Over the next 12 weeks I’m going to profile each of my Bulletproof Tips from my new book Bulletproof Investing.
The best place to start is this tip, which relates to something that is top of mind for me right now – and most Australians I’m sure – that is, housing affordability.
I really feel for anyone trying to break into the housing market today; it’s tough going!
582,900 homes were sold in Australia last year – that’s 1 in 18 of all the homes that we have in Australia.
It’s not normal and, in fact, it’s the most frequently we’ve traded homes since 2004.
There are simply more buyers than sellers right now – driven by record low interest rates.
When it comes to affordability, loan repayments as a ratio of household incomes are actually the lowest they’ve been since 2005 right now.
However, I acknowledge that the median house price (~$800,000) as a ratio of the average wage (~$85,000) is also at a record high.
I was excited to see during the week that the New South Wales government made it a lot easier to build co-living developments going forward.
Co-living spaces typically feature private rooms with shared large common areas (think kitchens, living rooms, dining rooms, alfresco, laundry, even bathrooms). It has traditionally been hard for developers to get co-living developments approved so this is a positive step forward.
You see a lot of this type of housing in places like New York, Toronto and London – cities with much bigger populations and affordability pressures than us.
Innovations around housing design and how we use our home can play a big role in delivering more affordable housing.
The biggest lever, though, is density.
In 1996, the average home size in Australia was 120sq m (square meters) and consisted of 3.5 people per household. That works out to be 34sq m of living space per person. That house sat on 1,000sq m of land (12% site coverage).
Today, the average size of a home in Australia is 196sq m and the average household consists of 2.6 people. That works out to be 75sq m of living space per person. That house sits on 400sq m of land (49% site coverage).
We’re also not the first country to face the issue of affordability. Tokyo has double the population density of Sydney, London is triple, New York five times and Hong Kong twelve times.
Even Toronto has 50 per cent more people occupying a square kilometre than Sydney does.
I’ve seen the future of Australian housing when touring developments overseas. There are some remarkably innovative and spacious homes sitting on 100sq m blocks of land. They are two and three storeys high, don’t have hallways (dead space), have the alfresco on the rooftop and each 100 homes has a nearby park which is more efficient than 100 stand-alone backyards.
We’ve started heading that way with land in Australia – the average block of land started out at 100sq m in the 1920’s – with more than 100 per cent site cover – that evolved in the post-war era into the quarter acre, 1000sq m block, and has gradually reduced in size since (under 400sq m in most cities).
The issue is – at the same time we’ve been building smaller blocks of land – we’ve been building bigger houses on that land.
Which brings me to my bulletproof tip – Buy land.
THE BEST PERFORMING ASSET
Land in fast growing areas in capital cities is the safest and best-performing asset you can invest in. There’s no more land being made. As the population grows, so too will the valuation of your land.
In truth, the rationale behind this bulletproof tip is that you should invest your money in an asset that will grow. That’s what working smarter, not harder, means. Importantly, before you do so, make sure the numbers support the theory that the asset will grow.
I haven’t found a better and safer asset than land when it comes to that criteria.
One last thing. My advice for anyone trying to get into the market is just do it, pay what the market says you need to pay.
The market is not going to crash, although it will calm down eventually. It’s likely you’ll feel like you paid too much – don’t worry, we all feel that way, particularly when buying in a rising market.
There is one disclaimer though, make sure you can afford it. My rule of thumb is to ask myself “can I afford the repayments if interest rates increase by 2 per cent?” – If the answer is yes, then my above advice holds.
Q – I just finished reading your book and enjoyed all the tips and your experiences. I am now planning steps to purchase an investment property with your principles. Engaged with current bank and mentor, accountant etc.
A – I did not just use equity to purchase my investments.
I started out buying my first home, then moved out and turned it into an investment property.
A few years later I bought property number two. I didn’t have enough equity in number one for deposit and costs on number two, so I used the equity I had available plus cash I’d saved.
I’ve since bought my current home and used equity in my home as deposit and costs for investment properties.
Be careful not to use redraw or offset savings (can affect tax deductibility). I’d recommend taking out a separate ‘equity loan’ for investment purposes. Your bank should be able to do that for you, if not I can put you onto a mortgage broker who will be all over it.
I’ve never bought property with my superannuation so not sure how you do that. I know you can buy property in a self-managed super fund, but my accountant suggested it’s not feasible with a balance under $200,000 (which I am nowhere near). You can only buy established properties, borrow a maximum of 70 per cent, and usually pay an interest rate in the 5’s. It might work for certain people, but make sure you consider all these things as part of your research.
The government will also let you access up to $30,000 of your superannuation (soon to increase to $50,000) to buy your first home – don’t think that’s what you were getting at but more info here.
Q – I devoured your book in 2 days. I love your story and the investment strategy makes so much sense. Thank you! I haven’t stopped talking about it all week.
We have lived in our PPOR for 11 years. We need to upgrade (three boys getting into their high teens). We intend to turn our home into an investment and purchase our next home, but we’re a couple of $100k short of that ideal home. Should we a) settle for a PPOR that doesn’t quite meet our needs b) purchase a new build investment property and hold off on buying the new home a bit longer?
A – I’d be inclined to try and keep your current PPOR and convert it to an investment property.
Particularly if you have the ability to rent the property for an amount that covers the mortgage repayments. Reason being is the costs of getting in and out of real estate are high (I am assuming your home is in a solid area that will continue growing).
When you say you’re a couple hundred thousand short, is that coming from your broker or a bank? Have they factored in the rental income you’d get from your current PPOR?
If you haven’t it might be worth speaking to your accountant about whether you might be better off selling your current home and using the equity as a cash deposit for new PPOR if the amount you can rent the house for won’t cover the additional costs. This would mean you’d borrow less non-deductable debt instead, and then borrow the equity back out as deposit and costs for a new investment property that has better cash flow. It could also give you a higher borrowing capacity for your next home.