Latest / Money Grows on Trees / #331 - Is It Negligent To Buy Property?

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#331 - Is It Negligent To Buy Property? · Money Grows on Trees

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Buying property in Australia right now might be the most expensive mistake
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of your life. Most people think property is the safest, most
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guaranteed path to wealth in this country and in many
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others. But when you factor in a $100,000 deposit, $38,000 in
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stamp duty, $25,000 in mortgage insurance, and 6.5% interest rates,
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just to begin with, the math starts working against you.
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And that's before you've paid a single cent off the actual house.
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I'm Lloyd J. Ross, seven-figure investor and entrepreneur, and I've helped thousands
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of everyday Aussies, Americans, New Zealanders, Canadians get out of debt and
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build real wealth. And in this video, I'm going to show you exactly what buying
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a property actually costs you and the alternative most Aussies
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never even considered. So let's take a look. A
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$1 million home, which is about the median price or the average price
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in most capital cities. What does it cost to
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walk in the door? Let's use the million dollar home as the example here,
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which is, again, the median in capital cities. Here's
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what's happened. You've saved a 10% deposit. You've saved,
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you've scrimped, your parents have been telling you, buy
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a house, get on the property ladder. So you created the
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cash deposit and here's what day one looks like. Okay, let's
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go through it. So 10% deposit on a $1,000,000 home is 100 grand.
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The average in Queensland and New South Wales for stamp duty, which
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is the transaction cost, is $38,000. That's
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a tax, you'll never see that again, 38,000. Lenders
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mortgage insurance, now I understand there's concessions for first
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home buyers, I understand that, but let's go through what most
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people are gonna experience because it's not usually their first home. Lenders
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mortgage insurance, now if you borrow less than 20% of
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the value. Sorry, if you borrow more than 80% of
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the value of the property you're buying, so the actual cash deposit is
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less than 20%, then you're going to have to pay LMI, which is Lenders
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Mortgage Insurance. Just like the name suggests, it's the
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lender's insurance, not yours. It does nothing for you. You must pay it. Again,
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it's a cost you'll never see again. Gone. Bye. $25,000, roughly,
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is what you pay for LMI on a million-dollar home. We got standard duty
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$38k, lender's mortgage insurance $25k, and the $100k deposit.
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Got it? Now, conveyancing, legals, inspections, moving,
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etc., $7,500, roughly. Before
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the mortgage repayment, it's $170,500 to just begin to buy the
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house. Got it? The
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$100,000 deposit isn't just, I mean, it sits in the home or
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the property investment as equity, it does, but it's locked into
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a single illiquid asset then. So it can't be touched, it
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can't be redeployed and it can't compound elsewhere.
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And so we'll come back to what that actually costs you later. It's called an opportunity cost
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because you've lost the opportunity to deploy that 100K elsewhere, okay? Looking
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at the STEM duty, It's a government tax,
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okay? It buys you nothing. You can't live in it.
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It earns no return. You never get it back. It's gone, okay?
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The LMI is much the same. If you only have the 10% deposit, you're gonna be
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charged that, and it protects the bank effectively, not you. It
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protects the bank if you default, okay? So you pay the $25,000 to protect them. Bye-bye. So
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we'll let that sink in for a bit. You borrowed their money, you're paying the interest, and
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you're also paying for their insurance, which is wild. Okay,
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so let's look at the mortgage numbers now, understanding that it's
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been secured. So the loan, if you're $100,000 deposit, the loan
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is 900K. Let's say the interest rate gets to 6.5% at
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the retail rate, because it appears that
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the cash rate, also known as the RBA reserve
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rate, which is what the RBA sets interest
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rates at for banks to borrow from each other and
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from funds in Australia. It usually
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follows the bond yields. If you ever see on the news the bond yield, Australian
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30-year bond yield, if you see that up
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at 4.6%, which I believe it's at right now, then typically you're
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going to see the cash rate move towards the bond yields. The
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cash rate is going to continue to climb. We know that they're going to increase interest
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rates by probably three more times in Australia here from May
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26, 2026 that I'm recording this. Right
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now, retail rates are about six, so it's not unlikely
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or it's not going to be unusual or unreasonable for
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us to anticipate that retail rates are going to be 6.5%. It's just
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probably going to be very reasonable. In fact, probably see them at 7%, but
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let's say 6.5%. That's usually where they are. That's
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pretty much where they normally are because the cash rate will oscillate between 4.5% and
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5% long term over 100 years. we
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are going to see the retail rates higher than that because that's how banks make money. They
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make it out of the net interest margin that they lend back out on. So
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6.5% is not wildly high and
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a term of say 30 years because that's the typical loan term. So if
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we take that on board, the monthly repayment is $5,689. That's
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the monthly repayment. Now paid over 30 years, the total interest on
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a million-dollar house is 1.147 million. You're going
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to pay 1.147 million in interest on top of
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the house price of a million bucks. You borrowed 900k and you'll
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repay in total, including the principal, over 2 million.
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You basically paid for the house twice. The
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bank effectively also got a house because you paid
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the interest of what your house cost. good business, the
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banking business. That's why
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the bank's finance team sends you enthusiastic emails whenever
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you get a mortgage. They make a ton of money. Let's
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understand now that that's what you're contending with when
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you buy. They're the cost to buy. That's also
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the cost to own in terms of the mortgage but the
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one thing that most people never consider
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is what's called the annual bleed rate. The
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bleed rate, like what's that? That doesn't sound good. No, sounds
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awful. It is awful. And it's primarily
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the thing that's really kept me from buying real estate. It's the
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one thing that irritates me to no end and it's indexed
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to inflation. So when people say, oh, you know, property's an
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inflation hedge, to some extent the mortgage is because over time
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the devaluation of the currency helps that. But the operational
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cost of the property goes up with inflation. Let me explain. The
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annual bleeding is what nobody puts in the brochure when you go and see
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your mortgage broker at the bank. They don't tell you about this, right? They
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think it's the mortgage repayment and they're like, I mean, I got my deposit, I got my
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mortgage repayments, $5,689 a month. I get it, cool. It's gonna
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be easy, right? I was renting for a thousand. So
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this is a bit more than rent. I'm renting for $1,100 a
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week. This is a bit more than that. It's like, you know, it's an extra
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thousand a month. I can handle it. And so this is what you talk about in your head when
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you're in the bank, right? But here's the thing. There
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are some operating costs you got to pay. Okay. So
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let me talk about the operating costs. The
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first one is insurance. Now
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let's say insurance is three and a half thousand dollars. Okay. Over
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time, it's going to continue to go up from inflation. Right? So
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by the time it hits year 30, it's more like seven over seven to 8,000 every
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year. Okay. But let's say first year in three and a half thousand for insurance. The
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next thing is council rates. Yep, tab services, it's
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about 2,000. So now you're at five and a half K a year just in those two
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things. And then maintenance, which is what we call the 1% rule because typically
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maintenance will be 1% of the purchase price. So
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we call it 10,000. Now, when I say maintenance, I do mean
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that to include some of the things you want to do
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to your home when you own it. You've got to maintain the
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property. If you've got a pool and you've got lawns and certain
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things you've got to look after, you've got to maintain them. That's one part of it. But
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also it's like, hey honey, we need to get the carpets replaced. Hey
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honey, we need to get the blinds done. Hey honey, one of the kids tripped over and smashed the
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glass window. Hey honey, I don't like our kitchen. We want to
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invite guests over to entertain us. It sucks. The toilet broke or the
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air conditioner broke. If you've got an air conditioning system in the house, it
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breaks. This happens a lot. If
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you're in a property like a unit complex,
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incidentally, where the body corporate has
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mismanaged the funds, which they often do, the
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body corporate fees you pay will have gone to zero, as in there's
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no money left in the coffers. All of a sudden, they're going to do what's
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called a special levy to raise money for the new balustrades in
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your building, or we're going to replace the glass, or the roof is
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leaking, or we're going to paint the building. In the body corporate meetings,
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they don't go and get three quotes and choose the cheapest. They just spend your money like
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it's They just get something expensive. I've seen this happen time and time
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again. If you don't believe me, go and join a body corporate committee if you dare. If
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you're a crazy person, you want to go and sit with other crazy people, go
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and join a body corporate committee where everyone in there doesn't have a job and they've got a
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title in the body corporate committee and their job is to spend your money. Then
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you'll understand what I'm saying. If you own a unit in
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a unit complex, you will be subject to special
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levies. Sometimes the special levies can
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be $40,000 or more. This
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happens a lot, right? That's
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why this 1% maintenance rule is a real thing. It's 10,000. Now,
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that's indexed over time to inflation too. If inflation goes up, the
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maintenance costs are going to rise over time. If we take the total first
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year, maintenance, stamp duty, council rates—sorry, not
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stamp duty—council rates to insurance and
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The 1% maintenance rule. We got 3 costs. 15 grand. Now,
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these are real numbers because my mom, when she bought an apartment
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in 2006, as she progressively
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over time, she had no debt on the apartment. I think it
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grew to about 1.2 mil and she had no debt on the
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apartment but it was costing her 10 grand a year to live in her own house debt-free. It's
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probably more like 15k now. These numbers are so accurate.
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This is real. What's interesting about the 15 grand per year
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you've got to pay to be in the house is that one, you
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haven't factored in on a monthly basis for your mortgage repayments. Your mortgage is 5,000. Let's
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call it 6,000. Then all of a sudden, you go, oh, shivers. I've
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got another $1,000 or $1,200 I haven't considered." Bang
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that onto the six. Now, you're at $7,200. Now, you're starting
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to think maybe renting was a lot more effective from a cash flow standpoint. Now,
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you're starting to understand what comes with home ownership is not just the mortgage
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repayment and the interest repayment. It's more than that. It's
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more than that. That's where the wheels start to fall
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off a little bit for people who own houses. Now, that never used to be the case. It
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used to make a lot more sense to buy a property in Australia when
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prices were three times annual earnings, first time
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it was effective to do. Then also, just the ownership
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costs weren't like that. It's got out of
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control. And this will continue
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to be out of control because they're indexed to inflation. So a 15K bill
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eventually ultimately becomes a 30K bill. And you're going
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to be over time paying a lot of money to live in your own house. Even
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with no mortgage, right? And then you're obviously going to
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pay the mortgage in interest itself. So if we take the cumulative
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operating costs, which is what they are, over 30 years, inflation tracked,
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you're gonna pay $680,000 just in that. That's not
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the mortgage, that's the upkeep, 680K. Now, just so you know, that's after
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tax dollars. That's after tax dollars. If we're considering a home, that's
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after. So you've got to earn with the tax rates in Australia,
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you've got to earn almost a million bucks to pay 680. So now you've
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got a million going to operate of earnings that you've made to
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go to that. You've got over a million dollars in interest. So you probably earn
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1.4 to pay the one. And then you've got the principal portion.
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Does that make sense? Your house is
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essentially a very needy business that never turns a
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profit but keeps sending you invoices again, again,
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again, again, again. At least with a business, you're going to be earning
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cash flow that's well above the 6.5% cost
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of owning it. Objectively, that's what you want in a business. The
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total all-in cost of a home Deposit, stamp
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duty, LMI legals, 170K, this is a million dollar home. 30 years
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of mortgage repayments in principle, over 2 million, 2 million. And
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then inflation tracked operating costs, 680,000. So grand total, $2.9 million. Your $1 million house just
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cost you $2.9 million over 30 years. So
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for the property to have been worth buying on pure financial terms, it
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needs to be worth 2.9 million in 2055. Now
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if we break it down, that requires the property to grow at 3.6% annually.
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Wait, just to break even. So
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if Sydney long run average is 7%, which it
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has been, It depends if your suburb is
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that or your timing is effective and that's the bet you're making. So
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if you're buying at all-time highs, maybe the
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growth – I mean certainly the growth will be
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there but will it be to that rate? What if we go through 5 or 10 years of flat
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growth? What if immigration does fall?
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What if rates go up even further than we anticipate? What if it is an all-time market
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bubble? What if we start to see a huge fall? Like in
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Canada and in the United States, it's collapsed by 30%. How
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long does that take to come back? How long does it stay low? In
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Japan, it hasn't recovered in 35 years. What
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does that look like? In China, prices have fallen
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back to the same. Prices are now what they were 20 years ago.
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This is not an unusual thing. This happens a lot. And
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in Australia, it happened in 1890. There was a huge demand-led boom
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in 1890. I've done an episode on this. Go back and check out the episode if you want to. It
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took 70 years to recover. So I'm just surmising, what
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would happen? You've got to carry that cost for 30 years. What happens
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if we don't get the 3.6 annual growth rate to break even? Even
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to break even, you haven't made any money. If property grows on
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a million dollar house at 3.6% on average over the next 30 years, you
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only break even. You don't make any money. Do
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you see where the challenges lie if you're about to buy into a huge bubble? What
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if we don't get that? You're basically losing for 30 years,
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but you won't be able to see it because it'll feel like progressing because you're paying the principal
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off. It's hidden. It's a hidden
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cost, this stuff, right? So that's the bet you're making, okay? And
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you're making it basically with three million bucks. It's
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just important for you to consider the opportunity cost. This is where it gets
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a little bit more interesting. If we look
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at the capital you're putting towards this house from an opportunity cost
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standpoint that no one's ever calculated, it
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gets less compelling to own, okay? So
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if we look at as an example, what could you have done with
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the 170,000 that you put in? Remember 100K
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and then 70 odd thousand dollars is gone forever. It's
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never to be seen again. What if you kept that? What if you just had
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that cash in your bank instead of deploying it to those things, you just had it. Now,
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what if you invested that, right? What
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if you invested that? What if you invested the deposit?
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the stamp duty, and the LMI. And what if you invested it
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in something like, as an example, not financial advice, but as
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an example, the S&P 500 Index Fund, which tracks the top
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500 companies' performance in the domicile in North America, some
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of the best companies in the world, Amazon, Google, Meta, NVIDIA,
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Apple. et cetera, et cetera. And that particular
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index has returned since 1957 on the data, 10.26% on average. So
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the 100,000 over the course of that time, the 30 years, would be worth 1.7 million.
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The stamps you do would be worth $660,000 and your
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LMI would be worth $436,000. That is if
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you invested it and compounded it at that rate. And that's assuming that
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the 10.6% that's happened since 1957 will continue. Just
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saying, there's assumptions here. So that's 3 million.
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That's 3 million just from the money you spent entering this deal. That's
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just what would happen if you invested the
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capital you did to buy the house in the first place. And here's where it gets even
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more interesting. Just quickly, if you're ready to take control of your finances but
17:12
feel stuck on where to start, I have a solution. My
17:15
book, Money Buys Happiness, simplifies investing and
17:19
wealth building with practical steps to help you achieve financial peace.
17:23
Get your copy via the link in the show notes and let's get your money working for
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you. Now back to the episode. Renting And
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I've spoken about this. Renting the same property, a million dollar property at
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a 3.5% rental year which is what they are now, which is about $35,000 a year
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incidentally. Now, if I look at our place, it's a 1.2 million dollar place and
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it's $40,000. So we're not off market. It's probably around about that, $35,000 to $40,000 for
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a million dollar. So we're looking at about $750 a week roundabouts. 700, we're
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about there. We don't know exactly, but we're gonna use these figures, okay? So
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your mortgage, going back to the mortgage and the operating costs
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in year one is $83,000 a
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year. That's if you own, that's
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if you buy that middle, it's 83,000 a year, including
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the mortgage repayment and the operating costs. Now, renting
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is not that. Renting is like 35 to 40. Let's
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call it 40. The gap is about 43K,
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right? Or 45K, depending on what you look at. It's over 40, okay? So
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here we go. If the renter invested the
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gap, the 40, the gap every year
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into the same fund, it compounds to 7.2 million. The
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day one costs, the cash deposit of 100, the LMI
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and the stamp duty, that's 170K, at 10%, 10.26% per annum,
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next 30 years, 2.9 mil, roughly. The annual
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gap between renting and owning, which is say
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40,000 a year, if you're intelligent enough and disciplined enough and
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understand enough to deploy that capital elsewhere,
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you have to, This doesn't work if
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you go rent and you just go and blow it on Thailand holidays. It doesn't work
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like that. I'm just looking at apples for apples of the
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amount of capital in operating 83,000 if you own
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versus 43,000 if you rent, as an example, okay,
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on the same property, then it's 7.2 mil.
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So 2.9 and 7.2, you're up at over $10 million. 10 million. Meanwhile,
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let's say the million dollar property grew at 5% from
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here going forward. It's 4.3. Now
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what about an optimistic 7% growth rate that everyone tells me
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all the time, real estate grows at 7%. It has with structural tailwinds.
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But if you put the structural headwinds in front of property, how can we possibly anticipate
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it's gonna grow at 7%? Maybe if
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there was a crash, maybe, but not at an all time peak. Right?
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But even if, even if it did at
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7%, it's 7.6 million. So even a 7% property
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growth factor, which is above the long run national average,
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you're still 2.6 million behind. Does that
20:27
make sense? If it's a
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5% growth rate in property, you're 5 million behind. So
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the $10 million in opportunity costs, I mean, what, for the
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right to mow your own lawn? and
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deal with the block drain on 11 o'clock on a Sunday night? What? Why?
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And I see in the comments, I've got these reels on Instagram, it's quite funny. I
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mean, one of them has got a million. It did pretty well. I think I'm
20:53
hitting the mark here with this because I can't be the only person that thinks this way.
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Evidently I'm not, but I'm fighting a cultural battle
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against almost all Aussies because for
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the last 50 years, they've been correct. But I
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do feel that to repeat what we've done
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would just be insane. And I think a lot of other people
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are understanding this. I don't think I'm
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the only one, right? And it's funny because in that reel,
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They keep, people keep coming back and they're saying, yeah, but I just like, I
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flipped my, I bought a house five years ago and I flipped it and now I'm worth a million. I'm like, yeah, but
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dickhead, you, you, you, you are part of the largest
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property boom in history and you're too young to
21:37
even understand what it's like. You just don't get it. Like,
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go and read a book. You just don't know it. Like, great,
21:45
but how do you repeat that? Right? Like how?
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And also, those in the comments, on
21:53
the thing they're like, what do they say? Yeah, but if you rent,
21:56
then you spend the money. I'm like, yeah, no, no, of course.
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This doesn't work if you don't invest the money elsewhere, right?
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I understand that. And I understand that there's leverage gains, I
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get it. I understand all that. But what
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people don't get, what they don't get because they're
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too flippant daft to even think about is they don't understand opportunity
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cost. They don't realize that LMI goes nowhere. They don't realize
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the standard duty has gone into the abyss. They don't even know what
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the operating cost of a property are because they've never sat down and done the numbers. And
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they never index into inflation. They never put an opportunity cost on those. But
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they all carry opportunity cost of capital. They
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do. So is buying property negligent?
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Sometimes. So I want to be very clear. I'm not
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like just anti-property. I'm anti-shitty money decisions. And
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I'm anti-house poor. and I'm anti this
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whole notion that when you buy a property, you make money. No. There are equally
22:57
many people that have lost money in housing. I
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think it's negligent just to keep telling people if you're a parent, okay, buy
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a property. That's negligent. That's poor. That is
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negligent advice. What I'm anti is I'm
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anti buying without thinking. I'm
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anti-financially dumb. That doesn't make sense. I want you
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to be intelligent financially, right? So buying that makes
23:23
sense is this, okay? Buying that
23:26
makes sense. when it makes genuine sense
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to buy, okay, ready? One, if you're buying in
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a proven growth area with
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high population demand and good infrastructure spending,
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et cetera, and you're in it for like at least 10 years, like long,
23:46
long-term, okay? So the
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longer the time horizon, obviously the better. So think about that.
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Those who are flipping, I think you're gonna be in for a world of hurt shortly. That's
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the first thing though, long-term mindset. And
24:02
of course, where the emotional gains
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in your life of owning far outweigh the
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data and just making money. The
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second thing is rent to own gap is small. So when the rent versus
24:18
own gap is smaller, it makes more sense to buy, right?
24:21
So for example, if rental yields went three and a half percent and
24:25
retail rates went six and a half, it was the opposite. Maybe retail rates were like
24:28
five and rental yields were five. Yeah,
24:32
I think there's less of a gap, okay? So
24:36
then in that instance, of course it makes more sense to probably buy, I
24:39
would say, you know, under the right circumstances. But
24:42
we don't have that right now. We get a huge gap. The third one is
24:46
that when you have perhaps you need career stability,
24:50
relationship stability, and the location makes all that possible,
24:54
then it also can be effective. Not always, but
24:57
effective. The fourth one is when you've actually run
25:00
the numbers and buying in your situation still wins. If
25:04
you've run those numbers and it's compelling, then
25:08
you're making financial decisions based on data and not just emotions. Of
25:12
course again, we'll go back to the
25:15
emotional needs for you. However, not at
25:18
the cost of the financial data. Meaning, oh
25:21
lord, I'm emotionally in this house and then two years later you're like, oh
25:24
my god, I need to go on the bread line because I can't afford this. That's when
25:28
it becomes negligent. You buy because It's negligent when
25:31
you buy because everyone else does. It's negligent you buy just to force what
25:35
your parents think of you. It's negligence to buy to then Skype to someone
25:38
on social media. It's negligent to buy just to put it on Facebook and put, we fucking
25:41
bought a house. Like some sort of social rite
25:45
of passage, it's stupid, right? It's really dumb. Or
25:48
if you're just flipping, because you've just flipped and you're
25:52
gonna get caught with the hot potato at one point in time, okay? I'm old enough to know
25:55
when that has happened. Just be careful doing that, right?
26:00
It's negligent when you've calculated what the cost of capital would be if you invested elsewhere
26:04
and you have the knowledge to do that. It's negligent when you haven't factored in
26:07
the years of operating costs that are linked to inflation and
26:11
they surprise you. And it's negligent if you think you're making a
26:14
smart financial decision when actually you're making a cultural one, when
26:18
you're making one to fit into the tribe. That's negligent. The
26:22
most expensive financial decision isn't necessarily
26:26
the wrong asset class, it's the one that's made without thinking,
26:30
without information. The verdict, is it negligent to
26:33
buy a property? For some people,
26:37
absolutely yes. Absolutely yes. If
26:41
you've never calculated the opportunity cost of your deposit, never added up the operating
26:44
costs over time, inflation tracked, never worked out that
26:48
you're paying double in interest just on top of
26:51
the purchase price or you've made a cultural decision
26:55
basically to satisfy some urge to have security that's
26:58
not really security. then
27:02
yes, if it compromises your
27:05
ability to live your life and it compromises the
27:09
ability to have actual cashflow security for your family, it's negligent,
27:17
right? It is. But
27:25
it's not negligent if it makes financial
27:29
sense, right? If you've done the numbers. So for a lot
27:32
of Australians, it's probably a no when it comes to real
27:35
estate right now. It's not an attack on property, it's just the maths. And
27:39
I feel like I've done a fairly reasonable job here with
27:43
real data, real numbers to back up my claim
27:47
from my reels on Instagram and even on the channel here
27:50
that what I'm talking is not BS and made up and nonsense. I'm not trying to
27:53
clickbait anyone here. Well, maybe on the thumbnails is kind of help because you get
27:57
someone's attention then so you can actually tell them you know, the facts,
28:00
right? Selling what they want, getting what they need, but...
28:05
At least I have your attention so we can go through the details here, because this is what you need to know, right?
28:09
So I feel like I've made a very strong case here. Now, will this case
28:12
stand up forever? Well, if we see a 30% decline in real estate
28:16
market, and we see rental yields flip, and we see an
28:20
oversupply of housing, and we see immigration falling, and we're starting
28:24
to see the price of housing not be 13 times annual wages,
28:28
and we see a real reset,
28:33
this might change. But I've spent the last
28:37
15 years building wealth without a single property, without a mortgage, not
28:40
because I'm anti-property, but because I did the flip of numbers. And
28:43
it just made more sense. And as a result of that, I've traveled the
28:46
world for 15 years and built businesses for 15 years. And I'm
28:50
sitting here and I don't even know what day of the week it is. Tuesday, I can do whatever I want. I
28:53
wake up when I finish sleeping. I don't have car debt. I'm
28:58
thinking about our next trip to Thailand and Vietnam and I don't have to think
29:01
about it. And we're just gonna go. I'm not here talking out
29:04
my ass. I'm just literally walking the talk. If you
29:07
don't believe me, go to my Facebook and scroll the last 10 years of my
29:10
life. You're like, oh, that's pretty good. Because I didn't put property at the forefront
29:14
of my life. I put my life at the front of my life. Put
29:18
your life at the front of your life. No goddamn bricks, who cares? I
29:21
never went to a funeral, never, where I went there and
29:25
the person stood up and said, here lies Joe Boggs. Had
29:30
a house, paid off his mortgage. No one gives a
29:33
shit. No one cares. So if you're gonna have security, make
29:36
sure it's real security, not made up security in your head, just so you can keep up with the Joneses. Got
29:40
it? Makes sense? Great. Hope you enjoyed the episode. If you've enjoyed it, share it with
29:43
a friend who needs to hear it. Click the share button, hit the subscribe button. And
29:47
thank you so much for your attention and for the comments below.
29:52
What do you think? Am I on the mark here? Does this make
29:55
sense to you? Am I way off? I'd love to know in the comments. I
29:58
love your support. I love your feedback. Non-support don't
30:02
matter. Let's go. Let's have a conversation in the