I recently heard a story about a young couple who saved like mad so they could buy their first home. They were buying in Sydney and prices were rising rapidly (this was back in 2016) and they despaired that they’d never be able to save enough to keep up with rising prices.
A solution presented itself, they could buy an apartment off the plan. They inspected the display suite. So much nicer to have a brand new place than somebody else’s second hand kitchen and bathrooms… It wasn’t going to be finished for 2 years, but they could pay a 10% deposit straight away, get free stamp duty courtesy of the state government and then save like mad over the next two years so they didn’t have to pay lender’s mortgage insurance come settlement day.
Fast forward to 2018 and the market’s changed a lot. The building’s completed and they’ve been given a settlement date. But their mortgage broker has some bad news for them, the bank valuation has come in at a lot less than the price they paid. Now the bank won’t lend them the same amount of money any more and the extra cash they’ve saved isn’t enough to cover the shortfall… The great Australian property dream has just turned into a nightmare.
You see, it’s really hard to save up a deposit for your first home or investment property, but it’s also really easy to lose money in property. In fact, much easier than most people realise. Get this wrong and you are back to the drawing board – and you may never recover financially. But get it right and you may never have to save again! If you’ve saved a deposit for your first home or investment property, don’t waste all the sacrifices you’ve made to get where you are!
There are three key things for first home buyers to understand so that you can get it right and not live to regret the day you finally get your keys!
Buy the best property you can afford
When I bought my first place it was a tiny apartment, which I outgrew too soon. At the time, I could have afforded to borrow more, I was just nervous. If I had pushed myself, I would have been able to buy a larger place and avoided the additional expense of selling up and buying again after only a few years.
Every time you buy, there’s an additional cost of around 5% of the purchase price. Every time you sell, it costs around 3% of the sale price. These costs are avoidable if you buy the right property…
Many first time buyers get ultra-conservative with their borrowing because the prospect of having a mortgage scares them. You’ll get used to that soon enough… I’d encourage you to stretch yourself before you get bogged down with other responsibilities like kids! (With the caveat that it’s affordable for you, of course!)
Most first home buyers want to avoid paying lenders mortgage insurance (LMI). But this can be a false economy if it means you forgo buying a vastly better property with a 10% deposit because you have constrained your budget by focusing on a 20% downpayment. In a rising market (obviously not something anybody’s worrying about at the moment), it can be advisable to buy as soon as you save the 10% rather than try to out-save price growth.
We’ve talked about how easy it is to lose money on property. The goal, of course, is to make money! The thing is, when the overall market rises and falls through the cycle, not every property goes up & down at the same rate. By buying a quality property, you have more chance of your home going up in value. How good to be quietly accelerating your wealth while you are paying down the mortgage?
And the most wonderful thing about owning your own home is that you won’t pay capital gains tax! So when you sell, you get to keep the spoils.
Avoid risky locations and properties
Please don’t fall for a shiny new apartment or house & land package! These properties are among the most risky things you can buy. It’s hard to resist incentives like stamp duty concessions and first home buyer grants, but please do! There is a very real possibility that you’ll see no growth for years and it’s alarmingly common that these properties lose value in the first few years of ownership.
Buying established property in established areas as close as possible to the CBD is ideal. If you can manage it, buy a home that was built prior to WWII, with some land and loads of period charm. This is all about scarcity. Land close to the city is a scarce commodity. Old homes are in limited supply and are being demolished in some areas. If you are going to buy an apartment, you can follow the same general rules, although you might also look at some newer buildings. Just make sure they’re more than 10 years old and not in an area where there is an oversupply. Locations within walking distance of cafes, easy transport to the CBD and green spaces are always desirable.
Why is scarcity important? Because the thing that drives property prices the most is supply and demand. If there is a lot of the same type of property on the market at any one time and buyers don’t feel any pressure to make a decision, prices will stagnate or decline. When there’s only one property available and a lot of buyers want it, the price will climb through sheer competition.
Once you’ve found a property you’d like to buy for your first home or investment property, the biggest way to reduce risk is to do your due diligence! There’s a lot to cover and it’s worth doing, so download our free checklist – it’s an easy way to ensure you don’t miss anything.
Think of the future
When you make good property decisions, the longer you own a property, the more equity you’ll have. The more equity you have, the more options you have.
Before you buy your first home or investment property, have a chat with a savvy accountant to make sure that you get the structure right. By doing this, you’ll keep your options open to possibly keep this property as an investment when you’re ready to upgrade. The interest you pay on your home loan isn’t tax deductible, but it is on an investment property. So you want to make sure that you leave yourself room to maximise this benefit in the future, should circumstances allow.
Ultimately, if you make a wise choice of property for your first home or investment property, when you go to upgrade, it will be less of a struggle. Or, instead of moving, you may choose to borrow against that equity and buy an investment property.
Often first home buyers think they should buy something unrenovated and add value over time. This can be a great move, as long as you are able to access the money to renovate it properly at some stage. If you are thinking a house has better long term prospects for you, get good advice from a local architect before you buy.
How one of Brisbane’s foremost buyers agents first got onto the property ladder and then climbed it!
I purchased my first property in 1998 in partnership with my brother. Our father had taught us that land and renovation potential was important so we purchased a deceased estate 5km North of the Brisbane CBD in an elevated position with load of character. We had a pretty clear idea of the how it would work – I would live in the house and do all of the renovation and he would pay half the mortgage.
We had worked out our exit strategy and when a promotion and relocation opportunity came up for me in Melbourne we were able to put that into play and he bought me out using the average of 2 valuations.
The second property I purchased was with now husband in 2002 and we still own it. At the time we could borrow (and comfortably afford) up to $500,000 which gave us a lot of choice at that time. Our plan was to live in it for 3-4 years then use the equity to purchase the next property. But there was so much we didn’t know about the property market and long term asset selection.
After what we considered a long search (which was actually only 3 months) we shortlisted 2 houses: one in Wilston for $425,500 and one in Kedron for $332,000. Same size block of land, similar size houses but one was in a far superior location.
If I knew then what I know now we would have purchased the Wilston option. That house recently sold for $1.25m and rents for $700 per week (7.5% gross yield). But we chose the Kedron option because it was more affordable. It is now worth $840,000 and rents for $500 per week (7.8% gross yield).
See the difference? Whilst the gross yield is similar, the Wilston property would have delivered 94% increase in value over the same time period as the Kedron property delivered 54% increase. So the total return on investment would be far superior if we knew more about correct asset selection back when we started out.
The lessons we have learnt over the past 20 years are what we share with homes buyers to help them benefit from our collection of experiences – both good and bad experiences!
Meighan Hetherington, www.propertypursuit.com.au
Whether you think about it this way or not, your first home is your most important property investment. This is your first rung on the property ladder and, if you choose well, you’ll give yourself a firm financial foundation for the rest of your life. But if you get it wrong, you basically can ruin your entire future. And I promise, I’m not over-dramatising! Take the time to get this property purchase right. Focus on quality, never lose sight of how important capital growth is and get good advice.
We’re serious about helping first home buyers and we’re working on a project that will help you get it right. It’s really important that we provide you with the advice you need, so please share your greatest challenges with us. It’s a short 5 minute survey and by answering our questions you’ll get the opportunity to be the first to know when we’re ready to launch! There’ll be a special gift for our first students too…
And one last word. Don’t get in the habit of lavish holidays and exxy handbags before you buy your first home… If you get your property strategy right, there will be plenty of time for that in due course!
Published: 13 November, 2018
DISCLAIMER: Good Deeds blogs/buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.