MONDAY MONEY – GETTING INTO THE MARKET

There needs to be a starting point. It doesn’t matter what market that is being considered to get into, it needs a starting point. There are many different markets that one can consider entering, the main ones being shares and housing. Within housing there is investment and for living in. Some people believe that a house for living in is an investment whilst others may not put it in the same category. I personally think that the house you buy to live in is a good place to start your investing, if done correctly.

So what do I mean by correctly? As with anything we do, there should be plenty of research into what it is you are going to do. As an important question, can we afford what we are about to do? The answer is usually yes, it may stretch us a little, but yes we can afford to do this. I am talking firstly about purchasing a house, usually the most important purchase we make. We plan out our income, look at what we can afford, and then buy the house that is going to use the maximum we can borrow.

Perhaps we should look at this another way. We want a 4 bedroom, 2 bathroom, 2 car house in a nice neighbourhood. Quiet street away from the traffic and hassles. The house we want is at the top end of the market, we can afford it, say over 25 years, going to raise the family here, perhaps even retire whilst we are still living in it. The value of the house will have gone up in the time we are living here, good investment. No question. For the area the house price is say about $600,000.00. Sounds lovely.

Now let’s look at the same thing differently. By finding a house in perhaps a little less desirable location, say a main road, or a little further out of town, or even a less popular neighbourhood, you can buy the same 4 bedroom, 2 bathroom house for a lot less. Getting into the market at the lower price will mean that you can pay the house off in much less time. This may not be as idyllic as the first scenario, but it will mean that you are clear of debt much faster, as well as being in the market.

Another factor to consider is getting into the market at the lower amount, paying off as much of the house as you can quickly, before starting the family etc, and then looking at upgrading at a later stage. Most houses appreciate in value so there is little risk of losing once you are in the market. Houses in the area appreciate at the same rate, so being in the market is better than not at all, moving does cost, but nowhere near what the cost of the more expensive house is going to cost over time.

We tend to buy the end product, rather than looking at ways of getting to it in a more affordable manner. We bought a house on a main road, bus route with a bus stop outside the front door, for some people this would be the last place they would buy a house. There were a couple of factors that helped us when we got it, the location being one of them, the other was that it had been on the market for a while and not sold. We were able to put in a very low offer and luckily made the purchase. For us it was great, lower than we could afford which meant we had room to move with our finances which has lead to us being able to pay it off sooner. Now we have several options available, there is equity in the property that we can borrow against, we can sell it and buy in another location or keep it and rent it out.

I’ve talked about a house to live in, the same goes for an investment property. The range of properties is immense, we don’t have to have the top end of the market to make money. There is a note of caution here though, there are risks at all levels of the rental market, but there can be more at the lower ends, so research is more important along with good insurance. Getting something a little cheaper and being able to get a good return may be better than spending more for the same or a little better return.

I am not keen on shares, I know many people who prefer shares to houses. I have several parcels of shares, I don’t do much with them, they sit there and do their thing, I get annual reports, which I don’t understand most of the time along with a statement and payment for the year. The tax man probably is more interested in this than I am, I pay the tax so make him happy and I get a little extra cash. Along with the house, it required research before I entered into the share market. Having done this, I thought I was well positioned to make the purchase. I now have shares that I can sell if needed or keep, hopefully not losing anything on them along the way.

The purpose of this weeks Monday Money is really about getting into the market, at a level you can afford. I would like to hope that in the changing times we face ahead of us that people can still get into the market. It concerns me that we are still getting in at a level of affordability which is way higher than perhaps it should be. Are we risking too much to get in? Have we researched what we can really afford? Should we look in an area or at something that is going to ‘stretch’ us less, and therefore put us in a stranger financial situation sooner?

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One response to this post.

  1. I actually think the bottom of the market is the place to go, you get a much better return on everything I’ve seen. Say you buy 2 x $250 000 units and are getting $500 / week. If you buy a $500 000 house you would have to get at least $500 for it, and you haven’t spread your risk at all – when you have no tenant, you get 0.

    I don’t do shares, but it’s a similar process short term I think.

    Hmm, I think we need a post on the differences between investing now for cash flow and long term for capital gains please!

    Reply

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