How to avoid getting it wrong when buying your first home.
Written by Veronica Morgan.
Fear of making mistakes plague every first home buyer: what you need to know before you start your search.
Every first home buyer wants to avoid making mistakes. But the process is so complicated and the advice you get is so often conflicted, so how do you even know where to start? There are some property fundamentals that, once you know them, will help you avoid getting it wrong. Here's what you need to know in order to get your search off on the right foot.
Careful who you listen to.
There are two big problems with real estate in Australia. The first is that everybody has an opinion and most are not afraid to share it. Your parents will no doubt be very enthusiastic about you buying a home, but they are rarely experts and can unwittingly lead you down the garden path. Know-it-all friends and work colleagues are a nightmare, particularly if they've recently bought something and they suddenly think they're your first home buyer agony aunt.
The second problem is that property advice is unregulated. This means that there are a lot of people giving "advice" who are really marketing something. It might be the real estate agency who runs first home buyer seminars, which are really a front for selling the "dream" of overpriced brand new apartments or house and land packages. Or it could be your mortgage broker who gives you a "free property report" which, if you rely on it, can result in you paying more than a property is worth. We've written about the dangers of these reports before.
When seeking out property advice, consider three things: 1. Do they really know what they're talking about? 2. Are they trying to sell you something other than the advice? 3. Are they getting kickbacks from somebody else who is trying to sell you something?
Think long term.
Real estate needs to be a long term proposition, and this principle applies whether you're looking for your first home or an investment property. You already know that the cost of getting into the market is huge. Forgetting the deposit for a moment, and first home buyer grants aside, buying costs add up to around 5% of the purchase price. When you go to upgrade, you'll be paying this on top of around 3% of the sale price in selling costs. These costs are one of the big hurdles in the way of buying your next home. You're probably thinking, "come on, I can't even get my first home without worrying about my second one" but once you're on the ladder, you'll wish you had thought longer term if you find you've bought the wrong property.
The other thing to consider is opportunity cost. Despite what a lot of property "experts" say, no two homes go up in value at the same rate. Buy a dud and it will be worth a lot less in 5 or 10 years than a good property will be worth. This is the magic of compounding, which means that the longer you own a good property, the better off you'll be. The more equity you have, the more financial freedom you will have.
Property buyers agonise over when the best time to buy is, but it's really the last thing you should be worried about. Where you buy will have the greatest impact on your financial future. When you know your budget, you can start to research what you can afford in different locations. If you're buying a place to live in, you'll want an area that offers a good lifestyle, where you can still be connected with friends and family and within a reasonable commute to work. If you're buying an investment, you'll want a low-risk location as close as possible to an economic and lifestyle hub so tenants who can afford to pay good rent will want to move there and, more importantly, stay there.
Once you know the area, the next most important decision is what to buy. Rest assured, you will struggle to work out what is more important: space or location. Pretty much every home buyer is faced with this dilemma, not just the first home buyer. What you need to know about are the characteristics that appeal most to other buyers in each area. Seek out a home with as many of these features as possible, since this "owner occupier appeal" is one of the most important ingredients for long term capital growth.
Don't let the stress of buying your first home get in the way of some clear thinking that will result in better decision making. We know it's overwhelming, that's why we want you to understand these fundamental factors as a starting point. When you get the steps right, and in the right order, you'll be able to buy with confidence.