Buy the best property you can afford
When I bought my first place it was a tiny apartment, which I outgrew too soon. At the time, I could have afforded to borrow more, I was just nervous. If I had pushed myself, I would have been able to buy a larger place. Instead, I needed to upgrade after only a few years.
Every time you buy, there’s an additional cost of around 5% of the purchase price. Every time you sell, it costs around 3% of the sale price. These costs are avoidable if you buy the right property.
The prospect of having a mortgage is scary and this fear causes many first time buyers to get ultra-conservative with their borrowing. I encourage you to stretch yourself before you get bogged down with other responsibilities like kids. (With the caveat that it’s affordable for you, of course!)
Most first home buyers want to avoid paying lenders mortgage insurance (LMI). But this can be a false economy if it means you forgo buying a vastly better property with a 10% deposit because you have constrained your budget by focusing on a 20% downpayment. In a hot market (obviously not something anybody’s worrying about at the moment), it can be advisable to buy as soon as you save the 10% rather than try to out-save rising prices.
I’ve mentioned how easy it is to lose money on property. The goal, of course, is to make money! The thing is, when the overall market rises and falls through the cycle, not every property goes up & down at the same rate. With quality property, you have more chance of your home going up in value. How good to be quietly accelerating your wealth while you are paying down the mortgage?
And one of the best things about owning your own home is that you won’t pay capital gains tax! So when you sell, you won’t have to lose anything to the tax man.
Avoid risky locations and properties
Now I know it’s hard to resist incentives like stamp duty concessions and first home buyer grants, but please don’t fall for a shiny new apartment or house & land package. These properties are among the most risky things you can buy. There is a very real possibility that you’ll see no growth for years and there’s a good chance the property will lose value in your first few years of ownership.
Buying an existing property in established areas as close as possible to the CBD is the ideal. If you can manage it, buy a home that was built prior to WWII, with some land and loads of period charm. This is all about scarcity. Land close to the city is a scarce commodity. Old homes are in limited supply and are being demolished in some areas. You might even consider a property you can do some work on. Just be careful not to bite off more than you can chew. Get expert advice before you buy a renovator’s delight.
If you buy an apartment, just follow the same general rules, although you might also look at some newer buildings. Just make sure they’re at least 10 years old and in a small complex. You don’t want an apartment that is exactly the same as all the others in the suburb and avoid areas where there is an oversupply. Locations within walking distance of cafes, easy transport to the CBD and green spaces are always desirable.
Why is scarcity important? Because what drives property prices the most is supply and demand. If there is a lot of the same type of property on the market at any one time, buyers won’t feel pressure to make a decision and prices will stagnate or decline. When there’s only one property available and a lot of buyers want it, the price will climb due to competition.
When you’ve found a property you’d like to buy, the biggest way to reduce risk is to do your due diligence! There’s a lot to cover and you don’t want to take short cuts, so download our free checklist – it’s an easy way to ensure you don’t miss anything.
Think of the future
If you buy a good property, the longer you own it, the more equity you’ll have. The more equity you have, the more options you have.
Before you buy your first home, have a chat with a savvy accountant about the right structure for your loan. This will matter if you choose to keep this property as an investment when you’re ready to upgrade. The interest you pay on your home loan isn’t tax deductible, but it is on an investment property. So it’s a good idea to leave yourself room to maximise this benefit in the future, should circumstances allow.
Ultimately, if you choose wisely when you buy your first home, it will be less of a struggle when you go to upgrade. Or, instead of moving, you may choose to borrow against that equity and buy an investment property.
I mentioned earlier that one way to build wealth is to buy an unrenovated property and add value over time. This can be a great move, as long as you are able to access the money to renovate it properly at some stage. If you are thinking a house has better long term prospects for you, get good advice from a local architect before you buy.