Beating the odds – strategies for young property investors

Published on December 2nd, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Young would-be property investors are struggling to compete against established property investors, never mind being able to enter the market.

According to the research from the Australian Bureau of Statistics (ABS) home loans for first-time buyers have dropped to its lowest level since May 2004. Besides, it should be stated that first-time buyers as of March, only made out 14.2% of the housing ownership.

Factors leading to a weak young investor sector

Reasons for the weak and declining numbers are down to the rising cost of the properties, the lack of supply of properties, high student loans and other personal debt, as well as a sluggish wage growth. More so, what the investment bank UBS found was that the deposit gap was a large obstacle of potential young homebuyers entering the property market. Meaning, that they were simply not earning enough to build up a deposit fast enough.

This is echoed in the research by ABC’s Four Corners, which found that many young homebuyers find themselves invested out of the market. Most are unable to put forward the home loan deposit, or were unable to make the monthly home loan repayments. Besides sitting and speculating when the housing market will crash, there are strategies that would-be young investors can apply to compete against the more established negative gearing investors.

The bank of mum and dad

With wages not meeting the inflation rate, it is understandable that the traditional model of saving for a deposit might not be possible for most, particularly those under the age of 34. A solution would be for them to ask their parents to either helping them out with the loan amount, to ensure that they can put down a 20% deposit. Alternatively, the parents can act as guarantor and then an application can be made for a guarantor loan. The benefit of having a guarantor loan, similar to placing a 20% deposit, is that the first-time buyer can avoid lenders mortgage insurance (LMI). All of this will save the young first-time buyer some money.

Applying the concept of rentvesting

As the property prices increase even more, an increasing number of young buyers are struggling to enter the housing market, as such rentvesting might be an option. Rentvesting implies you rent a property in the area where you would like to live, and then buying a property some place that you can afford.

Here it is vital to make sure that you can afford this strategy. To check that, make use our handy rent vs buy calculator, but also speak to your mortgage broker about your personal situation. You also will need to think like an investor. And the golden rule still stands – think with your head and not with your heart. You want a solid investment; therefore go for a property in a good location, close to schools, transport and shops. But keep your potential tenant in mind, as this will make it easier to rent out. Plus, it would be a good idea to chat with local agents, or you could visit a website such as realestate.com.au, for information on local agents, the average rental returns and even finding an investment property. Also, if you do not want to make use of an agent to find you a tenant, you could use free advertising sites like gumtree.com.au to list your property.

Just remember, for the first month there might be no income and you will need to cover the mortgage yourself, as well as your own rent. To ease some of the stress, you could find yourself a housemate to split the cost. Alternatively, another option would be to stay at the parents, thereby avoiding rent altogether.

Make use of the perks

If you are a first-time buyer, then you benefit from the exemptions that are applicable in all Australian states and territories, with except being Tasmania and the Northern Territory, which relate to stamp duty. For example, if you are a first-time buyer, you save even more if you build a new home or buying a home off-plan as you could apply for the First Home Owner Grant. Depending on which state you are, you could save up to $15 000, as part of your first homeowner discount.

Do visit domain.com.au to see how much you could save on stamp duty as a first-time homebuyer. Also make yourself familiar with some of the terms you need to adhere to – like, you will need to live in that property for at least a year.

The bottom-line

A young investor wanting to enter the property market might find many hurdles along the way. But with the right planning and advice from your broker, it can be possible.

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