Your own home has taken you hostage – and there are 5 ways you can escape.
That’s right, you may have made a horrible mistake when you bought your current home. You purchased the house for the present you instead of the future you.
I’m going to try to help you out, as, just like my friend Liam Neeson, I have are a very particular set of skills, skills I have acquired over a very long career, skills that make me a nightmare for homes like yours.
So, the 5 ways you can escape the clutches of your current home:
- Create it or replace it.
- Sell before you buy, or buy before you sell?
- Rent out your current home, then buy another.
- Own the investment, rent the dream.
- Get over it and be grateful.
Create it or replace it? How to begin with financing home renovations.
Perhaps you want to start your very own ‘Brady Renovation’, or simply do a wee ‘tart-up’ to make a bit more comfortable to live in. Either way, renovations = risk. Proceed with caution.
Here’s the usual way this unfolds – After hitting the open homes and seeing the price that properties are going for – ‘we can create this’ is your natural conclusion.
Architect, then builder, then council, then the realization hits you that it’s true, it does cost twice as much as the number you had in your mind.
The bank is aware of this fact, and they also know that when you go through a major renovation, there are a few other surprises along the way. Consequently, banks are pretty carefully in dishing out cash for this purpose. Prepare for this. Getting to the starting line ready (ie before you even talk to the bank) is the most important step in this exercise.
Here’s what you may need:
- Ideally, a ‘fixed price’ contract from a builder.
- Copies of permits/consents from your council.
- A valuation report showing the value now, and the value at the time of completion.
- An application form with supporting documents ready to go.
- A backup plan in case things go wrong (and chances are, yes, things will go horribly wrong!).
You may find as part of your work in getting ready, that the cost to create the home you wish you had, exceeds the amount that you thought it would cost when visiting open homes much earlier. At this stage, hopefully, you haven’t told too many friends about your renovation plans, paid your architect too much, and bought the doorknobs at the home show – it may be time to hit those open homes again. Then again, perhaps I’m saving you the hassle right now?
The costs of renovations, not just financially, are very high indeed. No one really wants to go through the hassle of paying real estate commission either, but in many situations, that’s the lesser of two evils.
Sell before you buy or buy before you sell? How bridging finance works and how the everyday person can do it.
Bridging finance is tough to get and if you can get it, it means the bank is pretty happy with you NOT selling your home – take this as a signal that perhaps you shouldn’t sell your home (more on this later).
How does a bridge loan work? The bank looks at your position just like they would when assessing a new application, but then they look for the intention – if it’s clear they are financing a short term loan, they may either decline the application (a lot of work, short term loan, how are they making money?) or approve it at higher interest rates pus fees.
The everyday person will buy first, arrange a super long settlement date, then start selling their home (great if you’re confident you have a solution should you not sell – like family, a bridging loan, or a one-way ticket out of town).
Sound scary to buy first then sell? Then do this: Sell first then buy. ‘But then we’ll be locked out of the market and potentially homeless’ The sooner you get over this hassle of having to move twice and missing out for a brief moment in time on capital gains, the better.
Still wondering about bridging finance – don’t. It’s hard to get, it’s expensive, and often the temporary bridge you’re relying on, takes on too much load over time.
Rent out your current home, then buy another! Rental properties in New Zealand are in high demand, and so is property in general – why not benefit from this?
I call this the ‘accidental property investor.’ If you retain every property that you own as you progress, then buying the that suits your ‘present you’ is pretty smart. In the end, you’ll build a portfolio of properties that will attract good tenants (people just like you, but younger right?)
Many wealthy property investors have started out just like this – sell you current home into a company, move the equity out and plow it into your next home. The value of the current home to be converted into the rental property is equal to the value as independently assessed by a valuer. Ever wonder why would I have an interest-only mortgage? This is why. If you’ve been aggressively paying down the debt on your first home, you may find that overall after the lower interest rates kick in and the rental income starts flowing, the new net mortgage payments are similar to what you’re currently paying.
Many people who can do this, don’t. Why, because their reference point is out of date – they’re afraid of holding that amount of debt. It’s ‘safer’ to assume you can build wealth by eliminating debt, but, it’s a trap. IF property values continue to rise from here, even modestly over time, AND interest rates stay the same or better, taking on more debt = more wealth in the long term.
Own the investment, rent the dream.
Do you have to own the property you live in? If it’s time to move out of ‘the big smoke’ and live in a regional town, why do you have to sell your city home?
For whatever reason: The kids need more room, someone needs a garage, the backyards not big enough, we need a new bathroom! It’s time to move on – I get that. As interest rates continue their march towards 0%, there’s likely going to be hyper-inflation around property prices – if this occurs, rental incomes will increase at a slower rate than property values. What this means is that eventually, the higher-quality properties are more affordable to rent compared to owning them.
So if you need to be in a better school zone or you’re keen to move to the country, lease the lifestyle your lusting after and don’t give up ownership on the asset that could fund your retirement one day.
Get over it and be grateful.
Your productivity as a household and your happiness dare I say, will increase significantly, when you give up and be grateful for what you have. So assuming you have a roof over your head, consider getting over it. The discontent homeowner dines on a cyclical meal of open homes, followed by meetings with architects for desert, then an evening of indigestion as the quotes from builders come in.
So let’s talk about another possible root cause for this desire to move on while we’re at it. Let’s say you got married, bought a home, got the cats, went travelling, then had kids – that’s a lot of fun within a short time period. You’re now in your mid-40’s, kids are in school, careers going well and hey, you’re bored. You could have an affair, but that doesn’t end well. A nice car works well or perhaps some filler in your upper lip, but you don’t want to be that person, do you?
Let’s be honest, often ripping out the back end of your home, going up another level, or plonking a garage somewhere is just an expensive manifestation of your very own mid-life crisis. So out of all the ways to bust free from being captive by your own home – this is my favourite option!