The debate in the office at the moment has been stemmed from a comment in last Saturday’s paper talking about what people regret they didn’t do in their 20’s. The comment that sparked the debate was that a finance writer said they wish they bought a property or two in their 20’s and about buying the "right stuff”. This debate then continued on to the age old question of how much can you put yourself into debt without restricting or putting to much pressure on yourself financially?
It’s the same as parents wondering if they should purchase that investment property in Melbourne now for when their kids go to university or relocate there. The other plunge that people talk about is extending themselves to a bigger family home when their kids are younger and they can actually utilise this bigger home.
I’ve been researching into buying a property recently and I have had the same debate with my father. I believe and have always been told that Blue chip real estate is always more expensive but also the safer investment to see you gain capital growth which would mean extending myself a bit more at the age of 24. What would I have to give up to be able to do this? and looking at the worse case scenario – interest rate rise and a property without a tenant for a period of time it would put me under a lot more financial pressure then probably necessary as a 24yr old. We all have heard about the well known fact about 'buying right' but the trick is to be able to hold on to it for 10yrs. Banks never run through the worse case scenario with you and have insurance to cover them if you default on your payments and the residential market plummets.
My father’s argument is that is doesn’t matter how much you outlay as long as you are careful about where you buy, you should always see growth over a period of time. I understood his argument a little better recently when I came across two people selling a home in the same area. The perception of spending more to make more didn’t really ring true.
Family number 1. outlayed $240,000 for their home and Family number 2. outlayed $320,000 for their home. Both parties saw roughly a 25% increase on their investment over 4 years. Say for example these two families were both in the same financial situation putting $120,000 towards their loan – Family 1 would’ve paid around $37,000 in interest in 4 years, however family 2 would’ve paid $62,000 in interest. This means family number 1’s profit is $23,000 and family number 2’s profit is only $18,000. On top of that the monthly repayments for Family 1. were only around $800 a month in comparison to Family number 2. at $1300.00 giving family number 1. more of an opportunity to pay off principal. (I’ve calculated this estimate on the current interest rates – these figures aren’t true and correct - only a guide).
The one thing everyone agreed upon was that you should only do what’s comfortable for you. Whatever path you choose can steer you in completely different directions. To go even deeper you can even ask yourself what’s more important – life without financial pressure or money – setting yourself up for later on in life. Those family holiday’s with the kids or having a bigger home so your children have more independence. No answer is the right one as such. Life’s pleasures can be scaled back – but how much do you scale in before you start putting yourself under too much financial pressure.
At the end of all this it’s what you feel comfortable doing. It’s quite easy to sit back and say in your 30’s I wish I bought a property or two in my 20’s but make sure you look at the entire picture and look at what you would’ve given up also. Or if in your 30’s you are financially stable due to the purchase you made in your 20’s but wish you had of lived your life a little more when you were younger as you have other stresses now – eg: Job, Children. It’s a decision you can only make but think carefully before jumping into anything and once you decide don't look back.
