Why first time buyers are becoming investors instead
More and more Australians are making their first step on the home ownership ladder an investment property.
Mortgage Choice conducted a widespread survey on a number of property investors around our country in July 2015. More than 36 per cent were, in fact, first-time buyers, a substantial increase from 21.1 per cent at the same time just 12 months earlier.
Statistics from the Real Estate Institute of Australia (REIA) add weight to the survey’s findings, as they show strong growth in lending to investors over the middle months of 2015.
“During the June quarter, the value of housing finance commitments from investors well exceeded the value of owner-occupier housing finance commitments excluding refinancing,” said REIA President Neville Sanders.
It would seem that the main reason for first home buyers purchasing homes as investments is the price increases across our capital cities. These have increased significantly, particularly in Sydney and Melbourne according to CoreLogic RP Data. Thus, what can be gained from making your first property purchase an investment instead of your home?
Where you want to live and what you can afford are often two very different things. There’s isn’t much point looking to buy a villa on the waterfront if your funds will only cover the boatshed.
Likewise, if you would like to live close to work in the CBD, property prices are probably going to be out of your reach. According to the Australian Bureau of Statistics, the average size of the first home loan is $341,200, meanwhile CoreLogic RP Data found that the majority of houses in our capital cities are priced over $400,000, with more than 10 per cent over $1 million.
Hence the rise of the ‘rentvestor’. You live in your desired suburb (renting or living with your folks, for example) while purchasing property in a cheaper area to rent out. Often you will be able to use the rent to cover the mortgage repayments, while you benefit from capital growth.
Don’t want to go through the hassle of maintaining a rental property? Investment property managers can take care of all the hard yards, allowing you to put your feet up. However, it is important that you choose the right property as not all homes produce a positive rental yield – the expertise of a buyers’ agent can help in this regard.
There are a number of tax benefits exclusively available to property investors, which is another reason why the option has become more attractive to first-time buyers. According to the Australian Taxation Office, you can claim deductions on a range of expenses related to your rental property, including:
- Advertising your home for tenants
- Charges/fees from the bank
- Borrowing expenses
- Council rates
- Depreciating assets
- Legal expenses
- Maintenance and repairs
- Pest control
- Property agent fees and commission
A property agent can help you with the various claims – these can even include lawn mowing, gardening, cleaning, stationery and postage.
Leverage to buy your first home
Essentially, if you were to sell your investment property and pay off your home loan, the money that you have left is your equity.The gains that you amass over time can be used as leverage to purchase another property.
There are a number of ways you can use your first property investment to purchase your next home, here is an example from ANZ:
You buy your investment property for $400,000, paying a 20 per cent deposit ($80,000) up front and borrowing the rest ($320,000). Over time, your property gains value by $100,000. Even if your rental yield is only paying for the interest, the added value would mean you would now only owe 64 per cent of the principal.
By refinancing, you can receive enough money to make your next step. Whether you use your equity to add another rental to your portfolio or perhaps buy your first home to live in is completely up to you. A buyers’ agent will often have unique insights and access to private house sales, which can help you make an informed decision.
An investment property can provide great leverage for further finance.
How to be a ‘rentvestor’
To help ensure your first step on the investment property ladder is successful, the Australian Securities and Investments Commission recommends:
- Purchase in areas that have shown stable growth
- Select a suburb that is attracts tenants, which can include being close to amenities and public transport
- Look for a location that has future plans for infrastructure and growth
- Try to avoid feeling pressured or rush into any decisions
- Be fully aware of the property you’re looking for, but remain flexible
There are constant changes to the property market and lending policies that you should keep on top of. By keeping up with any of the developments, it will allow you to ensure any decisions you make are informed.
If you’re unsure, then talk to a professional. A buyers’ agent can discuss your options with you and help you to understand the property market, in addition to assisting you throughout the whole process.