Buying Property For Dummies Read online

  Do you spend hours doing budgets to see how long you need to save up a deposit on your own home?

  Do you take your own lunch in to work and put the money saved into a special account called ‘home deposit’?

  Renting versus Buying

  Why not just continue to rent? After all, in lots of countries many people live in rental housing all their lives. In Denmark and Germany, for instance, less than half the population own their own homes. The rest rent for most of their lives — including well-off people with good jobs — and no-one thinks anything of it.

  The main reason renting isn’t as common in Australia as it is in many European countries is security of tenure. Being a tenant simply isn’t as secure here as in countries such as Germany and Denmark. Tenants in those countries enjoy many protections that make renting for the whole of their lives feasible. Governments are a major landlord, renting out good quality housing to middle-class people as well as to people on low incomes — and often for life. Even in private rental housing, the law strongly protects tenants’ interests — they have long leases and strict controls apply to how much landlords can raise rent.

  A neat little calculator on the website www.yourmortgage.com.au gives you a wealth comparison between renting and buying a home after seven years. The calculator makes some assumptions — such as that, if you rent, you invest the money that would otherwise have gone to repaying your mortgage, and that, if you buy, your home increases in value by 8 per cent a year.

  Liking the advantages of renting

  Renting a property has lots of advantages over buying one:

  Affordability: You can often afford to rent a bigger, more comfortable property in a nicer suburb than you could afford to buy yourself. (I lived for some years in quite up-market suburbs that I knew I couldn’t even dream of buying into myself.)

  Convenience: The other really big advantage is that a rental property isn’t your responsibility. If something breaks down or the property needs a paintjob, the problem belongs to the landlord, not to you.

  Flexibility: When you rent, you have flexibility to do what you want. If you want to up and leave after your lease runs out, nothing is tying you down.

  Financial benefits: Some people also argue that you may be better off financially by renting rather than buying. That argument presumes you invest the extra money you would have spent on buying and holding onto a property into something such as shares, or even an investment property. The money you spend covering the expenses on any investment, including interest payments, property management costs, repairs and maintenance, is tax deductible, whereas everything on your own home you pay for out of after-tax money.

  The catch when you invest the money you would otherwise spend on your own property is that you pay tax on the earnings and profit you make from an investment. You pay income tax on rental income or dividend income from shares. At the time of writing, you also pay capital gains tax on half your profits when you come to sell your shares or an investment property.

  Disliking the disadvantages of renting

  Renting can come with unpleasant side effects, and owning your own home has many advantages:

  Landlord involvement: In Australia, tenants are largely at the mercy of the goodness or otherwise of their landlords. Laws do exist to protect tenants being unfairly evicted and against outrageous rent rises or other harassment. But you can rarely get more than a 12-month lease, and landlords can ask tenants to leave the property as long as they give notice. (The number of days a landlord is required to give you as notice varies depending on the reason and by state or territory.) Some landlords can take weeks to respond to an urgent call for repairs to a heater or hot-water system. Others like to take advantage of a law that allows them to inspect their property every three months, a provision that can feel rather invasive if you consider the property as home.

  Money down the drain: You don’t see any benefit from the money you pay on rent month after month, year after year. Your landlord is the one who benefits if the property grows in value, and all while you help him pay off his investment. Consider that over ten years or so you may be paying several hundred thousand dollars into someone else’s pocket rather than paying off a property of your own that could be growing in value.

  Restrictions: You’re restricted by what you can and can’t do to a rental property. If you hate the wall colour, you may not be allowed to change it. Also, you may not be able to knock down walls, put up shelving or make other changes that can make the home more liveable.

  One landlord didn’t allow us to put any picture hangers on the wall, so for a year our walls were bare of the paintings and pictures we love.

  Uncertainty: Renting in Australia can be a rather precarious experience for another reason. A property you grow to love and care for as your own home can suddenly be sold from underneath you, leaving you out on the street looking for another roof over your head.

  Owning your own home has advantages

  When you weigh up the pros and cons of renting, you need also to consider the advantages of owning your own home:

  No-one can kick you out — as long as you make your monthly mortgage repayments.

  You can paint the walls any colour, hang pictures wherever you like, and knock down walls as you wish (subject to council approval, of course).

  If as a result of your home ‘improvements’ the property goes up in value, you’re the one who benefits when it sells — not your landlord.

  Your mortgage repayments are like forced savings into a growth asset that you can sell at a profit or rent out one day.

  When your property goes up in value, you can borrow against it to renovate or to invest in something else — like another investment property or shares.

  Inflation has a positive effect when you’re a home owner, increasing the value of your home and decreasing proportionately your interest payments to your income. Rent, on the other hand, tends to rise with inflation.

  When you retire you have a home to live in rent-free.

  If when you retire you need extra money, you can sell your home if necessary and buy something smaller and cheaper — and keep the change.

  You don’t pay capital gains tax on the profit from selling your home.

  When you retire, the value of your home isn’t counted towards your assets when you’re being assessed for your eligibility to receive the pension.

  Understanding How Your Home Is an Investment

  Buying a property isn’t like buying a car or spending money on a big overseas trip. The value of a car starts falling the moment you drive it out of the car saleyard, and the money you spend on an overseas trip is gone forever (although travel has plenty of other invaluable benefits). But the money you spend on a well-chosen property is likely to increase in value over the years.

  Being at the mercy of the landlord’s investment

  We had a wonderful landlord for our lovely rental home for some years. He inspected the house just once in the four years we lived there, only too delighted that we took care of the house and the garden as though it were our own. We had started saving, aiming to buy our own home six months down the track. About a month into our savings program, our landlord called to tell us apologetically that he had to sell the property. We had 90 days to find and move into a new home, which upset our savings program dramatically. In the end, we found a home to buy, but I can remember vividly the sense of helplessness at being forced out of the rental property we thought of as our home.

  Property is a growth asset — the longer you hold on to it, the more it grows in value. The money you spend on buying a property now may double in value if you come to sell it in ten years. (This prediction is based on the property price growing by an average of 7.5 per cent per year — a fairly conservative assumption. According to a report prepared for the Australian Securities Exchange by Russell Investment Group, residential property prices nationally went up on average by around 9.8 per cent per year in the 20 years to 2009.) Your property
can grow in value even more if you buy in a high-growth area, or if you add value by improving the property — putting in a garden, redecorating, renovating (see Chapter 7) or extending.

  Having the flexibility to improve your home makes it an important investment. In fact, in Australia, a good argument exists for regarding your home as a core investment, around which you can build your wealth over the long term. You have the following options for making money from the value of your home:

  You can borrow against the value in your home to buy other investments — another investment property or a portfolio of shares.

  You can sell your home to buy a bigger home in a better suburb that may increase even more quickly in value.

  When you retire, you can sell your home, buy a smaller one or one in a cheaper area and live off the change.

  You can take out a reverse mortgage against your home’s value. This option gives you a lump sum or a regular income that you (or your children) only have to pay back (with interest) when you sell your home.

  Owning Your Home Is Tax-Friendly

  A good reason the family home can be your platform for building your long-term wealth is that in Australia the government regards the family home very favourably when it comes to the tax system and to the social security system.

  When you sell your home, the tax office doesn’t charge capital gains tax against the profits you make on the sale. You can use that money to upgrade to a bigger or better family home, sell that to buy another, and so on until you retire and sell to buy a smaller, cheaper home. You finally get to live on the change, without ever having to pay a cent of tax on the profits.

  Similarly, our retirement system assumes that you own your own home when you retire and recognises this by not counting the family home as an asset when assessing your eligibility for a government pension. This approach by government may not sound very important now if you’re still young but, when you retire, getting even a small amount of pension means you can get concessions on things like your pharmaceutical bills, your council rates and other bills.

  By not owning a home when you retire, you actually get penalised twice. Not only do you have to pay rent but, also, the government counts the money invested anywhere else, such as in shares or investment property, as an asset so that you may miss out on the benefits home owners may be receiving. (Non–home owners are allowed a higher amount of assets before they start losing their pension, but the extra allowed is a little over $130,000 — not quite the value of the average family home.)

  The Government’s Leg-Up — the First Home Owner Grant

  State and federal governments recognise the plight of first home buyers and so offer a small (some would say ‘token’) handout of a few thousand dollars towards the purchase of your first home. The First Home Owner Grant (FHOG) was set up in 2000 specifically to compensate first home owners for the effect of GST (goods and services tax) and offers first home buyers a cash amount of $7,000 that must be spent on the purchase of your home.

  The FHOG is paid by each state and territory government — each has particular rules and idiosyncrasies that change from time to time. Some states, for instance, offer a further first home buyer’s bonus or rebate to help first home buyers with the cost of stamp duty (a state tax on the purchase price of a property). In most states and territories, concessional stamp duty rates are available on property purchases up to a certain price. Some states offer the concessions to first home buyers with families, or those with concession cards. (I go into more detail on stamp duty concessions in Chapter 2.)

  In Victoria and South Australia, the focus is more on promoting the purchase of new homes (see Chapters 8 and 9 for more on buying or building a new home). These two states offer the following, on top of the $7,000 FHOG:

  South Australia offers an additional $8,000 First Home Bonus Grant if you buy or build a new home.

  Victoria offers an additional $13,000 for its First Home Buyer Bonus if you buy or build a new home. Plus, if you buy or build a new home in a regional area in Victoria, you not only can get the additional $13,000 First Home Buyer Bonus but also a further $6,500, because it’s in a regional municipality.

  In Western Australia, first home buyers can apply for a Home Buyers Assistance Account, which offers up to $2,000 for the incidental expenses of buying an established or partially built home valued at up to $400,000 through a licensed real estate agent.

  Go to fhogOnline at www.firsthome.gov.au and click on your state or territory for up-to-date information on the First Home Owner Grant and your eligibility.

  If you’re counting on the First Home Owner Grant to help you to pay for the property at settlement, you need to apply through an ‘approved lender’ (ordinarily your lender). Otherwise, you receive FHOG after settlement. (I go into more detail on the settlement process in Chapter 13.)

  Getting Ready to Scrimp and Save

  If you’ve already started to look around the suburbs for a home to call your own, you no doubt have come up against the harsh reality that properties are expensive. Properties are frighteningly expensive. Even with a supposed slowdown in property price growth in late 2010, property prices are still outrageously high for the first home buyer.

  High property prices make coming up with the money to buy your first home a feat that can take up to a few years. You need to go into that feat with a battle plan (as well as lots of determination). (Chapter 2 gives you lots of ideas as to how you can achieve that seemingly impossible goal.) You probably need to cut back on expenses — forgoing your spring wardrobe this year or even going back home to stay with the parents for a while. You may have to find an extra source of income. If you’re going it alone, joining forces with others to be able to afford something more to your liking may be a possibility. You may also have to scale down your expectations a little.

  The most likely scenario is that you have to think a bit laterally. For many first home buyers, buying a home involves scaling down your choice a little — at least for a while. You may need to consider something a bit smaller than you’d prefer, or something that your mother may quietly regard as something of a dump — albeit one with renovation potential. (Turn to Chapter 7 for lots of ideas on how to go about renovating a home in a way that adds value instead of just costing you money.) Alternatively, you can consider an area previously off your radar. First home buyers have had to go outside the square (or outside the obviously desirable part of town) since people started building their own houses. If you choose well, you may find you benefit from being a pioneer in one of these up-and-coming areas. (See Chapter 3 for advice on the trade-offs between property and position, as well as hints on how to identify an area about to boom.)

  Assessing your commitment

  Some years ago, my parents suggested that my husband and I would be better off putting the money we were planning to spend on an overseas trip towards a deposit on a home instead. But we simply weren’t ready to make that commitment then. Given how much we had to tighten our belts in the first few years after we bought our first home, I’m glad we had that last splurge on an overseas trip. It sustained us for the years we had to cut back on our spending just to cover the mortgage payments.

  Agonising Over the Time to Buy

  First home buyers can spend a lot of time mulling over when is a good time to buy. But while you probably should avoid buying when the news is full of stories of how the property boom has become unsustainable, an obviously perfect time to buy a home doesn’t knock on your door either.

  When property prices are rising, you can feel like everything is priced out of your reach. But if you wait another few months, hoping the bubble might pop, you may end up having to pay another 25 per cent due to prices rising still higher. When property prices are flat, you face the chance that prices are even lower in six months’ time. Even when prices are falling, you have no absolutely certain way of telling whether they’re at the bottom.

  The fact is that if you’re buying a home to live in and you’re pl
anning to hold onto your property for the long term — at least five years — when you buy doesn’t really matter. (If you’re buying for investment purposes, you should go in with at least a five-year outlook as well.)

  Historically, property prices tend to go up — over the long term. But over the short term they can go sidewards and even decline for periods. During the slowdown that followed the global financial crisis, property prices fell in some areas by as much as 20 per cent. But unlike individual shares, for instance — the value of which can reduce to nothing — over the longer term, property generally tends to hold its value rather than fall.

  Waiting for the property bell to go ‘ding-a-ling’