By Lacey Filipich BEng(Hons) MAICD
Having bought a property in my teens, I am asked time and again by students and those early in their career how they can do it too. To those aspiring young property magnates, I say: bravo! Thinking about wealth creation in your teens and twenties is fabulous. It’s bound to put you in better stead than those that only wake up to it later in life. That you’re asking the question makes you one in a hundred.
Congratulations done. Now the hard part…
Why do you want to buy a property?
This is not necessarily an easy question to answer, but it is absolutely crucial that you do answer.
Before you embark on the grand adventure of property ownership, you must understand what you hope to get out of it:
- Do you want this to be the first of many properties, all appreciating in value and creating a strong asset base?
- Do you want an income stream from your tenants paying you rent every week so you can work less?
- Are you sick of living at home with your folks but hate the idea of paying someone else’s mortgage (i.e. renting)?
- Have you realised you’re giving away tens of thousands a year in rent each year and thought there must be some other way?
- Did you decide you never want anyone to have the power to inspect your home uninvited or give you a notice to vacate again?
- Did you read some statistics about how many truly wealthy people got their wealth from property and decide you want a piece of the action?
- Or do you just have a lazy $50K sitting around and thought perhaps you’d try investing in property?
All are perfectly fine and acceptable answers, but they lead to different places. Hence it’s very important to understand your motivation before you begin looking for properties.
So what’s your answer?
When you’ve worked that out, you’ll see you fit into one of these three broad categories:
This is you if your underlying motivation is starting a property portfolio and you’re not interested in living in a home that you own (well, it’s likely the bank will own most of it, but you get what I mean).
Perhaps you imagine that one day you’ll own several properties, or maybe it’s a just a few in combination with some other investments. The value of those properties will grow and grow, and you can either trade your way up the property ladder or keep accumulating. You might envisage living off the rent from these properties when the mortgage is paid out. Perhaps you want to amass cash by subdividing and selling some portion of your asset off.
The bottom line is: you’re viewing property as an investment mechanism, not a place to call home.
This is you if your primary motivation is to have a home to call your own.
Living with your parents or housemates can be the absolute pits at times. Sharing bathrooms, fridge space and the TV remote requires some diplomacy, but that’s manageable. It’s being nagged by your folks, or p*ssed off at the noisy sex your roommate insists on having at 3am when you’ve got an exam the next day, that’s the real problem. So you decide you want to be in control. You move out into a rental and discover the wonderful freedom of being your own master.
Except… you’re not really your own master. The landlord is.
You’re helping pay off Mr. or Ms. Landlord’s mortgage, and in return for the privilege you get regular inspections to make sure you’re looking after the place and can be told to move out whenever suits them.
Eventually you sigh and wish for a place to call your own, where the dishes can sit unwashed for weeks and the bedroom can be painted black if you want to. You’re looking for a nest to call your own.
Investor looking for capital growth
Capital growth is about the value of the property, which you hope will increase year-on-year. What you’re looking for is a high quality, undervalued property that will be in demand. In general, it’s the land value that appreciates – buildings just cost you money and depreciate over time – so you might be looking for something with a bit of land that will either make it attractive to developers or that you can yourself subdivide and either sell off in sections or develop yourself.
Investor looking for yield
Yield is about how much rent you earn and is about your investment giving you a steady income. Yield is quoted as the rent versus just the purchase price, so beware claims of 6%+ yields until you’ve worked out how much the property really costs to own and maintain. You’re interested in getting the maximum rental return for your dosh, and this can be quite different to capital growth potential. It’s also where apartments, townhouses and other high-density options that don’t come with much land can win over larger blocks with small, decrepit houses. Just watch out for body corporates with expensive items like elevators and pools – they cost a bomb to maintain.
Nester looking for a home
In this case, emotions can and should play a part in your decision (as opposed to investing, where emotions are not usually helpful). Your primary motivation should be meeting your needs within your budget. Consider your life and what would make you happy, and then shop for that. It’s fabulous if you can find a property that will go up in value and has the potential to provide a decent yield if you decide to rent it out, but that should not be your primary objective. Being happy is #1 here.
Switcher looking for somewhere to live then rent out
This can be a tricky one. Many real estate advisors say: ‘You can either shop for an investment or a place to call home. You cannot do both at once.’ They say this because buying an investment should be devoid of all emotion, lest you make a purchase simply because you love the place and decide to go against what the data tells you. They may well be right in most cases.
I’m less rigid about this, for several reasons:
- I’ve done it – living in then renting out – twice.
- If it’s your first home, you have to live in it to get the First Home Buyers Grant. I know it’s meagre and potentially will disappear, but a few grand never goes astray.
- There’s a sizeable tax advantage to having lived in a home first if you can sell it within six years of moving out, in that you don’t pay Capital Gains Tax (CGT) on the sale.
- I’m not fussy about my home, so I tend to prioritise factors that make something a good investment (like location and amenities) above creature comforts. I can live with a crap bathroom if it’s a fab location.
- Renovating can be cheaper if you’re living in the property – you’re there to supervise and do some of the work, and you’re not paying both rent and a mortgage at once.
You just have to be careful not to rush and don’t skimp on due diligence when picking a property. I made that mistake on one occasion and it wasn’t pretty.
But… how do I afford a property?
Working out your strategy is simple in theory. Where most young people fall down is finding enough money to buy.
In general, lenders encourage borrowers to deposit 20% of the home value and take out a loan for the remaining 80%. It is possible to borrow with a lower deposit – some lenders will let you get away with 5% or less – but you’ll be required to pay Lenders Mortgage Insurance (LMI), which covers the lender in case you default. So if you want to buy a $300,000 property (which would be on the cheap end of any capital city market these days) you’d be aiming for a $60,000 deposit. That’s not small change.
So what can you do to make buying a home possible in your teens or twenties?
Start stockpiling cash NOW
There are three simple (that’s simple, not necessarily easy) ways to stockpile cash quickly:
- Save more.
- Earn more.
- Spend less.
I recommend doing all three at once.
Saving: I’m not talking 10%. Plan to set aside 50% or more of your take-home pay. The sooner you start, the quicker you will build up capital. You will need cash – whether you do a 5% deposit or the more typical 20%. You’ll also have borrowing costs, establishment fees and possibly stamp duty to pay, which you don’t always have the opportunity to cover with borrowings. Amassing cash is mandatory. Get started as soon as you can.
Earning: Your biggest lever is your income. At 14 years old I was earning three times my friends who worked at Maccas because I took the time to get qualified for child-care and professional gymnastics coaching. I also worked more hours than most people – 12 hours a week during school term, and 30 hours a week during holidays. Don’t worry parents, I still got a 98.6 TE score and managed to have a social life as well as participate in sport – it can be done. The result was I had $7K saved by the time I was 19 (that was a big deal in 2001).
Spending: Just. Stop. It. I don’t care if your marvellous purchase was $5 in an op-shop, stop buying things you don’t absolutely need. Drive a cheap car, wear $3 pluggers from Woolworths until they break, and drink at home before you go out. People look at my 2002 Rav4 disparagingly, but guess what – those suckers have to work every day while I live on my passive income. Having an ego connected to things has a price. Learn to live cheap while you save. It’s not forever.
Consider investing first
The idea of owning your own home is seductive, and if you’re a nester it’s probably hard to separate emotions from house shopping. However, rental properties have a distinct advantage: they generate an income (i.e. rent). It’s easier for the bank to lend for a rental as they know the rent will cover part of the mortgage. As the investment value grows, you can access more equity and use it to buy more rentals or to get that dream home you want.
You could also consider other investment vehicles, such as shares, as a way to grow your seed capital (your savings) into something more substantial. This does not come without risk and is not for the lazy – you’ll need to learn what to do and stay on top of it. But if saving/earning/spending isn’t cutting it, this might work for you.
There comes a point where the bank will be happy to lend you more than you feel comfortable servicing. The loan amount is scary and the monthly repayments look overwhelming. First, absolutely listen to your instincts here – if it sounds too much for you, don’t go for it. But before you make that decision, consider renting out rooms.
I did this as a student with my first property. The mortgage was $110 a week and I rented out the second room for $90 a week. The difference was $20. I couldn’t have rented a bunk bed in a hovel for that.
Buying a property with multiple bedrooms (extra bathrooms are helpful here too) means you can rent out a room or two to help cover your mortgage. Sure, you’re sharing, but it’s a different game when you’re the landlord. You might only need to do it for a few months until you’re satisfied you can manage the mortgage on your own.
Start at the bottom
Thanks to TV shows like ‘The Block’, we think it’s normal to live in superbly finished designer homes. We might live in homes like that when we’re with our parents, but guess what – they’ve got 20+ years earnings on you. They can afford shiny, new bathrooms and beautiful furnishings. You probably can’t. It is highly unlikely that your first home will be a showpiece, so lower your expectations and save yourself some stress.
They call it a property ladder for a reason – you start at the bottom and climb up. Jumping to the middle rung is not common, nor is it necessarily advisable. Expect your first property to be modest. Shop accordingly.
Have you got a tip for first home buyers that you’d like to share? Or perhaps you have an instructive story about your first home buying experience? We’d love to hear about it – please leave a comment below.
What comes next?
Download our Free Financial Resources
Find the right Money School Course for you
Got a question: Contact Us
Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.