Mortgage Calculator House And Key

October 25, 2018

Questions I am asked often are How did I finance my first property? How did I raise capital to start my business? How did I get myself into this, one of the most expensive housing markets in the world?

Let's make no mistake about it, it is tough to get into the Melbourne and Sydney housing markets. After all, along with Monaco, Hong Kong, Singapore and Shanghai, the Melbourne and Sydney markets are some of the most expensive real estate in the world. Whilst it is difficult in this climate to obtain finance for your first home or next development, it is not by any stretch impossible.

So why is a builder discussing finance? Because I was not always a builder with my own construction company. In truth, my journey started almost 12 years ago when my 19 year-old self saw an opportunity to buy into the market at the low end. I was at university studying business with a keen interest in real estate. What I managed to purchase was a 30sqm studio apartment in East Melbourne for $175,000.

The studio was tiny, barely enough room to swing a cat but I knew location was key here and a sudden drop in the prices of the apartments in the block would be short-lived so immediate capital growth was more than likely. So how does a 19-year old university student working 30 hours a week afford a 175,000 apartment? Well, times were admittedly different than with lenders offering 105% finance, I knew it was a risk but a worthwhile one for me. I used the rent that I would obtain on this property to prove serviceability and I also took out the first home buyers grant to help with the deposit. My opinion was that I would rent it out for a year, move in and renovate it when I was working full time and fresh out of university. My feeling was by then the capital growth in the apartment would have eventuated so I could finance my next property. My calculated risk turned out to be accurate and after 1.5 years the property had soared to $255k in value, enough for me to purchase a "BPOS" (an acronym I like to describe houses, meaning a beautiful piece of sh*t which I can add value to). I never started out to be a builder and developer but the bug quickly took hold of me and now several developments later and I am still very much doing the same thing as I did back then.

People often say, well that is great but how do I get into the market now? As now, finance is much more stringent in this post GFC era especially with lenders not willing to put their necks out with a royal commission floating around. This is a valid point and one that I too have struggled with as obtaining finance for my projects has also become more difficult. However, it is not impossible.

Currently, both state and federal governments are giving away money to first home buyers to get into the market. What has not changed since 12 years ago is that most people who are willing to take advantage of these schemes will most likely need to put stepping stones in place in order to get to their dream home. This is because their first property will most likely need to be a property of $600k or less in order to take advantage of the state governments off the plan stamp duty concessions. This is a scheme set up by the state government whereby you pay no stamp duty on the dutiable value of a property up to $550,000 once taking into consideration off-the-plan concessions. As a result of the scheme, first home buyers can save $25,000 that a non-first home buyer would otherwise have to pay.

Secondly, the state government of Victoria still has in place a first home owner grant whereby first homeowners are entitled to $10,000 when they purchase a home less than $750,000. They are also entitled to enhance FHOG of $20,000 when this property is purchased in a regional area. Other states also have similar schemes in place for first homeowners.

Thirdly, a great initiative that the federal government has in place to help first homeowners is the first home buyers savings scheme. This is a new scheme that allows people to make voluntary contributions into their super account which they can then withdraw later for the purposes of purchasing their first home. Up to $15,000 a year of voluntary contributions can be made in a financial year. A maximum of $30,000 can be released at a later day plus associated earnings. What is so good about this scheme is that performing super funds will help drive your savings further than a typical cash savings account whilst too having tax concessions applied.

Here are my tips for people trying to get into the market:

  1. Use the government schemes and incentives to your advantage
  2. Purchase a BPOS, something that you can add value to and reap the rewards from later. It may mean getting your hands dirty but the long-term benefits will be worth it. Few people buy Ferraris for a first car and houses are no different. You need to set the necessary stepping stones in place to your eventual dream home and realise it may take a couple of homes before you get to your dream destination and home.
  3. Open a first home buyers savings account or, if not your first home, open an investment account that will most likely perform better than your typical cash savings account.
  4. If you decide to build your own home, note that times have changed with regards to owner building. Finance for owner-builders is becoming much more stringent and the finance cost is becoming much higher than the potential savings made. The Victorian building association is to making life harder for owner-builders as a result of poorly finished homes.
  5. Be disciplined with your savings and monitor the performance of your investments. The decisions you make now will have a long-term impact on your lifestyle down the track.

Whilst the housing market is difficult to get into at the moment, it is not impossible so long as you willing to use the rights tools and schemes to your advantage whilst using a little financial discipline.

For links to the discussed government schemes and incentives see below: