Con­sider the risks

Money Magazine Australia - - ASK THE EXPERTS - JA­SON PETERSEN Ja­son is a Syd­ney-based fi­nan­cial plan­ner and head of wealth man­age­ment at an in­de­pen­dently owned bou­tique fi­nan­cial plan­ning firm. 5fi­nan­cial.com.au

Ale­cia and Hamish, you’ve built a nice base and are cer­tainly on the right track in recog­nis­ing that you need a com­pre­hen­sive fi­nan­cial plan to pro­vide clar­ity and to guide de­ci­sion mak­ing. By go­ing through this process, you’ll be­come clear on your goals and it will help en­sure you only take on as much risk as you need. This will as­sist in weigh­ing up your in­vest­ment op­tions, which in­clude ren­o­vat­ing, rentvest­ing or buy­ing shares (among oth­ers).

It’s great that ex­pec­ta­tions for Hamish’s busi­ness are strong. As it’s a rel­a­tively young busi­ness, how­ever, and with the pos­si­bil­ity that you may start a fam­ily at some stage, you need to be mind­ful of tak­ing on more risk than you need to.

Rentvest­ing can be OK but ty­ing up all your funds in a sin­gle as­set – prop­erty – breaks a key rule of in­vest­ing: diver­si­fi­ca­tion. You need to be aware of the cash­flow risks as­so­ci­ated with prop­erty, in­clud­ing the out­go­ings and po­ten­tial for ris­ing in­ter­est rates.

I’d rec­om­mend bor­row­ing no more than 80% of the prop­erty’s value, as mort­gage insurance is an ex­pense you can do with­out – it will eat into prof­its. Based on your sav­ings of $80,000 and stamp duty and le­gal costs of around $20,000, you’ll have a de­posit of $60,000, so aim for a pur­chase price of around $300,000.

A lot of money can be made in de­vel­op­ment but, as with any in­vest­ment, in­creased re­turn comes with in­creased risk. This is more so in a de­clin­ing mar­ket, and down­turns in the mar­ket can have a sig­nif­i­cant neg­a­tive ef­fect. You must take into con­sid­er­a­tion all costs, in­clud­ing your own valu­able time, and any cap­i­tal gains tax.

There are lenders that cater to busi­ness own­ers. How­ever, the en­vi­ron­ment has be­come a lot tighter with APRA clamp­ing down on (what has some­times been) lax bank lend­ing stan­dards. Hav­ing your fi­nan­cials up to date is key and your busi­ness needs to show solid growth.

The neg­a­tive sen­ti­ment around rent­ing is un­war­ranted, as you can choose to rent some­where you like while still hav­ing the ca­pac­ity to grow your sav­ings. As well, with grow­ing va­cancy rates across Syd­ney, there’s greater choice.

HECS-HELP debt only in­creases at the rate of in­fla­tion, so there is no real in­cen­tive to pay off more than the min­i­mum re­quired. In the mean­time, keep your cash re­serve in a high-in­ter­est sav­ings ac­count for the short term.

With a prop­erty pur­chase in mind, look at the fed­eral gov­ern­ment’s First Home Su­per Saver scheme (FHSS) where you can salary sac­ri­fice sav­ings for your home, and help en­sure your fi­nan­cial fu­ture is more in your control than a bank’s.

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