Soaring property prices have made it difficult for many first home buyers, but there is another way to enter the property market. Buying an investment property before your first home is a good way to start building an asset portfolio to help you get ahead.
Michael Furlong, director of MAP real estate, was renting until last year, when he bought his first home at the age of 39. However, his first home was not his first time in the property market; he had bought and sold 18 properties before finally buying his dream home. He says there is a big difference between being a renter and a renter who is also an investor.
"The way you win is to have all of your money work for you throughout that phase that you’re still renting. The term I use is a ‘professional renter’,” he says.
Furlong says there are many reasons why it can be a good strategy to buy an investment property before your home.
“You’ll be able to afford to live in a much better property as a tenant than what you could if you were to buy it – we were living in a $700,000 or $800,000 property and only paying $550 a week [in rent]. As a professional renter you’ve got a much better property for a smaller amount of money for your own personal use.”
Furlong says it also doesn’t suit many people to solidify their first home until their late 30s. “Renting is a great option in your 20s and 30s if your lifecycle is still in that changing period, if you haven’t met a partner or haven’t had children. You’ll probably move every two to three years anyway and if you were to buy and sell every two to three years the transaction costs would be horrendous,” Furlong says.
By instead building a portfolio over this time, the end result is likely to be much better. “I could almost guarantee that the home someone would buy in their late 30s would be much better than in their 20s – and they’ve got these assets off to the side. Ten years of full tax benefits, gearing and depreciation will set you up for the future far better than [buying a first home earlier in life].”
Treasha Lim, a strategic property adviser at financial advisers KlearPicture, says many Australians are raised with a strong mantra to buy their home and not pay rent. “Parents struggle through their mortgage and always say, ‘don’t buy anything unless it’s your home, don’t pay dead money on rent’. The kids see it as such a hard task so that is ingrained in them,” Lim says.
Lim has six properties around Melbourne and has mainly chosen to purchase off-the-plan where she saves money on stamp duty and doesn’t need to pay the full purchase price until a future date, and rents tend to rise in the meantime.
“I was fortunate that I had a few friends in the same boat; we all paired up and rented so we could keep investing so we could use as much of our tax dollars as possible. My rent has never exceeded $850 a month and even though my pay was rising a lot every year, I didn’t change my spending. With some people the more they earn the more they spend, whereas the more I earned, the more I invested,” Lim says.
Lim says the key to success is the compounding growth of property, compared to holding cash in the bank – which is not only tempting to spend, but also grows at a smaller rate than property.
“If you leave $45,000 in the bank and you’re only earning 5 per cent, then you earn $2,250 a year and you have to pay tax on that at the end of the day. Whereas if I use that $45,000 on a 10 per cent deposit on a $450,000 property, let’s say it grows at 6 per cent, then you’re growing your net worth by $27,000 a year not $2,000 a year.” She says this size of investment is possible for many investors, as the shortfall to be paid each month, after rent is paid and taxes and depreciation benefits are deducted, is often as small as a monthly car loan repayment.
Once people realise what is possible, it becomes easier to build a portfolio of multiple investment properties, Lim says. Even with two properties, she says, you could be growing your net worth at a rate of $54,000 a year – which, after five years, is an increase of $270,000, assuming 6 per cent growth.
“And then you can get your dream home.”
Concepts to overcome
Fear of debt – distinguish between productive and non-productive debt. ‘Rent is dead money’ – ideas from past generations may not work today. Property is too expensive – only if you live in it and do not enjoy cash injections from tenants and tax benefits. I don’t want to miss the First Home Owners Grant – it’s a nice freebie but not always the reason to buy versus invest. I want a lifestyle NOW – but don't expect it to be long-term if you don't have a plan that allows for rising costs of living. Learn to spend less and save hard. It's too high a risk – not if you choose a property that matches your financial capabilities and have a cash buffer.
Allocate spending rather than spend willy nilly.
Pay into a savings pot monthly no matter how small the contribution.
Invest as soon as you can under proper guidance. Stop finding reasons to procrastinate.
Save now spend later, rather than the other way around.
Make practical, calculated choices rather than impatient, emotional ones.
Keep it simple – you don't need a degree or complex plans. Just a CONSISTENT savings plan into a vehicle that appreciates in value over time.
Search for stepping stones rather than the dream home today.
Make it fun and light-hearted.
Determine what you really want in life. Don't feel guilty for trying to make money. It does not make you look materialistic. It's being smart.
Information supplied by www.klearpicture.com.au
This story was found at: http://www.smh.com.au/money/on-the-money/investment-properties-a-stepping-stone-to-first-home-20110113- 19pdx.html