Golden rules for first-time buyers

If you wait for all the boxes to be ticked, house prices can rise at a faster rate than you can save

Most first home buyers and those new to investing wait for the perfect storm before buying property. They want: 1. High capital growth; 2. High rental yields;

3. Low interest rates;

4. Easy-to-borrow money; and

5. Easy-to-find property.

In my 25 years of investing I don’t think I’ve ever found the above scenario and so you could be waiting a long time.

Over the past few years we’ve had high capital growth and low interest rates, which has been great. Many people haven’t bought, though, because the rental yields have dropped (in percentage terms due to the high growth), it’s been very hard to find good property in decent locations (due to the increased demand) and it’s been increasingly hard to borrow money (due to APRA and the banking royal commission).

We’ve now got low interest rates and much easier-to-buy property but many people aren’t buying because either they can’t borrow money or, if they can, they don’t want to buy because they think the market will drop further.

These are all reasonable reasons for not entering the market but the danger is that if the conditions are never going to be perfect, you’ll never enter the market and before you know it prices will have doubled again.

Sure, you could keep saving a deposit and maybe the market will continue to drop or be flat for the next 12 to 24 months but will you have a job then, will the lending criteria change in that time, will we have higher interest rates, will something else change in your life so that you don’t have the ability to buy whenever you think the time is right? Chances are if it wasn’t right before and it’s not right now, it will never be right.

I’ve interviewed many property experts and economists over the years and not one of them believes they can pick the exact highs and lows of the market with pinpoint accuracy. All of them needed to change their 2018 predictions after the effect of APRA and the royal commission on bank lending. Many went from a healthy growth prediction to that of a loss.

My golden rule when buying a home or investment is to buy when:

1. You have the funds for a deposit;

2. You can get a mortgage;

3. You have enough cash buffer or excess wages to get you through the next few years.

For some that could mean taking advantage of lenders mortgage insurance (LMI). To some (typically old-school parents who look after the pennies hoping that they’ll get rich on the pounds) it’s an unnecessary cost. To the more educated or open minded it can help you get into the market sooner, could give you a cash buffer where you wouldn’t ordinarily have one or could allow you to afford a much better property in a much better location.

Half of my current $15 million-plus property portfolio was bought in the GFC when everyone around me was telling me not to buy. Why buy now when the market is continuing to fall, they would say, and why make the extra repayments if you can buy back in a few years?

Not only did I have no competition and could then pick up properties that ticked 10 out of my 10 boxes but the market in the good areas was still ticking along in the tough times and when it did make a serious upswing I got every single day of that rise. Properties I bought in 2009 for $620,000 were bank-valued two years later in

It’s all about time in the market rather than trying to time the market

2011 for $800,000 with no renovations or improvements.

All the naysayers stayed out of the market and didn’t buy. They couldn’t recognise it when it did turn and so they were already six to 12 months up the curve before they even had a chance to react, and by then prices were a lot higher than they potentially would have fallen anyway. On top of that, with the increased competition they would then have bought a property that only ticked seven or eight out of 10 boxes and paid a premium for the pleasure.

I believe that median-priced, secondhand properties in the blue-chip inner areas, three to 15 kilometres out of our main capital cities, that are short of supply due to height restrictions are still in demand and will hold firm. Sure, if you’re forced to sell or refinance at the wrong point in time you might see a 5%-10% drop from the peak but I think it will be an unrecognisable blip in an upward curve when you look at it in a few years. If you’re looking to get into that market, then I would buy as soon as you can if you find the right property and can hold on.

Units in high-rise towers have been a worry for many real estate professionals over the past few years and there’s good reason for that. In many areas there are

literally thousands of apartments for sale or due for completion and not much demand for them. Many were bought by foreigners (who have to buy brand new) and speculators who wanted to play the off-the-plan timing game. Those buyers are struggling to borrow and so there’s lots of supply and low demand. I think this market will come off further so if that’s the market you wanted to buy in, then you may well find deals with 20%-30% off the previous asking price. That can be great if you’ve got a cast iron stomach and some excess funds to play with. However, be very cautious as you’re getting into a market that is highly volatile and could drop further so it’s not the ideal territory for a first home buyer or novice investor.

Property performance in regional areas will be very much dependent on that area and the local demand and supply. Some areas might be going through the roof and others dropping by half. The word of caution here is to avoid one-industry towns unless you really know them inside out and are happy to take a punt. The more industries that support a local area the better because if one or two fail it is less likely to affect everyone there. Time it right and you could do well but that can be hard even for the more experienced buyer. Mining towns are the obvious example. As a first home buyer, it’s important to make your move into property a successful one and there can be pressure from friends and family to make you want to make it perfect. The more you try to make it perfect and the more profit you try to make, the more risk there generally is and the higher the chance of it all going wrong. There’s nothing wrong with buying an ugly duckling in a flat or falling market despite what those around you may be saying. When you look back in five or 10 years and the property market has headed through another cycle, you’ll remember the saying that’s it’s all about time in the market rather than trying to time the market.

There’s nothing wrong with buying an ugly duckling