I’ve changed my mind about something. Something important.
I’ve said on this blog before that if you don’t buy your own home to live in, it’s not the end of the world. As long as you choose some other way to build your wealth, you don’t have to freak out about not getting on the property ladder.
And financially speaking, that holds true.
But I think I missed something important: human emotion.
Having just settled into the new apartment I bought, I realised I’d been denying something to myself. I like having my own ‘patch of dirt’. It fulfils a deep human desire to be settled and to feel some control over my destiny.
This feeling was compounded by the dramas of trying to get my bond back. The exit cleaners didn’t do a good enough job, so I found myself Gumptioning walls in my lunch hour.
A detail was missed in my ingoing condition report, so I was accused of leaving holes in a wall. And then there was the threat to make me pay for an electrician to change a light bulb that was out.
I fought tooth and nail, and in the end they only withheld $8.80 for said light bulb. But it reminded me of the way the cards are stacked against renters in this country, along with short leases and pet bans.
So, this is my advice for the yet-to-be-homeowners. Do everything you can to get your foot onto the first rung of the property ladder.
It might take a while, and it might mean making sacrifices, but it’s one of the most important things you can do with your money.
“But wait”, I hear you say. “I’ll never afford a property in this crazy market”.
And if you’re in the very lowest income band, that may be the case. But for someone earning decent (or even ok) money, especially early in your career, it’s totally possible. And here are three ways you can go about it.
Rentvesting – There are two hard parts of buying a property to live in. Scraping up the deposit and then repaying the loan (known in the industry as ‘servicing’).
If you go down the route of buying where you can afford and renting where you want to live, you remove that second challenge by having rental income.
If you live in Sydney or Melbourne, being a first home buyer is really bloody hard. There aren’t really any bargain suburbs left, even on the outskirts.
But if you look elsewhere, median house prices look far more manageable. Perhaps it’s just out of town, like the Central Coast or the Bellarine Peninsula. Or it might be regional, such as Wagga Wagga or Ballarat. Or a smaller capital city such as Hobart or Adelaide.
I am not giving you hot tips on all of these as investment property destinations. I’m simply naming places where you can pick up a house for the price of a small garage in Sydney.
How do you work out where to buy? Well you can do a ton of research yourself, looking at the supply and demand drivers. Talk to people in the area. Visit it for yourself.
Or you can work with professionals whose job it is to research these things, and provide recommendations.
I am most definitely NOT talking about the guys who try and spruik you an off-the-plan development in the outskirts of a holiday town.
No, I’m talking about real professionals whom you pay for their services. Like any such adviser, choose carefully, look at their results with other clients and use your bullshit detector. But for the clueless or nervous, this can be a useful way to avoid buying a dog of an investment in a far-flung place.
Family Guarantees – This approach works where you have the ability to service a loan (i.e. a decent income) but trouble saving a sizeable deposit. Your parents can use the equity in their own home to act in place of a deposit. Say you have 5% saved for a $500,000 property, but need 20%. They promise to cover the missing 15% if anything goes wrong and you default on the mortgage.
This is different to just getting a lump sum gift from the parentals (let’s admit, that’s the dream solution). It means they don’t have to actually come up with the cash (unless things go wrong – see below).
Of course there are risks involved. The biggest is that you default and the lender demands some or all of that money your parents promised. Some lenders also require the guarantor (i.e. your folks) to cover the mortgage repayments if you fall behind yourself.
And lenders will generally require the parents to get independent legal advice before going ahead, so that’s an additional cost.
You’ll still need to prove your ability to save and be a responsible adult – lenders want to see proof of ‘genuine savings’. But family guarantees can get you into your own place sooner and avoid the cost of Lenders Mortgage Insurance (which banks hit you with if you have less than a 20% deposit).
Play the long game – Maybe it’s going to take you five or ten years to cobble enough together for a home. But in the Monopoly game of life, that’s not actually very long. If you live to 85 that’s less than 10% of your life!
It drives me nuts when I hear people say things like ‘well I’ll never afford to own property so I’ll just spend my money and enjoy myself’.
No! Just because you can’t afford it now, doesn’t mean you can’t ever afford it.
First of all, there’s the power of compound interest: 10 years of slow and steady socking away will actually see you get some free money in there too.
Secondly, just because you earn this much now doesn’t mean you will forever. You can climb the ladder, increase your education, change career, start a side hustle, marry money … ok scrap that last one. But seriously, there is always an opportunity to do more, be more and earn more than you do now. So don’t rule out a big goal.
The hardest part in a long game is staying motivated. If your timeline is five years, saying no to another overseas trip or buying clothes from Kmart instead of Lorna Jane can get old real quick.
So, don’t be afraid to do things like set SMART goals, make a vision board (as cheesy as it sounds) and track your progress regularly. Hey, maybe even ‘treat yoself’ to a reasonably priced reward when you hit milestones.
I have a plan to pay off my mortgage in 12-15 years (depending on what interest rates do), so some of this stuff will be going on in my little world.
I have specific and aggressive retirement goals, and this is what will keep me from making poor decisions about money.
I’ll never give up martinis, but will I drop twenty bucks on them in a fancy bar? Hell to the no! (I will totally make them at home.)
That’s because I have done the numbers on repayments, and I know that paying an extra $250 a month can cut five years off my mortgage. And then I think about not having to get up and schlep to an office five days a week, because I’m doing my own semi-retired thing, and it motivates me!
So, my message to you is: don’t despair! With a clear goal and some good behaviours, you too will one day have the pleasure of telling your property manager to get fucked. (Note: this only happened in my head, not out loud).