17/03/2008
Q. I am 34 and I’ve had bad credit. I now have a great job that is paying awesome money, I’ve paid all my debts and I’m looking to start purchasing some property.
1. Do I start with the First Home Owner Grant and purchase something to live in?
2. Do I buy an investment and just stay renting with my mates (cheap rent)?
3. How do I go about buying off-the-plan?
A. You have certainly asked a question with a lot of diversity, which is great because it means that you are seriously considering your future. I meet people every day who are in their 40s and 50s who wish they had started earlier.
As long as you are not an undischarged bankrupt, any bad credit references you have on your credit listing may be able to be explained to any lender, and it is possible that if approached correctly, a bank may lend to you now. You will, of course, need a deposit of at least 5%, and the First Home Owner Grant can help you with costs.
Since I don’t know the area in which you would like to live, answering your second question is harder as I don’t know the price of the market you may want to enter. For some people, owning their own home is paramount from a personal point of view, and the cost to do so is worth it. Others do not care so much, and do not mind renting forever. In most markets today, rents are around 4% of the property’s value (so, for example, a $200,000 property would rent for $8,000 a year), while interest rates are around 8% ($16,000 for the $200,000) and you also have to pay costs of around 2%. Those who elect to buy rather than rent do so because they want a place of their own. The payoff for spending a lot more on loan interest than you would on rent is that you get to own the rising equity.
If you don’t have a personal need to live in a property you own you can rent somewhere else but still get into the market as a landlord. This way, not only do you still get to own that rising equity, you have a tenant and tax breaks to help you manage the costs. It comes down to whether the margin between the income and the expenses on an investment property (after your tax breaks), plus the rent you pay elsewhere, is less than what you would pay if you owner-occupied, or more. The answer to this question varies according to the rent you pay, the price you pay for the property and the rent and tax breaks it can achieve.
The good news is that you can own an investment property and won’t necessarily lose your First Home Owner Grant to later buy your first owner-occupied home, if you change your mind later. See www.firsthome.gov.au for eligibility in your state.
As for off-the-plan, be very careful. In the old days, developers pre-sold a few properties at today’s prices in order to get the funds needed from the bank to build – the promises of future buyers to purchase were like a guarantee for the bank. These days developers try to pre-sell off-the-plan at anticipated future prices, which may or may not be reached. There is no real benefit to you, you have to wait a long time to begin earning income, and if the market falters you may actually pay far too much for the property. You cannot pull out of the sale if this happens. I suggest, especially for new investors, that off-the-plan is far too risky. Stick with properties that already exist on which you can do the right kind of research and be sure of what you’re getting.
The experts
Margaret Lomasis the founder of Destiny Financial Solutions, and is a qualified financial advisor and the author of five bestselling property investment books. She is the 2006 Telstra NSW Businesswoman of the Year. www.destiny.net.au
Jonathan Beaumanis the principal of Complete Building Advisory Service, and has been working within the NSW building industry, including the Building Services Corporation, the Office of Fair Trading, for around 15 years. www.cbas.com.au
