Your key to property ownership

By Nila Sweeney

Making the leap from renter to property owner is no mean feat, but with careful planning and due diligence, you can break into this elusive market. Your Mortgage reveals some handy hints on how to make your first foray a resounding success.

If you're sick of copping a rent rise each time your landlord takes an interest rate rise, you're not the only one.

As the demand for rental accommodation soars (thanks to land shortages and lack of new dwelling construction), chances are you'll continue to pay out more in rent than ever before.

The Housing Industry Association (HIA) recently reported that the underlying demand for new homes across Australia will reach nearly one million by 2012/13 - putting pressure on land supply and forcing property prices further out of reach for many.

"Supply must increase rapidly to meet expected demand, particularly in Australia's capital cities. Without a substantial increase in production there'll almost certainly be growth in the number of homeless and further affordability woes," explains Chris Lamont, chief executive for policy at HIA.

Lamont says 190,000 new dwellings are required by 2008/9 - 40,000 short of expected production. Not only will short supply make it harder to find a property in your price range, but you can also expect to be shelling out a higher percentage of your pay for mortgage repayments.

A recent report by Deposit Power and the Real Estate Institute of Australia (REIA) revealed that home loan affordability is at an all-time low, with 38% of the median weekly family income now required to meet loan repayments on new home loans.

On the bright side, the economy remains supportive of aspiring property owners. Although property prices and interest rates are high, so are incomes. This means that with smart planning and some discipline, that property you've been dreaming about is still within reach.

The owner-occupier
Being an owner-occupier means that you'll live in the home you purchase as your PPoR and not rent it out for investment purposes.
If you plan to get married and have children, then this is likely to be the most suitable option for you as a first-time buyer. If you're purchasing as a couple you'll most probably want to buy a three-bedroom house to cater for family expansion, but may be forced to buy 20km or more out of the CBD in an area which will hold its growth and where prices are more affordable.

If you're purchasing on a single income, your budget might be restricted to a one- or two-bedroom unit or small townhouse, also 20km or more from the city centre.

Obvious first-time buyer benefits include the $7,000 FHOG and stamp duty concessions.

The owner-occupier who shares
If you want to become an owner-occupier but are purchasing a two-bedroom (or more) property alone, you might consider renting out any spare rooms to help substitute your income. This can also help add equity to your property faster if you're planning to renovate or develop a property portfolio in the future. If you determine that the rented portion of your home is 33.3%, you would have to pay CGT on 33.33% of the capital gain at sale time.

"On the flipside, the homeowner is entitled to claim tax deductions against the rental income for 33.33% of property expenses such as mortgage interest, rates, insurance, depreciation, repairs and maintenance," explains Peter Bembrick, tax partner with HLB Mann Judd. You may still be eligible for the FHOG.

The 'live out of home' investor
A 'live out of home' investor is a homebuyer who wants to get their foot in the door in a more affordable area further out from the CBD, but doesn't want to jeopardise convenience and lifestyle advantages by moving out of their current inner-city location.

If you opt to become this type of investor, be careful with your budgeting. The cost of convenience and proximity to the CBD will most likely outweigh the rental income achieved from your property located further out. You'llbenefit from investor tax deductions, but also incur CGT when selling.

The 'live at home' investor
To put it simply, 'live at home' investors can have their cake and eat it too. They'll purchase a property to use as a rental investment and continue to board with their parents for free or at a reduced rent.

This is becoming a popular option and a generous offer from parents who don't want to become guarantors. You can maximise the use of your rental income and tax benefits. Depending on your lender, you can also factor up to 100% of your expected rental income into your borrowing capacity, effectively doubling your income capacity. This would allow you to buy closer to the CBD, or pick up a more modern property.

Who the market favours
If you're trying to decide which property buyer category best suits your lifestyle, it might be useful to find out how the current market favours each.
Cameron Kusher, a research analyst with RP Data, believes owner-occupied living is the best way to go in the current market conditions.

"I think with the housing shortages that there are, the rents are only going to go up, and continue to decrease the benefit they're getting from renting their property out. Unless you can find a property which is positively geared - which are few and far between at this stage in the market - I don't know that renting and owning a property is going to cost you less than someone living in the property and paying off their mortgage," he explains.

Becoming a 'live out of home' investor can work for and against you. You must pay tax on any rent that you earn from the property, but at the same time you can deduct all of your interest costs from your loan, and this is normally a lot more than the rent you're going to earn on the property. Gillespie provides an example:

"For a $300,000 loan you're going to pay around $21,000 interest per year, and if you earn $300 a week over 52 weeks in rental income that's around $15,000 per year. If you deduct off all the interest you're paying on your loan, plus the depreciation (decline in value may be around $5,000 a year), at tax time this ends up taking off around $10,000 of what you earn at work (reducing your taxable income)," Gillespie explains.

To get the best of both worlds, you may wish to consider moving into your property initially to benefit from first homebuyer grants and other freebies,
and then converting the property into an investment later.

5 Hot Tips for the first-time investor

  1. Consider the various locations suitable for investment, depending on your strategy. Are you looking for a buy and sell scenario, buy and hold or something to renovate or redevelop?
  2. Understand the market cycle and key investment factors of your target locations. For example, an ideal location may have recently emerged from a slump and is poised for strong growth due to increased investment, job creation or infrastructure expansion.
  3. Within these key locations, determine which property types have low supply and high demand, both for rental and re-sale. This will ensure a low vacancy rate and make a timely sale likely when you're ready to cash in on your investment.
  4. When selecting individual properties it's imperative to look closely at comparative property performance, recent sales and rental yields. Although a lot of good advice is given by agents and investment advisors, referring back to market reports and performance indicators is a great tool to gauge whether it's a worthwhile investment.
  5. Ensure you're paying a fair price. Always talk to multiple estate agents in the area before buying. Say you're a prospective buyer in the area, and ask how much you should expect to pay for the type of property you're after. This should only take an hour, but will either confirm it's a good deal or will help you walk away.

Out with renting, in with home ownership -casestudy

Paul Ahern, 31, had been travelling and working overseas for three years before he returned to Sydney to settle into the world of renting.

Like many first-time buyers, high rents and communication issues with real estate agents prompted Paul to begin the search for his first property.

"The real estate company managing my unit was so hopeless it took them six months to replace the damaged curtains. I was paying $400 a week for a small unit where half of my clothes were ruined because of the sun damage," explains Paul. "I just had enough and thought I could pay close to the same amount to be my own landlord."

Paul says it was an opportunity to escape the current rental market, which, from his experience, was a constant struggle. "Basically I was fed up with being exploited. I was excited by the prospect of having a place to call my own and to know that my hard work is going towards paying off my own slice of the property market, not someone else's," he explains.

Paul says he knew he would have trouble obtaining finance as a contractor, so he wasted no time consulting Phillip Minett, branch manager for Wizard Sydney CBD, for some advice.

"My situation was always going to be difficult because I required a 100% loan. Being an IT contractor moving from job to job every six months or so, I couldn't show a steady income from the same employer for years, but I always had employment, no debts and a solid income. So on advice from friends I went to Wizard and spoke to Phillip."

Phillip arranged a $385,000 Smart Choice Advantage home loan with no annual or ongoing monthly fees. The home loan has an interest rate of 8.84% and Paul will pay interest-only for 10 years. Paul's lender also organised his application for the First Home Owner Grant, which helped him out with the upfront costs of buying the property.

"Phil was exactly what I wanted from a lender as a first-time buyer. I had no idea about anything. He sat me down and told me the cold, hard facts and wrote down exactly how much money I needed for different expenses."

Paul settled on his $385,000 Maroubra property on 1 May this year and is thrilled with the purchase. "I see my first home as the first big step in the direction of my dream to have an attractive property portfolio in the near future."

Paul's top tips for finding the right property

  • Don't let emotion get in the way
  • Be patient, but be ready to move on your property ASAP
  • Real estate agents aren't on your side - the more you pay for the property, the more they get paid
  • To get on the shortlist for property, ring real estate agents every day
  • Do a lot of legwork and attend lots of inspections (under and over your budget), a few auctions and research online about past property results
    Have your lawyer read all the building • strata reports before your competition does, so you can put down an offer before them

Paul's tips for finding the right loan

  • Read what the experts are tipping
  • Speak to your friends and family

 Related: Home Loan Calculator