Having bought property back in 2001 at the age of 19, Lacey Filipich gets asked the same question at least once a month: Could a 19 year old do the same today? Her short answer is: yes, they could! The far more important question is: if they could, should they? Well, that’s a slightly longer answer. This month we have the pleasure of sharing Lacey’s insights into how young people still have a chance to get a foot into the property market.
How teens can buy property in 2019.
In the media, we are constantly told the property market is too expensive for young people. The Great Australian Dream of owning your own home is apparently becoming ever more elusive. For this reason, most people assume that my first property purchase in 2001 was only possible because of favourable prices, lax banking standards, family support and luck. Not so. Let’s dispel some myths.
Myth 1: Property prices are too high now.
This is a problem of many variables, but most notably location. Would I say property prices in Sydney and Melbourne are too high now? No dispute there. But certainly not EVERYWHERE. For example, Perth is showing signs of affordable housing coming into the market now, and it’s only likely to get better for prospective buyers in the next year. Even Sydney and Melbourne have pockets of affordable housing, and they certainly have distressed sellers – those with deceased estates or mortgagee sales.
Yes, I got a good deal on the property I bought. But it wasn’t just the general housing market conditions that created the opportunity. Getting that deal was the result of nine months of searching, being turned down several times, then finally finding a seller desperate enough to accept a low offer. It was a really ugly apartment too – brown walls, brown carpet, brown ceiling. Definitely a ‘fixer-upper’. It had been on the market for over six months with no offers. Ripe for the picking to the trained eye.
Can all of this still be done today? Absolutely. You might not get the same property for $103k, but you may be able to negotiate something similar for $280k when $320-350k is the norm. A discount like that could make the property positively geared within two years.
You make your money when you buy, not when you sell. It’s worth your time and effort to negotiate hard on a property with little competition and have the discipline to walk away if you don’t get it for the price you want.
Myth 2: It’s too hard to get a loan these days.
No. No. No. Banks make money by lending. They WANT to lend money for property.
They don’t want to lend to people who can’t afford the loan and/or for properties that are ridiculously overpriced. There’s too much risk in that game, and we’ve all seen how the story ends (remember the Global Financial Crisis?)
If you’re struggling to get approval for a mortgage, it’s up to you to find out why:
- Is your cash flow too low and/or unpredictable?
- Are you working for yourself and unable to show sustainable income?
- Is the equity on your balance sheet too low?
- Are you trying to buy something you can’t afford?
- Are you trying to pay too much for a property?
At the time I was somewhat incredulous that a bank loaned a 19 year old student studying full-time at university $75,000 without requiring a guarantor. However, I presented a compelling case:
- I had a meaty deposit,
- I timed the loan application so I had two payslips showing a full-time wage (thank you vacation work!), and the bank was aware I was getting at least a 20% discount on the value of the property.
Is the same possible today? Yes. It’s even more likely to work out if you buy an investment property rather than your own home. The cash flow from an investment counts in your bank application (minus costs of course). A positively geared property is much more likely to get approved.
Myth 3: Mum and Dad have to pay for your home.
To be clear, I think to buy a property in your teens without support from your family would be extremely difficult. Buying property is often stressful and intimidating for the first-timer. But that’s not to say:
you must have a guarantor, or
you can’t afford to have a mortgage unless your parents pay it for you.
Even if you don’t have the cash flow to cover the mortgage yourself, there is an alternative solution. It’s the one I used, and I’d certainly advocate that young people use it too:
Rent out rooms. Think of it as crowdsourcing your mortgage payment. Treat the first property you buy as an investment, even if you’re going to live in it. Make sure you can rent out a room or two to willing students, then you’ll never have to rely on Mum and Dad to feed you or cover your shortfall again.
Myth 4: It’s all about luck.
Really? So’s everything in one way or another. If you have a roof over your head, food in your belly, shoes on your feet and you’re not afflicted with a debilitating disease, congratulations – you won the Ovarian Lottery and were born into privilege. You’re ‘luckier’ than 90% of the world’s population.
I think what we call ‘luck’ in property is what happens when you work hard enough that you can spot an opportunity, then you grab the opportunity when it’s there for the taking. We’re too quick to call poor preparation and hesitation ‘bad luck’. Be honest with yourself: have you learned enough to be able to spot a property opportunity? And if one appeared, would you have done enough preparation that you can act on that opportunity quickly before it disappears?
What should teens that want to buy property do?
Now that we’ve dealt with those myths, what should an aspirational teenage property buyer do right now?
1. Save. As much as you can. 50% of your after-tax income would be good. A healthy deposit is important.
2. Work out your budget. Calculate your cash flow and equity to determine what would be reasonable (use 80% of likely rental income for cash flow). Not sure how? Google it or do our course.
3. Learn about property. Study the areas you’re interested in. Go to home opens and auctions. Check out rental prices. Befriend an agent or two and let them know what you’re looking for.
4. Create your ‘must-have’ and ‘nice to have’ list. What will be non-negotiable (e.g. proximity to transport/shops/schools, price, land size)? What would you like to have (e.g. car parking, security, a view)?
5. Create a risk plan. What will you do if you lose your job? If you can’t rent out a room for three months? If there’s a leak in your shower? In pretty much all cases, my idea of a risk plan is having a comfortable buffer of savings to cover the mortgage and other expenses in an emergency.
Now for the most important question. If you could, should you?
Yes, this really is the million dollar question. Quite literally – your answer could make you a millionaire in a decade’s time, possibly sooner.
Let’s say you’re 19 years old right now and you are ready to buy a property. You have your deposit, the bank is satisfied that you’re a good bet and you’ve found the right place.
You’ve negotiated a price lower than the property value (hopefully substantially lower), you’ve got a robust plan to crowdsource your mortgage (a.k.a. take on a boarder or two) and a buffer of savings to handle any emergencies.
Should you sign on the bottom line? I think so, if you:
- are going to treat is as an investment, not letting emotions dictate your price, and not over-invest in renovations or decorating,
- can commit to owning the property for at least 10 years,
- are confident you can handle the debt (i.e. you have a decent, secure job and you’ve calculated your ability to handle repayments based on 7%+ interest rates), and
- will put in the time and effort to monitor the property – whether that’s hiring a gun property manager, or doing all the repairs yourself, or simply watching what’s happening with property in your area to keep an eye on your yield and return on investment.
There are, and always will be, great opportunities to invest in property. Interest rates are favourable right now. A savvy 19 year old could do what I did 15 years ago and find themselves in a similar position to me in their mid 30’s – living off their passive income. I hope this becomes the new Great Australian Dream.
What would I tell myself to do today if I was 19 again?
No doubt about it – property has mostly been good to me. Paying down my debts means I now enjoy a passive income, so I can stay home with my gorgeous kids if I want to.
The question I personally find even more interesting than ‘should you?’ is: could I have done better? Perhaps.
When I started to think about investing in property, I’d read ‘Rich Dad, Poor Dad’, attended seminars and focused solely on property for a couple of years. I had a managed fund, but I hadn’t really paid attention to it.
It’s only in recent years that I’ve learned about shares, options, dividend reinvestment, indices and exchange-traded funds. The wonderful thing about all these investment types is that they don’t require debt. That makes them much more accessible for young people.
I think if I had the money for a deposit on a property home now and I was 19 years old, I would be weighing up the property against buying shares in an exchange-traded fund, with a dividend reinvestment plan. The latter has the advantage of not requiring debt.
Then again, that first property made my future property purchases possible…
It’s a tough call.
One thing is certain – I’d be investing as soon as I could. Time is the great equalizer when it comes to money. That’s why Einstein called compound interest the most powerful force in the universe. So if you’re young, make it your priority to start investing NOW to harness that powerful force for yourself.
Thank you to our guest contributor Lacey Filipich. Lacey is the co-founder and director of Money School and Maker Kids. She helps parents raise financially savvy kids and adults get on top of their finances.
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