Advice on real estate

We are a couple in our mid thirties with two young children wanting to become financially independent.  Recently we had a discussion with a local real estate agent who told us that now is a good time to borrow money to invest in real estate.  He advised us to use the $40,000 that we have saved and borrow another $360,000 to buy a unit off the plan in a new development.  He said we would be guaranteed a rental income of about $300 a week and could look forward to capital gains in the future. Should we take his advice?


Mr and Mrs S


First of all consider whether you are getting advice or just being sold a property so that the agent can earn a commission.


Let's look at a few numbers here:

• At the moment you can easily earn $40 per week interest on your $40,000 with many reputable banks
• If you borrow $360,000 you will probably be paying around $500 a week in interest
• Lets say you get rent of $300 a week - by the way how good is the guarantee and how long is it for? I certainly hope it is not being provided by the property developer or an associated company!
• If we do the sums at this point you are $240 a week worse off buying the property and we haven't taken into account costs such as rates, insurances, maintenance, agent's fees and strata levies, all of which will make you even worse off.
• On top of this you will have to pay stamp duty when you buy the property (about $13,000) and agent's commission when you sell (about 3%), plus if you make a profit when you sell there will be capital gains tax to pay)
• Over ten years this will cost you the best part of $200,000

What happens if property prices stay flat or go down? It can happen you know!

The information in this article is of a general nature only and should not be acted upon without first seeking personal financial planning advice. This article was provided by independently owned AFS Licensee (No. 236855) Direct Advisers Pty. Limited. They may be contacted on 02 6583 7588 or enquiries@directadvisers.com.au for a free consultation or further information.