February 4, 2015

Which comes first. A home or investment?

Cam McLellan

By Cam McLellan

Let’s talk about your first property. You can have your own home with a white picket fence and a mortgage that feels like a prison. Or, you could rent (or stay living at home), live wherever you want and put your money into an investment property.

If you concentrate on building a portfolio first, after a couple of years you can go and buy any house you want.

My brother still rents but has a solid portfolio of investment properties. Shortly after buying his first home, Bob decided he wanted to move out. The property, though located in a good area, just wasn’t where he saw himself living with a family down the track. It was no coincidence that his first purchase happened to meet all the criteria of a good investment, so he kept the house in his portfolio. Now anyone who knows Bob knows he’s good with numbers. He worked out that he could rent a much nicer house in his ideal location and put a tenant into the place he owned. Because he was able to take advantage of some standard taxation benefits, he was also better off financially in terms of week to week cash flow.

My business partner Matt only bought his first home a few years ago. Prior to this he built an impressive portfolio of investment properties and put himself in the position to go out and buy any house he wanted.

Matt once told me a story about how his wife Claire bought a house years before they were married. Matt had arranged for Claire to buy a block of land and build a spec home on it. It was in a lot of six or eight blocks of land. Coincidentally, I also happened to buy one of these blocks.

Matt identified the opportunity and it was Claire’s job to go and organise the finance. As usual, the banks messed her around and it was a stressful time. Houses aren’t cheap and banks often forget what it’s like when you’re standing the other side of the counter.

Claire told Matt that the guy at the bank was not only useless but extremely rude. Sadly this is not uncommon. She said she never wanted to go through that experience again. Now Claire’s a smart person, but this was all new to her and anything new can be stressful.

Eventually it all got sorted out and she bought her property. Luckily for Claire, Matt knows how to do his research. One year later the house was valued at $120,000 more than she had paid for it.

As she later conceded to Matt, it was all worth the four stressful hours she spent at the bank. This is not an unusual story.

One of my best friends Ady is also building his portfolio. He purchased a property and given that it wasn’t his first purchase he should have known the brokers would lose all his payslips and request the same information multiple times. That might be a pain in the backside now, but considering the return he will make, it’s a worthwhile one.

Ady is renting and he loves the security his portfolio gives him. No matter what his ex does or how bad his day is at work, he is secure in the knowledge that he has something substantial to pass on to his kids.

Most people want to buy their dream house first because that’s the way they’ve been programmed to think. Go to school, get a job, have a family, buy a house. Then spend the rest of your life paying it off. Sorry but that’s just depressing. That sounds like a huge weight to have on your shoulders. It makes me think of some old-school movie where the evil guy in the cape says, “You shall have a mortgage fooorrreeevvverrrr, ha ha ha ha”.

Sounds crazy, right? But that’s what practically everyone does.

I’m going to quote Einstein. “The definition of insanity is doing the same thing over and over again and expecting a different result.”

Everyone knows wealthy people do things differently to everyone else, but most people are just too hesitant to have a crack. They worry it’s too hard and they’ll end up failing – oh the shame.

Most people would also say they don’t really love their job. I can’t work out why some people choose unhappiness over uncertainty.

This is why the vast majority of people keep walking the same path towards a very poor retirement. I say bugger that. People bust their butt going to school and university to get an education. They work very hard often in complex jobs, but can’t seem to take the few basic steps to build an investment portfolio and reap the rewards.

The thing it takes is time, not only to learn the strategy of investing, but also to maintain your focus and make the strategy work.

I know it’s stressful doing something new. I still remember how green I was when I bought my first property. I went to the agent’s office and signed the contract. He asked for my conveyancer’s details. I gave him a blank look. “What’s a conveyancer?”

I really do understand the pressure of doing something new with this level of commitment. I have, however, found that it’s worth the effort. For most people, investing is not part of their everyday lives. But it’s possible to reach the stage where buying a property is like picking up a new pair of shoes.

You check them out. They fit. And that’s it.

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