Real Estate Mistakes

A couple of years ago I hosted a 13-week prime time television show.

Don’t remember it?

There’s a reason for that … it was axed after the second episode.

I found out about its premature death via a text message (!) from the network. It started out promising — “We LOVE the show” — but went quickly downhill — “And we’ll play out the rest of the series on one of the digital channels … sometime.”

Television is a brutal game.

Then again, so is the property market, which is what the show was about.

If we’d made it to the later episodes, you would have seen a young couple making a life-changing mistake.

Spurred on by her father, the couple were half-heartedly bidding at an auction on an absolute dump of a joint. You could tell they didn’t want it, and you could also tell that they really couldn’t afford it.

And then the unthinkable happened … the bloke they were bidding against suddenly put his hands in his pockets and shook his head, and the auctioneer turned around and shouted “SOLD!” to the shellshocked couple.

Real Estate Mistakes

So let’s talk about the two biggest mistakes that first home buyers make.

The first mistake they make is they buy a home they can’t afford. They’re often spurred on by the ‘advice’ of family, friends, real estate agents and bank managers — none of whom have the responsibility of repaying the debt for the next 30 years.

That explains why I’m a stickler for saving up a 20 per cent deposit. Yes, a good deposit means that you don’t have to pay Lenders Mortgage Insurance (LMI), which can cost homeowners upwards of $13,000 simply to insure their bank. And yes, it also means you’ll be able to negotiate a cheaper rate with the bank. But the main payoff from saving a 20 per cent deposit is that you will have proven to yourself that you can handle a huge mortgage.

How long does it take to save up a 20 per cent deposit? Well, the average full-time pre-tax wage in Australia is $78,832 or $5,000 a month in the hand (excluding super). So a couple both earning average wages could live off one income (very frugally) and save a $100,000 deposit in 21 months.

The second mistake first home buyers make is … buying the wrong home.

It happens every weekend. Property prices in our capital cities are so insanely high that many young couples get worn down by being continually outbid on places. Some get so desperate they wind up behaving like a boozed-up bloke at a nightclub when last drinks are called … “You’re here; you’ll do”.

I get emails from people most weeks saying things like, “We know it’s tiny, a little dumpy, and totally not in the area we want to end up … but it’s only temporary.”

Haemorrhoids are temporary … a $650,000 home is anything but.

Trust me on this. The biggest purchase of your life shouldn’t be a chew-your-arm-off-in-the-morning moment. You should only buy a home that you can happily live in for at least 10 years.

Reason being, the costs of buying and selling (hello stamp duty and agent’s fees) mean that you will likely be out of pocket if you plan on selling within a few years. Also, the idea of turning your home into an investment property and upgrading is generally a bad idea from a tax (and investment) point of view.

The bottom line is that if you can’t commit to a 10-year timeframe then you’d be better off renting.

Yet that doesn’t mean you should hold off buying until you can afford to live in a trophy suburb. Far from it. When my wife and I went looking for our place in the country, we decided to rent there for a year. “You should rent in the country for a while… make sure she doesn’t miss her soy lattes”, my father wisely advised. It was good advice, given my wife, Liz, was brought up in North Fitzroy where even the ducks have their own bike lanes.

In that year of renting we got a feel for the joint. Not only did we become part of the community, we also got to study the market. I made friends with local real estate agents and even did a letterbox drop of places I wanted to buy.

In the end, the day we bought our home was one of the best days of my life. Not only could we afford it, but we knew it was the home we’d never leave (well, until it burnt to the ground). I actually sealed the deal by proposing to Liz on the verandah.

Okay, so you may not go that far, but I guarantee you that every first home buyer feels a sense of freedom from finally being able to delete the Real Estate app from their phone. Not only did Liz and I get our weekends back, but we now had a place to call home.

As my mum says, “Life doesn’t always turn out like it does on TV”. And thank God for that.

Tread Your Own Path!

Meet the pizza boy with 14 properties

“Former Domino’s pizza delivery boy who earned $10 an hour owns 14 renovated properties and is now semi-retired at the age of 28 (and he says you can do it too)” read the headline this week.

And all the renters groaned.

Okay, so paint me purple and call me Dorothy but after more than a decade of doing this, my bulldust detector starts beeping whenever a young buck appears in the press crowing about owning 14 properties and retiring before he's 30 ... especially when his version of ‘retirement’ is running a property investment advisory business. Or maybe I’m just a dinosaur?

Either way, this type of ‘property porn’ always sucks in the eyeballs -- and with good reason.

House prices are our Vietnam ... man.

The war between landlords and renters has been a bitter and bloody two-decade-long battle. Over that time home-ownership rates of people aged 25 to 45 years have been in free-fall. The result being that young people are now increasingly middle aged before they get the keys to their first home.

40 is the new 30

According to research last year from ING, the average age of a first home owner in Australia is 38.A generation ago you’d hope to own your own home outright by 40. Today you’re just getting started -- so you are basically the housing equivalent of Janet Jackson (who announced this week she’s pregnant ... at 50).

And of course the banks can, and do, discriminate against older first-time borrowers. It’s simple maths: if you’re 40 and you take out a 30-year loan, you’ll still be working at 70 … or the same age that Janet will be on her kid’s 21st birthday.

So is there a way to fast-track it into your first home?You betcha.Enter the bank of Mum and Dad.

The Quickest Way into Your First Home

Research released this week from Digital Finance Analytics (DFA) estimates that the number of first time home-buyers getting a leg-up from their parents has increased from just 3 per cent six years ago to more than half today.

In fact, DFA found that over two-thirds of older homeowners who refinanced homes worth more than $750,000 did so for reasons that included helping their kids.

And how much are they giving?

DFA states that at the start of 2010 parents were handing over $23,000 -- today it’s more than $80,000.

There are three ways parents give that gift.

They can guarantor their kids’ loan by taking out a second mortgage on their family home (and you’d be totally bonkers to do this).

They can offer a limited guarantee -- say for a 20 per cent deposit. This has a couple of advantages: the kids won’t have to pay expensive Lenders Mortgage Insurance (LMI), and the parents know exactly what they’re on the hook for. Yet in the words of Pauline, “I don’t like it.”

Or retired parents can take a lump sum out of their super and hand it over to their kids to use as a deposit. That’s the cleanest option, though I won’t be doing it for my children.

Why?

A couple of reasons:

First, if a bank that earns $10 billion a year in profits deems your kid a risk -- why should you stump up?

Second, mixing money with family is never a good idea.

For the parents -- many of who are trying to fund their own retirement -- it sets a dangerous and expensive precedent for other children.

And for the kids, having your parents as your financial backstop could invite ‘boundary issues’...

“You know your mother and I didn’t lay down carpet until 1982? We sat on a cement slab for the first four years of our marriage. It gave your mother piles yet she’s still around, isn’t she? But you kids have to have it all now, doncha, with your fancy carpet and curtains.”

And …

“Why are you going on an overseas holiday / buying that car / talking to me like that ... when we helped you out with your home? Is that all the thanks we get?”

Planning for the Worst, Hoping for the Best

I’ve been called everything under the sun for my steadfast advice to save up a 20 per cent deposit. People have accused me of being out of touch. Mortgage brokers disagree and say ‘just borrow 90% … or get an interest only loan’. Real estate agents say ‘house prices are going up faster than you can save’.

None of these arguments change my advice.

The fact is we live in a country with the highest household debt in the world -- at a time when interest rates are the lowest point in history. All I’m concerned with is keeping first home buyers safe. And the best way to prepare yourself for taking on a massive 30-year commitment is to cut the apron strings and spend three or four years saving like mad.And what about our property-mogul pizza delivery boy?

Well I called him up and had a chat with him this week -- and I’ve got to admit that I was impressed.

When he started out, he lived with his parents and saved up a 20 per cent deposit with a low-paid job (and they don’t come much more low paid than delivering plastic pizzas), and he bought a little unit in the boonies. In other words, he scrapped, saved, and made things happen.

And then … it seems the Capricciosa went to his head. He just kept on leveraging up. Now, owning 14 properties on a low income at a time when interest rates are at all time lows (and have to come up some time) is not something I’d do. Then again, what’s the worst that could happen? He could go bust and … end up delivering pizzas for a living.

Still, hats off to the kid -- he’s got more guts than a freshly delivered Domino’s MeatLovers.

Tread Your Own Path!

Scott

The Real Estate Mistakes Most First Home Buyers Are Making

“Aussie Dream is Dying” read a newspaper headline earlier in the week.

I happened to be reading the article as I was waiting for a coffee. So I turned to my hipster barista -- who was all beardy and tattooed and David Beckham-like -- and read him the following sentence:

“The Australian dream of homeownership will reach a tipping point, possibly as soon as next year, when fewer than half of all adults are expected to own a property.”

Barista: “Bang on, brother! Why would I bother spending my twenties saving for a deposit … it’s hopeless prices just keep going up. And what do you have to show for it -- nothing!”

Barefoot: “Well, nothing but … EIGHTY THOUSAND BUCKS.”

By my reckoning he’d put precisely as much thought into getting his neck tattoo as he had his long-term financial security. He’s not unique. After being Barefoot for 15-odd years, I’ve spoken to literally thousands of young people about making the biggest purchase of their lives -- here are the five biggest mistakes they make.

Mistake #1: They’ve given up

Ever wondered why news websites publish so many stories about an impending housing crash?

Because it’s clickbait to a generation that’s priced out of the market and have given up -- thinking their only hope for buying is a crash.

That’s a cop-out.You can’t plan your life around something you have no control over -- the only thing you can control is yourself, and your savings situation. The time to start preparing to seize opportunity is right now.

Brass tacks?The average full-time pre-tax wage in Australia is $75,000, or $4,800 a month in the hand. So, a couple both earning full-time wages could live off one income (very frugally) and save a $100,000 deposit in 21 months.

Still, your mind should be set on owning your home outright, rather than just limping over the line with a deposit. Think of it this way: saving a deposit is like the Socceroos beating Togo to qualify for the World Cup. It’s the beginning of the campaign, not the end.

Which leads me to the second mistake first homebuyers make.

Mistake #2: They buy a home when they can’t afford it

They mortgage themselves to the hilt.

There’s a reason Australia has the highest household debts on the planet: we borrow too much.

One rule that I’ve lived by, is to borrow less than the bank is willing to lend.

What comes after a bird makes its nest?

Babies … and Baby Bunting bills. And sleep deprivation. And, later, school fees.Professor Bob Cummins from Deakin University has found that financial stress has similar effects on the body as physical torture.

Is it any wonder that the median duration from wedding bells to divorce bills is 12 years?

The truth is that buying a home creates financial stress and insecurity -- until you manage to get ahead of your mortgage. As all homeowners know, running a home is expensive, costing up to 5 per cent of the purchase price each year.

And this is compounded if you take on more debt that you can afford.

Mistake #3: They buy an investment property first

Here’s the pitch that young couples give me: “We’ll buy an investment property to start off with, just to get our foot in the game, and then we’ll use the equity to buy our family home in five years.”

I’m yet to see this plan work (the only exception being couples who buy an investment property to eventually move into). Reason being, the upfront costs of owning a home, and the ongoing costs, take years to recoup.Bottom line: If you want a family home, save up and buy one.

Mistake #4: They don’t consider other options

My hipster mate had written off the entire housing market, because he wouldn’t live in a suburb whose cafes didn’t serve organic tofu and coconut water.

However, there are options if you really want to buy your own place. You can move to the city. Currently my prediction (made 12 months ago) of an apartment bloodbath in capital city CBDs by 2018 is going swimmingly, especially in Melbourne, with press reports of apartments being re-sold at discounts of up to 30 per cent from their original off-the-plan purchase price.

Some desperate developers are offering holidays to Fiji and Bali worth $5,000, for buying a $350,000 one bedroom apartment. (Is anyone that stupid? It reminds me of Homer Simpson buying a pirate pregnancy test just because it came with a free whistle.) Don’t trip to Bali or Fiji just yet. Prices are likely to go lower as the oversupply really kicks in.

Or you can move to a country area and have less of a mortgage, less stress, and more time to spend with their kids. That’s what I did.

Mistake #5: They don’t back themselves

Yes, we’re living through the greatest housing boom in history (according to The Economist).

However, there’s no reason you can’t get yourself a home if you want to -- even if you’re single.

When I met my wife, she’d bought a little apartment on her own (with an oven she found on the side of a road, no less!). No help from anyone -- just savings and a determination that a man didn’t need to be her financial plan. And the Barefoot community has heaps of single people on average incomes who’ve bought their (capital city) homes.

They’re everyday people, just like my hipster mate.

Tread Your Own Path!