WATCH: The First Home Buyer Blueprint: From Dreaming to Doing | NAPP. Podcast Ep. 2

[00:10] Okay.

[00:11] So welcome back. In this episode we're concentrating on the first home buyer.

[00:14] We're looking for the blueprint from dreaming to actually doing.

[00:18] In this episode we're going to be chatting

[00:20] with Michael O'Malley, mortgage manager from Rate Money Sydney CBD.

[00:24] Andrew Chan, strategic financial planner from Phoenix Private Wealth Management.

[00:28] We're going to

[00:29] be talking with George Koletti, principal accountant from Access Professionals.

[00:33] Daniella Muzitano, founder and executive director from Titlespace

[00:36] Conveyancing and myself, investment property adviser Gianni Musumeci

[00:40] from Leveraged Property Advisers.

[00:42] Before we do ask the question, it's important to understand

[00:45] that the content in this podcast is only general in nature.

[00:49] It does not constitute financial, legal or tax advice,

[00:52] and it's strongly recommended that you seek professional advice

[00:56] that is specific to your situation.

[00:58] So that being said, I wanted to ask the question

[01:01] of yourself, Andrew, when I'm a first time buyer,

[01:05] what logistically is the first step in the process?

[01:08] I've decided that buying a property is my goal.

[01:11] Take us from there. What's the first step.

[01:14] You want to to know why you're doing it?

[01:17] So you know whether you're going to stay at home and you're going to rent

[01:22] that property out, or whether you're going to move out.

[01:26] And so depending on whether you're renting it out, you'll need

[01:29] less cash flow, because naturally you have the rental income to help you afford it.

[01:33] But if you're going to move out, you're going to have to understand

[01:36] exactly how much money you're going to set aside.

[01:38] You think about how much money

[01:41] you would have left for your own lifestyle.

[01:44] And, you know, financial planning is not just about acquiring assets.

[01:48] Financial planning is about achieving a goal.

[01:51] And that goal would be, say, working towards your retirement.

[01:55] But it's also to say, what will my situation be like when if I introduce

[01:58] this asset into my sphere wealth and and it would be a reduced living standard.

[02:04] And with that reduced living standard, you know, how old is this,

[02:07] this young person.

[02:08] Are they going to university?

[02:11] And then working at the same time or they're grad

[02:13] whatever I might be, they might not have the money

[02:15] to be able to go on those overseas trips and still afford this property.

[02:20] And so I think these discussions

[02:21] are important to be had with their financial advisor,

[02:24] or with whoever is in their circle

[02:28] to say, hey, I understand exactly what I'm signing up for.

[02:31] I accounted for the stamp duty.

[02:33] I've accounted for the deposit.

[02:35] I’ve accounted for how much money I'll have 500.

[02:39] Am I prepared to live on 500 bucks a month after all these expenses? And?

[02:43] And if the answer is yes and they're disciplined for it, then think right.

[02:47] But if the answer tends to be no, I would much rather be skiing in Aspen.

[02:53] You know, hiking that out somewhere, you know.

[02:55] Then I would say to them, just wait.

[02:59] Wait until you can, work,

[03:02] work towards a goal of buying it because it when you buy

[03:06] often people don't ask you should you be buying now?

[03:09] And I think that's with any financial decision

[03:12] you make it should be it should be an answer that comes out.

[03:16] And this is a this might come across

[03:20] a bit negative in terms of, of the industry.

[03:24] But industry whenever you think the properties are often sold,

[03:27] whether it's a real estate

[03:28] agent or buyer's agent or whatever it might be, people just always pushing,

[03:32] we might be an older person in the family at a barbecue because they have done

[03:35] well out of it.

[03:37] And that's what they did. And that made sense in that time

[03:39] because they had a very, very difficult upbringing.

[03:42] But the kids these days that it's not so difficult.

[03:44] They can have a very enjoyable lifestyle and it might not fit in with them.

[03:48] So if you buy a property too soon, you might feel that resentful

[03:54] because some parents, particularly, a good example is more ethnic.

[03:58] Parents push their kids into property and it's logical.

[04:02] But then I deal with those clients later on.

[04:04] They just they miss their childhood.

[04:05] They miss the wild used to be able to travel and do the things you do.

[04:09] But on the other hand, you've got these really, really enterprising young,

[04:13] young people these days who want to get ahead on the wealth scale.

[04:17] Absolutely. Switched on, locked in, and then 100%.

[04:21] So from an individual basis, if that is your mindset, then definitely

[04:26] then it's just a matter of understanding your numbers and making it happen.

[04:29] Yeah, for sure. And I think that's really important as well.

[04:32] A couple of things that you mentioned, you talked about,

[04:34] well, what is the goal behind purchasing property as well?

[04:36] Is it to for me to move out of home.

[04:38] Is it to me for me to get on the investment

[04:39] property ladder or you know, where I'm and where I'm at currently?

[04:43] Like, what sort of capital do I have available?

[04:46] What sort of cash flow can I sufficiently afford?

[04:48] Because I see a lot.

[04:50] I spend a lot of time in Facebook forums and property forums

[04:53] and that sort of stuff, and people are unfortunately forced to sell the property

[04:57] and come out in a worse situation because they don't go through that,

[05:00] that baselining exercise and understanding if they can afford.

[05:03] And there's a gap between, you know, there's a gap between

[05:06] what they have and what they want to buy as well.

[05:10] And I think in some occasions that's when we, start then talking

[05:15] to, to Mike around, you know, what are the lending options available,

[05:18] especially as a first time buyer to help them bridge that gap?

[05:22] If anything, how does that conversation go for a first home buyer

[05:26] perspective around how they bridge the gap with lending?

[05:29] Yeah, sure.

[05:30] And you know, Andrew, you talked about the mate at the barbecue.

[05:32] I want to meet that guy. He's so much about the advice this guy gives.

[05:36] There's always one.

[05:37] But but buying a property is a is probably the biggest transaction

[05:41] you're ever going to make. So it feels big and scary.

[05:44] And so we like to take an advisory approach

[05:46] and step people through, help them understand the process overall,

[05:50] where you are now and what comes next, so that all the way through

[05:53] you're feeling comfortable and informed

[05:55] and there are so many things to think about.

[05:56] I mean, is this property investment going to

[05:58] so is the purchase going to be investment or owner occupied?

[06:01] You know, what's your income?

[06:03] Is this going to be a self-employed or PAYG, low doc or full doc application

[06:08] because that will affect where you're going for your finance.

[06:12] How much deposit do you have.

[06:13] Because that impacts, you know, what you can buy and what you need to borrow.

[06:17] Have you spoken to anyone to assess your borrowing capacity

[06:20] because nothing drives you Crazy Johnny probably more than people coming

[06:23] and saying, we want to look at properties worth a million.

[06:25] When you know they can only afford one worth 500,000.

[06:28] So assessing your borrowing capacity is a pretty easy process,

[06:31] and an important one, so that you can start targeting the right kind of

[06:35] properties, and then think about where you're going to target to buy.

[06:40] Because lenders have postcode restrictions, there are restrictions

[06:43] around the kind of security that you can buy, you know, small units,

[06:47] that kind of thing. High density.

[06:49] So the type of property you going to look at is an important thing

[06:53] to get clear in your mind.

[06:54] And then what are your living expenses and what can you do to minimize them.

[06:59] Because that's going to have a big impact on your servicing capacity.

[07:02] You know, a credit card or, an EZpay account

[07:06] can, can have a major downward effect on your servicing.

[07:09] So have a look at your expenses, see if you can minimise those.

[07:13] And for me really the most important consideration is, you know,

[07:16] can you comfortably afford the borrowing.

[07:18] Because if you can't I certainly don't want to be a part of that transaction.

[07:22] Yeah. And I find as well that a lot of people,

[07:25] somewhat emotional Andrew touched on that before.

[07:27] You know often property is something that's handed down,

[07:30] through pressure from parents or even social groups as well.

[07:34] And it's seen as somewhat of a status symbol.

[07:36] So I'm conscious of people that overexert themselves,

[07:39] and they maybe take on too much of a burden or misrepresent their finances

[07:43] in order to take on a bigger loan and purchase a bigger property.

[07:46] And I see that in some biases as well.

[07:49] Like I need to buy in a capital city, or I need to buy a close to where I live

[07:53] so I can drive past it and make sure the tenants among the lawn,

[07:56] I think that there's a lot of biases associated with,

[08:00] especially with first home buyers that they've inherited

[08:03] from their friends and family that they need to really dispel.

[08:06] But what are some of the things that people can do to prepare themselves,

[08:11] from a cash flow and taxation perspective, George,

[08:13] that you could, impart to them, if any.

[08:17] From a taxation, I suppose,

[08:19] perspective, even from a cashflow perspective,

[08:23] it's important that they understand what their position is.

[08:26] Everybody is different.

[08:27] And I think, Andrew alluded to it earlier in that

[08:32] everybody's going to be at a different stage of their lives.

[08:34] Everybody's going to have a different earning capacity.

[08:36] Everybody's future as far as what their earning capacity is going to change.

[08:40] They might be getting into a relationship.

[08:42] They might need to basically paying for children.

[08:44] So everybody is going to have a different set of circumstances

[08:48] surrounding what the decision is going to be.

[08:50] In many cases, it's always better to look at what's the safer position.

[08:55] What should I be pitching my property purchase that,

[08:57] which is why I send them all to you, because we can really picture

[09:00] at the right level where they're entering into the property

[09:03] and sometimes buying a new property is going to be better

[09:06] because they've got, you know, some additional depreciation deductions

[09:10] that they can actually claim, which will offset some of their income.

[09:13] Other times that might be, well, we can't really afford a lot.

[09:16] So they'll go into an older property, higher yield, lower actual entry price.

[09:22] So it really depends.

[09:23] But there are lots of tools that we can use,

[09:26] both for planning cash flow and tax to help them through the process.

[09:30] And I think that's all part

[09:31] of the education piece as well, because I know a lot of first time buyers,

[09:34] typically they haven't

[09:35] had a lot of hands on experience, and even their friends and family

[09:38] might not have had a lot of hands on experience.

[09:40] So I tell people that the average person maybe only purchases 2

[09:44] or 3 properties in their lifetime.

[09:45] Nowadays, it's your first time your family home, maybe a downsize,

[09:49] maybe an investment property,

[09:50] maybe a holiday home or something along those lines.

[09:53] So look, typically that don't have that much breadth of experience

[09:57] when it comes to purchasing property.

[09:58] And so they don't have the experience associated with that, if any.

[10:03] I wanted to ask, what are some of the biggest mistakes

[10:05] that you find first time buyers make, especially because you hold a lot of hands

[10:09] when it comes to first time buyers Daniella.

[10:10] We love first home buyers actually, because we can work with them.

[10:15] So, I guess the biggest mistake would be not having your financing

[10:21] in place before coming to us, which we luckily don't see that often.

[10:26] And that's why I love working with buyers.

[10:29] First home buyers.

[10:30] Because by the time they come to us, they've

[10:33] spoken to their financial planner accountant.

[10:35] They've got their pre-approval.

[10:37] So when they come to us, they're that stage. Okay.

[10:40] Now I can start looking.

[10:43] And I guess my job with first home buyers is just to,

[10:47] prepare them for the real estate world, which is quite brutal.

[10:52] And I see, you know, the struggle out there.

[10:56] So, luckily, at least the majority

[11:01] of our clients, you know, they, they come pretty, pretty prepared.

[11:04] But as I say, the biggest mistake would not have your finances in place

[11:08] before signing that contract. Yeah, you're right, a really good point.

[11:11] And I mean pre-approval is are easy to get.

[11:13] They generally last for 90 days.

[11:15] You can roll them over. So you've got six months

[11:16] worth of confidence knowing that you've got the funds.

[11:19] Because what I often say is, you know, they'll go out and look

[11:22] and then find the property, fall in love with it

[11:24] and come screaming to us, well, I need a loan approval.

[11:27] During which time someone else who's got the loan

[11:29] pre-approval has bought the property, and it's gone.

[11:30] So it's really important to get the finance in place.

[11:33] The good thing with first home buyers, they don't tend to go to auctions.

[11:36] So we've got that cooling off period where we can

[11:38] then go back to the broker and say, okay, we signed the contract and here it is.

[11:43] Let's get to that approval point.

[11:45] And the great reason of getting you involved

[11:47] is because you're literally like the mum holding their hand through the process.

[11:51] So they've got some comfort there because they've got mum looking after.

[11:54] Well, you don't want me to hold your hand. I'd rather

[11:57] hold Dani's hand.

[11:58] But like, Dani is so good.

[12:00] I mean, like, you know what?

[12:01] You do it to get those pest inspections and building inspections.

[12:05] Nothing is worse as an advisor,

[12:07] when I tell, let’s say it’s an investment and you say don't get emotional.

[12:11] So to take a leaf out of your book, George.

[12:14] But like it's purely a transaction and often in, in our first home

[12:18] we're ill equipped to, to go in and make these purchases.

[12:21] But really if you don't you can't afford to have the help.

[12:24] It's very easy to get emotional.

[12:25] And so you really lay it on a good property

[12:28] lawyer like yourself and your team where you have that building inspection.

[12:31] Because when it comes back and I'm dealing with a property that now five years down

[12:35] the track has water damage and, and the waterproofing is insufficient.

[12:39] The the car parks flooded like these are all checks and balances.

[12:43] Had they've gone to the right professional in the first place,

[12:46] the right conveyancer that the right property lawyer,

[12:47] these things would have been uncovered, or the right buyer's agent

[12:50] who had done those checks.

[12:51] And then the other flip side to that, I think the other day we saw a situation

[12:55] where the builder uncovered a pest like bees in the roof.

[12:58] Right. And so imagine you didn't have that pest inspection

[13:02] and you find out the bees have been living there.

[13:05] It was a big nest.

[13:06] And, and all that honey is dripping down the inside of the wall is like,

[13:09] hey, talk about a sweet property purchase.

[13:11] But again, it's a good side hustle. Yes.

[13:14] Well, you're.

[13:15] Going back to the fact

[13:16] that first home buyers don't tend to go to auction, so I don't I had

[13:21] many clients coming to me on Monday.

[13:24] I bought a property and I was like, what?

[13:27] What about the contract review?

[13:28] I was successful at the auction on Saturday.

[13:30] That doesn't tend to happen with the first home buyers, so at least we have

[13:34] that time.

[13:35] We have that cooling off period to do the pre-approval,

[13:37] to have the building and pest inspection done, to have the strata inspection done,

[13:42] to make sure that, you know, there are no major dramas when it comes

[13:45] to the conveyancing structure.

[13:47] I'm sure that's happened to Mike a few times.

[13:48] I have bought a yes.

[13:50] I'm nervous sometimes when I get the calls from Dani, you know,

[13:52] particularly on a Monday morning, because, you know, they've been to the auctions.

[13:54] But yeah, we've had it

[13:55] and we've got lenders, you know, where if I lodge the loan application

[13:59] this morning, if I didn't have at least an initial indication by this afternoon,

[14:02] I'll be calling a guy, hey. What's wrong?

[14:04] So they're out there, but you don't want to limit your choices.

[14:06] It is far better to approach it in an orderly way and go to auction

[14:10] with the confidence that the finance is there,

[14:12] and you just need to pull the trigger on the inspection.

[14:15] Yeah, I find that a lot of first time buyers will make certain mistakes,

[14:19] especially around the investment property,

[14:20] because it's easy to purchase a property, it's hard

[14:23] to buy a good investment property or investment grade property.

[14:27] And it particularly when first home buyers have that.

[14:30] Two thoughts in mind.

[14:32] Yes, I want an investment property, but I also want someone to live in

[14:35] 2 or 3 years time.

[14:36] Something along those lines I sort of say, well, you can't have both.

[14:39] You can't have your cake and eat it too, so you need to pick one or the other.

[14:42] You know, you want to buy your dream home. Buy your dream home.

[14:45] You want to buy an investment property by an investment property.

[14:47] And so that being said, you need

[14:48] to clearly differentiate and understand truly what are your goals as well.

[14:52] And I see that as one of the biggest mistakes that first time

[14:55] buyers will make is when they buy my based on emotional purchases

[14:59] and they don't have the end in mind as well.

[15:02] Maybe from a tax perspective, I see a lot of first time buyers when upgrading.

[15:07] They want to understand what happens to their property after that.

[15:10] So maybe

[15:11] if you could give us a bit of a scenario, a bit of a walk through George, around

[15:15] what tax considerations?

[15:16] First, home buyers need to take into account,

[15:18] as to whether to hold on to their

[15:21] investment or their first home or not when they're upgrading particularly.

[15:24] Absolutely.

[15:25] Generally speaking, the, the tax considerations

[15:29] are, fundamentally keep your records.

[15:33] If I can say nothing else

[15:35] other than keep your records, that is super important.

[15:39] Most of our clients who we've taken on as new clients

[15:43] literally don't have many records about what they've done.

[15:46] So when they're considering selling the property, or making that decision,

[15:50] they don't have enough records for us to ascertain

[15:52] whether or not they were improvements.

[15:54] What were the holding costs

[15:55] during the periods that you were actually in or out of the property?

[15:58] Did you live in it for a period of time?

[16:00] Did you actually rent it for a period of time?

[16:02] Was there a period where you were actually doing some work on it and it was vacant?

[16:05] All of the considerations, because there are literally five limbs to,

[16:09] you know, capital gains tax cost basis, keep your records.

[16:14] Fundamentally that's important.

[16:15] And that also then from a different perspective,

[16:19] what are the tax deductions

[16:20] that they could actually claim and how to benefit most from them

[16:24] and actually use some of the equity for the next purchase.

[16:27] Rather than pay their debt down, by paying the principal off,

[16:32] put the money, the extra funds into an offset.

[16:35] So you're building up your deposit.

[16:37] So what you're paying in interest is actually only a small amount,

[16:41] so that when you then need that extra bit, you put that into the property

[16:45] that you're going to live in,

[16:47] and then you've got all the deduction available then

[16:50] for the property that you're now invested has as an investment.

[16:54] So it's almost acting as a as a line of credit almost.

[16:57] It's just sitting there in the offset ready to go. Yeah yeah.

[16:59] Ready to redraw. So you're not triggering anything.

[17:02] You've not changed or refinanced that debt that debt.

[17:05] And that's how the tax deduction works for interest.

[17:08] It's not necessarily what you had a security

[17:10] what you put down as a deposit.

[17:12] It what was the purpose of the borrowings.

[17:14] And if the purpose of those borrowings was for that rental property.

[17:17] Well, that's what the interest is going to be deductible against.

[17:20] Yeah. Yeah. It's so true that you definitely need to keep your records when it comes

[17:24] to property, regardless of it being principal place or owner occupied,

[17:27] because there's so many facets to income tax, tax, depreciation, negative gearing,

[17:33] capital gains tax, that people need to need to consider as well.

[17:37] And how does that work in terms of a person's overall financial position

[17:41] when they're considering whether

[17:43] to even keep the property as an investment after they've moved out of it?

[17:47] Yeah. I mean, there's a few things they often when you're buying your first home

[17:51] and you, particularly in New South Wales, if you remember,

[17:55] you'd have to move in to get the grant and your stamp duty exemption.

[17:59] You need to live there for one year, right?

[18:00] So you're already it's already become a principal place of residence.

[18:03] And there's all these carve outs not being tax advice that, you know,

[18:07] if you live there then you your principal place of residence will be tax free.

[18:11] And even if you rent that out for, say,

[18:13] six years and you correct me if I'm wrong, George, you can still keep that.

[18:16] It will, it will keep it six year status.

[18:19] And so the question will be will I

[18:23] nominate another property in the future to be the principal place of residence?

[18:26] Do I let that exemption lapse or is it is it is it is it it's

[18:32] is it more efficient to sell that property and buy that dream home?

[18:36] And so that’s the conversation that we have and once,

[18:38] once in the investment route where George was talking about

[18:41] it can be that line of credit

[18:42] and you can just keep building and adding on without taking away.

[18:45] And and if you have the income to support that, then, then why not?

[18:48] Right.

[18:49] But if you're in a situation where you, you and your partner

[18:53] have, lower incomes,

[18:56] then you need to really, really think about where it is you want to live.

[18:59] Because, you know, often in, in, in Australia where you live and,

[19:04] and the people in the community around you given that we work so much.

[19:09] It often has such an influence on the, on our children and their upbringing

[19:12] that it's really worthwhile to be able to invest into a good area to live in.

[19:17] And so if you don't sell, then, you know, the scenarios we put out to clients

[19:22] that show that we won't be able to get the finance to to buy that dream home.

[19:26] So there's really no correct answer.

[19:29] But the strategy of what you want for your life, so will be,

[19:32] do we have enough for our dream home and enough

[19:35] runway to be able to build up enough assets for ourselves,

[19:38] so we can also pay that off and and fund our retirement?

[19:42] I think that's really important,

[19:43] especially as we know the number of listings

[19:46] or the supply of property is tight in certain areas and everyone's

[19:48] trying to get into a good school catchment area, especially here in Sydney.

[19:51] But I think one of the more important aspects, as well as as we move

[19:55] from principle place of residence to investment property, and we consider

[19:59] keeping on first time that the lending around that first home.

[20:02] If I have a property and I change it from principle place

[20:05] of residence to investment, what are the lending considerations

[20:08] that I need to take into account as I review my loan?

[20:11] I guess one of the things you do you think about is

[20:13] you can change the purpose of a loan.

[20:14] You can buy a property as an investment property,

[20:16] but if you can evidence to the lender, you know, through utilities notices or

[20:20] those sorts of things that you're living in the property,

[20:23] you can change the purpose of the loan.

[20:24] And what that means is that you're getting the money at cheaper rates.

[20:28] So, yeah, I mean, it's worthwhile thinking about how you want to do it.

[20:31] And as you said, George, you know,

[20:33] the purpose of the loan doesn't really, impact the borrowing.

[20:37] You know, you can trade it, however

[20:38] it needs to be treated from a taxation point of view.

[20:40] So there's some flexibility there.

[20:42] Yeah. Awesome. Very good.

[20:43] Well, look, that's all the questions I had for you guys.

[20:45] I want to throw it to, a bit of a light hearted, quick quickfire question.

[20:50] Favorite go to holiday destination or even a dream holiday destination?

[20:54] I might start with you, George.

[20:55] Literally anywhere in the Mediterranean.

[20:58] Absolutely love it.

[20:59] Cyprus, Malta, Greek islands.

[21:01] Love it. Beautiful. Nice, Mike.

[21:04] Well, as you can say, I'm a peak athlete.

[21:06] Surprisingly, I'm a not a bad skier.

[21:09] I like, you know, Canada very much.

[21:11] And when we're lucky enough to go to Banff a few years ago

[21:14] and I'd happily go back tomorrow. Beautiful. Nice. Yeah. Andrew.

[21:18] Hong Kong, Vietnam,

[21:20] anything Southeast Asia being a financial advisor?

[21:23] It's always a value proposition, isn't it?

[21:26] And I could we could head to Europe and given the, the dollar at the moment,

[21:30] with all the unrest in the world,

[21:32] you wouldn't be living like the king that you or queen that you'd want to be.

[21:36] You go to Asia. It's just so lovely.

[21:37] So fresh seafood,

[21:39] really down to earth people with not much but really, really happy.

[21:43] And that for me, in a world of materialism, when I, when

[21:47] I go to experience new cultures and I can see that materiality

[21:52] has nothing to do with happiness, it definitely warms my heart.

[21:55] Beautiful.

[21:56] Very nice.

[21:57] Daniela should be listening to the financial planner but Italy...

[22:00] Italy no brainer.

[22:03] Yeah. Cool. Wine and pizza.

[22:05] Yeah, I I'd have to echo that, but I, I want to get a little bit more specific.

[22:09] I've been to Sicily a couple of times now, and the Isole Eolie, a group of volcanic

[22:13] islands off the coast of Sicily is, you know, a €50 hire, a Vespa for the day.

[22:19] You can eat a pizza for €8.

[22:21] It's fresh off the boat. I can’t go pasta.

[22:24] So very good. Thank you guys for joining me on another episode.

[22:27] Really appreciate it. Thank you Gianni.