $70k of this equity to cover the 10% deposit and other costs for IP #1, meaning we didn’t pay lender’s mortgage insurance on the 90% main loan. I’ve got a pessimistic spreadsheet showing me, worst case, how much it costs to hold this property with tenants in place and that works out to around $4k/year for the first few years; I’m meanwhile looking at the actuals and so far the costs versus incoming rent are more or less balancing out. Open Corp suggests holding costs are typically around $50-60/week.

Of course with Gemma not working this year (IP #1 is in her name) we’ll have to defer any tax benefits so it’s hard to get a true picture of holding costs.

Nonetheless, with the IP#1 build behind us, tenants installed, and actual holding cost data now available, I’m feeling comfortable about repeating the process.

Because the first build with Open Corp was so smooth and because I’m working full-time and have little time to spare researching the market, area, and property, I’m planning on going through Open Corp again despite the costs. At the moment we’re looking at a build in Melbourne and Mortgage Choice tells me we should be able to borrow what we need. I’m planning on using the same team, with state-specific replacements for certain roles of course (e.g. settlement).

I’ll note my intention at this stage is not to own a dozen properties, as some firms may suggest. I’ll do what we can afford to do and can do comfortably. Open Corp suggests five or six properties may generate the cash flow and create the equity needed to live comfortably in retirement but even that will come in time as the equity in IP#1 (and IP#2) grows and becomes accessible.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

31 – Thoughts on Upsizing

A couple of houses recently went up for sale on our street and when I saw the home open signs this weekend past I thought I’d take our daughter for a walk and go have a nosey. And then I got to thinking—which never ends well!

We looked at two houses: the first quite new (modern but lived in, on a rear lot like our PPOR) and the second quite old (not quite a “bonus house” but almost, on a large block with the potential for subdivision). Our neighbour’s owner-built house is also unofficially on the market. Give or take a few hundred thousand dollars, we could sell up and buy one of these places instead.

We had a project builder construct our family home in 2008 to one of the builder’s stock plans which we butchered to suit our requirements. After construction, we did a lot of work ourselves, including the painting, the tiling, the carpets, the skirting boards, the window coverings, light fittings, having the driveway poured, the pergolas and decking, the reticulation, the gardens, the paving, the fencing, air conditioning, the ducted vacuum, etc, etc. By my estimation, there’s about $95k of equity (materials, trades, and my free blood, sweat, and tears!) we’ve bolted on to the original $290k build price.

But here’s the thing: while our living areas are of a good size, the four bedrooms are modest (i.e. small) and we both feel we’ll outgrow this house in time as our children grow (funny what kids do to you…). Although this house was designed to be our “forever house” and we absolutely love the location in relation to the city, shops, and beaches and we can’t think of any place better than our particular block and its valley views, we built to our short-term requirements as DINKs, to a budget, and to a medium specification. I said to Gemma recently I feel like we built the wrong house on the right block.

Our house has served us well in the seven or eight years of living in it and it’s home. We’ve built strong relationships with our neighbours and the feel safe and happy in our local community. Gemma’s always insisted we spend an arbitrary minimum of ten years in our living in this house given our personal investment—as in, let’s enjoy the space we’ve had a significant hand in crafting and creating.

I’m not a status symbol type of person and having a large house in a nice area is not on my list of necessities. I do appreciate light and space, however; we can control the former to an extent but are bound by bricks and concrete when it comes to the latter (unless we extend) with our current house. I’ve also got a long list of must-have and wish list requirements for the next family house build… the things that to my mind would make the space in which we live more liveable.

Beyond that it’s just a matter of accommodating the kids’ friends when they have a sleepover, having storage to hide the clutter of daily life, and better flows and ambience.

I’d love to build again and probably would go through the pain of doing a lot of the finish work myself. I’d employ an architect this time around and wouldn’t go near the project builders.

Will the next house be our forever home? Perhaps the idea is a silly one and we’d be better off thinking about matching our home to our current life stage requirements. Of course Gemma and I are both Cancerians and therefore homebodies so just bury me in the back yard, thank you very much!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael