Start while you’re young
5th February 2018
By Scott Pfeiffer
There’s no denying that home ownership has gotten harder. Nevertheless for young people, buying an investment property can be surprisingly affordable.
Buying a home is difficult. First you have to raise the deposit, then convince someone to lend you the money. Finally you have to pay the mortgage and all the other costs associated with home ownership. There’s a good chance that where you can afford to buy is not where you want to live. Nor will it necessarily be the place you can realise the best capital gain.
This doesn’t mean you should give up on purchasing a property altogether. In fact, there are distinct advantages to buying an investment property over a home that make it a great way for young people to get a foot on the property ladder. Because you aren’t living in the home, much of the cost of servicing the loan is met by your rental income. This means the banks view your purchase as a less risky investment and are therefore more likely to lend you more money.
If you are lucky your parents might also be able to help you out. This could come in the form of letting you stay at home, so you aren’t paying rent as you pay off your investment property. Or they could offer to be guarantors for your mortgage, which will reduce the amount of deposit required, as well as extra expenses such as mortgage insurance.
Take the recent example of Andrew. Having finished university, he’d landed his first job and was earning $60,000 a year. He was still living at home, but was keen to get into the property market so he had something to show for himself by the time he decided to settle down.
Andrew had about $30,000 in savings, but also a HECS debt. When he went to the banks, they told him they would lend him up to $320,000 for an owner occupied property, but $490,000 for an investment property on the basis that much of the loan would be serviced by rental income that was in addition to his current salary.
The situation was helped by his parents who offered a limited guarantee for his loan. That enabled him to pay purchase costs from his savings as well as a deposit of $10,000. He was able to purchase a new 4 bedroom, 2 bathroom, 2 garage house in the northern suburbs of Brisbane for $500,000.
The most surprising thing is that when tax benefits, such as negative gearing and depreciation, were taken into account, along with a rental income of $420 per week, the property was costing Andrew only $30 per week. By comparison to hold the same property as an owner occupier would cost him $540 per week.
For the price of a coffee a day, Andrew was on the property ladder, without any significant sacrifice to his lifestyle. From this position, he can build up equity in the property. As the time comes to settle down, he will have a larger deposit and smaller mortgage to pay when he decides to purchase a home.