by Peter Lenkefi
As we checked out the local real estate prices in and around
Launceston, Tasmania, Australia the following question was
asked on several occasions: since prices are so low, why
don't the locals buy instead of rent?
This is a very valid question, especially when you realise
that although house prices in Sydney and Melbourne are much
higher than in Tasmania, construction costs and wages are not
substantially different.
This means that housing is far more affordable for
Tasmanians than for Sydneysiders or Melbournians for example.
There are two very important reasons for this.
Firstly there is a huge diference between an investor's
mindset and that of a renter and
secondly an investor is prepared to sacrifice today's lifestyle
for a better lifestyle in the future.
Let me explain . . .
When the renter receives his or her regular pay cheque, their
mind goes into a process which tells them that they must pay
the rent by the due date, otherwise they will be tossed out
of their home.
They may have received warnings for late payment in the past
or may have even experienced an eviction. The consequences
of late payment are therefore very clear to them and so the
payment of the rent is a high priority for a renter.
(Just ask my tenants.)
The majority of renters live from week to week and often
struggle to get enough money together to pay the bond.
Here's an example of just how difficult it can be for an
average Australian university graduate living in a capital
city to get out of the rental spiral and change from being
a renter to an investor.
Let's say they are on a salary package of $39,000 a year and
after deducting the employer's superannuation contribution
of 9 per cent, repayment of their HECS debt and taxation,
they are left with a take home pay of $25,000 a year or
$480 per week.
If they are renting a two bedroom appartment in Sydney for
example, they are likely to pay somewhere between $150
and $300 per week in rent.
That means they need to come up with a bond of between $600
and $1,200 for their rental accommodation plus bonds for the
supply of their telephone, electricity, water and possibly gas.
This doesn't leave a great deal over for food, clothing,
travel, entertainment and other expenditures.
The only way out of this is through careful budgeting and
saving.
The same person living in Tasmania would need to spend far
less on their accommodation, more in heating costs and have
more money available for discretionary expenditure.
So are they more likely to become an investor than a renter
living in Sydney?
Probably not.
Even though their accommodation costs may be lower, they will
tend to spend more on lifestyle and entertainment and still
not get the money together to invest if they are stuck in a
renter's mindset.
The investor's mindset on the other hand is that they are
willing to make some sacrifices now, in order to invest the
money for a better asset base and lifestyle in the future.
The investor has programmed his or her mind to put aside a
part of their income for investment purposes. They pay
themselves first and invest in their future.
They are also willing to leverage their current asset base
to make their money work harder for them so they don't have to.
The investor is focused on paying their mortgage on or before
the due date and ensuring the rent is collected in time to
meet their commitments. They are interested in having renters
who pay on time, rather than paying rent to other landlords.
Often the renters will have the bigger and newer cars,
the larger television sets and the overseas trips while the
investors stretch their dollars to plough into income
producing and appreciating assets.
Do you have an investor's mindset?
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