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I laughed, but now I cry

IF you have a burning money question, or just want to win a fight with your hubby, jump over to barefootinvestor.com to ask a question.

Real estate concept. House on calculator. Mortgage. Picture: THINKSTOCK
Real estate concept. House on calculator. Mortgage. Picture: THINKSTOCK

I’M in hot water. A year ago I had two properties in Karratha that were going strong — I was receiving $1300 a week in rent EACH. Fast forward to this year and they only pay $400 a week each. The mortgages are $600k each but if I had to sell now I’d be lucky to get $350k. I can’t handle the repayments — they’re killing me and I have no idea what to do.

Shane

BAREFOOT REPLIES: You bought the housing equivalent of a speculative mining stock — only with borrowed money.

What got you in this mess was speculating on things you had no control over, so I’m not about to do the same: I have absolutely no idea what the value of your properties will be in the future.

Instead, I have three pieces of advice for you:

First, today’s buyer in Karratha doesn’t care what you paid. Don’t anchor your expectations on what you paid — you paid too much. Second, if the repayments are killing you, you need to act. Sucking your thumb and doing nothing is also a decision. Finally, ask yourself this: would you buy these houses again today? If not, you’ve got your answer.

ASTRA RESOURCES NOT SO STELLAR

IN 2011 I bought $85k worth of shares in a company called Astra Resources — have you heard of them? When I bought them, I was told by a broker that they would be listing on an overseas stock exchange and I’d be looking at making a serious profit. That was
four years ago. Do I pull the pin and try to get my money out, risking $700k in profit, or do I continue to hold? And if Astra go broke do I lose my funds or am I covered through their insurance?

Paul

BAREFOOT REPLIES: Are you sitting down?

Go on, I’ll wait. Sit down.

Paul, there is no $700k profit.

The corporate cops (ASIC) have been on Astra’s tail for years. I discovered this by typing “Astra Resources” into Google. It took 0.33 seconds. It was the top result on the page. Here’s what the ASIC website says: “Earlier this year the Astra Resources PLC and its subsidiary Astra Consolidated Nominees Pty Ltd were found to have breached laws by raising funds without a prospectus.

“ASIC has applied to the Court to require Astra to inform affected shareholders that they may elect to have their share purchase contracts set aside and claim a refund or damages.”

That is, if there’s any money left in the kitty.

THE $154,470 PHONE CALL

YOU were right. I finally got around to looking at my super fees: it turns out that my wife and I pay on average 2 per cent admin fees to underperform the market with only a 7.6 per cent return! We have now switched to a low-cost fund, saving us $5149 per year. We both have around 30 years of working life left and will save $154,470 in admin fees alone. So, thank you! We confirmed your “$40,000 phone call”!

John

BAREFOOT REPLIES: Awesome stuff. There are two more things I’d like you to do: first, make an appointment with your fund and discuss the insurance you both have inside your super — you want to make sure that you’re fully covered. Second, think about moving your investments to high-growth shares (local and international) — you’ve got time on your side to experience the magic of compound interest.

big debt can also be a Thief of Joy

WE bought a modest house in need of a little renovation in a blue chip suburb for $770k three years ago. It’s already worth close to $1 million but our mortgage is $650k. We don’t have a lot of debt but I feel we’re behind the eight ball compared to our friends. They seem to be on their third property and have small mortgages. Is it ever OK to have a massive mortgage? We know comparison is the thief of joy, but sometimes it’s very hard not to be jealous.

Pip

BAREFOOT REPLIES: You have made (on paper) $230,000 in three years ... and it’s not enough?

Here’s the truth: your friends got lucky. They’ve ridden a once-in-a-lifetime housing boom, which has seen prices in Melbourne and Sydney increased by a staggering 66 per cent since 2008. Most people think these returns are normal. They’re not. They’ve been caused by interest rates dropping to all-time lows, and a belief that Australian property prices have some magical element to them that causes them not to go down.

However, today Australia has the highest rate of household debt to income in the world (to put it in perspective, that’s about twice that of those spendthrift Yanks). What happens when interest rates inevitably rise?

I argue that it’s never prudent to have a massive mortgage (relative to your income), but it’s downright dangerous to do it now. Especially if you’re only motivation is playing catch-up with the Jones’s.

AFIC SHARE PURCHASE PLAN

I’M an investor in Australian Foundation Investment Company (AFIC). They are currently offering a Share Purchase Plan. Is that something you recommend?

Gary

BAREFOOT REPLIES: Yes, AFIC is giving existing shareholders a chance to top up their holdings. The offer closes on November 16, and shareholders can apply for up to $15,000 worth of new shares.

The  shares  will  be  issued ­at a 5 per cent discount to AFIC’s market price, although the new shares will not be entitled to the next dividend payment.

I’ll be taking the offer up (though, admittedly, with a yawn): there’s no brokerage payable, and a 5 per cent discount is decent, especially in light of the fact that AFIC has historically traded above its net tangible assets.

THE BAREFOOT INVESTOR HOLDS AN AUSTRALIAN FINANCIAL SERVICES LICENCE (302081). THIS IS GENERAL ADVICE ONLY. IT SHOULD NOT REPLACE INDIVIDUAL, INDEPENDENT, PERSONAL FINANCIAL ADVICE.

Originally published as I laughed, but now I cry

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Original URL: https://www.dailytelegraph.com.au/business/i-laughed-but-now-i-cry/news-story/84945cbe015cc6730d6120cdb1005ccb