In recent years there has been much doom and gloom surrounding millennials’ prospects of getting a foothold in the property market. Circumstances as diverse as rising property prices, and Generation Y’s love for the humble smashed avo breakfast have contributed to despair about millennial investment prospects. However, the good news is entering the market isn’t as difficult as media reports make out – we spoke to millennial investors to find out how it can be done.
Andrew Courtney is Director and Principal Advisor at Plenitude Wealth and owns three investment properties. His personal investment philosophy is fairly straightforward. “Essentially the way we built up our property portfolio is by looking for properties we can add value to…so we don’t necessarily have to save big dollars for that next deposit.”
The strategy involves intensively researching for good value property in the right suburb, renovating it, renting it out, and then refinancing to make the next property purchase. “The idea is to do enough research on suburbs, so that we know exactly what a good price is and we’re buying with confidence,” says Andrew.
Dr Asti Mardiasmo is national research manager at PRDnationwide. Her job is to intensively compile research and data on the property market. It’s no surprise that she agrees research is key when choosing where to buy property. In fact, when she bought her first home, Asti went to 38 property inspections. “I made an Excel spreadsheet of every single address. My spreadsheet had the address, suburb, how far away from the CBD… bedrooms, bathrooms, the capital growth and what other infrastructure or development is about to happen in the area.”
Given this was before she had her current job, and the rich access to data that comes with being a property researcher, Asti would call up local councils to find potential commercial and residential developments planned for the area, which allowed her to determine whether growth was sustainable.
WHAT ARE THE FIRST STEPS?
In short, research, research, research. For technology savvy millennials, this is easier than ever before. Sites like realestate.com.au and Domain allow you to compare property prices easily, meaning you can easily determine market value for given suburbs.
There’s a wealth of more detailed information out there, too. RP Data, for instance, releases monthly updates on the state of the property markets. These can generally be accessed via real estate agents. “Understanding the suburbs is like understanding the ASX,” says Andrew. “There are some good ones and some bad ones so the key is to stay away from the lemons. “Typically the first thing to do is to understand what strategy you’re going to use. If it’s a buy-and-hold there are suburbs that are good for that, if it’s a buy-and-renovate there are [different] suburbs that are good for that.”
Asti encourages young investors to ignore the glittering temptation of double digit growth in the inner suburbs and look at the outskirts of Melbourne.
“Go to places where it’s more affordable. Yes, the growth might be 1 or 2%, but it is still positive growth. Make sure that in those areas there is going to be a lot of commercial infrastructure, a lot of development happening so the 1 or 2% that you’re currently seeing is sustainable, and might increase to the 3, 4 or 5% growth in future years.”
Andrew advises millennials to ensure they have a sensible exit strategy in case they find they have dived in too deep. “One of the traps for young buyers is they get a bit excited and forget that if things go pear shape you’ve got to have plans b, c, and d,” he says. “A lot of millennials tend to go for the maximum they can go for.”
He suggests investors leave some wriggle room: “it slows down your portfolio you’re building if you tap out, so narrow it within your means. “In terms of the deposit, you don’t need to save up 20%. You can save yourself five to ten years worth of savings by putting down a 5% deposit. Sometimes it’s ok to not pay down the debt and to pay interest only.”
His logic is sound. If you’ve bought a house as an investment, and have done your research, you should expect the value of the property to keep increasing. So why pay down debt unnecessarily when you’re going to profit from the property price increase anyway?
MAKE A COMPELLING CASE FOR THE BANK
Andrew says millennials should treat their finances like a business, keeping track of their spending with a balance sheet. “The key with property investing is all about building a viable story for the banks so they give you money”, says Andrew.
This means balancing debt and income and ensuring that you’ve always got a surplus.If you do get stuck though, it’s important to get sensible advice as soon as possible. “There’s enough information out there on Google but the biggest issue we have as millennials is who the hell do you trust? So if you’re looking for someone to help you I’d suggest asking about what they do. Do they actually invest themselves, do they have a portfolio themselves? And see how they explain it to you. If they can’t explain it, then I’m sorry, they can’t help you.”
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Andrew Courtney’s advice millennials may want to know as they try to get into the property market:
– You don’t have to buy your dream home straight away
– You don’t have to save up for a 20% deposit before you get in the market
– You can acquire a house with as little as 5% deposit.
– Lenders Mortgage Insurance (LMI) may be a necessary evil to lock in the capital growth in a moving market
– Buying new may not be the best way to get in as most new developments are priced at a premium and limit the growth you’re going to achieve in the short to medium term
– If you’re lucky enough to have parents who are happy to help you acquire your home, you can use them as guarantors
– You can do joint ventures with friends/family to acquire your first property if your serviceability and deposits are low
– Buying out in the suburbs may be the best way to start your portfolio
– Buying for the wow factor of having your own apartment may be great for the ego but not so great for the balance sheet
– Know your target suburb in and out and understand the drivers for capital growth