A few simple rules for those stuck at the crossroads

 

A few simple rules for those stuck at the crossroads

Author: Mark Armstrong
Date: October 27, 2009

There are times when you reach a crossroads in life — and property is often centre stage.

Should you keep renting or buy your first home instead? Should you upgrade to a bigger home or stay put? Should you borrow against your home to buy an investment property?

Transition one: renting to buying

If you've been renting for a while and you're trying to decide whether to buy, you need to consider three key issues. First, are you in a secure job?

If you're in a full-time permanent position, you're much more likely to get a loan than if you're in a contract or casual role.

Even if your job is meant to be permanent, the recent economic instability has affected some industries more than others.

And, as a first home buyer, you're in a riskier position than returning home buyers or investors.

If you lose your job and can't meet your loan repayments, you won't be able to draw on equity in the property to stay afloat.

If you believe there's a chance of losing your job, it may be wise to hold off buying a home until the situation stabilises.

The second issue to consider is affordability. If your job is secure, and you've saved enough for purchasing costs like the deposit and stamp duty, you should enter the market as soon as possible.

History shows that the Melbourne property market goes up, not down, over the long term. If you wait for property to become more affordable, you could be waiting for ever.

Third, it's vital to choose the right location. Your first property is arguably the most important because if you choose wisely, it is the one that will set you on your way to building equity through capital growth.

Not all properties or locations grow at the same rate. When affordability is a pressing concern, it's far better to buy a smaller property in a high capital growth area, than a larger property in a lower capital growth area.

Once you've accumulated enough equity, you can always move to a larger home.

Transition two: moving to your next home

There are two situations when you may need to move on to your next family home.

The first is when you're thinking of upgrading to a larger and more expensive home because you're planning on expanding your family.

In this case, location will be a particularly important consideration, because you'll want to be close to schools, shops and parks.

The longer you delay upgrading, the higher the market will climb and the harder it will be to get into the property and location of your choice.

By moving sooner rather than later, you may be under some financial pressure in the early days, but the buy-in price will be cheaper and you'll get the benefit of capital growth.

The second situation is when your children have flown the coop, and you need to downsize to a smaller and less expensive property.

In this case, it's to your advantage to delay purchasing until the market is in a strong growth phase.

This way, you can maximise the capital growth on your current property when you sell it and minimise the mortgage (if any) on your next home, or maximise any left-over funds to use in retirement.

Transition three: leveraging against your home to invest

Before you consider buying an investment property, make sure your current family home will be adequate for your lifestyle for another seven to 10 years, or the full duration of a property cycle.

There's no sense buying an investment property, then realising a couple of years later that you need to upgrade your family home.

Very few people can afford to do both at the same time. If your current home won't last the distance, it's probably better to upgrade to another home first, then buy an investment property later.

In summary

• First home buyers should consider job security, affordability and asset selection.
• Moving on to your next family home is a lifestyle choice, but timing is important.
• Don’t buy an investment property unless you can stay in your family home for the long term.

 

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