All About Finances

A personal financial blog

The share market vs. real estate

Posted by petrona on February 1, 2008

Anyone who’s looking at investing, or has invested already, is likelyto have noticed the share market turmoil that’s been happening, particularly over the last few weeks.  The markets have shown that there’s some uncertainty occurring in terms of expectations, with almost all major indices taking a dive.  As a result, there’s been some fairly substantial losses, on paper if nothing else. 

I have to admit that I’ve been watching this turmoil with a certain amount of interest, even though I don’t have a share portfolio (other than my compulsory superannuation, that is).  On a personal level, it’s served to reinforce my position that real estate is the investment of choice for us.  The stability of the real estate market is a big bonus for risk-averse investors.  Sure, the market might flatten out for a few months (or years) at a time, but it doesn’t have the same volatility as the share market does.

On an investment level, it’s interesting to note how the stock market losses will impact on the local real estate market.  As the less desirable traits of shares become more obvious, some investors will substitute away from shares.  In non-economic speak, shares and real estate are partial substitutes for one another.  If one becomes more ‘expensive’, the other option looks more appealing.

It’s like the margarine/butter situation.  Both do the same job, and taste similar.  If butter becomes horribly expensive, consumers start to buy more margarine instead.  If there’s a glut of butter, and the price drops, then consumers buy butter.  Investment works similarly.  When the stock market loses value rapidly, for whatever reason, a certain percentage of investors will look at alternative investment choices.  This may be for various reasons.  They may be depending on a certain amount of growth over a particular time span, and may consider that real estate is the best way to achieve this, as it is much less volatile.  They may simply be risk-averse, and wanting to avoid the share market declines that naturally occur along with the increases.

As one of those who are risk-averse, real estate is my preference.  For those of you who are looking to mitigate share market losses, I have two recommendations – buy when the market is low, and only buy blue chip shares.  I’d also stick to the resources sector.  Just keep in mind that I’m not an expert, so take these recommendations with a grain (or two) of salt!

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Everyday expenditure: ways to save money

Posted by petrona on September 11, 2007

I thought it might be time to look at things that are a bit more broadly applicable, such as ways to keep your day-to-day costs down.  We all have to eat, pay bills, use some form of transport, etc., so I thought I’d share some of the stuff that SO and I do.

1.  Reduce (or give up) your addiction.   You’ll notice that the addiction isn’t specified.  That’s because we’ve all got one, whether it’s low-scale (I can’t walk past the chocolate counter without picking up a couple of hip-widening items) or more significant, such as gambling.  Ultimately, all ‘addictions’ come at a cost – both financial and personal.  I’m not going to go into the personal side here, but the financial side is pretty obvious.  This is a difficult one, as weaknesses are pretty much universal, but it does save money.  For example, in Australia, a 25-pack of cigarettes is about the $10 mark.  That’s $70 a week, and over $3,500 a year.  That’s a lot of money, in anyone’s terms.

2.  Eat at home.  Cooking at home is cheaper than going out or eating takeaway.  Sure, it’s a pain to get home from work and have to cook.  But not every meal has to be a gourmet three-course production, either.  During the week, we eat a lot of meals of the poached eggs on toast/baked beans on toast/toast by itself variety.  On weekends I’ll cook decent meals, with things like green vegetative matter included.  We do get some vitamins in our lunches, as well – we can’t be bothered taking our lunch to work (well, only rarely, anyhow) so we tend to stick to things like Subway.  Also, we take multivitamins.  (I know, it’s not a substitute for real vegetables, but it’s better than nothing.)

One thing I do, if I’m cooking, is I tend to make extra.  That way, I can take it to work.  There are a number of dishes that taste better when they’re reheated (such as lasagne, spaghetti bolognase, really anything with mince it it).  It’s easy, as you’re already cooking, and it’s convenient at work to just reheat something, rather than go out and get lunch.

Another thing I do in the kitchen – I compost all the scraps (except for meat and dairy).  Perth has a Mediterranean climate, so this method works all year round – I don’t know how much luck you’d have if you’re in a colder area.  I fill up a container with a lid (such as an old icecream container) with scraps, dig a hole, dump in the scraps, add a containerful of water to it, then cover it over with the dirt.  In six to eight weeks, it’s broken down and helped fertilise your garden.  Plus, it’s reduced the amount that would’ve otherwise gone to landfill.  Since doing this, I’ve seen worms in our garden for the first time since we moved here (coming up to two years ago).

3.  Don’t have expensive hobbies.  Or if you do, control your expenditure.  SO is an IT geek, both professionally and outside of work.  However, we’ve only recently replaced his computer (bought in 2000!) for a new model.  Sure, it has bells and whistles.  But he hadn’t spent any money for seven years on his previous one, and he’ll probably do something similar with this one.  You try finding anyone who works in IT who hasn’t done some kind of upgrade in that time.

My hobbies are pretty low-cost – blogging, napping, reading, playing and listening to music.  So what with SO’s willpower to resist upgrading his first love, and my inexpensive hobbies, we spend very little of our money on pastimes.

4.  Check out eBay.  With all the potential downfalls (such as those people looking to rip off the unsuspecting buyer or seller), eBay is still a fantastic resource.  You can buy literally anything.  I recommend the stuff that doesn’t weigh a lot – I’ve bought some beautiful clothes in perfect condition from eBay sellers.  And it’s a good forum to sell things as well – I’ve had success in offloading clothes that I *cough* grew out of.  It’s definitely worth a look.

5.  Check out your local community forums.  I see local forums with items for sale as the perfect complement to eBay.  This is the place to look for the bigger items, especially furniture.  When we were furnishing our one-bedroom unit that we’ve just rented out, we kept our expenditure to under $1000 for all items.  (I keep meaning to write a post about this – when I do, I’ll make sure I link to it here.)  This is where people who are trying to offload stuff (often in a hurry) advertise.  Plus, you know it’s going to be local, which is handy for picking up – no delivery charges.

6.  Get to know when specials happen.  I’ve found I do this automatically at the local supermarket.  We buy the same stuff repeatedly, and so I know that every few weeks, the big packets of my cereal will go on special.  When that happens, I buy up big time.  The same goes for other staples such as cleaning products (which tend to be expensive), meat, and bread (freezes beautifully).  I keep hinting to SO that I want a deep freeze so we can really buy up big, but he’s of the opinion that we don’t need it.  The same applies to things like clothing and household items – keep an eye out for catalogues that advertise the end of financial year sales, for example.

Another avenue to explore is the factory outlets.  These can be for clothing, electrical items, you name it.  In Perth, these tend to be located around the Osborne Park area.  (Table 8 factory outlet, anyone?  My supervisor told me today that she got a cream coloured pants suit, in perfect condition, for $40 total.  The original retail price was close to $500.) 

7.  Carpool, or use public transport.  I must admit that I don’t find public transport appealing.  I think it’s the years I spent in high school, commuting an hour each way every day.  However, carpooling is ideal.  I’m lucky in that SO and I both work for the same organisation, so carpooling really works well for us.  But it can also work well if you and a neighbour both work in the same area.  Not only does it save on petrol, parking and servicing costs, it’s also better for the environment.  Every little bit helps.

8.  If you can’t save money, try making more.  This is looking at the other side of the saving coin, so to speak.  If you really have a limited budget, look at what you can do to increase your income.  Can you do a course to help you get a promotion at work?  Can you teach something?  I’m a fan of the teaching thing.  I played a musical instrument for many years, and considered it as a profession.  Teaching means I get to enjoy my passion, and make money from it, while seeing younger musicians develop their skills and get a kick out of that feeling of accomplishment.  It’s an all-round winner.  You don’t need to teach music – it can be craft, maths, almost anything.  You can schedule it to suit your lifestyle, and you can do it from your own home.

I’m sure there’s plenty of other good ideas and approaches out there – I’d love to hear of your bargain-hunting tips and tricks.

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Renting: furnished vs. unfurnished

Posted by petrona on September 7, 2007

One of the big questions when renting properties is, do you rent furnished or unfurnished?

Both options have pros and cons.  Unfurnished rentals have a cheaper initial set-up cost.  This can be a big factor if you don’t have much cash.  People who rent with their own furniture tend to be longer-term rental prospects.  Moving every six months is less appealing if you have to move a bed, fridge, washing machine etc. as well.  Also, the accumulation of furniture can be seen as a sign that the person is relatively financially stable.  This is a desirable feature in any tenant.

The negative aspects of renting unfurnished include the decreased rent that can be charged.  Also, in Australia at least, any furnishings that are included in a rental can be depreciated over time and therefore used to minimise your tax.  Therefore, renting unfurnished reduces the ability to minimise your tax.  Tenants moving furniture in and out can result in more damage occurring to walls and fixtures (whoops, who knew that light fitting was there?!).  Finally, the appearance of current tenants’ furniture can detract from your property when you are showing prospective renters through.

The benefits of renting furnished includes the tax break you receive on all items supplied.  Depreciation schedules are best done by specialist organisations such as Australian Tax Depreciation Services.  The cost of a depreciation schedule is tax deductible.  In addition, you can charge a higher rent for furnished properties.  However, the section of the rental market that is attracted to such properties is limited to those who are only interested in shorter-term accommodation (such as those people who are only looking to remain for up to two years) or people who don’t have enough money to buy their own furniture.  This may be because they’re low (or no) income earners (so there’s a possibility that they may have an irregular source of income) or they’ve just left home (think uni students, or young adults in their first job).  As well as the tendency to not stay in one place as long, this section of the market also can seem to be less invested in basic maintenance of the property.  However, it is important to note that just because someone is unemployed, they are not necessarily an undesirable tenant.  In Australia, Centrelink can arrange to directly deposit money from the person’s social security payments (‘the dole’) into your account, which ensures the rent payments will be made.  Also, if someone is at home during the day, the chance of a robbery occurring is minimised.

We’ve chosen to rent one of our units furnished.  (The other unit had a fixed term tenancy when we bought, with the tenant supplying their own furniture, so we have not been able to decide what to do with it for the moment.)  We wanted the higher rental income, and liked the idea of being able to ‘do up’ the unit to look fresh and bright, and providing furniture which complemented the look of the unit.  We also managed to find furniture, which fitted the look we wanted to achieve, at a very economical price.  (I’m planning to write an article on how furnish a rental inexpensively in the near future, so stay tuned.)  As a result, we now have a tenant in the unit who is paying $40 a week more than similar furnished units in the same area.  This is also $40 more than we had allowed for in our budget for rental income.  We view this as a highly successful outcome.

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‘Renovating’ on the cheap

Posted by petrona on August 28, 2007

Buying a unit was a big step.  We knew it was a sound financial decision, but we also understood that our budget was limited.  We could only borrow $385,000, which would buy either one two-bedroom unit, or two one-bedroom units.  We decided on the two 1×1 units, as that way in a few years’ time, if/when we have kids, we can sell one and hang onto the other (in an ideal world).

We also knew that we’d be limited to either buying a fair distance from the CBD, or buying places that were closer in but needed some work.  We opted for the latter, especially after doing some investigation.  Osborne Park is close to the CBD, and our units are on a main road (near public transport) and near a freeway entrance respectively.  This ensures transport is easy for tenants.  Also, it’s close to where we currently live, so it’s not too far to go when working on the units.

We made one smart decision – we’re doing one unit at a time.  Unfortunately, we thought that we’d be clever and not take any leave from work.  As a result, we’ve been patching, sanding, painting, measuring, etc.  after work at night, and all weekend.  It’s tiring, stressful, and, well, tiring.  Next time, we’ll take annual leave to do any necessary work.

So, how are we ‘renovating’ inexpensively?  I’ve used inverted commas because we haven’t replaced any tiles, bench tops, basins, toilets, etc.  These were all in good condition.  Instead, we’ve painted the entire unit, including skirting boards; replaced window treatments, to modernise the look; replaced power points and switches (the previous ones were the original ones installed, some 40 years ago); and replaced light fittings.  We’ve also replaces the rollers in the bottom of the windows and the sliding door.

Altogether, we’ve updated the look of the unit so it looks fresh and brand new, for around $500.  We painted the unit ourselves (with some help from my father-in-law, who’s a dab hand with oil-based paint).  We’ve also done the window treatments using ready-made curtains.  We did have to call out a sparky to do the powerpoints and light fittings, but he’s a friend of the family, so he gave us a good price.  We also supplied all the replacement light fittings and powerpoints ourselves, which saved us some money.

There are other, even cheaper ways of cleaning up a property.  For example, we took the glass sliding door out of the track to replace the rollers, and I scrubbed the frame.  It took three hours, but it looked fantastic when it was done.  Washing the windows finished the job properly and really made a difference to how the unit looked.  Another trick is to clean up any tile grouting.  If it’s really stained, whitening it does wonders.  There are lots of products on the market that will do this, and it can make the tiles look really clean and new.

Essentially, it’s the time vs. money conundrum.  We wanted to do things as inexpensively as possible, so we chose to do the work ourselves, for minimal outlay.  If you’re time-poor, it may be worth your while to pay someone else to do it.  For us, doing it ourselves saved a considerable amount of money, we learned a lot along the way, and we have a great sense of satisfaction and accomplishment. 

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Why real estate?

Posted by petrona on August 26, 2007

This is the question I get asked all the time by family and friends.  “Why are you buying units? The market is so overheated!”  Well, there are plenty of good reasons.  Sure, the market is overheated.  That doesn’t mean that it’s not a good option. 

 Here are some of my and SO’s reasons for buying real estate, instead of shares:

1.  Everybody needs shelter.  Currently in Perth, there is a huge rental demand that isn’t being met.  It’s being driven by our resources sector.  WA is rich in iron ore and natural gas, just to name two.  We’ve signed up long-term deals with China and various other developing nations to sell them as much as we can extract.  As a result, there are lots of jobs available here, and lots of people coming from other states (and overseas), all of whom need somewhere to live.  If you plan on only staying for a couple of years, you’re unlikely to buy – hence, the rental market is booming.

2.  The cost of owning a house is prohibitive.  It’s hard to believe, but Perth house prices now are the most expensive in the country.  As a result, it’s extremely difficult for lower income earners to afford a mortgage which gets them anywhere close to the city.  This is the market we’re targeting (see point 1).  Let me state here that I don’t think this is fair or reasonable.  I firmly believe everyone should be able to afford mortgage repayments.  However, this is sadly no longer the case in WA.

3.  You can change the value of real estate yourself.  SO and I have spent the last few weeks busily patching, sanding, painting, cleaning, you name it.  This will add to our unit’s value, both in resale terms and rental income.  There’s very little, if anything, you can do to increase the value of any shares you hold.

4.  Minimal land release.  Land release is controlled by the state government.  For whatever reason, there is little land released, and when it is, it’s on the outskirts of the metro area.  This contributes to point 2 above, and also ties in to point 1.

5.  We’re both risk averse.  While real estate may stay the same value for a few months or years following a rapid increase (as we’ve seen here in WA over the last four or five years), it’s pretty rare that it actually goes down in price.  Shares, on the other hand, are highly volatile.  For that reason alone, neither SO or myself are comfortable investing in the stock market.

I’m sure there are other points I’ve forgotten, I’ll post them at a later date when they occur to me.

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All About Finances

Posted by petrona on August 26, 2007

Okay.  I’ve decided to join the 21st century and put some of my personal financial experiences out in the public arena.  Not because I think what I do financially is infallible, but because I suspect I’m not the only person who is trying to make sound decisions while still maintaining my sanity.

Anyhow, some information about me.  I’m thirty, live in Perth, Western Australia, and I work for the government.  (I could tell you more, but I’d have to kill you.)  I’m married to Significant Other (SO), who coincidentally also works for the government, and we don’t have any offspring.  No kids, no pets.  SO is allergic to animals, and at this point in my life, I’m allergic to kids – just kidding!!

Like most couples of around our age, we have a mortgage on our house, of which the bank owns far more than we do.  We’re fortunate in that, other than some credit card debt (about $1,000) we don’t owe money in relation to assets that depreciate, such as cars, consumer debt etc.  We also don’t have any personal loans.

However, we have just taken a big breath and embarked on the world of real estate investment.  We have just purchased two units in Osborne Park, which we are looking to clean up and rent out (hopefully, at a ridiculous profit).

This blog will be primarily about our finances, why we’ve made particular decisions, and how we’ve implemented them.  It will also include posts about broader financial issues such as interest rate increases, inflation, and the economy.  I’ll try to avoid the dry stuff, but as an economist this does affect the decisions we’ve made, so I’ll attempt to make it as relevant as possible.

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