Homeownership For Millennials: When, What and How?
Get married, buy a house, and live in it. Simple, right? Perhaps not. This path of normality paved by older generations has left millennials perplexed – and rightly so.
Australia’s rapidly expanding population and subsequent shortfall in supply of in-demand housing has dramatically changed the landscape of homeownership. This long-running housing affordability crisis has reached a worrying peak over the last few years, as salaries and lifestyles among millennials fail to keep up with the price of an average family home.
What’s more, stricter lending, the ‘gig’ economy and innovative new ways of generating income all go against young people trying to get home loans.
Millennials’ desire to remain in close proximity to major capital cities—often in trendy areas—has come under scrutiny, with experts telling them to simply move further out of popular areas if they want to afford property.
While stepping away from hotspots stuffed with money-sucking amenities like brunch cafés and cocktail bars may indeed improve purchasing power for millennials, what it doesn’t take into account is the potential impact on their lifestyle and career.
For those who work in or near major capital cities, often it’s the ability to work in these business-driven hotspots that’s at the crux of their earning potential. Looking at Melbourne as an example, a millennial who works long hours in the CBD may consider moving from trendy Richmond to more modest Carrum Downs.
With a 3 bedroom median house price of $555k in Carrum Downs compared with $1.3m in Richmond, it sounds like a no brainer. But, in exchange for these hefty savings, the millennial CBD-worker could instead be looking at a door-to-door commute of over 75 minutes each way on public transport, covering an extra 90km daily.
Add to this the alarming regularity of transport disruptions as a result of system upgrade works—another unfortunate byproduct of Australia’s population boom—and it’s beginning to look like an almighty compromise.
A New Path to Homeownership
But luckily for the younger generation, there is an alternative. It just involves rewriting the homeownership narrative we’ve been conditioned to follow.
Gone are the days of marrying early and storming straight into your first and forever home with a modest home loan. We need to let that idea go, because for an increasing number of young Australians, it simply won’t happen that way.
What millennials can do, is instead of burying their heads in avocados and writing off homeownership as ‘too hard’, they can look into new paths to financial security through property.
What is rentvesting?
Rentvesting has quickly become a household term, often wafted in the faces of those who aren’t quite ready to relocate too far from their favourite barista. Director of BFP Property Buyers Agents, Ben Plohl explains that “rentvesting is a strategy I use to help many of my millennial clients.”
Lifestyle-wise, it’s an ideal solution, but here’s an alternative approach. Rather than continuing to rent and buying an investment property straight away, young Australians could build a property portfolio progressively, starting out as an owner occupier. “Investing in growth centric, fundamentally sound and affordable markets will give you the chance to experience potential capital growth”, said Ben.
As an example, a young couple in their twenties could look to purchase a neat one bedroom apartment for around $400K—and live in it. They’ll score tasty stamp duty discounts and owner-occupier benefits in most states by doing so, and ideally have more luck applying for a smaller home loan.
With a relatively small mortgage and repayments not too far from what they’d otherwise be paying in rent, the couple could stash extra cash each month in an offset account, reducing their interest repayments and working towards their next property move.
In two or three years, the couple could begin looking at acquiring a second property of a similar grade and size. Depending on their age, income, borrowing capacity and appetite for starting a family, a third property could be on the cards in a few more years. Once the couple outgrow apartment living, it’s at this point that rentvesting comes into play.
Rather than buying a family home, lease one, while renting out the smaller investment properties. This spreads the financial risk across three separate assets. Plohl concurred, explaining, “spreading your savings across a diverse portfolio of properties is a sound strategy which allows you to take advantage of differing property cycles.” Should the couple run into financial difficulty, they can sell off one asset at a time, rather than rely on their only asset being the family home. Dismissing the age-old assumption that ‘rent money is dead money’, Plohl noted that the theory is simply “not applicable, providing you’re putting your hard earned dollars into property in another location.”
Maintain enough rental income or financial surplus to pay off all three mortgages before retirement, and the pair could easily downsize back into one of the smaller properties, while enjoying a tidy rental income from their other assets.
The key to maximising the potential in strategies like this is starting early. Keep abreast of changes to lending and familiarise yourself with the ins and outs of Australian home loans to stay ahead of the curve.
It’s certainly not the traditional route to homeownership, but if young people can start getting on top of their finances early enough, it’s a very real and practical way to make the Australian dream a reality in 2019. To get started, explore the best home loans for your income and savings capacity, and start your journey to property ownership.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.