Money and Happiness Part ii

It’s been a while since I last wrote on this topic (or any topic for that matter). Lots have been happening – from a new job and going through the process of searching for, and applying for a new gig, to changes at home. Throughout it all, I’ve still been thinking a lot on money and it’s relationship to happiness. Passive income in particular is something I’ve been keen to get around – that is, earning money without doing anything! What a concept! I started thinking about how to achieve this…. Remember – I am not an investment advisor and I do not advocate any of this as advice. You should see a professional and exercise due diligence on these matters. This is for informational and entertainment purposes... back to my story:

Some time ago I purchased my first investment property (not an ideal situation). Fast forward several years and I finally have a tenant in the my investment property (that took 2.5 years to empty and clean up). It was very expensive for a while there, but now there is a light at the end of the tunnel. All of a sudden, this costly mortgage has become far less stressful – the property is looking after most of it’s costs. I have it ever so slightly negatively geared – about $1500 a year which is nicely tax effective without being a burden. It won’t take long to swing that around and have it positively geared and generating income (and paying tax on!)

Funnily enough, I was talking with my wife about this and she has never been terribly interested in finance. We discussed the pros and cons of where money was going and whether there was anything that we could do to make our income work more effectively for us. Given that we are a single income family at the moment, but have a solid budget and control over our spending we have a certain amount of freedom. The conversation continued along the lines of investigating several options:

  • a 100% equity purchased property – well within our means of repaying without a tenant
  • an investment into an index fund – like one of the Vanguard options
  • something else?

Partly this thinking was inspired by Mr Money Mustache and the way he describes money as being little workers – if they’re in a bank then they’re doing bugger all, but if they’re out in an index fund or a house, then they’re working for me. I like that thinking….

So of course, we’ve done both of the first options. She Who Must Be Obeyed (SWMBO) found three properties within our parameters, which were:

  • $100,000 to $125,000 price range (we are very modest in this)
  • current tenants (preferably long term)
  • NSW
  • good location with reasonable re-rental possibilities

While we could have spent more, we made a conscious decision to control our spending and get into the market in a manageable manner – minimising risk if things were to go wrong or get out of hand (if I lost my job or similar).

Long story even shorter – two were a bust (sold straight away) while the third the price dropped $10,000 right before we seriously considered it. This is the first time I’ve bought an investment property in its own right (remembering I purchased the other one from family). Going through the process of making an offer, getting inspections done, organising the bank, lawyer and real estate was a process that was quite intimidating. There are several good websites that describe the process, but the real value was in my lawyer, banker and the real estate agent helping me out and guiding me through the process. It’s important to note the rules around investment properties have changed (and seem to be continuing to change) so the bank was pretty restrictive in what they were able to offer. Finding the money for a deposit was tricky but it’s amazing how much cash one can pull together when one has to – we had money sitting in all sorts of spots, sometimes not much, but enough to cover a 5% deposit and make everyone happy.

If you’ve never done this then the equity purchase works like this:

  • the bank looks at how much equity (or value difference between what the property is worth minus the amount owed) is available on existing properties
  • the bank also considers how much money you have socked away and your ability to pay if there is no rent
  • the bank also looks at what they value your new property to be against the purchase price

and then they figure out if you’re good to go or not. In our case we were good to go and it was all approved. Looking back on it, and considering what I’ve paid out so far – the net cost has been around $300 so far. I still await a final lawyer’s fee but apart from this, everything else is tracking along. The first month, prior to receiving rent has meant I’ve had to find the mortgage repayments, but this hasn’t been onerous because we have started small. Indeed, when considering what these extra payments have done for the loan interest and time frames, every $500 extra invested in the loan yields a $1000 and one month interest and time saving. Not a bad extra investment really. I’m not sure where else you’d get such an impressive return! I use a loan amortisation spreadsheet to figure this out (if you search there are several good ones available). You add in your extra repayments and it calculates how much interest you’ve saved and how much shorter the loan term is. Now is a great time to get into this market – housing prices have dipped a bit and interest rates are still very low.  So I’ll let the properties chug along in the background, making occasional extra payments as I’m able.

OK, so that’s great, but I don’t want to get stuck with all my eggs in one basket. We’re kind of lucky in Australia that our superannuation contributions are mandatory and locked up until we’re old and grey – so that’s handy. I did have one other thing I wanted to play with….

Index Funds.

When thinking about the index funds I’ve mentioned on occasion the Vanguard Index funds. Have a look at https://www.vanguardinvestments.com.au/ for details on their various options. I’ve long been interested in the index funds but there is a $5,000 buy in fee which has been a blocker. After pulling together the deposit for the investment property, and having it returned by the bank I used a part of it to invest with Vanguard. There were two main funds that caught my eye – the Vanguard Australian Shares Index Fund and the Vanguard International Shares Index Fund. Both are strong performers – the Australian Shares fund is based on the Australian market as the name implies, while the International Shares fund is spread around international markets. Check out the breakdown of the two and the Australian one is mostly the big banks in the top 10 shares, while the international one is mostly tech businesses like Apple and Facebook. Being a tech chap I was immediately attracted to these and decided to invest in the International Shares fund. It promptly went down and so did my investment. It was at this moment I was reminded of Warren Buffett’s advice of playing the long game, so I have decided to check my investments at most monthly, but otherwise review it yearly. The fund pays dividends twice annually which I’ll re-invest. To date it’s been up and down, and I remind myself to be patient.

So there you have it – the investment plan of yours truly. We’ll see how it goes over time and check back in periodically.

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