Three strategies to get into the property market

Saving up to buy property in today’s market can be an uphill battle. Australian homes are already some of the most expensive in the world, and when you factor in rising interest rates, it can feel like there’s no end to the challenges first home buyers face.

Things are especially difficult if you’re a single borrower or you live in a particularly expensive city. But even then, it’s not as if the path to home ownership is closed off to you — it’ll just require a bit of compromise.

So let’s explore a few strategies to make home ownership more feasible for anyone worried about being priced out of the market.

The term ‘property investor’ usually conjures images of wealthy men with heaps of money buying places they’ll never ever live. However, investing (or rentvesting ) can actually help you get closer to buying your dream home, even if you start small. It’s all about building up equity.

Equity (also known as your loan-to-value ratio , or LVR) is the proportion of the property you own. When you take out a home loan, you pay an initial deposit; this establishes your equity. Paying down more of your mortgage means your equity grows because you own bigger and bigger ‘chunks’ of your home. Over time, your LVR will lower.

Having a low LVR can be an amazing tool for owning property. It can qualify you for cheaper interest rates when refinancing because lenders see you as a safer investment. Banks may also let you use your equity (typically around 80% of your place’s value) to finance another property.

So, instead of looking at city property markets where your initial budget might not stretch as far, consider investing regionally. This strategy lets you get your foot in the door (even if you don’t intend to live behind said door) and build up wealth you can use later.

However, there are a few cons to consider with this strategy. Chiefly: if you don’t intend to live in your investment property, you aren’t eligible for the first-home buyer grant .

You must also be careful about which suburb you buy in and how much you front up for a deposit. If you buy with a small deposit in an area where values tank, you could slide into negative equity and become trapped with your home loan . But if you do your research, this workaround can be a clever method of climbing the first rung of the property ladder.

If you’re single, one way to bolster your home ownership chances is to team up with friends. By pooling your money with one or more people, you might be able to purchase a larger home or one in a more attractive location than you could have on your own.

Going down this route will require plenty of discussion upfront. You’ll need to make sure everyone has the same goals for the property (will you be living in it or renting it out ?), and is on solid enough financial footing that they can keep up with the mortgage repayments.

You’ll also need to be clear on the risks involved. Buying property with friends can be messy if you’re not careful, especially if one person’s contributions are greater than the other’s, or if you opt for the wrong ownership arrangement.

So before you and your friends agree to anything, make sure you seek independent legal advice, and consider having a contract drawn up so everyone involved understands what’s expected of them.

Some questions to ask ahead of time:

• Will each person have an equal stake?
  
• What type of co-ownership agreement will you have: joint tenancy or tenancy in common ?
  
• How will you split costs and rental income?
  
• How will you handle disputes?
  
• What happens if one party suddenly can’t afford the repayments?
  
• What happens if one party wants to exit the arrangement?
  

Having answers to these questions can help start everyone out on the same page.

Lastly, it’s essential to stay open-minded when buying property. While having a specific vision of your perfect forever home is helpful (especially when you run a property through an inspection checklist), you may overlook good opportunities for the sake of your dream.

Instead, widen your perspective. Start with a “must-have” list (limit it to five essential features), then put the rest in a “would-be-nice-to-have” list. Renovations go in the second list, nonnegotiables the first.

Doing this could mean honing in on something that’s smaller than you had initially hoped (a unit instead of a house), or in an area that’s further out than you would like, so long as it’s comfortably within your budget .

For some, it might help to remember that your first home likely won’t be your forever home, so it doesn’t have to tick every item on your wish list. Buying a manageable, cost-effective, if imperfect, property and selling it later is okay. What’s more important is getting your foot on the ladder and setting yourself up for financial security down the track.

This isn’t to say you should settle for a fixer-upper that won’t suit your needs (a bad investment is still a bad investment). It’s more about managing expectations and embracing the process.