Whether this is your first ever property or you’re considering adding an investment unit to your portfolio, there are a few things you need to know.
It won’t be news to you but last month, data from Domain showed house prices have surged by an average of 10% across the capital cities in the past year. Canberra led the way with a whopping 19.5%, with Hobart (15.9%), Adelaide (10.4%) and Sydney (12.6%) close behind. Bulli, in Wollongong, shot up by 34.1% over the year, and Byron Bay increased by 31.2% in the same timeframe.
That doesn’t mean you can’t afford to buy. What it does mean is that you need to be smarter about where you’re buying.
Your money will go further if you look at areas that will increase in value in the next few years, rather than places that have already increased. Look at where big money is being invested in infrastructure – think: new train lines, hospitals, schools, malls – or where major events are taking place, like the Sydney Olympics in 2000.
And there is help out there for first time buyers – particularly young couples and singles.
Rosie*, 32, has been saving for several years to buy a PPOR (principal place of residence) in Sydney and was frustrated at the way property prices were growing faster than her savings.
“Increasingly I was looking at homes that compromised on everything I wanted and were still out of my budget,” she says.
“I’d never wanted to own an investment property, but it started to feel like the only way to get a foot in the door. I started looking in the north of Brisbane – there’s a lot going on up there at the moment so it’s likely to be a high-growth area – and found that a little way out of the city, there were a few things in my budget.”
Units in in-demand areas tend to be more affordable than houses or townhouses, and will still usually provide a stable rental income, but they may come at the cost of capital gains. Across the country, units are underperforming compared with houses. So while they’re a good stepping stone into the market, if you can afford a house, you’re likely to see its value (and therefore your equity) increase faster.
Rosie recently put in an offer on a new-build townhouse in Moreton Bay, in Queensland. She won’t be earning an income from her property, but it also won’t cost her a lot to pay the mortgage and she’s confident that the house will increase in value, giving her a leg up for her PPOR later.
“The rent and the tax benefits of having a rental just about cover the mortgage and the property manager’s fees,” she says. “I got an okay interest rate, though not as good as if I was living in it. Caboolture has really low vacancy rates at the moment and I’m expecting around 5 to 8% capital growth each year in that area – though there’s no guarantee!
“I’m nervous about all the things that can go wrong with a house, but I’ve left myself a buffer in case I have trouble getting tenants or something. It’s just good to finally be getting on the ladder.”
Putting down a 20%-plus deposit will get you a better interest rate, but you can also consider a smaller deposit upfront and the rest of your money in an offset account to give you more flexibility.
Keep in mind that if you’re buying as an investment property, you won’t be eligible for any of the government’s first home buyer benefits, but make sure you know what you can claim as a deduction come tax time.
The most important thing is to do your research. Get recommendations for mortgage brokers, solicitors and property managers, and interview them carefully. Read everything you can about the area you’re interested in, go for a walk through it if you can. Look at all the properties in the area available for sale and what similar properties are asking for rent to get an idea of what your return might be (expect between 2% and 9%), then go and inspect properties as thoroughly as if you were going to live there yourself.