Getting started in property – when everyone says you can’t
Increasing property prices, rising interest rates and declining housing affordability have many young people worried whether they will ever be able to buy a house.
Thousands of renters have been priced out of the home ownership market and fear a lifetime of paying to reduce someone else’s mortgage, while many young adults continue living in their family home largely because they can’t afford to move out.
And economic forecasts suggest that the gap between what people earn and how much they need to buy a house is widening to the point that many first home buyers simply cannot save for a property. For many, by the time they manage to get $10,000 in the bank, the price of the property they want to buy has increased by more than that amount.
But there are alternatives - innovative solutions paving the way for twenty-somethings to break down the barriers stopping them from buying their own home.
Some of the methods might be bitter pills to swallow for today’s “want it now” generation, but real estate experts suggest a buyer’s first property should be viewed as part of a long-term strategy towards a future goal.
Rob Farmer, the CEO of Australia’s largest metropolitan property agency, RUN Property, said young people should aim to buy their first property to get them established on the property ladder, not as their dream home.
“The smartest first home buyers go for something small in a good area which has potential to increase in value, so they can trade up to a better property in years to come,” said Mr Farmer, whose company manages properties valued at more than $10 billion throughout Australia.
“Their first property might not have all the fancy gear that the new display homes have, but it should be as close as possible to the things that drive capital growth such as transport, schools and shops.
“They should not be looking for how much accommodation they can get within their budget, but how much capital growth their dollars will buy.”
Mr Farmer said while many people preferred two-bedroom units, well selected one-bedroom apartments could be just as good for first home buyers provided they could compromise on their aspirations.
And if even the cheapest properties were out of reach, young people should consider teaming with their brothers or sisters, friends or parents to buy their first property.
Share the load
People who bought with a sibling or other family member had double the income to tackle the mortgage and each could pay off half the loan, Mr Farmer said.
“It means they pay for a fraction of the property and pay it off in a fraction of the time it would normally take,” Mr Farmer said.
“Buying together means people can buy a better property than they would otherwise be able to get on their own, perhaps in a superior location or with other benefits that they could not afford by themselves.
“At RUN, we’re seeing this becoming more and more common with the properties we’re selling.”
Mr Farmer said he knew of four friends who could not afford even a one-bedroom property by themselves, but by pooling their resources they bought a four-bedroom house worth more than $1 million in Sydney.
“It was brilliant. The house had much bigger living spaces and it was in a much better area than any of them could have bought alone, and the capital growth will be way better, too,” he said.
Mr Farmer said there were simple contracts that could be drawn up between joint owners – like a prenuptial agreement involving property – to cover everyone in case one party wanted to sell, fell behind in their mortgage payments, moved overseas or had a partner move in.
Be a tenant and landlord
One of the biggest reasons why young people don’t buy a property is because they don’t want to live where they can afford to buy. But they don’t have to, Mr Farmer said.
People can enjoy the lifestyle of renting in the inner city while they buy a property in an outer area as an investment, have a tenant contribute to the mortgage and use the growth in the property’s value to provide the equity to buy in their preferred location later, Mr Farmer said.
“This goes against what many people think, but it is a great example of clever people thinking outside the square – and they’re reaping the rewards,” Mr Farmer said.
Rent out a room
Cash-poor buyers can rent a room to friends – or advertise for a tenant – to help cover the mortgage costs.
Mr Farmer said this was often a win-win for the property owner and the room renter because the owner gained an income they would not normally have had and the renter was often not locked in to a 12-month lease.
Live at home and lease the property
Young people who buy an investment property and stay living at home with their parents get the best of both worlds financially, especially if they pay into the mortgage as if they had no tenant, Mr Farmer said.
However, this strategy cancels eligibility for first home buyer grants unless the buyer lives in the property for a period before moving back into the family home.
Buy in the outer suburbs or the country
Capital growth is often slower where prices are lower, but Mr Farmer believes it is better to gain a foothold on the property ladder in a cheap area than not to buy.
Ask mum or dad for a loan or to be guarantor
Generous cashed-up parents are an obvious solution, but their money need not be a gift. It could be a loan which opens the door to housing affordability.
Parents can also nominate as guarantor for a mortgage, but be careful because if the borrower defaults, the lender will chase the guarantor for the money, Mr Farmer said.
Offering to care for someone’s house while they are away can be rewarded with free rent, enabling the house sitter to save money that would have been spent on rent for a deposit.
Sydney’s Chris Smith, 22, recruited his parents to share the burden of buying his first property and together they bought a two-bedroom, two-bathroom unit on the Lower North Shore for $530,000.
“It would have been virtually impossible by myself,” said Mr Smith, an accountant.
“I knew I could afford to buy but I couldn’t gain the borrowing capacity.”
Mr Smith and his parents Neil and Wendy went 50:50 in the property, meaning both parties are responsible for only half the mortgage repayments and they have been able to buy a much better property, with greater potential for capital growth, than Mr Smith could buy alone.
“We got an extra bedroom and an extra bathroom by buying together,” Mr Smith said.
RUN Property is Australia’s largest metropolitan real estate agency which manages property valued at more than $10 billion and has a dedicated team of sales specialists in Victoria, NSW and Queensland. RUN Property – sales, leasing and management. For more information visit www.run.com.au