Tuesday, 1st October 2019
By Steve Waters
Some decades back the Great Australian Dream had aspirational young Aussies following a familiar path when it came to property purchasing.
Mostly, after meeting their life partner and planning for family, it was time to get serious. Save hard for the deposit, go modest on your first purchase and don’t live beyond your means as you paid down the loan and built equity.
The idea was then to upgrade as needed in response to your growing brood or better job prospects – but keep building that home equity because it would become your retirement nest egg.
Nowadays, however, both the psychology of millennials and the opportunities afforded them have resulted in more choice. It’s no longer a case of trekking the same journey as your parents and grandparents, but rather having the autonomy to choose.
Now the question has become, “Should you buy a first home or a first investment property?”
The decision drivers
I can understand why young people are questioning their next move, because the elements that drive the decision are in a state of flux.
For example, in Sydney this cohort was dealing with extraordinary price growth. It was near impossible to save the deposit, qualify for a loan and successfully secure a home within reasonable distance of the city.
For those looking to acquire real estate, it was a recipe for rentvesting success. Buy what you could afford in the outer burbs and stick tenants in it while renting where you want to live instead.
More recently, however, the cost of renting has continued to rise while property prices have softened. In addition, financiers have eased up a little on the brakes.
Suddenly, home ownership is looking a little rosier.
Another driver is interest rates and their continued move down. Think back some years to when they were all over five per cent. It made sense to rent then because the cost of a mortgage was gouging into your monthly cash flow, so young Aussies would choose to save their dollars and live where they wanted by taking out a lease.
However, we are in a time where it’s been said. “If your mortgage doesn’t have a ‘4’ at the front, shift financiers.”
This has caused a rethink. Why tip rent money into someone else’s bank account when, for the same regular outlay, I could own my own asset?
In addition, the Great Australian Dream continues to survive. As a nation, we love home ownership. I accept it’s been delayed by many, but the desire hasn’t disappeared all together.
The other side of the current coin is the ongoing attraction of rentvesting. For those in their 20s, it’s a chance to get a property portfolio underway without having to sacrifice the lifestyle factors that make being young so much fun!
Even some young couples with kids are choosing to rentvest for the sake of their family. School zones are a great example – if you have aspirations toward a particular school district, but can’t afford to buy a home there, renting is the solution.
The answer as to whether it’s best to rent or buy first depends entirely on you doing some frank and fearless personal planning because ultimately there is no one-size-fits-all answer.
You must consider where life is likely to lead you over at least the next five years, and well into the future too.
For a start, form an opinion about what interest rates will be in the future and how well placed you’ll be to service a potential rise of a few percentage points over the next decade.
Factor in that you might also be having kids and be a single income household for a stretch. Alternatively, you might be on the fast track to a promotion and looking at a better pay rate.
These are just some of the considerations. Map out your plans so you can make an informed decision that’s right for you.
Two big traps
Now a word of warning – there are two hurdles that can see you miss opportunities and/or live in regret.
Firstly, there’s confirmation bias – an effect where you unconsciously seek out opinion and information that reinforces your already held beliefs. My advice is to break free of your pre-conceptions, because they can have you making incorrect decisions. Guidance from a professional property advisor is the best solution.
The second trap is indecision. Humans often tend to over analyse situations. We start having internalised arguments with ourselves while running multiple spreadsheets and doing constant financial modelling about which path to take. In the end, we procrastinate to the point of inaction. I’ve seen some investors miss their third local area price cycle, and they’re still wondering what to do.
So, as to whether its best you buy a home or invest comes down to personal choice – there will be a million arguments as to why you should rentvest and then another million as to whether you should by a home – but the real danger is doing nothing.
Remember, one inch of forward movement is better than a mile of sideward procrastination.