It was the winter of 1998, I remember it like it was yesterday, I’d just added another two terrific properties to my investment portfolio. My mate “Billy”, not his real name, was aghast, he said he just wouldn’t be able sleep at night with such a debt.
A Lifetime’s Work Wasted
Fast forward 12 years and despite earning a six figure income for a decade “Billy” is a financial bind. He called me for a coffee. It was sad to see him so despondent. Aged 60 and divorced he is now living in a rented flat with the last remnants of his wealth, an 8 year old sports car and $140,000 cash to which he’s desperately clinging.
“Billy” mentioned he was selling his car and leasing a brand new $52,000 sports car. Now I was aghast!
The Final Nail
Now earning just a fraction of his former income, “Billy” was about to commit to a $1000 per month on top of $1300 pm rent, a lifelong obsession with cars was continuing.
Instantly, I knew that if he went down this path, he would be locked into the rent trap forever. Desperately I searched for the words save him from himself.
“Billy” I started, “if you buy this car you will be committed to $2300 pm!”
“No problem” he interjected, “I can easily afford the repayments”.
“Well, if you can easily afford it, why don’t you buy yourself a home or an investment property?” I pleaded. “In 7 years it could be worth nearly double rather than buy a car that will lose 75% of its value in that time”.
I could see in his eyes that he was having an epiphany. “What, do you mean I can afford to buy myself a house?” he stuttered, “What would this mean for me”.
I explained that if he bought a house for say $400,000, he could borrow $320,000, take the shortfall from his savings and put the balance into an offset account and be nearly $800 per month better off than staying in the unit and buying a flash new car.
He hesitated for a moment as the words sunk in, “but, what about my car?” he said feebly.
I said, “You’re 60, you don’t need another brand new sports cars, put the money into a 2nd hand Camry.”
“I don’t know if I could afford the repayments, what if my income dropped” he finally said fearfully.
Securing His Future
“Your rent now is $1300 pm, let’s say it increases no more than 5% pa, within 7 years you’d be paying over $1800 pm and you own nothing.” After some quick calculations I added, “On your present income you could easily have repayments on a property down to around $1400 pm by then.”
I explained how his $52,000 car would only be worth maybe $15,000 while his property could easily be worth $650,000, a gain of around $250,000.
Finally, after 12 years, I could see his thinking was starting to shift as he the realised that this may very well be his last chance to finally get into property investment. If he didn't act quickly and decivisely the conseqences really could be frightening.
“Billy” called me a few days later, he was the most excited I’d seen him in years, he was diligently searching for his first investment property, he’d found a 2nd hand Mitsubishi 380 and, albeit reluctantly, was advertising his beloved sports car.
“Billy” is well on the way to a more comfortable and secure retirement.
If you or one of your friends aren't sure what you should be doing, because everyone's circumstances are different, don't hesitate to call me on 03 9509 8911, we just might be able to save you from making a mistake and put you on the right path.
03 9509 8911