Ask Paul: Should we buy a $600k beach house to help us de-stress?
Q. We are from Melbourne. I'm 35 and my husband is 33, and we have two young children, 9 and 4.
This is my second year back in the workforce full time and currently I earn $61,000.
My husband runs his own business and he earned $58,000 for the 2017-18 financial year.
We have about $50,000 or so in super.
The business holds a ute owing about $30,000 with monthly repayments of $665.
Due to the nature of his work my husband has returned to school to become better positioned and reduce stress.
We have a mortgage of $159,000 with $34,000 in savings used as an offset.
Our life has been stressful and we have decided to purchase a beach home to help us relax and de-stress with a view to also build wealth for the long term.
My question is, do we look for a property that can be developed in the future (maximum two as per council regulations) and rent it out for, say, six months of the year and use it ourselves for six months, or should we purchase a property that cannot be developed and continue with our plan of half rental, half enjoyed?
We will be approved for $730,000. However, I do not want to use it all because I don't want to be controlled by work causing extra stress.
I'm thinking of no more than $600,000 or so.
My view is to work four days in the near future. We don't like investing in shares. - Lucy
A. Crikey, Lucy! I fear that this beach house may cause more stress than relaxation.
Interest rates are on the way up, and as you will know rates for investment property are moving up faster than for home loans.
Let's say the $600,000 you borrow is at 5.5%. You may get an interest-only loan on an investment property.
If so, at 5.5% your repayments are $33,000.
Then you will pay land tax if the land is worth over $250,000, plus rates, insurance, agent fees and maintenance. I suspect it will cost you at least $40,000 a year to own the beach house.
Now we look at rent. How certain is this where you are looking to buy? Is it just holiday bookings and when you would want to use it? Also ask yourselves what happens when we get a recession and people reduce their holidays?
Now I know I am being negative but I want you to look at the downside. Sure, buying property with development potential makes sense but I think you have a bigger decision to make here: namely, is this a good or bad idea?
Check it out for yourself but in my experience beach houses are not good wealth creators. You can easily get historical numbers but properties in high-demand locations with jobs and population growth generally fare much better as investments.
I am sorry to hear you have had a stressful time and I don't want to talk you out of owning a beach house.
I just want you to take a calm and logical look at all the costs, including rising interest rates, potential for capital growth and rental returns.
If these all stack up, then that is fine, but I am deeply concerned that this may generate extra stress for you and your family. Please take great care with this decision.