Barrier to Entry

Tenants in one of our IP's have given notice that they will vacate towards the end of October. The agent held the first inspection last weekend and we received four applications. When the agent emailed me with her thoughts on the best application, I was surprised at how low the prospective tenant's family income was. The prospective tenants have offered to pay 6 months in advance, which means they have either been given a gift, or can save some money. Their figures and reference from previous pm and current employers check out.....

I started to think further about the figures and came to the conclusion that while the tenants could afford to service a home loan, the barrier to entry is probably saving up a deposit.

I then thought a little further about investors starting their journey into IP's or other asset classes for that matter. What type of surplus do prospective investors require from their income to begin investing? How realistic is it to have a surplus - a couple of kids with regular sporting, music activities, school fees/expenses, annual holiday etc would probably wipe out any extra cash a family may have. I also think lifestyle expectations today are a lot higher than they were when I was a kid....

In case you are wondering the prospective tenant's figures were as follows:

1) Primary income earner: $50,000 p/a
2) Secondary income earner: $20,000 p/a
2) 2 yr old child

They take home $1200 wk. Rent will be $350 per week.

In terms of borrowing capacity - use of a bank calculator which is probably incorrect - brokers feel free to fill in further info that I may have incorrect of have missed.


1) Borrowing Capacity ($330,000)
2) Can afford a prop of approx $400,000
3) Need 20% deposit and 5% for costs: $100,000
4) Repayments: $20,930 p/a. The rent is about $18200 p/a....

As it is owner occupied they may be able to go to 90%?? (Meaning they need 15% - or $60,000 deposit) I am not sure of what the new APRA rules mean in the context of a PPOR.

I'd be interested to hear your thoughts regarding families on low income with kids managing to put $ aside in today's climate to invest in property or other assets?

 

They manage to nett about $62k plus government benefits eg low income offsets, FTB A&B, childcare allowance etc.

The rent would be 30% of income. Littlies don't have vices, school sports etc.

 

Yes it's almost always about the initial deposit and it's a hard slog for most people.

 

Scott, how much would FTB A& B be worth? Yeah, true, no expenses for 2 yr olds with regards to sport, music etc.

 

Substantial FTB would alter the figures, not enough to save for a house deposit most likely but enough to pay the rent and provide for the family.

 

The greatest barrier to entry into purchasing your own place is mindset

 

Absolutely no idea @Jingo - FTB B was a pittance and we didn't qualify for A.

 

The principles of super success (not just financial but all areas) are so simple it could be said in 2 sentences. I've always found it massively ironic.

 

with interest rates so low the difference in a weekly mortgage repayment and rent would be minimal so the initial deposit and stamp duty is a large barrier.

no sporting activities for a two yr old but may have daycare fees and they can be expensive!

 

There will always be challenges to achieving your dreams. If it was easy everyone would be doing it. The principles are simple, but the execution is very difficult for most. That's why i have always believed that anyone starting out with the wrong mindset (and doesn't change along the way) won't get very far. It's not possible. You can't build a 7 storey building if the foundation is weak. Just my opinion.

 

And you can't build anything if you never take the first step.

 

Stamp duty, first deposit either 10% or 20%, nothing is easy.

It's better to start saving as early as possible.

 

I think the interesting Point to discuss about this is weather owning your own home is a dream or decent goal in life

I agree getting a 10 or 20 percent deposit for a house for an average person is ridiculously hard fortunately I started early and took a lot of risks and a lot of hard work paid off however for the average person who is not going to take such a huge risk I think I only at home is near impossible unless you're on a high income which would put you in the upper Echelon Society

 

I'm of the opinion if its your first home, do what you can to get your foot in the door, lower deposit, greater risk, whatever, once you got the keys you can work hard to lower your risk profile. I think it's easier to hold on than it is to jump on.

 

That's predicated on the condition that one has a strong enough desire to own their home. Saving up for that first deposit is hard/painful/uncomfortable/unfamiliar. Humans are wired for the comfortable/familiar/easy.

Obviously unfamiliar with the circumstances of the prospective tenants but I think they are either:

• Happy to rent and don't want to own their own home, or
• Want to but the desire is not strong

Regarding the expenses of raising kid(s) mentioned in the opening post and how that's an impediment to getting onto the property ladder, if the couple really wanted to save up for a deposit, why couldn't they put off having kids for a couple of years? I highly doubt someone just rocked up one day and dropped a kid in their lap. Somewhere in their conscious or subconscious mind their desire to start a family exceeded the desire to save up that deposit. They didn't want the latter badly enough. That's it.

 

Oh of course, motivation and priorities plays a huge role. I speak only in a general sense, not about this couple. We don't have enough information to really judge them.

 

Exactly. For all we know their values and perspective could be completely different, rendering our points completely moot

 

I agree but then see if they turn away 1mil cash

The reality is a large majority of the population would love to have the fruits that we will reap from our labour. They just ain't willing to pay the price. Which is fine.

 

We have a 1 yo and still manage to save, however our incomes are more than theirs.

People's life choices are more than ever before, think about children with an ipad that is $1,000 just there. Obviously I am not at that age where they need or want one however that is a lot of money compared to a $20 toy.

I didn't get a mobile phone until I was in grade 12 and had started to work, yet today children probably younger than 10 have one.

Yes we have a more expensive life but it is because we choose to have it. I laugh at our child which we haven't bought any toys for since she has been born (we bought 2 before she was born) but she would rather play with earphones, cases, even cut up fabric then with a rattle. I keep saying to my wife she has hundreds of $$$ worth of toys but prefers to play with rubbish, classy lady.

My parents bought a house for a family friend to rent from them, as we grew up their kids had everything, the latest toys, clothes going out all the time we thought they were richer than us. Fast forward 20 years and my parents have retired with a dozen properties along with a block of units and would be worth guessing $15M with full offsets. The other family the parents are still working and renting.

Life choices.

 

I'd say is the goal and also the risk profile which can be a big stumble block in starting the investing Journey.

for a lower income family like @Jingo mentioned above, I'd say the should invest in a Cashflow Positive or investing for Income rather than negatively geared IP (for CG purpose).

One good example that I know is that my friend who is working casually for $25 p/h salary with wife working part time and 1 kid, they can only afford to invest in new H&L package which is $305k for 3/2/1 house in Park Ridge, QLD 4125 due to the lower entry cost. With a depreciation schedule, they can get some negative gearing components which can then varied (using Tax Witholding Variation) to enjoy the cashflow monthly basis.

Hopefully this story can inspire more people in starting to invest a house even with lower income under $100k combined.