Buying Property For Dummies Read online

  Doing it solo

  Part of the reason house prices have risen so much in the past decade or so is because many homes are now bought by two-income households. If you’re a single person, you may find covering the costs of buying on your own very difficult. So what can you do?

  The most obvious solution is to buy at a lower price point. You may have to think long term, aiming to buy a unit or an apartment first, and use it as a springboard to buy something bigger down the track. Even with the price rises of the past few years, finding a unit for $300,000 or so in the major capital cities, or a small two-bedroom cottage elsewhere is possible.

  If you buy well, when you choose to sell up, you can expect good demand from buyers in the same position as you were in when you first bought. Alternatively, you could use this property as the beginning of an investment property portfolio and rent it out. Either way, your position allows you to borrow against the equity you’ve built up (through your repayments and the increase in the property’s market value) and use it as a deposit for your next bigger and better property.

  Getting together with friends

  An increasing number of single people are getting together with friends, siblings or other relatives rather than a life partner to buy a property. There’s nothing to stop you doing this, and it can be a great way of increasing your buying power, as long as you’re aware of a few of the pitfalls of doing so.

  In terms of finance, lenders treat friends or relatives purchasing together like any other borrower. All the buyers’ names are on the title deed and on the mortgage and all parties are liable for the loan repayments.

  When assessing how much you can borrow, most lenders take your combined incomes into account. However, they usually calculate your living expenses individually, as distinct from a couple that has shared expenses. This approach can have an impact on how much you can borrow. For example, a single adult’s living expenses might be calculated at $2,000 per month, and two individual adults at $4,000 per month. The living expenses of a couple, on the other hand, might be calculated at $3,000 per month.

  Legally, a purchase made by friends is treated differently from a purchase made by a couple. When a couple purchases a home, they’re defined as ‘joint tenants’ and are said to have an equal interest in the whole of the property. Friends or relatives buying a property together are defined as ‘tenants in common’, and have shares in the property depending on how much they have contributed to the purchase. For instance, if three people are purchasing the property, one person might contribute half the purchase cost, and the other two might contribute a quarter of the cost each.

  The consequences of such joint purchases are seen when the property is sold, or when one party moves on or dies. In a joint tenancy, if one partner dies, the ownership of the house automatically goes to the other partner. But in a ‘tenants in common’ arrangement each party can pass on their share of the property to someone else through their will; they can also sell their share of the property to someone else.

  If you’re going to enter into a joint-purchase arrangement with friends, you need to make sure your legal agreement is drawn up very carefully. Some things your lawyer should consider are

  What happens if one party wants to sell the property?

  What happens if one party wants to sell just their own share of the property?

  What happens if one party is unable to meet the loan repayments?

  How is the property to be valued if one party wants to hold on to the property and the others want to sell?

  Asking the parents to help out

  A mark of how difficult it is to buy a house these days is that parents are so keen to help out . . . or perhaps this option is one of the few ways they can finally get the kids off their hands!

  Lump sums to help with the deposit

  Many parents or grandparents offer their children or grandchildren a lump sum gift towards a deposit. That can be a huge help, particularly if the amount increases your deposit beyond the magic 20 per cent that eliminates your need to pay for expensive mortgage insurance. Such a gift doesn’t help with your savings history, though, if you’re applying for a regular loan. For that, you usually need to be able to show that you can save up at least 10 per cent of the deposit yourself.

  However, lenders have come around to the idea that even though you may not have a savings record now, or even have the income to service a loan, your family may be in a position to help you out, especially if they have built up equity in their own homes over the years.

  Lenders like St.George Bank and the Commonwealth Bank now offer products that allow a member of your family to take out a mortgage on their own property and give you the money towards the purchase of your property. You and your family decide whether the money is a deferred loan or a gift.

  Second mortgages

  Another option is that a family member takes out a second mortgage on the property you’re buying to help you meet the repayments. Under this option, the family member gives you the money to put towards the property purchase. They’re then responsible for the amount of their individual loan. You can arrange it so that at a point down the track, you buy out this family member, giving them an amount that reflects any increase in the value of their portion of the loan.

  Properties owned by your parents

  Many parents buy a property for their children to live in until they can afford to buy it from their parents. The children may pay their parents rent, perhaps at lower than the market rate. This approach can be a way in which parents can ensure their children are safely housed in the future, without rent ‘going down the drain’. However, you must remember that when the property does finally change hands, you’re going to need to pay your parents a fair market price (one that is comparable with other similar sales in the area).

  If your parents are planning to buy a property to sell to you some time in the future, you should be aware that, depending on how much the value of the property has risen, your parents could be up for a hefty capital gains tax bill when they eventually sell on to you.

  Investing in shares and managed funds

  One other option for raising money to buy a home — although you need to be aware that this one is risky if you have a short time frame to work with — is to invest your money in a potentially high-growth asset, such as shares, either directly or through a managed fund, rather than just putting the money in the bank.

  Most fund managers that invest in Australian or overseas shares recommend that you hold the managed fund for at least five years and preferably seven years: This advice is sound because, unlike a term deposit or an online savings account, the returns on the sharemarket aren’t guaranteed. The sharemarket can go up 30 per cent one year and drop 20 per cent the next. Such a roller-coaster isn’t so much of a problem if you have enough time to ride out the ups and downs, but predicting whether the sharemarket is likely to go up this year or down is almost impossible. If you need to use the money for a deposit in a year the sharemarket drops, you may not benefit at all.

  Managed funds or shares are best used if you have at least a five-year time frame to save up for your home deposit. If you don’t have a great deal of investment experience or money to start off with, a good low-cost option is to use an index fund that invests in the whole sharemarket rather than pay a professional fund manager to pick a few potential winners. Most funds allow you to start off with one or two thousand dollars and then let you add a couple of hundred dollars a month in a regular savings plan.

  Investing in the sharemarket is something you should only contemplate if you have clear picture of the risks involved and know that you have the personality and the time frame to tolerate those risks. I strongly recommend you get professional advice from a financial adviser if you’re thinking of entering the sharemarket.

  Deposit guarantees

  A deposit guarantee (sometimes called a deposit bond) is an alternative way to raise the cash deposit required when you first purchase a property.
Deposit guarantees are generally used when you have cash tied up in other investments such as shares or a term deposit, or where you’re waiting on the money to come through on the sale of an existing property. Deposit guarantees are often a lot quicker to get and cheaper to use than a personal or a bridging loan. After you apply for a deposit guarantee, you can hold onto it for up to six months while you’re looking for your ideal property; after that, you need to renew it.

  Deposit guarantees can be purchased from most lenders and some specialist providers like Deposit Power and Deposit Bond Australia, and cost from 1 to 10 per cent of the deposit amount, depending on the amount and its term. A deposit guarantee for a $45,000 deposit on a $450,000 home, for instance, may cost about $540. When you finalise the property purchase (such finalisation is known as settlement), the full purchase price includes the deposit amount.

  In order to qualify for a deposit guarantee, you must be able to prove that you have enough funds to settle on, or finalise the purchase of, the property. Meeting a lender’s criteria is a similar process to that for a standard loan application, including assessing that you have adequate income to meet the financial commitments. For standard rules of assessment to apply, you also need to be an Australian resident or a corporate entity.

  Deposit guarantees don’t come without risk. If you fail to finalise the property purchase, you still owe the deposit issuer the money you borrowed as well as any costs or expenses they have incurred. Deposit bonds (as they were then known) become notorious during the recent off-the-plan investment apartment scams that proliferated in Melbourne and Sydney. In those cases, people obtained multiple deposit bonds with the intention of making quick money by selling their off-the-plan properties before having to settle. When they couldn’t find a buyer and were unable to pay the balance of the deposit or the sale price, many faced financial ruin.

  Chapter 3

  The Position or the Property

  In This Chapter

  Envisioning your ideal home

  Listing the important features you want in a home

  Trading off location against facilities

  You’ve made the big mental shift to thinking of yourself as a potential home owner. Now, you can spend your thinking time on how you’re going to translate your dream into reality. At this time, two big questions require your attention — and the criteria for one can almost certainly affect the other:

  What kind of a home are you looking for?

  Where do you want to live?

  Property gurus often cite location as the most important factor in choosing a home. And it’s true; a well-located home is more likely to hold its value in a flat market, and grow its value faster in a strong market, than one in a poorly located area. However, unless you’ve got plenty of money to play with, you may need to make some compromises on either the location or the kind of home you would like to buy.

  If location is absolutely most important to you — either because you want to live close to your workplace or for more emotional reasons, such as living near grandparents, or perhaps because you believe a particular location is a sensible investment decision — you first may want to research the kind of properties you’re able to afford in that area. Based on that information, you may need to scale down your expectations and settle for something smaller and less fancy than you had your heart set on, or you can investigate purchasing an unrenovated bargain with potential to improve.

  On the other hand, if the style and comfort of the home is more essential to your happiness as a home owner than location, you may need to make other trade-offs. While you may not be able to afford to buy in a particular suburb, an adjacent suburb may have homes that fit your criteria, and at a price you can afford.

  The more flexible you are with what you want from your home and its location, the more quickly you’re likely to have success with your home hunting. Having a clear awareness of the importance of each feature about the home or location is very important. Some features may not be negotiable for you, while others may just be nice to have, if possible. This chapter shows you how to work out what those criteria are so you can go out into the marathon task of home hunting with a clearer picture of what you’re looking for.

  Dreaming Up Your Perfect Home

  You may have your idea of the perfect home. It may be a clean-lined and architecturally designed apartment with smart modern appliances, or a cosy cottage full of old-world character, with a sunroom where you can curl up with a good book. Finding something that matches those dreams can be a difficult balancing act between imagination and practicality. You need to be able to imagine what kind of features are going to make you happy, but also be prepared to make the inevitable compromises when you’re restricted by either your budget or the property choices that are available in the area you’d like to live.

  Must Haves, Like to Haves and Mustn’t Haves

  Your first step before looking for your ideal home is to sit down and make a list of the kinds of features that are important to you in a home. Eventually, you may have to make compromises on some of these criteria but, right at the beginning of the exercise, you may as well be completely open with your hopes and dreams. You never know — you may just come across a home with a sunroom facing a view that you always dreamed of enjoying.

  If you’re planning to buy with someone else, being clear on the essential criteria for you both is particularly important. You may have other features you like, but which you’re prepared to use as a trade-off for others the co-purchaser may prefer. For example, while you may insist on a study as a must-have inclusion, you may be able to negotiate your wish for central heating with the garden shed he craves. Remember, also, to make a note of features you absolutely can’t live with. This list may include a home on a busy road or one with an outdoor toilet.

  This list gives you some criteria and features you may like to consider when you complete your own list:

  Apartment/house: If you like the idea of apartment living, this choice may be an easy one. For others, it may be the trade-off they’re prepared to make in order to be able to afford to live in the location of their choice. If you decide on an apartment, you may also like to think about whether you’d like to live on the ground floor, with the possibility of a courtyard garden, or whether you prefer the security of living on an upper level.

  Bathroom: Having two bathrooms or more is no longer seen as a luxury, but extra bathrooms are likely to jack the price up considerably. If you absolutely must have a second bathroom, you may need to move your search further out of the city, or look for a property with the potential to add another bathroom down the track.

  What about a bath? Some people wouldn’t dream of living in a home where they can’t have a long soak in a tub now and then. If you have or are planning to have children, a bath is pretty much a must-have.

  Building material: In many areas you don’t have a choice between brick veneer, timber, stone or whatever is commonly used as a building material. But for some people, the material from which their home is built is paramount. Some building materials can look ugly — think ‘brick’ cladding from the 1960s and 1970s — but remember that in most cases you can paint or render, or improve the exterior in some way. Unless you have a very strong preference, you may be best to leave this feature open. One exception may be properties constructed using asbestos. Asbestos is a safety hazard and can be expensive to remove safely. A building inspection report should be able to uncover any existence of asbestos in a property.

  Floor plan: You can have any number of properties with three bedrooms, a kitchen, bathroom and living area — how they’re put together makes all the difference. You may have heard about ‘logical’ floor plans. This concept refers to the way space flows through a house so that you move easily from one room to another; doors and windows seem to be where they ought to be and dead ends are eliminated. You may have a preference for the kitchen to flow into the dining area, the laundry to have a door out to a hanging area and, as is incre
asingly demanded in Australian homes, that the living area or kitchen/family room opens to an outdoor entertaining area.

  Garden: The world may be divided between those who dream of their own patch of land, with flowers, veggies and room for a dog to run about, and those for whom a garden is just one more hassle. If two or more of you are purchasing the property, make sure you’re clear on how important this feature is to you all. If you like a garden, you may also like to think about what size and style you prefer. You may be lucky to find your perfect garden, or you can look out for one with the potential to be transformed.