Houses are unaffordable aren’t they?
Just open any paper and you’ll read how hard it is to get a foot up the property ladder these days, particularly for those who are not yet in the fortunate position of owning a home.
So today I’d like to discuss seven things that stop many young people from getting on the property ladder… and suggest 12 practical ways to overcome the affordability barrier and kick-start a property investment career or get into your first home sooner.
Sure it can be challenging to break into some of the popular inner city postcodes in Melbourne and Sydney, but it’s really no different to 40 years ago when I first got into property and felt property cost a lot of money too.
But I had to learn how to compromise.
The point I’m trying to make is that our perception of price and cost is somewhat relative.
If you have a good salary, then a $1.5 million home in Bondi won’t ruffle your feathers too much.
On the flipside, if you’re struggling from paycheck to paycheck, you’re likely to see the same property as an unattainable fantasy.
(I’m starting to sound like Joe Hockey…aren’t I?)
The home ownership ideal is changing
While many social commentators are busy telling us how impossible it is for today’s first home buyers to break into the housing market, an interesting new trend is emerging among twenty and thirty-somethings.
Many young ‘Millennials’ are establishing a life that involves renting where they want to live and investing where they can afford to do so.
Why don’t more young people take the plunge into property investing?
For some, it's a matter of their personal circumstances that keeps them from buying a property, things like limited employment opportunities and a lack of financial capacity.
But for others, the list of excuses is more about the so-called ‘trappings’ of youth.
However unless you work to overcome the barriers and kick start your own property investment career at a young age, you could find yourself a slave to money rather than its master for much of your adult life.
Here are seven obstacles you might be facing as a would-be first time home buyer or investor…
1. Poor money habits
The ‘want it all yesterday’ mentality isn’t necessarily the fault of younger generations, but it probably impacts on how you manage (or mismanage) your finances.
If you’re in the habit of spending money that isn’t really yours in the first place (using credit or store cards) to buy ‘stuff’ that won’t further your life’s ambitions, then this is something you need to address, because what you’re really doing is borrowing tomorrow’s money today and paying interest for the right to use it.
2. Poor credit
Spending money you don’t have means you’re trying to sustain a lifestyle you can’t realistically afford.
Put simply… you’ll never get rich owing people money
While credit card debt might not seem like a big deal as a young, single worker bee, what happens if your life takes a turn you weren’t expecting and you lose your income for a period of time?
Or what if you overextend yourself to the point where you can no longer afford your credit habit?
These issues can result in black marks against your personal credit file, which may prevent you from securing a home or property investment loan.
3. Lack of life experience
O.K. I thought I knew it all as a teenager and I definitely knew even more in my early twenties
We all like to kid ourselves that we’ve got this thing called life ‘in the bag’ as we enter adulthood, but the fact is we’re only just beginning to learn.
4. Lack of investment peers
It’s unlikely that those in your current social circle spend lots of time talking about the liquidity of shares versus the relative illiquidity of property as an asset, over Friday night cocktails.
Starting up the property ladder can be a lot more problematic when you’re surrounded by people who don’t really care too much for real estate, or more importantly, what you intend to do with it.
Here we are, back at the ‘want it all yesterday’ mentality.
Many on the verge of leaving their cosy family nest often expect to live in a property similar to what took their parents over forty years of hard work to acquire
While it’s not surprising that Gen Y’s raised on modern day marketing are impatient consumers, problems arise when you set yourself unrealistic and unattainable property ownership goals.
6. The affordability barrier
According to a report from Deloitte Access Economics, the affordability barrier is very real for younger generations.
The 2015 Deloitte Mortgage Report found that Australian housing remains some of the most expensive in the world, with property prices increasing up to five times faster than salaries in select areas.
You see… while wages are trending at a growth rate of just 2 per cent per annum right now, some of the more sought after postcodes around Melbourne and Sydney are experiencing dwelling price rises in the region of 10 per cent plus.
So how can you ride the property investment wave to wealth?
Despite the seemingly long list of obstacles that might be preventing a large number of young people from thinking about securing their financial future through direct property investment, as the old saying goes, where there’s a will there’s a way.
So here are 12 ideas to get you started…
1. Do what you can with what you’ve got
Energy, motivation and ambition…most young people have these traits in spades; yet tend to waste them in pursuit of trivial experiences (that usually cost money).
As age starts to catch up with us though, so too does a sense of complacency and we start to settle on our perceived ‘lot in life’.
Use that youthful drive to identify and define your future financial objectives, then chart a course to get you there.
It’s called planning and it works a treat alongside motivation.
2. Use that tech brain to your advantage
Knowing how to use the Internet, social media and spreadsheets makes you an investment force to be reckoned with…you just need to know which resources to use.
Your parents didn’t have the modern day advantage of real time access to market data and information with which to build their investment portfolio.
Make every minute you spend online count (literally). Hit Google and get started!
3. Work out if property as an asset meets your expectations.
If you’re after a quick road to riches, then I’m afraid you’re venturing down the wrong path with real estate.
Sure, the current market has produced some amazing capital gains, but it’s not always this way – the market moves in cycles
So while it’s unlikely that you’ll strike it rich overnight in property, in my opinion when it comes to long-term stability, security and returns, you won’t do better than well-selected residential housing.
4. Be realistic about your budget.
Unless you earn a lot more than the average 25 year old, it’s unrealistic to think you can spend half a million plus on your first foray into property, be it for a home or investment.
Aside from the fact that most sane lenders will likely turn you down, this would represent a significant financial commitment.
Remember, if this is your first home, it’s unlikely to your last so be realistic with your expectations.
And as a property investor, your budget may only allow you to buy a one bedroom apartment. But that’s O.K. – the way we live today makes a well designed smaller apartment a great long term investment.
5. Learn the ropes.
There’s such a wealth of information at every investor’s fingertips these days, ignorance is no longer an excuse for losing money in the property game.
The problem is there’s too much information out there and it’s hard to know who to listen to with so many people calling themselves property experts.
Seek out a mentor who has personally achieved the type of success in real estate you aspire to and pick their brain as much as possible. You can learn incredibly valuable lessons from other people’s mistakes…without paying for them yourself!
6. Save, save and save some more.
While credit might be relatively cheap right now, it’s also getting more difficult to come by for property investors, due to tighter lending restrictions recently imposed on the financial services sector.
Lenders have certain criteria you must fulfil in order to obtain a mortgage, with a clearly documented savings history at the top of their list.
Establishing a good savings habit will hold you in good stead for securing future funding. Aside from that, you’ll always be ahead of the game.
7. Keep your credit history clean.
Ignoring creditors doesn't make them go away, so whenever possible pay on time and if it’s just too hard, make the effort to arrange an alternative that suits everyone in order to prevent a default that could count against you with lenders.
It might not seem like a big deal in the immediate here and now, but credit glitches can remain on your credit file for up to five years.
8. Consider a ‘joint venture’ or guarantor arrangement.
Co-investing with friends, siblings, aunties, uncles, cousins and/or parents is becoming increasingly common, as more young people realise that owning a share in something of value is better than owning nothing at all.
Alternatively, you could ask your parents if they’d be prepared to use the equity they’ve built up over the years in their own home to go guarantor, so you can secure a mortgage and get a foot on the first rung of the property ladder.
I call it “bringing forward your inheritance.”
9. Do your research.
Learn the importance of careful and considered asset selection, based on the type of tenant and owner-occupier markets your investment must appeal to, in order to generate consistent capital growth and cashflow.
Buying an investment grade dwelling when you start out will make your ascent up the property ladder a lot more successful than it might be if you end up with an underperforming asset.
Acquire the best possible property your money can buy in a proven high growth location or better still, an area that’s being gentrified and is on an upward trajectory.
Something that gives you the capacity to manufacture equity through minor renovations – such as an older apartment or unit – in an area with good established infrastructure is ideal.
10. Maintain a cash buffer.
Keep aside a cash reserve when you buy your first investment property, adding to it as you accumulate further assets and grow your portfolio.
This will act as a buffer that you can access as needed for maintenance costs, or to manage the mortgage repayments should you find yourself without sufficient rental or personal income for a period of time.
Maintaining a ‘rainy day’ account in an offset facility will also help to reduce any non-tax deductible debt you may have, such as the mortgage on your own home.
11. Keep saving.
While some people think it’s best to direct any spare money into reducing the debt against their property, this isn’t necessarily the case when you’re actively accumulating a real estate portfolio.
Remember, you want to take full advantage of investment related negative gearing benefits.
But it’s about achieving the right balance.
Save surplus money in the mortgage on your own home - possibly in an offset account so you can access it if you need to.
This will minimise your non-tax deductible debt.
12. Rent and invest.
While the Great Australian Dream might be changing, research suggests young Australians still value the ideal of purchasing real estate.
Now though, it’s more about buying as a property investor rather than a homeowner.
Renting is considered a lifestyle choice these days, offering the flexibility and convenience of being able to relocate relatively easily and live in areas that might otherwise be unattainable as a homebuyer due to prohibitive property prices.
But why should becoming a tenant stop you from accumulating wealth through real estate?
Even though affordability might be an issue for today’s young Aussies looking to get a foot up the proverbial property ladder, there are always opportunities if you’re prepared to think just a little outside the square.
I admire today’s young investors for not being swayed by the negative press around affordability and housing.
Rather than giving up on the dream, they’re doing it bigger and better. Good on them!
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.