Why this property expert says your first home should be an investment property
By Sonia Taylor & SSB
With property prices at record highs, first home buyers are increasingly looking to investment properties as their initial purchase.
But considering government support is only available to those buying a first home to live in, going the investment property route can feel contrarian and even a little scary. Are you silly to be forfeiting First Home Owner grants and discounts on stamp duty?
Todd Sloan – award-winning real estate sales agent, professional renovator, host of property podcast 'Pizza & Property' and author of Australia's Home Buying Guide – doesn't think so. In fact, he sees it as a fantastic opportunity to switch your mindset and create the lifestyle you desire.
"If you're planning to go down this route it's not about government assistance – it's about freeing yourself from that. It's about creating your own financial independence," Sloan explains.
"Personally, you don't choose to invest because you want the government help. The real benefit to investing is being able to wave goodbye to the government and say 'I don't need you'."
Sloan shares his expert advice on things first home buyers should know about property investing.
You can enter the property market sooner with broader opportunities
"One of the big things rentvesting does is bring down the barrier to entry into the property market," says Sloan.
Rentvesting is a property strategy where you rent suited to the lifestyle you want and buy an investment property suited to your budget.
"Let's say you're in your early 20s and you're on $60- to $70,000 a year – you're not bringing home large amounts of money but you're on a respectable wage – you're going to be pretty capped as to what you're able to borrow. You might be able to borrow $3- to $500,000, but you're not going to be able to borrow $2 million any time soon," he explains.
This is where many first home buyers realise they won't be able to buy and live in a preferred area. They then face the dilemma: buy and live somewhere outside a city or change tack and go the investment route?
"[In this scenario], it's unlikely you'll be able to afford to enter markets in Sydney and Melbourne, but buying an investment can open up the doors to other opportunities in a lot of other areas around the country. This is known as 'borderless investing'."
Borderless investing means you can focus on the numbers, looking at growth rates and rental yields in more affordable areas in other states.
Buy with your head and crunch the numbers
Sloan originally went the traditional route and wishes he'd done things differently.
"Sometimes people look at what they might potentially miss out on when it comes to government grants, they will go down the path thinking they're being pushed towards buying something to live in and they don't want to lose their $10,000+ from the government. But looking back on my own story, I wish I started out rentvesting," Sloan explains.
He recalls "doing everything wrong": buying an apartment in Adelaide to "impress a girl," essentially buying with his heart instead of his head. Around the same time, his friend bought a "crappy" house in a suburban area on a decent-sized block.
"In the space of two years, despite us both spending similar amounts on our properties, his doubled in value and mine went up $10,000 because I bought an apartment," Sloan says.
"He then knocked that house down and built two properties. By the age he was 24, he owned one of the houses on that parcel outright, and had the other one producing an income. He went on to continuously build his portfolio because he made about $300,000 equity in two years."
"In hindsight, I should have just rented the apartment I wanted to live in, and bought houses that were going to be better for my finances long term."
To avoid regret, Sloan urges the importance of removing emotion and focusing on the numbers. The philosophy is simple. "Does it make you money?" Sloan asks.
"I like to compare it almost to shares," he explains. "People sometimes will invest more with their heart than their head, saying things like 'Oh, but it has a nice kitchen' or 'you can see a view'. But it doesn't matter."
"Imagine going to buy some shares and saying 'I'm going to buy this share because the CEO is really handsome' or 'their logo looks cool'. You wouldn't do it. But for some reason, people do that all the time with property. Look at the numbers."
Consider things like:
- Median prices
- 12 month growth and capital growth
- Rental yield
- Vacancy rates (are they increasing over time?)
- Proximity to amenities and infrastructure
- Proximity to transport
These will help you decide whether an area is good to invest in. This research should help you understand whether buying in a certain location will give you a good return on your investment.
You can have the lifestyle you want to enjoy
A major positive to buying an investment property is the opportunity it affords you to continue living in your desired areas and enjoy the associated lifestyle. This is the core philosophy behind rentvesting – renting where you want to live and owning where you can afford. The best of both worlds.
"Sometimes you can actually get a better lifestyle by buying an investment," says Sloan.
He uses property expert Chris Gray of Sky News' 'Your Property Empire' as an example.
"His portfolio is worth $20 million now. He rentvests, always. That man can very much afford to buy his own home, but he rents a $10 million house in Vaucluse in Sydney. Let's say that costs him $3,500 a week rent – if he were to buy that same property, it would cost him more like $10-12,000 a week."
For the rest of us without multimillion-dollar property portfolios, the same philosophy still applies.
"You might be able to live somewhere that is worth $1.5 million but costs $700 a week to rent," explains Sloan.
"But if you were to have a mortgage on a $1.5 million property, firstly, you probably wouldn't be able to get it and secondly, it would cost you $1,500 a week plus council rates and everything else. It adds up very quickly."
You can get in the market now and start building your property portfolio
It can take a long time to save for a property in an area you want to live. But borderless investing reduces that time frame significantly by giving you the option to buy in much more affordable states and areas.
Furthermore, without the need to 'own' the home, you can choose an interest-only loan – where you pay off the fees the lender charges you for loaning you the money as opposed to paying off both the interest and the property itself.
As a result, your repayments will be lower and your 'serviceability' for a second loan improves, giving you more opportunity to start building a portfolio.
"Serviceability is your ability to service a loan," explains Sloan. "That refers to how much money is coming in versus what that loan is going to cost you."
"The reason interest-only loans can be beneficial when you're trying to scale a portfolio is because it will help with your serviceability and what you're potentially able to borrow."
You'll still be able to access the equity made on the property and leverage that to buy your next investment.
"The equity you'd get is going to be one of two kinds: It's going to be either manufactured equity, that comes back to the renovation side where you've made the property better and it's now worth more; or market growth equity, which is where the market's done the heavy lifting for you and your $500,000 house is now worth $700,000," explains Sloan.
Choose a broker with investment experience
"You absolutely want to surround yourself with a professional team," says Sloan. This starts with the mortgage broker you choose to work with.
Sloan believes it's important to get a broker that understands investments and also brings personal experience to the table.
"One the best way to do find a broker that understands investments is to ask them about their own investments. If someone hasn't done any of it before, while they may be a great broker, they won't understand some of the nuances that come with the experience of being an investor."
Buyer's agents are 'worth their weight in gold'
Next up in your professional A-team is a great buyer's agent. Sloan is a fan of buyer's agents, especially if you're considering borderless investing where you've probably never been to the area you're considering buying in.
"Use a buyer's agent if you need to, because a good buyer's agent is worth their weight in gold and they're very under utilised," he says. "They'll have local knowledge and more importantly, local connections. Buyer's agents are also great for buying off-market."
A good buyer's agent will help you secure the right property at the best price, which involves having extensive knowledge of certain areas and being adept at working connections to negotiate the best deal.
"I think a lot of people should use them that don't," continues Sloan. "As someone who works in the sales side of things, you wouldn't expect me to say that."
"I get paid by the seller, make no mistake of that – but buyers, and especially first home buyers – will often go way past where they needed to go price-wise. I get a fantastic result for my seller, but I look at it and think, 'Mate, if you'd have just paid $10,000 for a buyer's agent you probably could've saved yourself $40,000."
In an instance where you've managed to find a property yourself, but still need professional support during negotiations, Sloan recommends property negotiation firm Hello Haus.
Don't skimp on a property manager
Owning an investment property means you'll become a landlord. But Sloan warns against trying to manage your property yourself – property managers are the way to go.
"I managed my first investment myself and I will never do that again. You 100 percent need a good property manager," he says.
"A great way to find a property manager that you're happy with is to go to an open, go to a few of them. Start chatting and see how you're treated as a potential tenant. It will give you a good idea of how they operate."
Always remember there is so much more involved in managing both tenants and a property than many people realise.
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