What Income is considered ‘Low Income’?
The ABS considers an average full time income to be around $92,000 per annum (p.a.), with the average income including part time, contract & casual workers to be around $70,000 p.a.
Due to this, we are considering a low income as anything below $70,000 p.a.
In this analysis we will use incomes at 3 separate levels: $50,000, $60,000 & $70,000 p.a. Please note, that we are using the assumption of a single individual with no assets to their name. They have a student loan/HECS debt and do not have parents to fall back on.
For people with significantly more complicated circumstances, we strongly recommend that you reach out to us as everyone’s different circumstances are important to us.
The Biggest Challenge is the Deposit!
Living in Australia is expensive, particularly for those living in our Major CBDs & Regional Centre’s. Cost of living expenses aren’t cheap either.
To be able to afford a reasonable house in a good location, you will be required to have at least a 10% deposit & closing costs (stamp duty, pest & building reports and legal expenses). We estimate that on a $350,000 house the deposit required is about $50,000.
Realistically, you need to be looking at saving at least $300-400 per week to have a reasonable chance of achieving your goal within a 3 year mark.
Below we will demonstrate a budget for a standard single individual living in Sydney operating with standard expenditure. As you can see people tend to spend more as they earn more, regardless of their situation, also known as being a ‘lifestyle creep’.
Income Weekly Income
As demonstrated below, each of the 3 above examples fall well short of the minimum $300-400 mark that you are required to achieve.
How do I get my savings in line?
Saving is actually quite difficult, especially at times where inflation is high and everything is so expensive. Below are strategies to lower the overall costs per item:
Rent – Is likely to be the largest killer of your savings. Often, people want to be amongst the nicest upmarket locations close to everything. Guess what, this doesn’t help your saving.
Perhaps consider moving into a share house, or smaller apartment, close to a major transport line or with easy access to the CBD on the train or bus. There are dwellings with 3 bedrooms for still under $600 per week. On this study, the weekly rent will be down to $200 per week.
Food – With inflation so high, it is hard to contemplate saving money on food today. General grocery bills are at all time highs. A method of saving money on food is meal preparation – this at times can cut grocery bills in half.
For this example, lets you had something different for every meal, but now plan cut this down and have only 4 different main style of meals for the week.
In this circumstance you bulk buy and prepare your meals on bulk. You also cut out a small portion of extra junk food out of your budget. This in turn saves a small amount of money, bringing your weekly grocery bill to $90.
Bills & Utilities – Bills & Utilities are an extremely difficult thing to avoid, most of the time those on lower incomes are already at their minimum threshold. In the previous food example, we explained how bulk preparation of food would lower the amount of meal preparation required in a week. This in turn would lower your bill, as will your shorter showers and limited running of non essential electronics/heating. This will bring your weekly bill down to $70 per week.
Petrol & Transport – Petrol & Transport is surprisingly an area that many can cut down on. During work days many can use public transport to go to work, limiting the amount of time required for you to use your car.
On the weekends, perhaps you catch up with friends and you take driving in turns. This therefore lowers your overall use of your car and weekly transport expenses to $60 per week.
Entertainment – Entertainment is the area in which expenses can be minimised the most. Perhaps you go out every single weekend, perhaps limit this to once every 3 weeks. Perhaps consider catching public transport instead of driving there. Doing so, allows you to have a $90 night out every 3 weeks, or a nice day out for lunch once a week. Plenty of money to have fun with on a budget in moderation. This brings the entertainment budget to $30 per week.
Insurances – Having a limited budget, perhaps you own a rather small old car. This is fine, as it is likely not worthy of comprehensive insurance. If you have an expensive car, perhaps now isn’t the time to be having an expensive car if you are serious about saving.
Assuming you have an inexpensive car, you are likely to only need CTP Green Slip & Rego, along with the most basic health insurance you can get.
In both circumstances, there are insurers that will now take your circumstances and actual use into consideration, meaning a significantly cheaper policy. With basic health insurance and standard CTP, your insurances are down to $40 per week.
Student Loan – Unfortunately, Student Loans cannot be subsidised due to employment contribution requirements.
The only circumstance where there may be a case for money to be saved, is if ones employer agrees on sponsorship. For the purposes of this exercise, the amount will stay the same.
What are the net results of these changes?
On a $50,000 p.a. income, an individual is able to save $303.54 per week. This means that after 3 years they will have saved $47,352.24, within striking distance of the $50,000 goal assuming no interest has been added.
To save the targeted $50,000, it will take the $50,000 income earner roughly 3 years and 2 months, a very respectable result.
On a $60,000 p.a. income, an individual is able to save $394.85 per week. This means that after 3 years they will have saved $61,596.60, above the $50,000 target goal.
To save the targeted $50,000, it will take the $60,000 income earner roughly 2 years and 5 months, a fantastic result.
On a $70,000 p.a. income, an individual is able to save $480.15 per week. This means that after 3 years they will have saved $74,903.40, well above the $50,000 target goal.
To save the targeted $50,000, it will take the $70,000 income earner roughly 2 years, an entire year in advance!
What could I borrow with these savings?
Many of the larger institutions use the Household Expenditure Measure (HEM) to assume expenses when applying it to their own serviceability or borrowing calculations.
To get into the market on a lower income, investing will improve serviceability. For the purposes of this exercise, we are using a modest weekly rental return of $350 per week.
The more mainstream institutions that use HEM, in the present market, the following borrowing capacities apply:
On a $50,000 p.a. income, an individual is able to borrow approximately $290,000-$310,000. Allowing a purchase price of up to $350,000.
On a $60,000 p.a. income, an individual is able to borrow approximately $330,000-$350,000. Allowing a purchase price of up to $380,000.
On a $70,000 p.a. income, an individual is able to borrow approximately $410,000-$430,000. Allowing a purchase price of up to $450,000.
What about non mainstream lenders?
The good news about the modern day, is that there are over 100 lenders available.
Policies for each of these lenders vary quite significantly: some include negative gearing, some don’t, others take high rental serviceability, others don’t, some will consider bonuses, overtime and loading, others don’t. Some lenders do not include HEM but include actual expenditure if proven through account statements.
All of the above reasons can cause serviceability to improve depending on your circumstances. Serviceability based upon our study improves the respective borrowing capacities:
On a $50,000 p.a. income, an individual is able to borrow approximately $360,000-$380,000. Allowing a purchase price of up to $410,000.
On a $60,000 p.a. income, an individual is able to borrow approximately $410,000-$430,000. Allowing a purchase price of up to $450,000.
On a $70,000 p.a. income, an individual is able to borrow approximately $490,000-$510,000. Allowing a purchase price of up to $520,000.
Having this larger serviceability allows for small interest rate increases, with the ability to still purchase a property at our existing base $350,000 price.
What to do next?
Before contacting us to move forwards, ask yourself two questions:
What is your risk profile?
Perhaps, you are more willing to take on larger risks for larger returns. If this is the case, you may be more open to go for a high growth property, with development potential and plenty of value to add.
Maybe you are risk averse, therefore you might be looking for a property with a higher cash flow property which is structurally sound with little to do.
What is your strategy?
If you are a long term growth investor, who wants to simply own assets with the highest net value, you might only want to buy 1-3 properties in the next 15 years. A higher growth property is more suitable for this individual.
Perhaps you are a more active investor and want to own 3+ properties in the next 15 years. A higher yielding cash flow property is more suitable for this individual.
Perhaps you have a hybrid strategy, everyone has different circumstances!
Putting Yourself in the Drivers Seat with the Right Mindset
Over time, inflation increases as well as pay rates. Just recently we have seen a record 5.75% increase to the minimum wage, with steady wage increases in many lower level positions above the award too. It is likely that you have also earned interest in your savings accounts over this time period - adding to your deposit savings. Sometimes it is just getting started that puts you in the right direction. You may be on $50,000 today, but $60,000 in 3 years time and reach your savings and purchasing goal earlier than expected. The greater the struggle, the greater the success. Having that vision in the first place is just the start; without vision, execution is just a delusion, but with vision, execution may just be the beginning of something much more.
Where to buy?
Based upon more than 100 years of data, houses perform significantly better than units. Those houses based around major CBD’s or Regional Centres also perform better than more distant regional properties. Our purchasing results reflect the above data extremely consistently.
For higher capital growth properties, there is still a single major regional market in Australia which presents sustainable long term capital growth for $350,000 or sometimes even less. This has proven data for over 80 years, with consistent results in up to 8 suburbs of over 7% capital growth on average p.a.
For higher yield properties, many of our smaller capital cities and major regional centres represent cash flow at or above 5% p.a. at or below the $350,000 mark. Please note, be sure to check the area you are purchasing in, many regional locations may have very volatile dynamics, regardless of higher cash flow.
Why not seek Professional Advice from one of our consultants
We are unbiased market investors, who will put you first.
We treat every deal for your portfolio as if it were our own.
We will give the time to understand every clients situation & needs.
Our performance is unparalleled in the industry.
We have a background in Finance, Banking, Mortgages, Leveraging, Taxation & We are Present Market Investors.
We are precise down to the level of the suburb, street & house for greater performance.
The cost of our service is nearly half of what many industry professionals charge, yet their results do not represent value for the cost of their services.
Phone: (02) 9136 0263
Email: admin@compoundinvest.com.au
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