Why Shani bought a house

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The costs for Shani's first home are outlined in this article.

The recommendations from a buyer's agent for what to look in an investment property can be found here.

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: So today we're going to talk about a very personal perspective on housing. And after weeks of spotlighting me.

Jayamanne: The Mark Show.

LaMonica: Yeah, we are now going to talk about you, Shani. So this is your perspective on housing.

Jayamanne: That's right, Mark. So we do share a bit of ourselves in this podcast, which has been going since October 2020. So that's over three years now. And there's some listeners that have been with us from the beginning. And there's some listeners that have joined us recently.

LaMonica: And we do get quite a few emails from new listeners that listen to all of the episodes in quick succession. And they follow the arc of our investment strategies and lives. And this is through holidays and promotions, mostly for Shani. Marriages, once again, you, Shani. And life events like house purchases, which is also you, Shani. So people follow your life.

Jayamanne: Yeah, basically. Has anything changed in the last, what, three and a half years for you, Mark?

LaMonica: No, I'm old. Once you get old, nothing changes. And then one day you die.

Jayamanne: Okay. Well, that's something to look forward to. But one thing that these listeners notice and bring up quite a lot is that in earlier episodes of this podcast, I said that I don't have a desire to purchase a house. And then one day I bought a house.

LaMonica: Yeah. So some inconsistencies there, Shani.

Jayamanne: Yeah, exactly, Mark. And I welcome the questioning and I've responded to quite a few of these emails. But we thought it would be a good episode to put out.

LaMonica: So this is you setting the record straight and I guess clearing your name for being somebody that said something and then did the opposite.

Jayamanne: I don't think people care that much, Mark, but yes.

LaMonica: Well, we'll find out if anyone listens to this podcast episode.

Jayamanne: Yeah, exactly.

LaMonica: So why don't we start with why you didn't want to purchase a house?

Jayamanne: Okay. So it's never really been a financial goal for me. And that's because I never really thought it was realistic for me. Not to say that I would have never had the means to purchase a house, but I would have never had the means to purchase a house in an area that I would have liked to live in and that had enough space for me, as well as achieve my other financial goals that were much more important to me. And on top of that, it was just experience with rental properties and repairs that would come in that would require a small fortune to get fixed. And I didn't have the cash flow to make sure that I had peace of mind and that I would be able to cover emergency repairs or costs. And I just always remember breathing a sigh of relief that those invoices weren't going to be paid by me. And I understand in terms of an investment property perspective, negative gearing, how that works, I understand that most of these expenses are deductible if it's that investment property. But it's not like the ATO pays part of that bill for you. And I'm very conservative with how much cash I hold in my emergency fund. And I would have had to hold out a lot of cash to make myself feel comfortable with the property purchase, especially because negative gearing wouldn't have been applicable if it was my primary place of residence.

LaMonica: And the argument is always that younger people should sacrifice on things like location or size or I guess just wants or needs around the house just to get a foot on that property ladder.

Jayamanne: And that just never really made any sense to me. And that was just because of personal experience. So I spent a lot of my early adult years living far away from work and uni and I would travel 3.5 hours to work each way some days. And that was definitely the exception more than the rule. But on average, it would be 3 hours of travel a day. And I had no time to spend with my family or friends. I was constantly exhausted and it impacted my career. And if I was going to purchase a house, it wasn't going to be purchasing a house to get on the property ladder and sacrificing my lifestyle, especially because I was and I'm very comfortable with investing through equity and fixed income markets, including investing in real estate through listed vehicles.

LaMonica: And this is obviously something that's very personal to you. You were comfortable with investing for your financial goals through other asset classes, as you just said. And you were happy renting.

Jayamanne: Exactly. So I've got a few financial goals. And I had structured my finances around saving for those goals, one of them being travel just like you.

LaMonica: So that's right. And we'll come back to those financial goals a little bit later. But what changed? So obviously, you just outlined your whole position, something must have changed. So what's that?

Jayamanne: So ultimately, what changed my mind was getting married. So it's never really been a goal to own or purchase a property given the opportunity costs that I would have had. But it has always been one of my husband's goals. So we actually met because I couldn't afford to rent a place by myself in Sydney, and he advertised a room on flatmates.com.au. So I moved in with him and his best mate.

LaMonica: Okay. So renting in a way led to you purchasing a home?

Jayamanne: Yeah. So you know how run clubs are very popular, Mark, in Sydney.

LaMonica: But they're not popular for running.

Jayamanne: No, for dating. So I feel like flatmates.com.au maybe should take off.

LaMonica: Okay. Well, maybe. What do you think run clubs lead to, like knee surgery?

Jayamanne: Yeah, I don't know.

LaMonica: Well, there we go.

Jayamanne: Anyway, so it did. So it did lead to me buying a house. But my husband, Matt, he grew up in Port Macquarie, where his family own a residential property development company. And I think it's always sort of, he's always grown up in an environment that has stressed the importance of property and owning your own home. So we made a decision together to purchase a property because it was something that he has always wanted to do. And when you marry someone, sometimes you do things to make them happy.

LaMonica: I don't know. They're going to kick you out of some sort of feminist club.

Jayamanne: I could have married a woman and wanted to make her happy.

LaMonica: Okay. They're going to kick you out of some sort of club where you're not supposed to like change your whole philosophy on life for something.

Jayamanne: Okay.

LaMonica: Anyway. Yeah, I mean, I don't know. I'm obviously married, but I just kind of try to stay out of my wife's way. So purchasing a property seems a little bit different. So what happened? So you had this now, you now decided to purchase a property. And yeah, how did you go about it?

Jayamanne: All right. Well, I think here, it's important to think about perspectives about housing. And in the situation, purchasing a house was an emotional goal for us. And I think that all these terms about housing get thrown around, there's updates on how the housing market has performed each month, constant discussion of annual returns, how many years it takes for your house to double in value. And that is noise for a lot of homeowners that have no intention of perceiving their home as an investment.

LaMonica: Yeah. And of course, a lot of -- the driver of a lot of this is that a lot of Australians have gotten very lucky with purchasing property, and I'll underline lucky, people seem to think it was skill to purchase a property and then have these eye watering returns purely from just purchasing a place to live. But it's turned from an emotional goal, which I think people have always had, to have a family and a place that you can raise that family and make memories to now an investment or a way to fund retirement or any other financial goal.

Jayamanne: So in my situation, the house that we purchased was not an investment.

LaMonica: Okay. So because this is different from how a lot of other people think, let's dive into this a bit. So I certainly have a perspective on this, which I guess I'll share if I'm allowed to intrude on the Shani show today. But why don't we start with you? So you said that you purchase this house, it's not an investment. Why? Why don't you think of it that way?

Jayamanne: Yeah, look, I don't know for certain what's going to happen in the future. But what I do know is that I have no intention of selling this house. And that means that I will not realize any gains or losses. I didn't purchase the property with the intention of selling it in the future to upgrade or downgrade or to make money from it. And I haven't gone into this with the mentality that I need to buy the most optimal residential investment. It's a home. It's something that I chose based on my circumstances and what I like about it and not really considering it as an investment.

LaMonica: Yeah. And I think the interesting thing, like in my mind, if somebody came and asked me to define an investment, to me, that would be something that generates positive cash flows. So I always, obviously talk about dividends a lot and income investing. But even if that's not your type of investment, if you buy a company, that company generates, you're part owner, that company makes money in the future. And I know that people are definitely going to disagree with this. But if you look at a house, a house, particularly your primary residence, it's a huge negative drain on cash flows. So there's the mortgage, obviously. And just in a hypothetical situation, let's say you borrow $500,000 at 5% for 30 years. Well, if you pay that mortgage back, don't pay it early, pay it over 30 years, well, you're paying $466,000 in just interest on that mortgage. And then of course, it's estimated that, and there's a variety of estimates, but the low end of the range is 1% a year on the purchase price on maintenance, maintaining that house. And so let's say it was a $600,000 home with that $500,000 mortgage.

Well, over 30 years, that's another $180,000 in cash outflows. And then kind of finally, in my mind, to call something an investment, you need to be able to sell it to pay for something in the future. And that's why we save and invest. We fund future expenses. And for many people, that just isn't the case with their home. So they either buy a starter home, which is sold for something more expensive, that is also likely increasing at the same rate. Or maybe they just buy a home, they live in it for the vast majority of their life, and then their kids sell it after they're dead. So as I said, probably a little bit controversial, but that's just my two cents. And I also think as a society, we'd probably be in a better place if a home was just a place to live and create memories and raise a family. And I think ultimately, we just tell ourselves it's an investment, because that lets many people take the mental leap to pay the high prices of housing right now, and to buy houses that they can't really afford. And this isn't unique terminology. And we were actually talking about this earlier, Shani. But we use this idea of an investment just to buy things that we can't afford. So you hear people talking about, they buy an expensive piece of clothing, and they call it an investment. And it's just this kind of ridiculous mental trick, right, that people use to justify a purchase.

Jayamanne: Yeah. I mean, ultimately, it is a place that we bought because we wanted to create a home. And this is a perspective of many people that have purchased a home, who have been locked out of the housing market because of how expensive it is to own property in Australia, especially in capital cities like Sydney and Melbourne. And just like going on an expensive holiday or buying an expensive car or any other financial goal, when you get out of the mindset that it's an investment or housing is just a utility to provide shelter, you're spending money on something that brings you joy. And buying a home means a bit more permanency. We purchased furniture that we liked, we hung photos of our family on the wall, we put in light fixtures. I love spending time at home. So it was just nice to feel like it was, I was in a place that I could really settle.

LaMonica: And that is by definition, a financial goal. It's something that is individual to each of us. And it's something that brings you joy or peace of mind or security. And I think you mentioned earlier that one of my goals is to travel more. And I've spoken about it a few times on this podcast, but that's really, I look at the other spending I have in my life and where I allocate investments within that prism, right? Because it's trade-offs for all of us. And in my mind that if I can use my financial assets to buy investments that produce cash flow for me, then I can use that to actually go out and travel. But nobody wants to hear about me going on trips. So keep going with your story. So you got over your mental hurdle, you don't think it's an investment, you've decided to buy a home, now what?

Jayamanne: Okay. So we sat down and we talked about what was important to us in a house. And the non-negotiables and the things that we were willing to bend a little on. And my non-negotiables were that I wanted to keep investing and saving for my other financial goals. So that was retirement, travel, and saving to support my parents later in life. And I didn't perceive this house as an investment. So it was more important that my cash flow wasn't impacted so severely that I wasn't able to continue saving for my financial goals.

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LaMonica: What about the house? So, like, I'm picturing and I have watched snippets of the Harry Potter movies. I have not studied every second like you, but some sort of, like, Hogwarts...

Jayamanne: Castle, yeah.

LaMonica: Type of thing.

Jayamanne: Yeah, I mean, that's the other thing that we get a lot of emails about. So, we get questions about what house I'm in, which one is my favorite movie, but I think...

LaMonica: Oh, the house doesn't like the stupid way they split up the students.

Jayamanne: I wouldn't call it stupid, but -- I think the only property in Sydney that looks like Hogwarts is USYD, which is where your wife works.

LaMonica: That's true.

Jayamanne: But I think I've spent enough time there. But I think also, super important to note, we became a dual income household with no dependents and no plan to have dependents. So, we had double the savings and double the income. And so, this meant that there's extra costs that I was worried about and those emergency repairs, those unexpected or planned expenses with owning property. We were in a position where it wasn't really going to be a huge burden. And that was a huge relief for me. And one of the reasons I was reluctant to purchase in the first place.

LaMonica: Okay, and how did you account for this? So, obviously, there are some extra expenses. You just increased your emergency fund?

Jayamanne: Yeah, exactly, Mark. So, Matt and I have saved enough for both of us to be out of work for six months.

LaMonica: Which is looking increasingly likely for you.

Jayamanne: Why is that?

LaMonica: I mean, I think just your general attitude of telling everyone on the podcast you're not going to buy a home and then sliding back on it.

Jayamanne: Exactly, yeah. Can't trust me.

LaMonica: People have been fired for less.

Jayamanne: So, that sits in our offset. And it seems a bit extreme, but that's what gives me peace of mind.

LaMonica: Okay. So, outside of investments, what else was a non-negotiable when you were looking at this thing? And what were those things that you said you were willing to bend on a little bit?

Jayamanne: Yeah, so, my other non-negotiable was location. So, as I mentioned, it was something that was super important to me because I've seen how it impacts your lifestyle when you live away from friends and family and places that are important to your lifestyle. And I also really enjoy walking to work. So, I wanted to live close enough to work that I was able to walk to work in less than an hour.

LaMonica: And also, you're relatively close to the Gidley.

Jayamanne: Yeah, exactly. So, when we were looking, the first thing I checked was whether it was in the radius of the Gidley. So, yeah, you asked about things that you were willing to bend on. We were hoping for a two-bedroom, but we really didn't mind if we ended up with a one-bedroom. We're not planning on having kids. So, as long as we have separate space for a study, we were pretty happy.

LaMonica: I just want to point out that you're saying that you're not planning on having kids, but you also were not planning on buying a house.

Jayamanne: Yeah, I feel like this one's a little bit more concrete.

LaMonica: All right, well, there we go. So, you've made this decision, and what'd you do, you popped on domain and just bought the house with a couple clicks of your mouse?

Jayamanne: No, it works like this in the U.S. So, Mark showed me the site once, Zillow.

LaMonica: Yes.

Jayamanne: I think it's called. So, do you want to explain what it is for people that aren't familiar with Zillow?

LaMonica: Okay. Well, it's to buy investment properties. And so, you don't have to ever see the house. You just go on there and you put it in your shopping cart, like you're on Amazon or something, and then you bought a house.

Jayamanne: Yeah, so that's definitely not how it works here. So, we were casually looking for a while to get a feel for the market and what we liked, and then very seriously looking, and we just couldn't compete at auction. So, we're up against parties that were paying all cash, and we were constantly outbid. And some context to add here is that my husband and I are both first home buyers. So, we wanted to get into the market when the New South Wales government was offering land tax in lieu of stamp duty. And secondly, we were purchasing homes in the inner city in a first home buyer's price range. And so, that means that we were very much looking at houses that needed work. And both, my husband and I are not experienced with building trades or coming anywhere near being able to estimate costs on repairs or renos that need to be made.

LaMonica: Yeah, and part of this story, I don't know if you want to share this, but I came to some of these home inspections.

Jayamanne: You did, yeah.

LaMonica: With you. So, yeah, I mean, I think for our international listeners, the Sydney housing market, both rental and buying, is a little bit crazy. And there's certainly this rental crisis in a lot of the capital cities in Australia that rents become unaffordable for most Australians. And we've done a few episodes where we talked about median house prices. But I guess as an American that moved here, it's hard to explain how expensive houses are here. But anyway, I went to one place with you. So, I went to an apartment in a part of Sydney called Edgecliff.

Jayamanne: Which I would still classify sort of inner city. It's maybe like two or three kilometers from the CBD.

LaMonica: Yeah, yeah, something like that. And it had two bedrooms. So, that checked one of your boxes, but it did not have room for dining room.

Jayamanne: Yeah, it was, well, even a dining table. Like, there was no way to put that. So, it was like always eating on the couch situation.

LaMonica: Yeah, which seems like something you'd be comfortable with. But the apartment was, I thought, and once again, someone who's not interested in property, it seemed pretty well maintained. It was close to a main road, which I guess made it a little bit noisy. But you were right across the street from the Edgecliff station.

Jayamanne: Exactly, yeah.

LaMonica: Yeah, and apparently this place costs $1.4 million, is what your buyer's agent said. And I guess that's just an example of how expensive things are right now in Australia. All right, so anyway, enough of my stupid observations. Tell me about how you got this house before this deadline for the stamp duty exemption ran out.

Jayamanne: Well, first, I just want to acknowledge that this is not the typical first home buyer's experience, but we decided that we were going to use a buyer's agent. And he used to be a builder, so he helped estimate a lot of the costs around the repairs or renos that we would have had to make at most of the properties that we're looking at. And I won't talk about this too much because I've written about it and spoken about it before, about what this service entails. But he was able to find a property for us within a month, and we didn't have to compete at auction, which was good for us.

LaMonica: Yeah, so there you go. So you purchased a home, and then you immediately went on vacation. And then you sent me a text message, and you said, somebody needs to go to the house and cut off the like power…

Jayamanne: The gas.

LaMonica: The gas.Yeah, so there I am at night trying to find the stupid gas thing. But yeah, I feel like I contributed a lot to this home.

Jayamanne: You did.

LaMonica: But anyway, you did reference an article. So you wrote an article on purchasing a house that goes through all of these other costs. And you actually were honest and use your own costs, which I think was good because you're really transparent about each step in the process. What a first home buyer will have to fork over when they actually purchase a home besides the actual costs of the home. So we'll put a link to that in the bio. But let's talk about how this impacted you and your financial goals.

Jayamanne: Yeah, definitely. Look, mortgages aren't cheap. I think we all know that, and borrowing is expensive right now. And I don't imagine it's going to drastically change in the near to medium term. I think that my perspective is very much the same as it was going into this. This is not an investment. It's something that allows me to live my life in the way that I want to live. And it's an enabler for that and brings me and my husband joy. And my non-negotiables were non-negotiables. My regular contributions haven't dropped to my main financial goals that I have.

LaMonica: Okay, so I mean, I don't know if you can have regrets yet because you haven't lived in your home for very long.

Jayamanne: I feel like you definitely could.

LaMonica: If you regret it already, you've really screwed something up. But any regrets?

Jayamanne: Yeah, I mean, hopefully you can tell from my tone in the podcast. I don't really regret it. I've spent most of my adult life moving around from year to year, place to place, because of places being sold or rent being raised unreasonably or landlords wanting renos. And it feels good.

LaMonica: You're like a gypsy.

Jayamanne: Yeah, exactly.

LaMonica: I don't think we're supposed to use that word anymore.

Jayamanne: No, I don't think so either. Will help us out with that. Just blip it out.

LaMonica: Like a traveler.

Jayamanne: Yes, it feels good to be able to settle somewhere where I think, and I think that's important for a lot of people, especially those with families. And that's why this podcast is very different to what we normally talk about, which is definitely about financial goals that matter to us. But a lot of it is about assessing investment opportunities, running the numbers around whether it makes sense to get us to those goals. But this is about the end of that process where it's not about investments anymore.

LaMonica: Yeah, okay. So I guess it vibes for people that are thinking about purchasing a home.

Jayamanne: I mean, I think I covered a lot of it in my article. So we'll link that one in the notes. But I do want to acknowledge that my position as a first home buyer isn't common. It isn't common to be able to get a buyer's agent who makes the process a lot easier. It's not common to have dual incomes and no dependents. And it's definitely not possible now in Sydney to forego stamp duty if you're purchasing at the median house price and purchase a house and pay land tax instead. So I feel for a lot of renters that are looking to purchase for that sense of stability and security, and not just to say that they've gotten their foot on the property ladder. And there's absolutely nothing wrong with that if you want to do it. But that requires a completely different perspective and assessment of what the negotiables and non-negotiables are. And that's more around assessing the value of the property as an investment, the cash flows it generates, and the black and white financial costs more than how it fulfills an emotional need.

LaMonica: Yeah.And I remember you did an article, you interviewed a buyer's agent. So not actually the one that you use. And she said that there's something that often gets mixed up. And it's one of the most common mistakes that people make. And it's that they're focusing on their own preferences when they're buying investment property. And they have a bias towards these properties instead of what is important to look at an investment property. You need other people to like this. So purchasing somewhere that you may want to live may not always be the best financial decision. Many investors look at properties with the lens, yeah, would I live in this house or unit? And if you're living in a two bedroom terrace in Balmain, in Sydney's inner west, you're not going to want to transplant into a suburb in Adelaide and expect the same result. So these investments need to be viewed through the lens of financial performance and not preference. What we may like or what we feel like is a good place to live might be a substandard investment performer. All right. So are you going to give out your address now? So people can come and see.

Jayamanne: There was a lot of personal details about my life in this one.

LaMonica: There was, but at the end of the day, you just said you bought a house and that you don't want to have children. Now nobody believes that. But anyway, if anyone does have any questions for Shani about the process of purchasing a home, just send me an email and I'll either answer for her. No, I will forward those on to Shani and you can certainly get her perspective. But like any financial decision in life, this is obviously a big one. There are a lot of parts of the process that I think, Shani was talking about the emotional need for a house, but there's a lot of parts of the process where I think those emotions come out. And I think unfortunately that causes a lot of people to potentially buy stuff that they can't afford. And we've seen a lot of issues in Australia as interest rates have gone up, especially around that. So anyway, hope you enjoyed a peek into Shani's decision changing in her life and the purchase of her home. And she does have a dependent and that of course is Priscilla. But thank you very much for listening. Please send me an email if you have any questions or comments.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)