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Charity and money

Years ago I decided I wanted to donate at least 0.7% of my income towards charity.

Over the weekend I was doing my tax, and calculated it: for 2015-16 it’s 1.32%. Cool.

About half the annual total is Oxfam. Other regulars include Greenpeace, The Salvos (though I mean to check their latest position on homosexuality, as for a while there it was looking pretty medieval), Amnesty. The regulars, of course, have been set up as direct debits – though note I refuse to deal with chuggers.

The rest is ad hoc stuff like sponsoring friends for charity events, Royal Children’s Hospital (Good Friday), Public Transport Not Traffic etc.

Meanwhile in the high finance stakes, I’m being urged by some family members to refinance my home loan and get an investment property.

Refinancing is easy thanks to a friendly local mortgage broker. But investment property? It all seems very adult… and time consuming, though probably worthwhile. Do I really want to contribute to the stupidly high appreciation of home prices?

By Daniel Bowen

Transport blogger / campaigner and spokesperson for the Public Transport Users Association / professional geek.
Bunurong land, Melbourne, Australia.
Opinions on this blog are all mine.

15 replies on “Charity and money”

There is much to be said for paying off one’s own home and having clear title of it.

It is probably also desirable for one’s own home to be no more than about 25% of one’s asset base. This is because while one’s home provides a degree of security and save paying rent it produces no income (unless you takes in a lodger). Non-home assets also provide a safety buffer against needfulness.

Middle class Australians often achieve the first but not the second. They sometimes fall into the trap of having too much of their asset base tied up in their own home.

An investment program (which may include real estate) can bring desirable increases in asset-base size, diversity and income. Modest borrowing can accelerate this. High borrowing even more so but risks becomes unacceptable. For example it should be possible to lose one’s job and not be forced to sell anything.

Significant time is involved, especially in research and asset selection. However it will repay itself many times over. Not only in what you buy, but, perhaps more importantly, what you do not buy. However ongoing work is modest if good management is in place.

One way to not to contribute to stupidly high prices is not to buy in areas where they are stupidly high. That may mean going interstate but again the returns from a wise purchase will be worth it.

While the profit on our Hotham Street investment flat paid off our mortgage here through capital gain, I would not advise. It never made an income profit and was a constant drain on the our spending money. You must be nearly on the way to paying off your house. Your children are smart and self sufficient, as is your partner I guess. They won’t need your money. Well, given house prices, perhaps they will. Pay off your house and spend the then excess of money on travel, fun and self indulgences. You could quite well survive on the pension in your old age as long as you own your home. I can’t see why you would need an investment property, but perhaps you currently have an excess of money, which is why we bought the Hotham Street flat. Capital gain against loss of income. Hard call. Concluding, why do you feel the need to make more money from investing in property?

You can also reborrow to buy a sensible, modest share portfolio. Dividends roughly cover the interest, and you should get some decent capital gain over time. Investment properties needn’t be the first choice (although as always, your circumstances may vary, this is not investment advice etc).
Good work on the charity position – you’re ahead of most, I suspect.

Out of my own ignorance, I don’t know what the connection is between refinancing an owner-occupied home and purchasing an investment property. Why wouldn’t someone just pay off their existing mortgage (if they can), take full title of their home, and then (as a separate exercise) borrow for an investment property. Perhaps out of your blog-readers can enlighten me.
PS At the risk of revealing my smutty mind, your terminology “position on homosexuality” made me chuckle. Sorry for lowering the tone.

Thanks for all the wise comments.

Refinancing gives an opportunity to use the equity built up in the home to borrow against.

As I understand it, one could refinance and extend the existing loan to include a deposit on a second property, then take out a second loan for the purchase of that property. Rental income would cover some or all of the payments on that loan.

This is viable at the moment because interest rates are low and capital growth is good. If this changed, then obviously one would need to re-think (and possibly sell at that point).

Of course as long as you buy carefully, unless there’s a huge bubble burst, I would think property is a pretty safe bet.

What makes it most inviting for me is it strikes me as a way to build up something for my kids to use when and if they are ready to join the property game; effectively giving them a head start. As it stands, Melbourne house prices are going berserko, so it’s hard to see how they’d otherwise ever be able to buy here.

But Andrew’s note of caution is important: it might just absorb a lot of money month to month. Having some spending money and enjoying life is important.

Due to contract work arrrangements and not having work this year I have not been able to make a regular contribution. I still made about $270 in charity donations. I get the need to have a regular income for charities rather than for individual appeals and disaster relief but I do not know when I will have the money. Also I put in rather a lot of money into crowd funding projects last year.

I never earned enough money to even save for a deposit even when I was paying cheap rent.

Daniel, congratulations on your record of charity contributions. That’s such a great example to set for your kids.

Thanks also for the blog. Whilst I live in Sydney (although I’ll likely be relocating to Melbourne for work next year) I really enjoy your Melbourne observations.

Your understanding of refinancing is correct (ie redrawing your home loan for a deposit for a rental property, then getting a separate loan for the rental). Having the properties with separate stand-alone loans gives more flexibility than cross-collateralising which is generally undesirable and gives less flexibility.

One could argue that for there is something to be said for kids buying their own home under their own steam. Parental largess denies or lessens their sense of achievement. Even if they have to move to Frankston for a while. Society would be much fairer, and privilege less entrenched, if parents just spent all their money on themselves, even to the point of commissioning the grandest possible funeral with anything left over.

Although I have spare cash and so could buy an investment property, the thought of being a landlord makes me shudder. It’s bad enough keeping on top of my own home maintenance, let alone another property. And if you were to employ a service provider or agent to do the maintenance (rather than organise your own tradies) you’d just be eating into the profits.

I haven’t decided yet what to do with the extra cash but I’m thinking that shoving some into super and then the rest into an investment fund might be the best option.

This conversation is way, way too grown-up for me – but here goes anyway…

I’ve heard a fair few investment property regret stories. Many of them are down to particular circumstances (mostly high costs and effort, e.g. high maintenance or frequent turnover of tenants). It’s certainly something I’d do a lot of research on prior to committing to.

Is property actually a significantly better investment in terms of appreciation? I’ve seen it said that that’s not necessarily the case. And as you mentioned there’s always the possibility of the bubble bursting; something I think I’d be worried about if most of my money was in property.

A point continually emphasised is that retirement planning is the single most important financial decision one makes, and how everything needs to be considered in the context of it.

On the other hand, much of our lives revolve around knowing that we have the security of our own homes, and making sure that your kids aren’t priced out of the market is definitely a huge deal.

I’d certainly agree with the comments that anybody getting into property investment has to tread very carefully. As I understand it, getting an agent to handle rental (which is certainly what I’d do – no way would I want the extra work myself) can take 5-7% of the rent, which to me doesn’t seem unreasonable – but I’m sure repair and maintenance costs are on top of that.

If the US market crash teaches us anything, it’s that you’d certainly want to carefully research where and what to buy before jumping in – though the market conditions in Australian capital cities are quite different of course.

5 – 7% is a bit on the low side for property management – managers typically charge a percentage of the rent plus flat fees for things like postage, inspections and advertising. Also a letting fee. Budget 10% of the rent. Repair and maintenance costs will vary but will be higher than your own home – tenants will complain about things that you’d put up with at home. It is extremely difficult for rental income to outstrip holding costs but the situation generally improves with time (unless the property is one that requires major repairs).

The bigger picture though is that even if house prices were only to rise at the same rate as inflation, the amount you owe each year declines in real terms by that amount (even assuming an interest only loan). The difference between the two is the equity gained (less after tax holding costs). This can be higher than what you are able to save, though it is more volatile (eg there was almost no house price growth in Melbourne for most of the 1990s). Plus there are certain classes of property (eg off the plan apartments) where people have had negative equity – in general these should be avoided despite the generous tax advantages claimed.

I’m not sure if it’s still valid in the current climate, but we borrowed 110% of the value of our investment property (to also cover stamp duty etc.), using the equity in our existing home to do it. This kept the loans seperate and didn’t impact our primary mortgage.

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