Buying First Home – Asset or Liability?

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The Problem with House and Land Packages

You are looking at buying your own home because it’s the “Australian dream” and it will be one of if not the biggest asset you’ll ever own -right?

Well not quite.

Let me explain. To understand whether something is an “Asset” or not let’s revisit the definition of an asset.

Below is the official definition from Investopedia:

What is an Asset?

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

And herein lies the problem. Every asset has future economic benefit but not every asset will make a profit. Which, in turn means, that not every asset is good investment if you are looking to create wealth with it.

When I look at an asset, I always look for the tri-factor of characteristics that determine how good the asset is. By determining this upfront, I can make a calculation on my opportunity cost and if my money is better spent elsewhere. 

The 3 characteristics I look for are:

  1. Re sale value
  2. Capital Appreciation
  3. Income

Nothing kills wealth creation more than money being tied up in an underperforming asset not working as hard as it should to compound your returns.

To illustrate this point let’s look at an example. 

Using the above would a car bought for personal use be classed as an asset?

  1. Resale value ? YES!
  2. Capital appreciation? NOPE! (Well apart from a few exceptions but I am talking about the average, everyday vehicle).
  3. Income stream? NO!

Based on this, a car is an asset, but you should avoid borrowing money to acquire one. Why borrow money to spend on an asset that only goes down in value over it’s useful life?  Makes no sense. 

Yet, according to this report conducted in 2018, 9 out of 10 cars on Australian roads today are financed! 

“Indicatively, 90% of all car sales are arranged through finance, of which around 39% are financed through a dealership and around 61% are financed from other sources”

No wonder majority of people just do not get ahead in the financial game.

House and land packages :

Ok so what does this have to do with Buying first home?

Well if you are buying first and last home then it really does not matter what you buy. If all it is, is a lifestyle investment, than all that matters is what you can afford and where you would like to live.

But if you are buying a first home to get into a fruitful, long and sustainably successful property investing career, then keep reading because I wrote this for you.

Well, apply the same principle above to a house and land package. Using a real-life example, my cousin, a first home buyer, finally purchased a house and land package in 2018.

He settled on the land first, paying $355,900 for a 392 square metre plot of land in a new housing estate.

He then used his builder to build a 4-bedroom, 2 bathroom and 2 car garages, signing the contract to build in Jan 2019.  

A beautiful, large home, approximately 25 square metres with multiple living rooms (2 TV rooms!) and high-end finishes. Not to mention a huge front door and tall ceilings. 

A premium product and indeed impressive by any standards for someone buying first home.

So how much did the build cost? A grand total of $320,000 plus GST. 

After a 10 month build period my cousin and his new wife moved in. 

Let’s look at the real total of what it cost my cousin when buying first home:

  • 10% Deposit for house and land package: $ 70,790
  • Total amount borrowed $637,110 
  • Interest rate 3.5% 

Total cost:

So…How does this end?

Well after costing my cousin a grand total of $735,198.85 before he moved in, how much do you think that same house would sell for today over 2 years after settling on the land ?

Answer = $599,000! 

My cousin’s neighbour 3 doors down on the same side of the street who used the same builder with the same finishes and floorplan.

That is right! After spending over $735,198.85 on buying first home, my cousin, if he were to sell today, would sell at $599,000. 

Why? Sure, we went through Covid-19 in 2020, but that is not why. Where has the major loss come from here? 

It is depreciation. 

My cousin has effectively funded the loss of his own property by buying premium products through house and land packages. It is an absolute myth that house prices in Australia “always go up”. 

If that wasn’t bad enough, he has used debt to fund 90% of it!

Big lesson here is when you are using debt, make sure Income > Debt Cost. Beware of credit risk. Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations! 

Avoid using debt to buy depreciating lifestyle assets.

Whether it’s a house or a car or a boat etc. This behaviour is eating into the potential wealth you can create in the future.

Hopefully, this real-life example proves how naïve that thinking is and how naive investors lose out in the long term. 

I am not saying avoid house and land packages altogether because in rare occasions there is opportunity to profit from such deals without gambling on the future of house prices.

Do not think its as simple as buying land at first release and then selling when prices go up because that again is gambling.

Investing is not gambling.

Getting lucky a couple of times wont lead to sustainable wealth creation via property investing.

Another huge factor is because of the amount of supply, new land, and similar houses available in this area. It is basic supply and demand. When supply outstrips demand, prices stagnate or worse – fall. 

Even if my cousin held on until prices hit a level where he was able to make a profit, at least on paper, it’s hard to account for the depreciation, inflation, and cost of holding until time prices rise.

If they ever do. 

Imagine trying to pick when these prices will hit a profitable level? As the days go on, the cost of the investment goes up with inflation, holding costs and most devastatingly-opportunity cost!  Again there is a lot of “gambling” involved in this buy, hold and hope strategy.

My cousin’s deposit alone of $ 70,790, is being eroded every second he holds on to this property.

He would have been better saving that $70k (plus all the other cash he chipped in for legal fees and interest, premium furniture, holding etc) in a saving account earning less 2% a year. At least then he actually makes some return (barely anything after inflation) and

It’s safer than putting it in a risky property deal. 

So how does this house and land package stack up?

  1. Resale value?
  2. Capital appreciation? 
  3. Income stream? 

You may argue that since its my cousins’ own home he is going to live in for a while that it doesn’t really matter – it’s your prerogative. 

Just remember if you are serious about investing then you cannot create any wealth worth talking about over your lifetime by being ignorant to how money works and the opportunity costs of poor choices. 

Understanding the power of compounding returns will empower better investment decisions.

Remember most of the time buying first home isn’t always your forever home. More often than you will upgrade as the family grows and circumstances change. 

Having your finite resources (time, money and borrowing capacity) tied up in what is effectively an exercise in funding the gradual depreciation of your asset will prevent property investing progress more often than not.

Bottom line is, when buying first home, always consider:

  1. Resale value (at a profit)
  2. Capital appreciation. 
  3. Income stream

……and please avoid funding losses!

Shehan Tambinayagam

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