How To Own A Home In Your 20s (According To People Who’ve Actually Done It)
Back in 1986, the average house in Sydney could be yours for a tick under 100 grand. Today, a cool $1 million will get you your palace: a pokey two bedroom eyesore in Leichhardt, or a fixer-upper in Bondi that needs to be completely re-gutted. Is it any wonder the Aussie dream is looking more and more out of reach for Millennials?
But it can be done. And these five home owners – Cihan (19), Cat (27), Hayden (29), Rebecca (22) and Alex (25) – have fought the market and won. Before revealing their pearls of adulting wisdom, it is worth noting that most had a bit of help. Whether it was living rent-free with parents, getting financial help or selling family shares, the common thread among young home owners, especially in Sydney, is having an advantage that enabled them to secure property.
But having a roof over your head that’s all yours doesn’t need to mean a life lost to a home loan – if you know what to expect. These young home owners provide insights that go well beyond “get a better job”.
#1 Have an existential crisis before purchase
This may sound crazy, but having a pre-buy freak-out helps. Cihan was 19 when his parents put a deposit on an apartment for him and his brother. They lived there together, paying off the home loan. While grateful, Cihan was not sure he was ready for a home loan at such a young age. “It was a difficult time in my life,” he says. “I didn’t know what I wanted to do. I realised I wanted to study… but I couldn’t. Everything was about repaying the home loan.”
Cihan says being honest about uncertainties will help you in the long term. “You have to expose all doubts you have about making the decision instead of glossing over them and going along with what other people want for you, or you’ll suffer down the line.”
But you don’t have to start as early as Cihan. Hayden was 29 by the time he purchased an apartment by himself. “There’s no rush to get a property in your early 20s,” he explains. “I saved for eight years, but I also travelled and enjoyed myself, and I wouldn’t take that back to have a property earlier.”
#2 Get help from professionals
It doesn’t matter if you’re not a finance, legal and real estate prodigy – you can pay someone to do that stuff for you.
Cat used a financial advisor to set savings and repayment goals based on her income. Cat did not pay for the service – it was covered by her lender. “At first you think you could never afford to own something worth hundreds of thousands of dollars, but when you sit down with a financial advisor, you get a pleasant surprise… it is a goal you can work towards.”
A buyer’s agent can also be useful. Unlike a sales agent, a buyer’s agent considers your budget and strategy, and buys a property for you. (Not with their own cash, of course).
Hayden didn’t receive help from his parents, and embarked on the property journey solo. He found a buyer’s agent whose services cost approximately 2% commission on the property price. For Hayden’s $655,000 unit, this was approximately $11,000. For an investment property, Hayden was advised the buyer’s agent fee may be tax deductable after the sale of the property.
This means after Hayden sells this property, he could take $11,000 off the money he potentially makes from the property so he is taxed less, the same way you might take the price of purchases for work off your income. I am not an accountant, and you should consult one before having a buyer’s agent build you an empire.
All these home owners also had solicitors look over contracts during transactions for their property.
#3 Research, you beautiful nerds
Knowing the property market makes you less likely to overspend. Rather than using a buyer’s agent, Alex got help closer to home. “My mum spent six months looking at property every day, evaluating what apartments were worth. When the right one came along, she knew instinctively that a property in an area was going for a lot less than what it normally would.”
Researching an area is very important. Rebecca bought a two-bedroom apartment with her brother last year. They saved $60,000 for a deposit in their casual jobs over many years, and purchased an apartment in Westmead, in western Sydney.
Rebecca knew she didn’t want to live in Westmead, but could see it was an up-and-coming area. “If you are looking for an investment, you can look at less popular areas and think ‘what will that place look like 10 years from now?’”
According to Onthehouse.com.au data, the median unit in Westmead has increased in value by approximately 18.6% since August 2014. Touché, Rebecca.
#4 Know what you’re buying into
Rebecca, Cihan, Hayden and Alex own apartments. As well as home loan repayments, they have ongoing strata levies (the costs of maintaining parts of an apartment building), council rates, property management fees and maintenance costs.
Rebecca prepared for contingencies using modelling in Excel. She is currently on a working holiday in the United States, and in the eight months leading up to her trip, she budgeted for every possibility. “I was in Excel, I thought, ‘OK, what if interest rates go up while I’m gone? What happens if the strata levies change?’ I had money ready for almost every scenario.”
#5 Life will change, but there’s always exhibition openings
What does it mean to have a home loan?
Say you purchase a unit for $600,000, you will probably need between a 10- to 20% deposit to attain a loan, with 20% being $120,000. This doesn’t include up-front costs like stamp duty, title transfer, loan establishment fees and legal costs. With this deposit, you would have to borrow $480,000 from a lending institution to make up the rest of the $600,000.
A weekly repayment on $480,000, assuming an interest rate of 5.6%, would be approximately $640 per week. For the next 30 years. Assuming interest rates do not rise, which they are likely to do.
Alex was 22 when his parents helped him buy an apartment in Neutral Bay. He purchased the property before the 2013 housing boom, but worked three jobs to cover home loan repayments. “I worked full time as a motorcycle postie from 6am to 2pm. Then after school care from 3pm to 6pm, then I would go home and work on my online business. It was a great place, overshadowed by the constant stress of a mortgage.”
Cihan warns that having a home loan means having little disposable income, and your social habits need some adjusting. “You won’t get to see as much of your friends, unless it’s at a free art gallery show. Those are great. You get to see art, you get to talk with friends and you get to drink some free booze.”
#6 You probably won’t live in it
None of the homeowners we spoke to for this article currently live in their property. Most adopt a rental yield strategy. A rental yield strategy means buying a property and letting someone rent it. This rent can be used to pay off all, or part, of the home loan.
Rebecca knew from the beginning she would need an investment property to get into the market. “Two weeks before settlement, we asked the same agents who sold us the place to manage the rental side of things and put tenants in it. We had tenants within one week of settlement.”
Purchasing a rental property provides Rebecca with an asset for later in life, but it was made possible by the self-confessed privilege of a strong emotional and knowledgeable support network, and the advantage of living rent-free with her mum.
Living with your parents seems to be a go-to for avoiding home loan repayment stress and allowing a little give to enjoy life and travel. Both Cihan and Alex initially lived in their respective properties, but have since moved home for affordability and flexibility.
You might also want to consider furnishing a property you plan to rent. Hayden used $5000 to furnish the apartment he rented out, and by doing this he earns an extra $100 in rent per week. That $5000 paid itself off in less than one year.
#7 Parents can be stakeholders
Your parents, when able, don’t have to chip in, they do it because they love you – the partial investment is clearly just a bonus. Having the option of parental financial support really is a huge advantage many would choose if they could, so don’t stuff it up by forgetting to respect their involvement. It doesn’t matter that it’s Mum and Dad and they’re really annoying sometimes, we’re talking big bucks here.
When asked how to manage parents as a contributor to the process of buying a house, Cihan says it is important to treat your parents as financial and emotional stakeholders. “My parents had a stake in the process, so if there are any disagreements with what you intend to do with the property, their word is a significant factor in the decision you make, and you have to respect that, or else you could threaten the relationship.”
Whether you’re able to wrangle help or not, it seems that it’s possible to land your first home or investment property in your 20s. It doesn’t mean it will be easy, but having insights into the reality, the process and mistakes others have made along the way can turn a daydream into an informed choice.
Eliza Owen is a housing market analyst for onthehouse.com.au and a freelance economic reporter. Eliza is a regular guest on Backchat on FBI Radio.