A lot is always written about housing affordability and its impact on the younger generation. This is not something that is unique to Australians. I was reading recently that home affordability is one of the top three issues that young people currently grapple with in the UK. Buying your first home was a challenge 30 years ago, still is today and probably always will be.
We can be smart about it
I think we all agree that buying a home is a massive financial commitment and one that often requires a large amount of borrowings – be it if it’s for your first home or if you are upgrading. Therefore, why not make it as financially rewarding as possible? My thesis is that with the right approach, you might be able to catch two rabbits. That is, buy a home that suits your lifestyle as well as generate substantial (tax-free) capital growth.
Caution – this approach is not for everyone
The criteria we typically use for selecting our home is primarily shaped by our lifestyle preferences. I believe that it is important to balance out lifestyle and financial considerations. As such, for some people, buying the home that suits their lifestyle is way more important than the possible financial outcomes. If that’s you (i.e. you are not bothered about the financial outcomes), then, without prejudice, you probably don’t need to read the rest of this blog.
However, if you are open to maximising your financial outcomes and it’s important to doing so (i.e. the financial outcomes are 51% or more), then this strategy might suit your circumstances.
Why your home’s value is important
Last year, I wrote this blog which is is quite relevant to this topic. The main benefits of buying a home that is likely to appreciate in value in line with, or at a greater rate than, the median house price include:
- It provides a possible home loan repayment strategy. Consider a situation where a young couple own a home worth $1.5 million with a $1 million home loan. This would be considered a large home loan in anyone’s language. At this level, a strategy could include the assumption that the home owners will maintain their home loan rather than repay it (unless they have a substantial income). If they have bought well, in 10 years their home might be worth $3 million and $6 million in 20 years. If they haven’t managed to make any substantial repayments over this time then their equity in 10 years has grown from $500k to $2 million and to $5 million in 20 years. A well-located home eventually makes your home loan balance appear immaterial. When you eventually sell your family home (to downsize), you will have a lot of equity to play with.
- Helps upgrading and investing. If you buy a well-located home you can borrow against the equity to aid investment. Also, it can assist in any potential upgrades (i.e. sell and buy a more expensive home) and/or renovations.
In short, having more equity in your home increases your net worth and strengthens your financial standing.
Smart home buying (investing) strategy
I have been working with an increasing number of clients and helping them develop a well-considered home buying strategy. The aim is to ensure that when they look back in 10 to 20 years’ time, they have no regrets about the home they decided to buy. What we want to avoid is a situation where a client is priced out of the market (in the location they like) and/or cannot invest (to build wealth) because their home hasn’t appreciated in value. Here is an outline of the process we take clients through:
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Develop a budget
Obviously, the higher your budget, the better-quality property you can buy, from a capital growth perspective. Sometimes spending a relatively small additional amount money ($50-100k) can get you a significantly better-quality property – so it can be a false economy to set your budget too low.
In respect to the challenge in question (i.e. buying a home that also makes a good investment), my advice is to typically maximise your budget having regard to any possible changes in income (e.g. maternity leave) and interest rates. Typically, this requires us to undertake some financial modelling to ensure the home is affordable now and into the future.
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Develop a ‘must have’ list
There are some things that you might not want to compromise on. For example, if you have two or more kids then you probably want a 3-bedroom home (or larger). It is important to carefully consider these ‘must have’ items whilst trying to keep the list to a minimum. Minimising your own lifestyle requirements will allow you to prioritise the investment attributes responsible for driving capital growth.
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Identify the best property type and location that complies with your budget and ‘must have’ list
Now that you know what your maximum budget is and have a rough idea on the type of property you need, you can identify the areas that might suit. It is important to assess a location for the characteristics that drive growth and investigate the past growth of similar properties. This will give you an indication of what future growth you may be able to expect.
For example, I have been helping a client identify an area where they can buy a home near the water in the low $1 million price range. We have identified that it might be possible to buy a home in Mentone, Parkdale, Mordialloc, etc. that could suit their needs. Whilst this is circa 20-25 kms from the CBD (and therefore wouldn’t be investment-grade), some attributes such as the village atmosphere and proximity to the beach somewhat offset the negatives. The historic growth over the past 20 years has also been pleasing.
Warning: We are not buyers’ agents / property experts. We can certainly help you with step # 1 (this is our area of expertise). Step # 2 is your responsibility. With step # 3, you have the choice to do the analysis yourself with a little bit of coaching from us or engage the services of a reputable buyers’ agent. I would nearly always recommend the latter – we can introduce you to the right people (we never receive any incentives, financial or otherwise for making said referrals. We have zero conflicts of interest in this regard).
What next?
If you are considering buying your first home or upgrading and you want to ensure that you make a wise decision you may like to engage our assistance (if you are a mortgage broking client – or will become one). We would need to meet to better understand your needs (in person or by phone). If appropriate, it may be necessary for us to complete some financial analysis/modelling and if so, we undertake this work on a time-cost basis. It is important to note that we are completely independent and have no vested interest in the advice outcome. It is possible that it’s in your best interest to defer buying/upgrading a home and, if that is the case, we will tell you this without fear or favour.
