A Severe Case of the ‘Hold-Ons’
We speak with a lot of different people every day and we are very interested in people’s situations. Recently we were chatting with some potential clients about their situation, set out as follows:
- Husband (54), Full-time industrial work on $86,000 pa
- Wife (57), Full-time medical work on $140,000 pa
- Owns a home in Sydney worth around $1,300,000 and owes $1,050,000 on their Home Mortgage.
- 2 kids (21, 15)
- Credit Card Limit of $1,000
They broke some of the cardinal rules of investment a few years back and refinanced against their home and used that equity to acquire non-deductible, depreciating assets such as cars. This one decision has caused them so much damage in our current high-interest rate environment. Most people lack foresight when they expect interest rates to remain low forever.
They are now paying about $84,000 a year to the bank to live in their home. About $7,000 per month… Ouch!
We asked the question: “How much you would pay to rent in the area?” The answer was about $700 per week or $36,400 per year.
If they sold their home and started renting in the same suburb, they would be saving $47,600 per year. They wouldn’t compromise on lifestyle because they could get a very similar house for a fraction of the monthly cost. We often ask our clients, is it the house that you want or the benefit of the house that you want?
Let’s now examine the numbers if they sold their home and acquired a positive cashflow Property Solution:
They could pocket about $224,000 (after selling costs) and use that as a deposit for an investment property. There would be no Capital Gains Tax (CGT) because they would qualify for the personal place of residence exemption.
They could easily acquire a Co-Living Property Solution with the following numbers:
Purchase Price = $812,000
Rent = $59,276 (7.30% pa)
Positive Cash-Flow = $265 per week ($13,780 pa)
Borrowing at 80% = $649,600
Interest Rate = 6% pa
Equity Contributed = $195,000 (20% deposit, buffer, and furniture package)
If they were disciplined, then they could save the $47,600 a year and in two years’ time have close to enough deposit for another investment property in the next boom location. They could potentially borrow against the equity uplift in their Co-Living Property Solution if they were a little short on cash.
Unfortunately, these clients will probably not do anything because they have a severe case of the ‘Hold-Ons’. From the outside looking in doesn’t it seem like an obvious decision to sell? Why would anyone endure unnecessary pain chasing the great Australian dream of “owning your own home” when the numbers don’t make sense? This is precisely why our most successful clients come back to us again and again, to challenge their way of thinking. Sometimes it takes a Property Strategist, someone removed from the situation to assess things objectively. At the end of the day, the numbers don’t lie and it’s our job to help people get passed the misnomer of pride of homeownership when the numbers no longer make sense.
Unfortunately, our clients often get caught up prioritising lifestyle choices, such as staying close to their kid’s school or being close to family for support. We want to challenge our investor client’s way of thinking so that they can still achieve their lifestyle goals at the same time as achieving their financial goals by being smart about a few key decisions in life.
If you are hurting in the current high-interest rate / high-inflation environment and need help to look at your situation objectively then reach out to our team. Click the button below to book a call with one of our friendly Property Strategists for a complimentary discussion about what options are available to you.